Financial Markets and the American Revolution
Bryan Taylor, Chief Economist, Global Financial Data
Can you trace the progress of the Revolutionary War through the stock market? Was the stock market a good investment during the American Revolution between 1775 and 1783 or a poor investment? The United States, of course, did not have a stock market during the American Revolution, so we have to look at shares in the United Kingdom to study the reaction of the stock market to the American Revolution. In London there were three principal shares that traded: the Bank of England, East India Co. and South Sea Co. The British 3% Consols represented a large part of the market and grew in size as Britain took on more debt to fund the war. Although France was involved in the American Revolution, the war had no impact on shares of the Compagnie des Indes Orientales, which was the only French company trading in Paris. So how did the American Revolution impact shares and bonds trading in London?
The British Credit Crisis of 1772 and the British Tea Party
East India Co. (EIC) stock played an important role in the birth of the United States. Its stock declined in price between 1769 and 1770 during the Bengal Bubble of 1769. Robert Clive conquered Bengal in 1757. Clive and the EIC gained increasing power over Bengal through the imposition of the puppet regime of Mir Jafar and control over tax collection rights. As a result, the price of EIC stock rose from 112 in January 1762 to 166 in May 1766 whence EIC stock shot up to 277 in March 1769. Thence, the stock price plummeted. The combination of the attack on company holdings by Hyder Ali in 1769 and the Bengal Famine of 1770 caused EIC stock to collapse to 183 in November 1770, a 34% decline. This is illustrated in Figure 1.
The years between 1770 and 1772 showed rapid growth in trade between Britain and the North American colonies as a credit boom funded the growth in trade. EIC stock rallied after its November 1770 low, and Alexander Fordyce thought the EIC stock would reverse its rally from 183 to around 230. He borrowed heavily and shorted East India Co. stock, but his timing was off, and his gamble failed. Instead, Alexander Fordyce lost money and he fled to France to avoid debt repayment on his £243,000 in debts. He was declared bankrupt on June 8, 1772, and the London stock market collapsed on June 22, 1772, on a day which became known as Black Monday. It was the worst collapse in the London stock market since the South Sea Bubble of 1720.
The southern colonies of the United States had borrowed money to fund the planting of crops to export them to Britain and the rest of the world. Nearly 85% of the borrowing by the colonies from Britain was from the southern colonies. When the 1772 crisis occurred, British merchants urgently called for debt repayments from Thomas Jefferson and other planters, which the colonists were unable to provide.
Figure 1. East India Co. Stock Price, 1760 to 1785
The East India Co. was hard hit by the Financial Crisis of 1772. Their stock fell in price from 226 on May 30, 1772, to 139 on May 25, 1773, a 38% decline. Failing to pay or renew its loan from the Bank of England, the EIC tried to sell its eighteen million pounds of tea to the American colonies to raise money. Because the EIC had to use middlemen to sell the tea, the price of its tea was not competitive with other sources, so the British parliament passed the Tea Act in May 1773 allowing the EIC to sell the tea directly through its own agents in America, and imposed a three pence tax on each pound of tea sold in the American colonies. The EIC could now sell tea from China in American without shipping the tea through middlemen and without the imposition of the taxes required by the Townshend Acts of 1767 and 1768.
The Tea Act aided the EIC and stopped the slide in the price of its stock, as Figure 1 illustrates, but the colonists were furious at how the British government and the EIC were controlling the trade in tea. Consequently, on December 16, 1773, the Boston Tea Party occurred during which colonists, disguised as native Americans, dumped an entire shipment of tea into the Boston Harbor. The Philadelphia Tea Party, which occurred several days later, sent an entire shipment of tea back to England. The British considered this an act of treason and the Tea Act, stemming from the Financial Crisis of 1772, fueled the American Revolution.
The American Revolution
The Battles of Lexington and Concord occurred in April 1775. The British Parliament declared the colonies to be in a state of rebellion in August 1775 and the Declaration of Independence was ratified unanimously on July 4, 1776. As Figure 2 illustrates, these events had little impact on the British stock market since it traded sideways between 1773 when the Boston Tea Party occurred and early 1777. The British were successful in the war at first, seizing both New York City and Philadelphia, forcing the Continental Congress to move to Baltimore. However, in October 1777, British troops under General John Burgoyne were forced to surrender at Saratoga. After the victory at Saratoga, the French signed a Treaty of Alliance with the American colonists in February 1778.
Figure 2. British Stock Market, 1770 to 1785
As can be seen in Figure 2, stock prices in London collapsed by 20% between September 1777 and April 1778. In fact, the bottom in the British bear market that occurred between June 1768 and April 1778, during which the market fell by 41.2%, occurred after the colonies signed their Treaty of Alliance with France, convincing British investors that England was not only at war with the colonists, but with the French as well. Britain had fought the Seven Years’ War, known as the French and Indian Wars in the Americas, between 1756 and 1763 and with the French now allied with the Americans and having suffered defeat at Saratoga, the chances of a British victory declined significantly.
During the 1700s, British stock and bond prices behaved in tandem, rising and falling together. The price of the British Consol fell from 90 in November 1775 to 60 in March 1778 and the yield on British bonds rose from 3.4% in 1775 to 5% in April 1778. The price of the British Consol continued to fall as the war continued, reaching 54 in February 1782. Yields on the British consol are illustrated in Figure 3.
Figure 3. British Consol Yields, 1770 to 1785
French aid helped the colonists to defeat the British. General Cornwallis was forced to surrender to the Franco-American forces at Yorktown in October 1781. As can be seen in Figure 2, the loss at Yorktown brought relief to British investors and the stock market rallied into the new year. Although the British continued to fight with the French and Spanish for another two years, hostilities basically ended in the American colonies. The Treaty of Paris, signed on September 3, 1783, brought an end to the Revolutionary War and recognition by Britain of the new United States as an independent country.
British government expenditures rose from £10 million in 1775 to £29 million in 1782, the highest level they had ever been at in Britain until then. British debt rose from £127.4 million in 1775 to £231.8 million in 1783, an 81% increase. By the end of the American Revolution, British government debt was 140% of GDP.
Once hostilities ceased between the British and the French and Spanish in 1784, peace returned to England and the stock market began a bull market once again. The British stock market continued to rise until March 1792 when it was 94% above the level it had been at in 1778. In August 1791, stock in the Bank of the United States began trading in Philadelphia and it rallied creating the first bubble and bull market in U.S. history. The U.S. stock market peaked in January 1792, and the British stock market peaked in March 1792. France declared war on Austria in April 1792, and Europe plunged into war for the next 23 years.
Conclusion
It is fascinating to analyze how the prelude to the American Revolutionary War and the war itself were reflected in the behavior of the stock market. Overlending to the American colonies in the early 1770s led to the British Credit Crisis of 1772. The East India Co. needed to sell tea to cover its debts acquired in the Credit Crisis, which led to the Boston Tea Party. Grievances over the way the way the British parliament was imposing taxes on the colonists without any representation led to the revolt of the colonies, the Declaration of Independence, and the American Revolutionary War.
At first, the British were victorious against the colonists, occupying both New York City and Philadelphia, and this success is reflected in the stock market. But after the victory at Saratoga, the tide turned against the British when the colonists were able to ally themselves with the French. The British stock market collapsed. Victory at Yorktown in 1781 led to the Treaty of Paris, signed in September 1783, and the recognition of the colonies by Britain as an independent country. Each of these events is reflected in the stock market, and then as today, the stock market provides a barometer of investor expectations about the future.
It is fascinating how we can analyze and discover the causes behind the sudden drops in the stock market 250 years ago, being able to determine what events caused sudden slides in the stock market and what events the stock market did not respond to. It was usually the sudden, unexpected events that created the bear markets of the American Revolution or other wars. You can discover the influence of the Credit Crisis of 1772, the Boston Tea Party, the victories at Saratoga and Yorktown, the alliance between the American colonists and France and other landmarks of the American Revolutionary War in the behavior of the stock market. The stock market reflects the greed and fears of investors today just as it did 250 years ago, a fact investors today should never forget.
