Managing my financial journey
Managing my financial journey

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Managing my financial journey

1.2 The London Stock Exchange

In the following video Martin examines the events leading to the creation of the London Stock Exchange and its development up to the twentieth century. In the video he also refers to the South Sea Bubble fiasco. Details of this famous historical episode are provided in the glossary.

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As you will see when you're studying Managing my financial journey, the financial exchanges which are used for transacting debt securities and company shares - are an important and integral part of the financial services industry.
Of all the exchanges the most important is the London Stock Exchange here in the heart of the city.
The roots of the London Stock Exchange can be traced back to the establishment of the Royal Exchange in 1571. This was where merchants and financiers used to meet to conduct business arising from England's overseas trade.
During the sixteenth century, London's biggest rival in financial services used to be found in what was then the Spanish Netherlands - first in Antwerp and then in Amsterdam. However, the outcome of the Anglo-Dutch wars in 1654 and 1672 left London not only as the World's biggest port, but as its biggest financial services centre too.
The London Stock Exchange itself was founded in 1760, when a number of traders at the Royal Exchange were thrown out as a result of their bad behaviour. How things have changed.
In the early years though, the business of the Exchange was limited as a result of the Government's ban on joint-stock companies (or limited-liability companies) as a result of the South Sea Bubble fiasco.
However, in the eighteenthth and early nineteenth centuries the growing need of the Government to finance a series of wars led to much more business for the Stock Exchange in the same way as it did for the Bank of England.
The London Stock Exchange therefore became increasingly active in raising finance through the issue of government securities as well as arranging more finance to support Britain's growing overseas trade activities.
The nineteenth century saw a fast growth in the stock exchange business as the emergence and development of the mining and railway industries prompted a huge demand for more finance.
The history of the London Stock Exchange in the twentieth century is dominated by the financial effects of the two World Wars and the economic recession in the 1930s. During this period the need for the Government to raise finance grew quickly and as a consequence the level of national debt grew quickly too.
Despite the changing fortunes of the UK economy, in the 30 years after the Second World War, the role of the Stock Exchange in providing finance for governments and companies was maintained. Given its position as the World's largest stock exchange (until it was overtaken by the New York Stock Exchange) overseas companies had a big incentive to come to London to raise money.
Foreign exchange controls - which had limited overseas investment activities - were finally abolished by the Conservative Government in 1979. This not only opened up the scope for companies and individuals to invest overseas but also opened up the UK for inward investment from abroad.
As you will see later, this fundamental change to the environment within which the Stock Exchange operated was matched by changes to the way in which the Stock Exchange was organised and regulated.
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