Chaos at Jonathan’s Coffee House

I'm Andy Temte and welcome to the Saturday Morning Muse! Start your weekend with musings that are designed to improve financial literacy around the world. Today is October 25, 2025.

Last week, we discovered how the Dutch East India Company revolutionized equity ownership in 1602 by creating the first permanent joint-stock company with transferable shares. This innovation solved the liquidity problem that had plagued investors for millennia—you could now sell your shares to someone else rather than waiting years for a venture to conclude.

But transferable shares create a new challenge: where do buyers and sellers find each other? How do they agree on fair prices? Who ensures transactions are completed honestly? Today, we're crossing the North Sea to London, where informal trading among merchants would eventually evolve into the formal stock exchanges that define modern capitalism.

London Imports Dutch Innovation

By the 1690s, London merchants were watching Amsterdam's success with envy. The Dutch had grown wealthy from Asian trade, and their stock market allowed ordinary citizens to participate in that wealth.

The English East India Company had been founded in 1600—two years before its Dutch rival—but initially operated on the old model of temporary partnerships for each voyage. In 1657, the company finally reorganized along Dutch lines, creating permanent capital and transferable shares. Other English companies followed—the Royal African Company, the Hudson's Bay Company, and various mining ventures all adopted the joint-stock structure.

This created a problem: dozens of different company shares were now trading, but London had no organized marketplace. Buyers and sellers met haphazardly, prices varied wildly, and fraud was rampant.

Jonathan's Coffee House Becomes an Exchange

Enter Jonathan's Coffee House, established in 1680 on Change Alley—just blocks from Edward Lloyd's Coffee House, which was becoming the center of marine insurance, as we explored in our insurance series.

Coffee houses were the social media of the 17th century. Different establishments attracted different crowds—Lloyd's drew insurance underwriters, while Jonathan's became the gathering place for share traders.

By the 1690s, Jonathan's had become the de facto stock exchange. Brokers—intermediaries who matched buyers with sellers—congregated there daily, calling out prices and negotiating deals. The coffee house keeper provided tables and a central location, but the actual trading was entirely informal.

If you owned shares and wanted to sell, you'd visit Jonathan's and find a broker. The broker would announce your shares were available and listen for interested buyers. Once a deal was struck, both parties would sign a memorandum recording the transaction.

This informal system worked for small-scale trading, but had serious problems. There were no rules about who could become a broker, no standards for recording transactions, and no enforcement mechanism if someone failed to deliver shares or payment.

The South Sea Bubble: When Speculation Runs Wild

These weaknesses became catastrophically clear in 1720 with the South Sea Bubble—one of history's first and most spectacular stock market crashes.

The South Sea Company had been granted monopoly rights to trade with South America. In reality, Spain controlled South America and allowed minimal English trade, but the company's promoters promised investors extraordinary profits from South American gold and silver.

The company's shares began rising dramatically. From £128 per share in January 1720, they climbed to £1,050 by June—more than eight times their January price.

The frenzy was extraordinary. People mortgaged their homes to buy shares. Servants quit their positions to become stock traders. New companies sprouted daily with impossible schemes. One company sought capital to develop a wheel for perpetual motion.

Jonathan's Coffee House was the epicenter of this madness. Crowds packed the establishment, shouting bids and celebrating paper fortunes.

Then reality struck. In August 1720, when the company failed to deliver promised profits, investors began selling. Prices collapsed to £175 by September—wiping out months of gains. By December, shares traded below £128. Thousands of investors were financially ruined.

The Bubble Act and Its Consequences

Parliament responded with the Bubble Act, restricting the formation of joint-stock companies. Any company wanting to issue transferable shares would need a royal charter or act of Parliament—a difficult and expensive process.

The Act had profound unintended consequences. It made it harder for legitimate businesses to raise capital and didn't prevent future bubbles—speculation is a human tendency no law can eliminate.

But the South Sea Bubble did convince London's financial community that informal coffee house trading wasn't sustainable. Stock markets needed organization, rules, and oversight.

From Coffee House to Formal Exchange

The transition took decades. Throughout the 18th century, trading continued at Jonathan's and successor establishments. Gradually, traders developed customs—standard trading hours, accepted methods for recording transactions, and informal rules about broker behavior.

In 1773, a group of 150 brokers formed a subscription club, paying an annual fee for access to a private trading room—essentially creating a members-only stock exchange. They established basic rules: members had to maintain good reputations, disputes would be arbitrated by a committee, and manipulative practices were forbidden.

This was the genesis of what would become the London Stock Exchange, formally established in 1801. The exchange created systematic rules for membership, standardized procedures for recording trades, and enforcement mechanisms for disputes.

The pattern mirrors what we saw with Lloyd's of London in our insurance series—informal gatherings evolving into formal institutions with rules, governance, and legal standing.

The Foundation for Modern Markets

These London innovations—building on Dutch foundations—established principles that govern stock markets worldwide today:

- Centralized marketplaces where buyers and sellers efficiently find each other

- Professional intermediaries (brokers) who facilitate trading

- Standardized procedures for recording and completing transactions

- Rules and regulations to prevent fraud and manipulation

- Membership requirements ensuring professional standards

- Dispute resolution mechanisms for disagreements

The progression from Jonathan's Coffee House to the London Stock Exchange reveals something important: financial markets naturally evolve from informal to formal as trading volume increases. Informal arrangements work fine when trading is occasional, but sustained activity demands organization, standardization, and oversight.

Next week, we'll discover how the railroad boom in 19th-century America brought stock ownership to the middle class and introduced the concept of "the market" as a measure of economic health.

Until next week...

Grace. Dignity. Compassion.