How common law provided the LSE with an instrument to deal with financial distress

Economically successful networks and associations, typical of the early days of capitalism, were often characterized by successful self-regulation, through which they secured or further developed their ability to function. By succeeding in transferring these rules into a formalized legal framework, they played a decisive role in shaping the legal development of modern societies according to the common law tradition. Marc Flandreau, Howard S. Marks Professor for Economic History at the University of Pennsylvania and this year’s holder of the Financial History Visiting Professorship at Goethe University Frankfurt, explored the law-forming role of economic networks and associations using the example of the London Stock Exchange in his Public Lecture on 13 June 2024, hosted by the House of Finance, the Leibniz Institute for Financial Research SAFE, the Center for Financial Studies, and the Institute for Banking and Financial History. The lecture is one of the highlights of the Financial History Visiting Professorship, which was made possible with the support of Metzler Bank and the Friedrich Flick Förderungsstiftung.

Flandreau showed that the efforts of traders on the London Stock Exchange to develop a procedure for sanctioning abusive trading practices or fraud and dealing with payment defaults among jobbers increasingly shaped the structures of the market platform, which ultimately had the governance of a voluntary association. According to Flandreau, in the last third of the 18th century, a series of procedural steps regulated how to deal with “lame ducks,” i.e., traders who failed to meet their payment obligations. The regulation confirmed procedures to identify the guilty parties and to ensure the functioning of the market in case of default. It also offered the possibility of rehabilitation for those wrongly suspected. When a self-standing bankruptcy legislation was enacted at the turn of the 18th and 19th centuries and jurisdiction was established, it essentially followed the previous self-regulation measures. According to Flandreau, this confirmed the classification of the London Stock Exchange as a “voluntary association”, just as the court had the character of a “committee” typical of the association’s governance.