Bucket Shops and Outside Brokers

In order to finance World War I, the British government sold war bonds to millions of investors and savers, thereby prompting a wider interest in financial securities including stocks and shares during the interwar period. Faced with a large intake of investment newcomers, the City of London was anxious of ‘amateur’ involvement in the market. The largest securities market, the London Stock Exchange, restricted access to small investors where possible, which pushed much of the new retail activity to the market fringes. Here, ‘outside brokers’ and ‘bucket shops’ catered for investment newcomers, the more gullible of which fell prey to fraudulent share pushers. Scholars have entirely overlooked this vibrant grey market for financial securities. But it was here—and not just at the organized exchanges—that ever more people made their first experiences with the ups and the downs of the stock market, most prominently in the great crash of 1929. This new perspective brings a sharper contour on some fundamental challenges that Britain’s financial landscape was facing in the interwar period: a large intake of new investors, a resurgence of financial fraud, and a new struggle over the distinction between speculation and gambling. The City’s response to these challenges can be described as financial paternalism. After a surge in political democratization, there was very little appetite to enfranchise ordinary people in the stock market. Instead, institutions like the Stock Exchange deliberately took a conservative stance on the ‘democratisation of investment’.

Part I The Conceptual Framework, 1 Getting to Know Multinationals

This chapter provides an overview of multinational enterprises (MNEs), which are the most talked-about business associations in the contemporary world economy. The MNE is a business association that engages in direct investment outside its home country; that is, in foreign direct investment (FDI). The chapter traces the patterns of MNE growth over time and space. The evolution of modern MNEs has usually been divided into historical periods, interrupted by the First and Second World Wars. The ‘first global economy’ emerged during the second half of the nineteenth century and began to disintegrate with the outbreak of the First World War in 1914, finally collapsing with the Great Crash of 1929. The ‘second global economy’ originated in the post-Second World War era and gathered pace between the 1980s and into the first decade of the twenty-first century. The chapter then looks at the main explanations of MNE growth, and the role of legal factors in this process.

Crash

The Great Crash on Wall Street in October 1929 undermined the U.S. economy and led to the Great Depression. National City Bank, Chase National Bank, and other U.S. universal banks eagerly promoted the stock market bubble of the late 1920s. The reputations of those institutions and their leaders plummeted during the Great Crash and its aftermath. Their inability to prevent the stock market’s collapse severely eroded their credibility with the public. The financial and psychological trauma of the Great Crash led to a steep drop in household consumption, which triggered sharp downturns in industrial production and investments in new business facilities and equipment. The U.S. economy fell into a severe recession by the fall of 1930. That recession exposed the speculative risks that universal banks had assumed during the boom years of the 1920s.

Will the World’s Glass after the Coronavirus Pandemic Be Half-Empty or Half-Full?

The author comments on the political and economic options in the wake of the coronavirus pandemic that started at the beginning of 2020. She revisits responses to the crises of the First World War, the Great Crash of 1929, and the Second World War, sorting them into ‘pessimistic’ and ‘optimistic’ responses, and outlining their respective consequences.

E. L. SMITH’S ENDURING CONTRIBUTIONS TO FINANCIAL ECONOMICS

In 1924, Edgar Lawrence Smith published a monograph presenting evidence aimed at overturning the conventional view that equities were speculative and bonds were the only long-term investments. This was immediately so successful that such eminent commentators as Irving Fisher and Benjamin Graham agreed that the monograph had had a material impact on market psychology, playing an instrumental role in the Great Crash. In this article, we examine Smith’s approach in detail, arguing that he made significant, enduring contributions to finance theory, empirical finance, and portfolio management practice. He was influential in creating the “cult of the equity,” laid the foundations for the equity risk premium, and introduced a probability-based risk metric and equally weighted portfolios. His influence is felt nowadays not only in the methodology employed in empirical work but also in major aspects of the conventional approach to portfolio management.

Can We Rebuild the Economic Consensus?

There are times in history when the consensus about our economic system breaks down. It happened after the Long Depression, also known as the Great Depression of the 19th century, and again in the 20th century around the Great Depression of 1929-1933, as well as after the Great Recession of 2008-2009 that followed the global financial crisis. The Covid-19 great crash, which carries the risk of a deep downturn, has led governments to take extraordinary measures in all areas of our lives. This has further fuelled the need to discuss how to rebuild the consensus about the most appropriate economic system for the 21st century as the great question of our time. This is a reflection piece invited for the Dahrendorf Symposium.