The coffee houses that built the City — how London finance began over a hot drink

Long before the gleaming towers of Canary Wharf or the glass-fronted offices of the Square Mile, the business of buying and selling shares was conducted over a cup of coffee. The men who built what became the London Stock Exchange did not work in boardrooms. They sat at wooden tables, in noisy rooms thick with tobacco smoke, and traded gossip, rumours, and occasionally actual investments.

London’s coffee houses arrived in the mid-seventeenth century and quickly became something that had not quite existed before: open, informal spaces where merchants, lawyers, sea captains, and speculators could mingle without the social barriers that normally kept them apart. You paid a penny to get in and could sit as long as you liked. The coffee was secondary. The real commodity was information.

Jonathan’s Coffee-House on Change Alley, near Cornhill, was where the trading community started to coalesce. By around 1680 it had become the regular haunt of stock and commodity dealers. The atmosphere was chaotic by modern standards. There were no regulators, no rules about who could trade or on what terms, and very little in the way of formal record-keeping. What held it together was reputation. If a man was known to default on his word, he found himself very quickly without anyone willing to deal with him.

It was at Jonathan’s that a man named John Castaing began publishing a twice-weekly price list called The Course of the Exchange and Other Things. First issued around 1698, it listed the prices of stocks, commodities, and exchange rates in a format that traders could actually use. This was not journalism in any modern sense. It was raw data for people who needed to make decisions quickly. Castaing’s list is often cited as the earliest forerunner of the financial press, though he would probably have been surprised to hear himself described as a journalist. He was a broker trying to make himself useful.

Just down the road from Jonathan’s was Garraway’s, another coffee house that attracted a different and sometimes more reckless crowd. It was at Garraway’s that some of the more speculative enthusiasms of the era found an audience. Auctions were held there, pamphlets were distributed, and schemes were pitched to anyone willing to listen. If Jonathan’s was where serious dealers met, Garraway’s was where the promoters went to find them. The two were separated by only a few yards but by rather more in character.

The South Sea Bubble of 1720 is the event that ties this era together in most people’s minds. The South Sea Company had been granted a monopoly on trade with Spanish South America, a monopoly that turned out to be largely theoretical since Spain had no particular intention of honouring it. What the company did have was a genius for financial engineering and an extraordinary ability to talk up its own prospects. Share prices rose to dizzying heights as investors, including members of Parliament and the aristocracy, piled in. When the bubble burst it left thousands ruined and the government scrambling to contain the fallout.

The crash did not destroy the coffee-house trading culture. If anything it reinforced the view that some kind of order was needed. The merchants and brokers who continued to meet at Jonathan’s were not idealists. They were practical people who understood that markets need a degree of trust to function. Too much chaos, and nobody would show up at all.

Through the following decades the community at Jonathan’s grew more organised. The dealers developed informal conventions about how to conduct business, what constituted a valid deal, and how disputes should be settled. None of this was written down in any formal sense. It was understood, enforced by social pressure and the knowledge that one’s livelihood depended on being taken seriously by the people in the same room.

In 1773 the members of Jonathan’s took a significant step. They moved to a new building in Sweeting’s Alley and, for the first time, gave their gathering a name. They called it the Stock Exchange. Entry was restricted to those who paid a subscription fee. The open-door penny-entry culture of the original coffee house was replaced by something more controlled. This was the moment the institution became, in recognisable form, what it would remain for the next two centuries.

Lloyd’s Coffee House deserves a mention in its own right, even though its story diverged from that of the Stock Exchange. Edward Lloyd ran his establishment on Tower Street from around 1686 and it became the meeting place of ship-owners, merchants, and the underwriters who insured their cargoes. The habit of underwriters signing their names one below the other on a contract gave the insurance market its name and its characteristic structure. Lloyd’s of London today is among the most recognised insurance markets in the world, and its origins trace directly back to the same chaotic, energetic coffee-house culture that produced the Stock Exchange.

What made all of this work, in the end, was not regulation or law. It was the fact that people kept coming back. The coffee houses were useful because everyone who needed to be there was there. Prices were set not by any formal mechanism but by the simple process of buyers and sellers finding each other in the same room and agreeing a number. The more people showed up, the better the prices became. The better the prices, the more people showed up. This is, at its core, exactly how markets still work today, even if the room is now electronic and the participants are spread across the globe.

There is something worth holding onto in the coffee-house story. The City of London did not begin as a place of towering institutions with fleets of compliance officers and armies of analysts. It began as a place where imperfect information was exchanged between people who were simultaneously trying to get the better of each other and trying to build enough trust to do business again tomorrow. The tension between those two impulses has never really been resolved. It is simply better managed than it used to be.

This post is drawn from The Street-Smart Trader by Ian Lyall. Republished with permission.

Street Smart is a series drawn from first-hand experience of the City of London, updated as each new chapter arrives.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.