The ABC of Stock Speculation

Ask where the word "broker" comes from and the old law dictionaries start arguing. Nelson opens his book by letting them argue.

One camp traces it to a Saxon word for misfortune: the broker as a broken trader, a man who had failed in business and now lived off other people's deals. Another points to French and Saxon roots meaning to break or grind into small pieces, so the broker is the one who breaks a large bargain into particulars and sells it at retail.

Neither origin is flattering, and neither has anything to do with shares. For most of its long life the word belonged to cloth, grain and second-hand goods. The stock market borrowed a job that already existed.

There is a third reading, and it is the one worth keeping. In Piers Plowman the word turns up meaning a fault-finder, someone who blames men's wares. One of Nelson's authorities concludes that the broker was originally one who inspected goods and rejected whatever fell below the standard.

That changes the picture. Before he was a salesman, the broker was a judge of quality standing between buyer and seller, trusted by both because he belonged to neither.

The Romans, Nelson adds, had a class of public officers who did all of it at once: bankers, money-changers, brokers, commissioners and notaries rolled into one. Notice the last item on that list. From the very beginning, the middleman's job came bundled with keeping the record.

As early as 1285, an Act of Parliament ruled that nobody could act as a broker in London unless he had been admitted and sworn before the warden, mayor or aldermen. A middleman had to take an oath before he could stand between two merchants.

Why swear in a go-between? A sixteenth-century legal writer answers with a proverb: between what you will buy and what you will sell, the price can differ by twenty in the hundred. Bargains were spoken, and spoken bargains breed quarrels.

The broker ended them. In that writer's words, "the testimony of a sworn Broker and his book together is sufficient to end the same." His word and his book were the whole value he added, centuries before anyone traded a share.

According to the sixteenth-century writer Nelson quotes, what made a sworn broker worth paying?

• His sworn testimony and his book could settle a disputed bargain✓Correct answer
• He held the legal power to fix prices for the whole city
• He guaranteed that both sides would come out with a profit
• He owned the goods himself and could sell them at any price

Bargains were verbal, and verbal bargains led to quarrels; the broker's oath and his written record ended them. He never promised anyone a profit or set prices. What he sold was trust that both sides could check.

For centuries, though, the sworn broker dealt in things you could lift. Nelson quotes the lawyer John R. Dos Passos on a later English statute that still spoke only of "merchandise and wares." Down to that period, a broker in money, stock and funds had no legal existence.

The change came late in the seventeenth century, when the East India Company came prominently before the English public. Buying and selling shares became an established business, and the old word, with its well-understood meaning, was simply carried across to the men employed to do it. They became stock-brokers.

So the profession was not invented for the stock market. A trade built on oaths and records took on a new kind of goods, and brought its habits along.

What exactly was this new kind of goods? Nelson admits that nobody can trace the stock certificate further back than the middle of the seventeenth century. Rome had merchant corporations, but whether their members ever held a paper that could be sold or inherited, Roman law leaves completely in the dark.

English judges had to decide from scratch. In 1770 someone argued before Lord Mansfield that stock certificates were money. He refused: "This is a new species of property arisen within the compass of a few years. It is not money."

That ruling marks the edge of the speculator's world. A share is not a coin and not a bale of cloth. It is a claim on a business, and a claim can be valued, doubted, bought on hope and sold on fear.