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CHAPTER 1
The origins of business reporting and early crises
The exchange of financial and business information between companies oils the wheels of trade, and the history and development of business and financial journalism in both the UK and the US is inextricably linked with the provision of information on and about companies. The forerunner of the modern public company was the joint stock company, and, just as the modern investor needs information about a company, so did the earliest investors in joint stock companies.
While in England companies that offered shares to investors date back to at least the thirteenth century (Micklethwait and Wooldridge, 2005), the joint stock company really began to take off in the seventeenth century, stimulated by the wealth of gold and silver from South America and the economic potential of trade with colonies in North America. This encouraged traders to look at other continents for similar opportunities. The companies created to open up trade in new areas were risky enterprises with no guarantee of success – or even of a return on the money invested. The common feature of all the companies was that they needed large amounts of capital to finance buying ships and paying the sailors (Scott, 1951). Such finance could be raised only through a joint stock company because it spread the risk among a large number of investors. Joint stock companies were granted a charter by the crown which gave them exclusive rights to trade in a specific part of the world. 'Chartered companies represented a combined effort by governments and merchants to grab the riches of the new worlds' (Micklethwait and Wooldridge, 2005: 25).
Chartered joint stock companies were used to open trade with Virginia (1606), Bermuda (1611), Guyana (1619), New England (1620) and Nova Scotia (1621). One of the most famous and long-lasting of these trading companies was the Hudson Bay Company, formed in 1668 to develop trade with Canada. In contrast, one of the least successful was the Muscovy Company or to give its full name, 'The mysterie and companie of the Merchants Adventurers for the discoverie of regions; dominions; island and places unknown'. It was created by the explorer Henry Cabot in 1555 to trade with Russia but, despite a promising start, it was not successful and, around 1630, disappeared from view without giving its investors any return on their investments.
The buying and selling of shares in joint stock companies was strictly controlled: if, for example, further capital was needed by a company after the initial issue of shares, it had to be provided by existing shareholders. Investors who wanted to sell their shares could do so only through private negotiations.
The investors of the seventeenth century share a common problem with twenty-first-century investors: information asymmetry – that is, the unequal flow of information between the company and the potential investor. Information asymmetry was the term used by the Kay Review (2012) into UK equity markets established by the government in 2011. Led by the economist Professor John Kay, its purpose was to review how the equity market was working in the UK and, especially, whether companies were too focused on short-term outcomes. If they were, the Review would recommend actions to address the problem. The Kay Report was published in 2012 and welcomed by the government on its publication; however, so far, none of its recommendations have been implemented.
Information asymmetry suggests that the information balance always seems to lie with the company, and the investor can struggle to find adequate information to inform their investment decision. The history of financial and business journalism demonstrates that companies cannot always be relied upon to produce the objective, accurate information that investors need. One of the most important functions of business and financial journalism has been – and continues to be – to balance this information asymmetry and provide the critical information and analysis that can help investors to make informed investment decisions.
Early beginnings
The first recognisable business newspaper was born out of the trading activity centred on Antwerp in the eighteenth century, which at the time was part of the Spanish Empire and the leading financial and trading centre in Europe. Antwerp was a major port, and hundreds of ships passed in and out of it every day, sailing to and from the Spanish possessions in the Americas. Many trading ventures that needed finance found support through the merchants and traders at the Antwerp Stock Exchange.
Trading houses produced handwritten sheets that contained information on tides, what ships were sailing in and out of port and what their cargoes consisted of; these were distributed to their customers to help their investment decisions. These handwritten publications (McCusker, 1991) emerged in Antwerp in 1540. The first printed 'newspaper' was a development of this, and was produced by the Antwerp trading house Van der Molen (McCusker, 1991). The information it contains is still the same, giving customers advice about visiting ships and what goods are being unloaded in the port (Roush, 2006). We know that other licensed brokers of the Antwerp Stock Exchange (McCusker, 1991) published two different kinds of business newspaper; one was known as the commodity price current account and the other as the exchange current account. Significantly, these publications were intended not just for domestic consumption but also for distribution outside Antwerp to other cities in order to try to stimulate trade for local businesses and attract investors and customers to the city.
Another client newsletter, produced by the powerful German banking family the Fuggers in 1586 (Roush, 2006), shares more of the features of the modern financial and business newspaper. The core information on the tides and currents was similar to that of the Antwerp newsletter, but what made it a 'newspaper' was that the factual material was complemented by news and information on the political and economic events of the day. There was news on, for example, the activities and intrigues of Europe's ruling dynasties; such information was important for traders and merchants, as wars and dynastic changes impacted on commercial activity and the fortunes of their clients. The collection and dissemination of information to produce the newsletter was a sophisticated operation, indicating just how important it was to both the clients and the Fuggers. The main providers of news were the Fugger bank agents who were based throughout Europe; there was also trading news from America.
In the last decade of the seventeenth century, London replaced Antwerp as the financial capital not only of Europe but of the world. And in London, as in Antwerp, a network developed to disseminate trading information. However, in the early eighteenth century this was not initially based around a stock exchange building but around a unique public sphere, the London coffee house.
London at the beginning of the eighteenth century had over 2,000 coffee houses, many of which became associated with a particular clientele or profession; authors, for example, frequented Will's in Covent Garden, while scientists preferred the Grecian in Devereux Court. Life insurers used Tom's in Exchange Alley. Politicians had their own coffee houses: the Whigs used St James, whilst Tories frequented the Cocoa Tree. The legal profession gathered at Nandos in Fleet Street and even the clergy had their favourite spot, Child's, near St Paul's. Traders from different parts of the world also had their own meeting places such as the Jamaica, Jerusalem and Pennsylvania in Exchange Alley (Dale, 2004).
Two coffee houses, Jonathan's and Lloyds, were to have a long-term impact not only on London's financial history but also on financial and business journalism. Edward Lloyd opened his first coffee house in 1687 near the docks, and, with its mercantile and shipping connections, Lloyds soon became the headquarters for a profession that became known as marine 'underwriters' (Dale, 2004). In 1691 Lloyd moved his establishment to Lombard Street in order to be nearer to the General Post Office, then an important source of shipping information (Kynaston, 1995).
One of the main attractions for the customers of the coffee houses was that they had access to the expensive newspapers of the day. Some coffee house owners, however, found that either the newspapers did not provide information that was relevant to their customers or, if they did, it was often unreliable. This led a few of the more enterprising newspapers to start publishing their own newsletters to meet their customers' requirements. Another factor that led the coffee house owners to set up their own publications was a 'war' that broke out between the 'coffee-men' (the owners of the coffee houses) and newspaper proprietors. The coffee men said that the newspaper subscriptions were too high and that newspaper journalists harassed coffee shop customers. Journalists were accused of attempting to eavesdrop on private conversations in order to gather information. For their part, the newspaper owners argued that as the availability of newspapers was the main attraction of the coffee houses for their customers, then the coffee-men should pay higher subscriptions (Dale, 2004).
Edward Lloyd produced his Lloyds List to provide reliable news and information on shipping matters for the ship owners and merchants who used his coffee house. So valuable and accurate was it that after his death in 1713 publication was taken over by the association of underwriters that took its name from his coffee house. Both Lloyds and Lloyds List still exist. Lloyds is the home for UK insurance underwriters; Lloyds List is owned by the Informa Group and still covers insurance-related matters. In common with many modern publications, in October 2013 it announced that it was ending the print edition and would in future be available only online.
Jonathan's coffee house was established by Jonathan Miles in Exchange Alley in 1680 (Kynaston, 1995) and attracted customers who were involved in or associated with the buying and selling of company shares. The information that Jonathan's offered to customers was its main attraction because it was so regular and up to date. While it had some information similar to the first Antwerp trading newsletter it also had wider editorial coverage on lost cargoes, problems caused by diseased crews and delays in sailing caused by repairs to a ship. In fact, the news was on anything that could impact on a trading mission. Jonathan went to great and sometimes unusual lengths to gather the information and deliver it faster than his rivals. He had an army of boys who waited around London's docks for ships to arrive to pick up any relevant news. These young, early investigative journalists also badgered the servants of merchants for scraps of useful information (Dale, 2004). Their collective findings were displayed on boards inside the coffee house, entry to which cost a penny (Dale 2004, Roush 2006).
One of Jonathan's regular customers, a Huguenot named John Castaing, was a broker at the Royal Exchange and he spotted a gap in the information market and produced his own publication to meet it. His newsletter contained the now basic trading news of ships and tides, but what Castaing added was up-to-date information on company share prices, bullion prices and also changes to the currency exchange rates. His newspaper, Course of the Exchange, first appeared in 1698 as John Castaing, Broker at his office of Jonathan's Coffee-House and was delivered every Tuesday and Friday in the City of London for an 'all-in' subscription of 3s per quarter (Dale, 2004: 17). While some publications such as Whiston's Merchants Weekly Remembrancer, of the Present – Money Prices of Their Goods Ashoar in London had covered share prices since 1681, the information in them was often inaccurate. What made the Course of the Exchange different was the reliability of its information. It was so reliable, in fact, that the listing eventually became the accepted standard and benchmark for other traders and city coffee houses (McCusker, 1991). As with Lloyds List, there is a direct link to one of the modern Stock Exchange's most important current publications; Castaing's list evolved into the current official price list of the London Stock Exchange. When Jonathan's burnt down in 1748, a replacement building was funded by a number of brokers and, as the new site was close to London's livestock market (the 'Stocks Market'), the two were combined to become the 'London Stock Market'.
The South Sea Bubble
In the early years of the eighteenth century, 'London was a town for making money and journalism and coffee thrived on the passion for profit. Thus it was that coffee houses emerged to provide a means by which personal exchange and information, gossip and rumour could take place more easily' (Parsons, 1989: 13). This was the background to one of the notorious incidents in financial history – the South Sea Bubble. The South Sea Bubble is significant in the history of financial and business journalism because for the first time we see a combination of circumstances that continue to recur at different historical periods. The Kay Review (Kay, 2012) highlights the South Sea Bubble as the first, and ideal, example of information asymmetry, where potential investors in a company lack independent advice on whether it is a worthwhile investment proposition. The combination of naïve investors with rising share prices and a financial media which not only misses the danger signals but actually exacerbates the problem by the way it reports on events can be a toxic one. Understanding that incidents such as the South Sea Bubble and the financial crisis of 2008 are linked should also enable us to have a better understanding of why they occur and how we might identify similar ones in the future.
Up until the end of the seventeenth century, trading in joint stock company shares was limited in both scope and volume. After 1695 this changed dramatically, for two main reasons; firstly, following the revocation of the Edict of Nantes, thousands of Huguenots were expelled from France and arrived in London with cash to invest after selling off their assets. This flood of new money coincided with the second factor, a period of peace and domestic prosperity which encouraged investors and companies to look for trading and business opportunities.
While joint stock companies were still restricted by Royal Charter, there were no such limitations on share trading by unincorporated companies, which could offer their shares to investors. It is estimated that by 1695 there were at least 140 companies with a total combined capital of £4.25m (Scott, 1951). Many of these companies were a risky proposition for potential investors, who had little information by which to judge the company, other than through what it provided. While success is not and cannot be guaranteed on any investment, what reduces the risk for an investor in any period, as we shall consistently see, is accurate information about the company and its prospects and about those behind it.
In the 1690s, among the companies looking to raise funds from investors were some that must have taxed the imaginations of those responsible for producing information about them. How, for example, could a potential investor assess the risk associated with an enterprise that wanted to take advantage of new diving equipment to find and raise treasure from shipwrecks? Another wanted finance to manufacture goods in England such as wallpaper, fine linen, plate glass and tapestries, that were currently being imported from France (Dale, 2004).
While financial and business journalism would eventually evolve to offer the type of objective information that can help potential investors make their investment decisions, in the late eighteenth century this role was in its infancy. Newspapers, though, did have an important function for new businesses: they were eagerly used by company promoters to advertise a company's prospectus, which gave potential investors information about the company and its prospects.
The advertising generated from new company flotations was to provide newspapers with a valuable source of income down to the twentieth century. For journalism, though, this was sometimes to be a double-edged sword, with the power of advertisers often being used to compromise editorial integrity.
(Continues…)
Excerpted from "Complacency and Collusion"
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Copyright © 2015 Keith J. Butterick.
Excerpted by permission of Pluto Press.
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