Darwinian natural selection or political interference? A political economic history of the Lisbon stock exchange.

Author:Mata, Maria Eugenia
 
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  1. The Earliest Legal Aspects of the Lisbon Stock Exchange

    Where did stock markets come from? Were they invented by government or did they evolve over time? This article contrasts what are essentially creationist versus Darwinian views of stock markets, where the creationist view holds markets as suddenly invented by government, and the Darwinian view considers them as a process of market evolution. This article focuses on the evolution of stock markets in Lisbon and examines exchanges' juridical features throughout Portugal's history. Although government was involved at various points, a process of market selection determined many of the outcomes.

    There is much evidence that during the fifteenth century, at the peak of the Portuguese discoveries, a rudimentary form of centralized market existed in Lisbon as a response to two main problems: mobilizing the large amounts of money necessary to finance the fleets and the successive voyages, and dealing with the insurance premiums to cover the associated risks (Santarem 1552; Amzalak 1958).

    This market was not very organized, and all transactions were conducted in the open air on a corner of a major downtown street, Rua Nova, which most archival documents describe as the longest and the noblest in the city. It served many professional establishments, which made it vibrant, and it also connected the many narrow and twisting medieval streets to the royal palace. The presence of foreign merchants living in Lisbon or attending its seaport explains why this rather informal market offered trading in commodities, exchange letters, and foreign currencies. Milanese, Genoese, and Florentines performed an important role in this kind of financial business in Lisbon (Marques 1987, p. 176). Additionally, the traffic of commodities, in particular those brought from recently discovered overseas regions, required funds for investment. At this stage, one cannot yet speak of a specialized market, but of a business center--a centralized market for freight, trade, insurance, and negotiation--where extending credit and taking risk had to be rewarded. As Stringham (2002, p. 14) writes about London, it was the "need to attract business that allowed for discovery of better ways of organizing and self-regulating."

    From the docks near the royal palace, fleets left for the Mediterranean, France, Flanders, and Britain, and more and more regularly for the Atlantic islands and Africa. In the 1500s, they also sailed to India following da Gama's voyage, which opened the Cape sea route to that destination in 1498, and to the New World, crossing the Atlantic, thanks to Columbus's and Cabral's voyages (Justino 1994, pp. 5-10; Ullrich 1906, p. 103). Local municipal authorities oversaw trading in all these segments, with the operations on exchange letters following Crown regulations (Justino 1994, p. 31). The Lisbon Bourse also developed the professional expertise for managing contracts, and the presence of brokers is documented in archival sources on fourteenth-century municipal regulations for urban provisioning businesses, and for maritime businesses thereafter (Justino 1994, p. 11, quoting Oliveira 1891, pp. 92-94). In fact, the law of August 23, 1342, compiled the rules for the exercise of the brokerage profession and defined tabular data for the value of the listing fees and intermediation commissions. This legal framework represents the earliest known attempt to control transaction costs and to provide for market transparency.

    By the end of the fifteenth century, the royal law of February 15, 1492, reduced the number of brokers from twenty-five to twelve in order to promote the implementation of a policy of professional privileges to reward the king's twelve most trusted aristocrats for relevant services provided to the Crown (Justino 1994, p. 13). This law reveals that the profession was upscale and profitable. It also means that the profession was honorable in a society based on clear social cleavages between common laborers and the highest strata, which comprised respectable merchants and traders. Financial business was not considered an unsavory way of life for the Portuguese nobility (Godinho 1980). The warrior-merchant was a gentleman, coupling military activities in Portugal or overseas with benefits and profits, a noble condition of life.

    All the revenues from listing fees and commissions on financial businesses in that market were pooled together and shared equally among all brokers, according to a 1458 resolution of the municipal senate (Justino 1994, p. 22). As some brokers were more agile than others in dealing with and negotiating the operations, two years later, some of them complained to the king, but the equal division of the revenues prevailed, and the new law of July 15, 1473, consecrated that principle and even forbade competition among them (Justino 1994, p. 22). These facts illustrate that the government saw the bourse, and the services it provided to trade and to long-distance markets, as a public good whose dominant role was to fuel the implementation of a geopolitical project for the nation. The original 1485 regulations (Regimento de 1485) also required that all operations be recorded by a clerk in a single ledger as a corporation so that the profits collected by the receiver could be equally divided among the brokers, even though some of them had a larger portfolio of clients and operations (Justino 1994, pp. 25-26). This means that a division of labor within the corporation created specialized tasks among the brokers. Penalties collected for disrespectful behavior were also registered in the book, as well as some common costs of the corporation (such as funeral expenditures upon a broker's death). The elevated esteem of the profession was clearly expressed in the law of November 11, 1491, which stipulated that brokers should take a leading position in the rank-structured file of Lisbon's annual Corpus Christi procession, which wandered from the cathedral throughout the main streets of the capital city (Ullrich 1906, p. 102).

    Market trust and confidence were decisive features, but they did not prevent the authorization for the subestablishment of the brokerage privilege, which was consecrated in the royal law of August 20, 1500. This meant that the brokerage function belonged to a restricted number of nobles, who could delegate the practice of this function to a specialized clerk under his responsibility, as clearly registered in the regulation book for the profession (Livro do Regimento dos Corretores).

    There are four cases of individual brokers whose names are followed by another name (Justino 1994, p. 13, quoting the Livro do Regimento dos Corretores, follium 31 V[degrees]). This regulation reveals that the profession required technical abilities that only trained people could provide, was very honorable from a social perspective, was in high demand for the high revenues it could provide to the entitled person, and was very conspicuous with the political authorities in order to provide financial help to them, both at the central and local (municipal) governmental levels. To implement market transparency and maximize rewards for the regulatory authority, in 1500 it became routine for the municipal senate to award those broker positions to the highest bidder, thereby discontinuing the monopoly aristocratic condition for applicants, because the condition of trader and merchant could also lead to a personal nobility entitlement to attain the warrior-merchant status (Justino 1994, p. 15).

    Political authorities inspected the business of exchange letters to apply penalties for usury behavior, but overlooked those penalties against the opportunity of obtaining loans for the king and the government. For example, in January 1443, the government bought armaments in Bruges with the credit granted by local merchants and paid by letters of exchange issued by Lisbon traders and merchants, who lent to the central state (Justino 1994, pp. 33, 34). Then, brokers could deal in maritime transportation, insurance, freight, credit, exchange letters and currency exchanges, international trade, and lending to government.

    Domestic public debt (short-run floating debt and long-run redeemable public debt) also became a financial business in the Lisbon stock market because the Crown developed entrepreneurial merchant (retail) activity in the Cape of Good Hope route shipping. As public revenue was not enough to manage the huge colonial empire that the government dared to build, the central state's participation in maritime shipping provided funding for new undertakings (Godinho 1971, pp. 244-64). The nonspecialization of the brokerage in each of these businesses may result less from the small development of each one of these financial branches and much more from the strong ties and interconnections among all of them, which produced...

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