Financial History Issue 116 (Winter 2016) | Page 21

leading financial centers that brought rapid economic development in their nations and the world. As Wright (2002) and Rousseau and Sylla (2005) point out, well-functioning capital markets, particularly secondary securities markets, provide an important explanation of where and when economic development occurs. Modern capitalism owes its existence to stock markets and the private rules and regulations that made them possible.  Private Incentives for Increasing Transparency and Reducing Fraud The system of private regulation made the market more attractive by screening firms, creating listing requirements and requiring disclosure for investors. The requirements were not decided by government, but by the market participants themselves who won or lost based on the attractiveness of the venue. While it was impossible to prevent all instances of fraud, the listing and disclosure requirements made it more difficult and precluded most fly-by-night firms. Although the stricter rules of the NYSE were considered the Cadillac of listing standards, an advantage of markets is that not everyone is required to buy a Cadillac. Market participants only opted into the exchange’s stricter rules if they considered them value added. If firms or investors found an exchange’s listing or disclosure requirements too onerous or not appropriate, they could opt into venues with different rules. Exchanges that failed to adopt good rules, or that adopted burdensome rules, were at a competitive disadvantage; those that adopted good ones succeeded. Rather than being “a race to the bottom” in which anything goes, the NYSE worked to make its market attractive and only put its stamp of approval on firms that warranted trading. By providing extra assurances to investors, the exchange increased the demand for its market and made investing in stocks more attractive and safe. Private Governance as the Historical Norm Although most politicians would assert that advanced markets are impossible without government enforcing the rules of the game, history shows otherwise — and not just for a short time, but for hundreds of years. This form of private governance has been tremendously important for centuries, but its mechanisms are often not easily seen or are forgotten. When buyers do not have to worry about counterparty default risk in a stock purchase, the time they spend thinking about the problem is minimal. Behind the scenes, however, the stock exchange spent hours making sure people who are permitted to trade in a market can actually deliver what they promise. ​ dward Peter Stringham, Ph.D., is the E Davis Professor of Economic Organizations and Innovation at Trinity College, Hartford, Connecticut. This article has been adapted from his latest book, Private Governance: Creating Order in Economic and Social Life, © 2015 Oxford University Press. All rights reserved. The New York Stock Exchange, 1882. When the Securities Act and the Securities Exchange Act were implemented in 1933 and 1934, they mandated X[