Four Centuries of Financial Markets

Four Centuries of Financial Markets

Bryan Taylor, Chief Economist, Global Financial Data


Global Financial Data has produced indices that cover global equity markets from 1601 until the present and bond and bill markets since 1694.  In organizing this data, we have discovered that the history of financial markets over the past 400 years can be broken up into different eras when economic and political factors affected the size and organization of financial markets in different ways. There are periods of ten or twenty years when economic conditions were sufficiently similar that rates of return to financial assets were consistent.  There were also times when there was a sudden change in economic or financial conditions that established a trend that took years or even decades to unravel.

World War I changed the world in ways that could never be undone.  Global markets closed when the war began and attempts to return to pre-war conditions after the Great War ended failed. Charles Kindleberger pointed to 1252 as an important year in European Financial History because this was when Florence began minting gold coins in Italy for the first time since the Roman Empire fell.  His Financial History of Western Europe begins in 1492 and he discussed how the financial center of Europe moved from Italy to Amsterdam to London and to New York over the past five centuries.

In collecting data, we have analyzed the returns to stocks, bonds, and bills to find patterns in those returns.  We have noticed that there are some periods when returns were low throughout the world and periods when returns were high. There were times when the Equity Risk Premium was positive and times when it was negative. Over time, the correlation between returns throughout the world has increased, but even in the 1700s, information flowed quickly between Paris, London, and Amsterdam so investors could take advantage of news that others lacked.  Financiers kept track of the Battle of Waterloo, using pigeons to transfer information and semaphores transferred information between New York and Philadelphia in the early 1800s.  Since then, the telegraph, the transatlantic cable, the telephone, and satellites have sped up the dissemination of information until it can be transmitted instantaneously across the planet.

The stock market provides a history of the world and the financial and economic revolutions that have driven changes in the world over the past four centuries. Without financial markets, few of these changes would have happened.  There are a number of external factors which drive financial factors more than others.  These factors define the economic era, and the four main factors are war, inflation, the government and trade.  Markets expand when there is no war, inflation is low, government intervention in the economy is minimal and trade is encouraged.  Returns fall when there is war, inflation is high, the government restricts the market and trade is discouraged. These are the factors that determine a financial era.

              War directs economic activity away from production. Goods are produced to win the war, not to benefit consumers. War creates massive destruction which reduces the supply of resources to the market.  Governments often take over production during the war and redirect industries toward the war effort.  Consumer goods become short in supply and the government limits the profitability of corporations.  Countries directly involved in a war suffer while countries supplying materiel to the belligerent countries, but are not involved in the war, may benefit.  Countries often default on government bonds during wars and inflate the economy since they find it difficult to pay for the war with taxes.  After the war there is dislocation in the economy and recovery may be slow.  Once the war and its subsequent dislocations are over, the economy can recover quickly as it returns to normal, but during the war, returns to stocks, bonds, and bills falter.

              Inflation is one of the worst enemies of bonds and bills.  If you purchased a bond in a low-inflation environment and expected to receive a 3% return for the next ten years, but inflation goes up to 10%, 100% or hyperinflation occurs, your returns will be quickly wiped out. The German hyperinflation in the 1920s wiped out the savings of millions.  Stocks can provide protection against inflation, but mainly in relative terms. The Equity Risk Premium increases during inflationary periods, more because of the low return to bonds and bills than an increase in the return to stocks.  After adjusting for inflation, some countries have seen real losses of over 90% to investors as inflation accelerates and shares fail to keep up.  After the inflation has stopped, shares recover to their real values, but the destruction of value in bonds and bills remains.  Fixed income investors have no way of recovering their losses.

              Asset bubbles drive up prices as large amounts of money and credit chase assets that are limited in supply.  The bubble can affect shares, real estate, or any other financial assets.  People begin buying financial assets because they are certain that they can sell them in the future at a profit. This is the “greater fool” theory: “I may be a fool for buying at this price, but there will be a greater fool who will buy at a higher price.”  But this means that someone will end up losing money when prices reverse. This process can continue for several years before reality crashes the market.  Prices often return to their level before the bubble began as investors flee crashing assets which can remain low for years to come as people avoid investing in shares, real estate, or any other asset whose value got artificially bid up, fearing that they will get burned again.

              Government intervention can come either in the form of government regulation of an industry, government nationalization of an industry, government restrictions on operating in an industry or any other form of restriction on the market.  The mere threat of socialist intervention in the market can hold back returns for decades out of fear that either the government may pay too low of a price for the assets they nationalize or that they may seize assets without compensation.  When the Communists took over in Russia, China and Eastern Europe, investors were not compensated for the loss of their assets. Some investors lost everything.

              Autarky refers to trying to produce goods without pursuing international trade.  Barriers to trade may help companies within their own domestic market but limits their ability to sell their goods and services to other countries.  Exchange rates can also be manipulated to limit trade between countries.  Trade restrictions were used between 1914 and 1981 to limit trade between countries causing a reduction in returns to stocks. The most successful economies, such as the Anglo and East Asian countries, are ones that promote trade.  Countries that have relied on import substitution, such as South American countries, have suffered from those policies.

Although there are other factors that influence long-term returns, these are the four main factors that provide the best explanation of differences in returns over time and between countries. We have isolated four factors that limit returns and increase risk to investors: war, inflation and asset bubbles, government control of the economy and autarky.

Factors Determining Financial Eras

We can find significant dates when events occurred that changed the course of financial history and set the tone for markets during the next few decades. We base the historical eras on the periods between these dates.  Before the 1600s, there was little organized trading of stocks and bonds.  Exchanges were set up to buy and sell commodities, or to transfer money between ports in Europe, but there was little trading of financial assets.  Nevertheless, there were important turning points in financial history before the 1600s.  Gold coins were first minted in Italy in 1252 and this signaled the rise of Italy as an important financial center. Venice issued its first bonds in 1285. The bonds continued to trade in Venice until 1502 and acted as a good barometer of Venice’s economy. Under optimal conditions, the bonds yielded around 5%, but when the market thought Venice might default, as it did in 1381 during the fourth Genoese war, yields could rise to 20%.

The Black Death struck in 1348 and shifted economic power to the workers who survived.  The 100-years war devastated Europe between 1337 and 1453, but other events influenced financial markets as well. The War of Chiogga between Venice and Genoa occurred between 1378 and 1381 affecting financial markets. The Medici Bank was founded in Florence in 1397 and failed in 1494. The Banco di San Giorgio was founded in Genoa in 1408 and was closed by Napoleon in 1805. There were wars between Venice, Milan, and the Turks in the 1420s and in 1453, Constantinople fell to the Ottoman Turks. This was followed by war between Venice and the Turks between 1464 and 1479.

Columbus discovered America in 1492 and Spain began issuing bonds (Juros) in 1520, although a financial crisis followed in Spain in 1522. Italian bankers and financiers loaned money to sovereigns in the 1500s. Between 1557 and 1560 there was a triple sovereign default of France, Spain, and the States General of the Netherlands. Spain defaulted again on November 19, 1607. Each default weakened the bankers in Italy and forced them to charge higher interest rates to cover expected losses when the sovereign defaulted. 

The Spaniards began mining silver in Potosí and in Zacatecas in Mexico in 1546. This contributed to the Great Inflation between 1545 and ,1650.  Prices increased faster during that century than they would until the 1900s. The Great Tudor Debasement occurred between 1544 and 1551. Although they were primarily founded to quote exchange rates and trade commodities, not stocks and bonds, exchanges were founded in Hamburg in 1558, Cologne in 1580, and in Frankfurt am Main on September 9, 1585. The Banco di Rialto was founded in Venice in 1587 and the Banco del Giro in 1619.

Exchange rates are available between the Dutch Guilder and the British Pound beginning in 1590. The English East India Co. was established in 1601 and the Dutch East India Co. in 1602. The Bank of Amsterdam (Amsterdamsche Wisselbank) was established in 1609.  This was followed by the Bank of Hamburg in 1619, the Nürnberger Banco Publico in 1621, the Riksens Staenders Bank in 1668 and the Bank of England in 1694. By 1700, trading in stocks and bonds was established in London and soon spread to Paris and Amsterdam.

Financial markets have always existed.

Factors Influencing Markets

Financial markets react to the economic climate of the times.  The price of a stock depends upon the future cash flows to the corporation the stock represents, and the ability of a government or corporation to pay the interest due on a bond, or to redeem the bond depends upon the financial and economic conditions of the time. Stocks respond to changes in the profitability of corporations and bonds respond to changes in inflation.  Periods of technological change, free trade, few government restrictions, and a stable economic environment all increase the profitability of a corporation.  Periods of high inflation harm fixed-income investors while periods of low inflation benefit fixed-income investors. 

Both the rates of return to stocks and bonds as well as the Equity Risk Premium are influenced by external factors.  When there is a change in the overall economic environment the rates of return to stocks and bonds will change.  The Equity Risk Premium is not a fixed value, but changes constantly as the economic and financial environment changes.  There is no point in trying to find “the” Equity Risk Premium.  It is more important to try and predict the returns and volatilities associated with stocks, bonds, bills, real estate, and other financial assets.

At best, other analysts have only looked at 50, 100 or even 150 years of data on financial markets.  No one has collected several centuries of data to see how returns have changed over time.  What we have found is that the state of the economy and government’s role in the economy greatly influence the rates of return to financial assets.  Returns before World War I, during World War I, between World War I and the Great Depression, during World War II and the recovery after World War II led to dramatically different rates of return. It was not only the state of the economy, but the role of government in the economy that influenced returns.  Rates of return in the countries that were defeated in World War I and World War II were dramatically different from returns in countries that were victorious.

Although you could argue forever about when these different financial eras began and ended, we have tried to simplify the financial eras since stocks began trading in 1600 into a number of periods when external factors determined returns in similar ways throughout the world. The goal has been both to minimize the number of eras to avoid confusion but make them precise enough to cover an era.  The length of the eras shortened in the 1800s because the speed of information increased.  Before the 1840s, there was no telegraph or transatlantic cable or telephones.  The introduction of these technologies eventually made the transmission of information instantaneous.  Today, it takes just seconds for information to be transmitted around the world.  In the 1700s, this was not true.

Since 1600, we have broken up financial history into financial eras as follows:

1618-1648          The Thirty-Years’ War

1648-1689          The Anglo-Dutch Wars

1689-1720          The Glorious Revolution

1720-1756          Mercantilism

1756-1792          The Anglo-French Wars

1792-1815          The Napoleonic Wars

1815-1848          The Railroad Revolution

1848-1860          Gold Discoveries

1860-1873          American and German Wars

1873-1893          The Long Deflation

1893-1914          The Gold Standard

1914-1929          World War I

1929-1945          Depression and World War II

1945-1966          Post-War Recovery

1966-1981          Stagflation

1981-1999          Globalization

1999-2019          Irrational Exuberance

2019-                   Nationalism

We suspect that we may be heading into a new financial era of higher interest rates, more international confrontation, more emphasis on domestic production and less on international trade, and an even greater emphasis on IT as a source for growth.  It is unlikely that bond yields will return to the negative rates they were at in the 2010s.  Authoritarian leaders are holding on to power and democracies are becoming divided.  We initially want to call the new era one of Nationalism.  It will probably last until the 2030s.

Of course, we cannot predict the future, and we could be wrong.  But the 2020s seem sufficiently different from the 2010s to justify the possible beginning of a new financial era.



The Financial Eras

General information on financial markets during each of the financial eras is provided below:

1618-1648          The Thirty Years War

The Thirty Years’ War lasted from 1618 until 1648 and was one of the bloodiest wars in history. It is estimated that between 4 and 8 million people died directly or indirectly from the Thirty Years’ War. The English Civil War took place between 1642 and 1651.  The main outcome of the wars was the Peace of Westphalia which recognized the independence of the Netherlands from Spain.  The Netherlands had been fighting for its independence for eighty years and finally achieved it. This shifted the European balance of power and moved the financial center of Europe from Italy to Amsterdam. For the most part, peace ruled in Europe between 1648 and 1789 until the French Revolution led to the Napoleonic Wars and another continent-wide conflagration. However, England and the Netherlands became rivals and fought several wars in the 1600s.

The Amsterdam Stock Exchange was founded in 1602 when Dutch East India stock was issued.  Shares for the English East India company were issued in 1601.  Although a number of corporations were established in England in the 1500s, the number of shares that were issued was low and there was very little trading in their shares.  We do have a record of prices in Dutch East India Stock in the 1600s, and you can see how the politics and economic changes of the time influenced the Dutch East India stock price.  The Dutch West India Company was founded in 1621, Det Danske Ostindiske Kompagni was founded in Copenhagen in 1616 and the Vestindisk Kompagni in 1671. 

The Spanish state bankruptcy of 1607 wiped out many of the Genoese banks.  There had been previous Spanish defaults in 1557, 1560, 1575 and 1596. When the Thirty Years’ War broke out in 1618, a monetary crisis, known as the Kipper-und-Wipperzeit hit Germany. In some places, prices increased tenfold in Germany. A second Spanish state bankruptcy in 1627 caused further damage to the Genoese bankers and Fuggers. The Dutch Tulipmania occurred in 1637, though it had little lasting impact on financial markets. After the Peace of Westphalia ended the Thirty Years War, the bankruptcy of the French state eliminated the Italian bankers.  Financial markets remained underdeveloped in the first half of the 1600s, but the Thirty Years’ war shifted the center of European finance from Italy to the Netherlands. Data are available on exchange rates and on commodities as well as the VOC, but no bond data are available.



1648-1689          The Anglo-Dutch Wars

The Peace of Westphalia brought an end to the Thirty-Years War in 1648. At the end of the Thirty Years’ War, France defaulted, leading to the ruin of the Italian bankers. Spain defaulted once again in 1652. Although they were not as large or as expensive as the wars fought between 1618 and 1648, new wars erupted between England and the Netherlands in the decades that followed the Peace of Westphalia.

The First Anglo-Dutch War immediately followed the English Civil War and took place between 1652 and 1654. The English attacked Dutch ships disrupting Dutch shipping.  The Second Anglo-Dutch War took place between 1665 and 1668.  The Third Anglo-Dutch War occurred between 1672 and 1678. When France and England invaded the Netherlands in 1672, it led to a severe market decline which is referred to as the Rampjaar (Disaster Year) in Dutch history.   Exchanges were established in Koenigsberg in 1619, in Leipzig in 1678, in Bremen in 1682 and in Berlin in 1685. The Stockholms Banco was founded in 1656; it collapsed in 1668 and was purchased by the Swedish Riksbank.

The only company for which we have regular data on share values in the 1600s is the Dutch East India Co. Shares in the Dutch West India Co. also traded, but historical data on their shares is limited.  Most of the trading on the Amsterdam Exchange was in commodities and currencies. There is also occasional, though not consistent, data on English stock prices.  Unfortunately, there is very little history of the prices of stocks and bonds in the 1600s, only data on exchange rates and commodities. 




1689-1720          The Glorious Revolution

Wars:                                        Nine Years War (1689-1697), War of Spanish Succession (1701-1714)

Inflation:                                   Modest

Trade:                                       Trade grew though interrupted by war

Government Intervention:        High during the War of the Spanish Succession

Government Debt:                   Increased to fund War of Spanish Succession, tried to eliminate in 1720

Stock Market Capitalization:   Exploded until 1720

Stock and Bond Returns:         UK (10.36% for stocks and 9.85% for bonds)

Bear Markets:                          Third Anglo-Dutch War (1688), Nine Years’ War (1700), Death of Charles II (1704)

Exchange Rates:                      Steady


England was transformed when the Glorious Revolution occurred in 1689 and William of Orange became the King of England, removing James II from power.   The Dutch brought their financial skills to London and trading in shares of English corporations grew dramatically. The Glorious Revolution brought Parliamentary democracy to England and peace between England and the Netherlands.

It wasn’t until the 1690s that data on the prices of stocks and bonds became regularly available. Trading occurred in coffee shops, but the Course of the Exchange was published twice a week beginning in 1698 providing prices from Jonathan’s Coffee House. It kept track of trades daily. East India Co. stock began trading daily in 1692 and the Bank of England was founded in 1694. Britain tied the Pound Sterling to gold in 1717. Shares of the British East India Co., Bank of England and South Sea Co. traded not only in London, but in Amsterdam and in Paris.

Governments in both Paris and London wanted to unload the debt they had accumulated during the War of the Spanish Succession (1701-1714) and the result was the Mississippi and South Sea Bubbles of 1719 and 1720. John Law’s bank was opened in 1716 and the Compagnie des Indes took over other French trading companies to help the Laws system succeed.  Share prices for the Compagnie des Indes may have gone from 300 Livres to 10,000 Livres in Paris, and South Sea shares went from 100 Pounds to 1000 Pounds, but the shares eventually collapsed. During 1720, the Bubble Act was passed which both restricted the incorporation of new companies and redirected capital toward the South Sea Co. This Act put a damper on the founding of new corporations for the rest of the century.

When the bubble of 1719-1720 hit London, Paris and Amsterdam, stock trading exploded and data on individual stocks became regularly available. The first stock market bubbles occurred drawing in thousands of people who had never bought stocks or bonds before. A dozen companies were trading in London daily in 1720. London, Paris, and Amsterdam provided an integrated market with capital flowing between the three cities to arbitrage price differences.  After the bubble of 1719-1720, interest in stocks remained low for the rest of the century.

The Nine Years’ War occurred between 1689 and 1697 and the Great Northern War occurred between 1701 and 1720. There were bear markets in 1688, 1700 and 1704, and a recovery in the 1710s after the War of the Spanish Succession ended. Britain suffered a financial crisis and recoinage between 1692 and 1696.




1720-1756          Mercantilism

Wars:                                          War of Jenkins’ Ear (1739-1748), War of the Austrian Succession (1740-1748)

Inflation:                                     Slight deflation

Trade:                                          Increased

Government Intervention:           No wars so relatively light

Government Debt:                      Increased very little

Stock Market Capitalization:      Decreased after the 1720 bubble

Stock and Bond Returns:            UK (2.94% and 3.05%), Netherlands (1.18%)

Bear Markets:                             Stocks declined after the 1720 bubble

Exchange Rates:                         Stable


There was little change in the investment opportunities for investors between 1720 and 1756. 1720 marked the height of the South Sea Bubble when the price of South Sea stock increased tenfold. The were few wars during those years, one being the War of the Austrian Succession (1740-1748).  The financial maneuverings of the John Law and the South Sea Co. had wiped out much of the debt of both France and England. Consequently, there was little new government debt and stock market capitalization declined slightly as did prices.

England introduced the 3% bond in 1729 and consolidated its debts in 1751 creating the Consol which remained a perpetuity and was the most traded bond in England until World War I. France issued similar bonds in 1746 which continued to trade until the French Revolution.

Although there were few companies that were founded in England during these years, stock trading grew in both Denmark and Spain.  The Reales Minas de Guadalcanal was founded in 1727 and the Real Compania Guipuzcoana de Caracas was established in 1729. Five more companies were founded in Spain in the 1740s and four more companies in the 1750s.  Unfortunately, there was insufficient trading to keep track of changes in the prices of these companies. Similarly, the Soassurancekompagniet was established in Copenhagen in 1726, the Asiatisk Compagnie in 1732 and the Kurantbank in 1736.



1756-1792          The Anglo-French Wars

Wars:                                           Seven Years’ War (1756-63), American Revolution (1775-1783)

Inflation:                                      Slight deflation, except during wars

Trade:                                          Increasing trade except when interrupted by war

Government Intervention:           Very little except during war

Government Debt:                       Increased to fund wars

Stock Market Capitalization:       Corporations closed in Netherlands, France, Growth in UK, USA

Stock and Bond Returns:             United Kingdom (5.23% and 3.57%)

Bear Markets:                              Seven Years’ War (1720-1762), American Revolution (1768-1784)

Exchange Rates:                          Erratic due to wars, inflation


There was little change in the investment opportunities for investors between 1756 and 1792. The two major wars during those years were the Seven Years’ War (1756-1763), and the American Revolution (1775-1783).  Government debt grew as a result of these two wars, the capitalization of the stock market shrank relative to debt and investors bought bonds and shares for income, not for capital gains. There were two bear markets which resulted from the Seven Years’ War and the American Revolution, which drove both stock prices and bond prices down. Inflation in the United States made the Dollar “not worth a Continental.”

The small number of companies that existed in the United Kingdom changed between 1791 and 1794 when parliament approved 44 canals to be built in the Midlands. These shares were not traded in London but in the towns where the canals were built. The Irish Grand Canal was incorporated in 1772 and work on the Irish Royal Canal began in 1790. The Banco de San Carlos, which eventually became the Banco de España and the Bank of North America were both founded in 1782. Every Man His Own Broker was first published by Thomas Mortimer in 1761 to advise individuals on trading stocks at Jonathan’s Coffee House.  Although there was little change in the trading of stocks and bonds between 1756 and 1792, the foundations for the dramatic growth in stocks and bonds were laid.




1792-1815          The Napoleonic Wars

Wars:                                          Napoleonic Wars (1792-1815), War of 1812 (1812-1816)

Inflation:                                     High due to war

Trade:                                         Trade interrupted by war, blockades

Government Intervention:           Very heavy due to war

Government Debt:                       Increased to fund wars

Stock Market Capitalization:       Dramatic Growth in UK, USA, Banque de France founded

Stock and Bond Returns:             World x/USA (3.54% and 1.93%), USA (3.23% and 3.36%)

Bear Markets:                              French Revolution (1792-97), Napoleonic Wars (1809-12), Waterloo


Exchange Rates:                          Inflations in Denmark and Austria, Erratic due to wars, inflation


1792 was significant for several reasons.  In the United States, the Bank of the United States was founded with $10 million in capital, $2 million of which was owned by the United States Government.  Overnight, it became the second largest corporation in the world, after the Bank of England.  This was part of the reorganization of American finances which Alexander Hamilton introduced.  American Continental and State debts were reorganized and reissued, replacing the debts which previous American governments had defaulted on.  During the wars, there was high inflation in Denmark/Norway and Austria. Napoleon redrew the boundaries of Europe, brought an end to the Holy Roman Empire in Germany, and exerted control over Italy. Napoleon ended the inflation of the French Revolution and brought stability to the French Economy.

Canal mania struck England and the price of many canals doubled and quadrupled in price before the bubble burst and prices returned to par. The French Revolution occurred, leading to the dissolution of French and Dutch corporations and default on the debts of every country that participated in the Napoleonic Wars except for the United Kingdom.  Dutch and French debt was reorganized.  Interest payments on Swedish, Russian, and Spanish debt was suspended, though later resumed. Britain suspended its link to gold in 1797, only to restore it in 1821.

Just as World War I brought an end to the world of Free Trade in 1914, the Napoleonic Wars brought a complete transformation of Europe and laid the foundations for the rapid development of Europe during the long century between 1815 and 1914, though more because of the defeat of Napoleon than his victory.

Between 1792 and 1815, the French Revolutionary Wars and the Napoleonic Wars dominated the financial scene. Every country in the world, except the United Kingdom, defaulted on its debts and Dutch and French companies that traded in Amsterdam and Paris were closed.  Bubbles in 1792 in New York and 1810 in canals in England expanded the number of companies that listed on exchanges in New York, Philadelphia, Boston, and London. While there had been almost no growth in the stock market between 1720 and 1792, after 1792, the number of stocks in the UK, USA and Ireland exploded.  There is data on Irish equities beginning in 1784, United States equities beginning in 1782, British canals beginning in 1806 and data on the Banque de France beginning in 1801. British government debt grew to over twice its GDP by 1815, but during the next 100 years, debt would shrink, stock market capitalization would grow, and new transports and technology would transform the world.



1815-1848          The Railroad Revolution

Wars:                                          Minor wars and rebellions

Inflation:                                     Deflation after Napoleonic Wars

Trade:                                         With Napoleonic Wars over, trade increases

Government Intervention:          Minimal

Government Debt:                      Decreased due to absence of war

Stock Market Capitalization:       (from 1.27% to 4.05%) Increased due to railroads, canals, banks

Stock and Bond Returns:              World x/US (6.89% and 6.82%), USA (6.21% and 7.45%)

Bear Markets:                                Bubble of 1825, Panic of 1837, Railroad Mania (1845)

Exchange Rates:                            Stable


The period from 1815 until 1848 was one of peace, expanding equity markets, and a reduction in the importance of government bonds relative to equities. There were bubbles in 1825 in South American stocks and in 1845 in railroads. South American countries gained their independence in the 1820s, and money flowed into South American stocks and bonds, including countries such as Poyais, which didn’t even exist. The first global panic occurred in 1837, which spread from the United States to Europe and impacted the global economy until the rise of the railroads in the 1840s.

In the 1830s and especially the 1840s, the number of railroads increased dramatically, not only in the United Kingdom, but in France, Germany, and other countries as well. British and French investors helped fund railroads in countries without active capital markets. Investors discovered that transportation stocks could provide reliable dividends as well as capital gains.  All of this culminated in the crash of the railway mania in 1845 and revolutions on the continent in 1848. These two events drove markets down to multi-decade lows. The period from 1845 to 1848 was the only global bear market between 1815 and 1914.

The Napoleonic inflations in Austria, Denmark, Norway, and other countries led to reforms of the currencies of those countries as well as new central banks. The Wisselbank (Bank of Amsterdam) was closed, and the Netherlands Bank was founded in 1814. The Austrian National Bank and Norges Bank were founded in 1816 and Danmarks Nationalbank were founded in 1818. These were not Central Banks in the modern sense, but they did provide funding to businesses in their countries.


1848-1860          Gold Discoveries

Wars:                                          Crimean War (1853-56)

Inflation:                                     Rising prices, but no large inflation

Trade:                                         Increased due to Free Trade and gold supplies

Government Intervention:          Very Little

Government Debt:                      Decreased due to Balanced Budgets and Lack of War

Stock Market Capitalization:      (from 4% to 7.5%) Increased Steadily in nominal terms

Stock and Bond Returns:            World x/US (5.00% and 4.15%), USA (5.56% and 3.04%)

Bear Markets:                             Revolutions (1848), Panic of 1857

Exchange Rates:                         Fixed to Gold or Silver


The continental Revolutions of 1848 led to sharp declines in stock and bond prices throughout Europe and brought about the worst bear market in the world between 1815 and 1914.  In 1849 gold was discovered in California and in 1851 in Australia, leading to a reflation of the global economy. The Crimean War between 1853 and 1856 had a minor impact on financial markets. It wasn’t until the railroads and telegraph began to spread through the world that there was a sufficient number of companies listed worldwide and information could be transmitted fast enough through the telegraph that global markets began to integrate. England and France were connected by cable in 1850 by the Submarine Telegraph Co. Ltd. Thus, the length of the global cycles declined.

Although the 1840s had laid the foundation of the spread of railroads in Europe, the 1850s saw their continued growth. The Panic of 1857 had a greater impact on the industrialized northern United States than the southern states.  Because cotton was such a large portion of US exports, the south thought they could survive and flourish if they separated from the north.  These economic conditions contributed to the Civil War in the United States.



1860-1873          American and German Wars

Wars:                                          Civil War (1861-65), German Wars (1864-71)

Inflation:                                     None outside of Wars

Trade:                                         Increased due to Free Trade

Government Intervention:          Very little outside of wars

Government Debt:                      Decreased due to Balanced Budgets and Lack of War, except in USA

Stock Market Capitalization:       (7.5% to 17.4%) Increased Steadily in nominal terms

Stock and Bond Returns:             World x/US (3.31% and 1.92%), USA (7.21% and 1.33%)

Bear Markets:                              Civil War, Grundjahr and Panic of 1873, Guernsey & Co. (1866)

Exchange Rates:                          Fixed to Gold or Silver


The United States, Germany, and Italy all united as single countries during these thirteen years and Austria became Austria-Hungary. Between 1860 and 1873, investors had the opportunity to invest in thousands of companies in Europe, the United States and the rest of the world that helped to build the world economy. Every country saw the number of companies in transport, finance, utilities, and industry expand. Financial markets became globalized, and the transportation revolution enabled the global economy to expand.  New industries were born, and the telegraph connected the world into a single market. The transatlantic cable connected Europe and North America in 1866, and the Suez Canal opened in 1869, making it easier to send goods around the world.

There were several wars that impacted financial markets.  The American Civil War affected the production of cotton, caused inflation in the United States and the collapse of the Confederate currency.  Lower production of cotton in the South and the Northern blockade of the South meant higher production in other countries. Prussia fought a series of wars with Denmark in 1864, Austria in 1866 and France in 1870, winning each. Prussia merged the former states of the Holy Roman Empire into Germany and used the indemnity from France to move onto the Gold Standard as did every other major country in the world. Italy became a united country and Austria granted greater independence to Hungary. These changes further contributed to the integration of the global economy.

The corner of the gold market in the United States in 1869 caused few problems. The crash of Guernsey & Co. in 1866 led to a bear market in the United Kingdom. Stock markets expanded, but it wasn’t until the 1870s that the world moved to the Gold Standard.

1873-1893          The Long Deflation

Wars:                                          No major wars, Imperialism in Africa, Asia

Inflation:                                     Deflation

Trade:                                         Free Trade, increased globally

Government Intervention:           Very little

Government Debt:                      Declined due to balanced budgets, lack of wars

Stock Market Capitalization:       (17.4% to 26%), Increased as governments promoted free trade

Stock and Bond Returns:             World x/US (6.18% and 6.16%), USA (7.32% and 6.33%)

Bear Markets:                              Panics of 1873 and 1893, Depression of 1882-1885

Exchange Rates:                           Fixed by Gold Standard


In 1871, Germany unified and adopted the Gold Standard between 1871 and 1873.  In the United States, the “Crime of 1873” demonetized silver and de facto moved the United States onto the Gold Standard. The Scandinavian Monetary Union was established in 1873. The Panic of 1873 and the crash of the Vienna Stock Exchange in May 1873 led to the Long Depression which lasted until 1879. The introduction of the Gold Standard in 1873 led to a steady deflation over the next twenty years. The collapse of the Union Gėnėrale in Paris in 1883 led to a bear market in Paris.  The Panic of 1893 spread from the United States to the rest of the world.

Nevertheless, there was growth in stock markets and in industry in every country in the world.  The telegraph, transatlantic cable and telephone sped up communication dramatically.  Petroleum replaced whale oil and Standard Oil became the largest corporation in the world.  Steel and other industries were born, and the electrification of industry was about to begin. Trusts were formed to produce consumer goods and the production of sugar, tobacco, and other goods was centralized in a small number of firms.  New corporations were founded in every country in the world.



1893-1914          The Gold Standard

Wars:                                          Boer War (1899-1902), Russo-Japanese War (1905), Balkan War (1912)

Inflation:                                     Very Low

Trade:                                         Free Trade, increased globally

Government Intervention:           Minimal, primarily during wars

Government Debt:                      Declined due to balanced budgets, lack of wars

Stock Market Capitalization:       (26% to 37%), Increased as governments promoted free trade

Stock and Bond Returns:             World x/US (3.07% and 2.52%), USA (8.17% and 1.47%)

Bear Markets:                              Panics of 1893 and 1907

Exchange Rates:                          Fixed by Gold Standard


There were panics in the United States in 1893 and 1907, which spread to the rest of the world.  Although there were bear markets in different countries at different points in time, there was no global bear market during these years. There were too many innovations and too much capital being poured into new industries to stop the growth of the economy. Stock markets expanded throughout the world and interest rates declined. There were minor wars in South Africa between the Boers and the British in 1899-1902, and between Russia and Japan in 1904-1905, which led to the Russian Revolution in 1905. The first Sino-Japanese War in 1894 and the Boxer Rebellion (1899-1901) as well as the Balkan Wars (1912) did not have a large impact on financial markets.  Nevertheless, it gave Germany the impression that the Great War would be short.  It was not.

This was a period of free trade based upon the Gold Standard which lasted until 1914. Capital flowed freely throughout Europe and the rest of the world, enabling investors to optimize returns globally. European countries invested in their colonies and in South America or wherever opportunities presented themselves. All the world’s major economies were on the Gold Standard, exchange rates were fixed, and bond coupons could be paid in any major European currency. A Russian bond was payable in Rubles, Pounds Sterling, Francs, Marks, Dollars, Gulden and Guilder.

By 1914, there was a global economy in which capital and goods flowed freely between countries. No one could imagine that a war would disrupt the progress that was being made, but it did. Europe was at war or recovering for the next thirty years. One wonders how much further the world could have advanced had World War I never begun.


1914-1929          World War I

Wars:                                          World War I (1914-1918)

Inflation:                                     Hyperinflation after World War I

Trade:                                         Reduced due to War, trade picks up in the 1920s

Government Intervention:           High intervention because of World War I and aftermath

Government Debt:                       Increased significantly to fund World War I

Stock Market Capitalization:       (from 37% to 55%) Grew during the 1920s

Stock and Bond Returns:             World x/US (4.36% and -0.51%), USA (10.45% and 0.16%)

Bear Markets:                              Markets Closed during WWI, Bear Markets after WWI, Hyperinflations

Exchange Rates:                          Attempts to return to pre-WWI levels failed


The era of globalized financial markets came to an end on July 31, 1914, when the world’s stock markets closed when World War I began to prevent capital from leaving each country causing economic collapse. During the war, capital was directed toward paying for the war, not to fund investment in new industries. Although London, New York and Paris reopened by 1915, Germany and Austria remained closed until 1917.

The end of the war was followed by the Spanish Flu pandemic of 1918 and the Global Recession of 1920. Hyperinflation occurred in Germany, Austria, and Hungary in 1923 which caused markets to crash in real terms. There was slow growth and poor performance of financial markets in the rest of northern Europe.  Attempts to restore globalized financial markets after the war failed. Financial markets operated on a national level, not on an international level. There were restrictions on capital flows and national economies behaved independently of each other.  Before World War I, markets in different countries provided similar returns because they were integrated.  After the war, national equity market returns diverged significantly because capital was unable to flow to the countries with the highest rates of return. The boom of the 1920s mainly occurred in the countries that were victorious in World War I.  Countries in northern Europe and countries that were defeated during the war did poorly.


1929-1945          Depression and World War II

Wars:                                          World War II (1939-1945), Italy and Japan Invasions

Inflation:                                     Deflation in the 1930s, Price Controls during World War II

Trade:                                         Reduced due to Great Depression, Communism and Nazism

Government Intervention:           High due to World War II and Great Depression, control of economy

Government Debt:                      Increased significantly to fund wars and Great Depression

Stock Market Capitalization:       (55% to 32%) Shrank as investment declined during wars

Stock and Bond Returns:             World x/US (4.36% and -0.51%), USA (7.14% and 1.81%)

Bear Markets:                              Great Depression of 1929-1932, Depression of 1937

Exchange Rates:                          Countries exited Gold Standard, government-controlled exchange rates


The stock market crashed in the United States in 1929 and the Creditanstalt bank failed in Austria in 1931 leading to global economic depression. The US Stock market crashed by over 85%. British countries left the Gold Standard in 1931 and the United States left it in 1933. The attempts to return to the pre-1914 financial world failed.

There were major recessions in 1929-1933 and 1937-1939. Unemployment hit 25% in the United States. Recovery between 1933 and 1937 was brief. Many countries seemed helpless in trying to stop the Great Depression from spreading. Countries relied more and more on domestic production and prepared for war. In Germany and the Soviet Union, growth was driven by government spending, not by free-market capitalism. Their success appealed to other countries for a while.   When war began in 1939, governments restricted trade and directed capital to help pay for the war, not new industries. During the war, governments controlled production, and the stock market shrank as a share of GDP.  Very little money was put in the stock market.  During the war, money was redirected to War Bonds, though as much to control spending and inflation as to fund the war. The private sector was squeezed out by the government. Nevertheless, the war led to many innovations that would benefit the world after World War II was over with.



1945-1966          Post-War Recovery

Wars:                                          Korean War (1950-1953), Cold War

Inflation:                                     Inflation after the War, mild Inflation during the 1950s

Trade:                                         Expanded through Bretton Woods and GATT

Government Intervention:           Increased as government tried to manage business cycle

Government Debt:                      Declined as there were few wars and governments balanced budgets

Stock Market Capitalization:       (32% to 41%) Increased during post-war recovery

Stock and Bond Returns:             World x/USA (5.34% and -3.56%), USA (9.52% and -0.89%)

Bear Markets:                              Post-war Recession in 1946

Exchange Rates:                          Realignment in 1949, Fixed rates until 1973


After World War II, Europe nationalized many of its main industries and the United States regulated the economy. Bretton Woods and the GATT laid the foundations for recovery from World War II and from the Great Depression. Although many had expected a return to Depression after the war ended, it never happened.  Instead, the government promoted trade and reinvestment to help grow the economy.  The unloved stock market of World War II grew rapidly as the economy recovered. 

The separation of Germany into capitalist and communist countries occurred in 1948. There was a realignment of currencies in 1949.  Stock markets in Eastern Europe were closed by the Communists. After European countries overcame the post-war inflation, the Wirtschaftswunder in Germany and the trente glorieuses in France produced the highest levels of economic growth in history. The foundations for the European Economic Community were laid to avoid future wars in continental Europe.

Governments felt they had successfully run economies during World War II and felt they could do equally well after the war.  Major industries were nationalized, shrinking the number of companies that listed on stock exchanges in Europe. The cold war helped to focus governments on growing their economies and making Europe succeed. Governments encouraged investment, recovery and new technologies as stock markets provided their best performance since World War I began.  Rising interest rates, however, reduced the return to fixed-income investors.



1966-1981          Stagflation

Wars:                                          Vietnam War (1966-1973)

Inflation:                                     Accelerating Inflation, reached double digits in most countries

Trade:                                         Grew due to GATT, slowed down due to OPEC and embargos

Government Intervention:           Increased as government tried to manage the business cycle

Government Debt:                       Declined as governments balanced budgets, inflation reduced real levels

Stock Market Capitalization:       (41% to 22.5%) Restricted due to inflation

Stock and Bond Returns:              World x/USA (4.42% and -1.06%), USA (0.22% and -3.17%)

Bear Markets:                               OPEC in 1973 and 1981

Exchange Rates:                            Fixed rates until 1973, floating rates thereafter


The post-war recovery between 1945 and 1966 was one of recovery from the destruction of World War II during the 1950s and 1960s. The period from 1966 to 1981 was a period of faltering growth and rising inflation. The United States became fully committed to the war in Vietnam and this began an inflationary spiral that would last for the next fifteen years. Inflation was under 2% in 1965, but between then and 1981, inflation gradually crept upward to double-digit levels. Governments raised interest rates in the 1960s and 1970s as inflation increased in developed economies. Emerging markets suffered hyperinflation. Stagflation referred to a stagnant economy under circumstances of inflation. This combination pushed the equity premium to record highs as equities provided record returns while fixed income returns lingered.

Governments inflated their way out of economic problems, further pushing down total market capitalizations.  The Vietnam War (1966-1973) was followed by the quadrupling of oil prices and economic embargo of the West by OPEC in 1973. A second oil crisis hit in 1978-1979 by which time the price of oil was ten times what it had been in the 1960s. The economic growth of 1945 to 1966 was followed by the stagflation of 1973 to 1981.  Keynesianism appeared to have failed. Many governments saw no way out of the economic problems of the 1970s.



1981-1999          Globalization

Wars:                                          Iran-Iraq (1980-1988), Iraq (1990), USSR-Afghanistan (1979-1989)

Inflation:                                     Declining from double digits to around 5%.

Trade:                                          Globalization increased trade, China, India, other countries joined

Government Intervention:          Reduced before 2000, privatization was favored

Government Debt:                      Increased as governments ran budget deficits

Stock Market Capitalization:       (from 22.5% to 109%) Increase due to privatization, globalization

Stock and Bond Returns:             World x/US (11.90% and 8.03%), USA (15.44% and 7.76%)

Bear Markets:                               1987 Crash, Iraq War (1990), Internet Bubble (2000)

Exchange Rates:                           Floating


It wasn’t until the 1980s that equity markets became globalized once again when deregulation and privatization swept over the world’s stock markets. It took over 70 years for the world to return to the globalized free trade that existed before World War I. The poor performance of markets and the economy in response to the OPEC Oil Crises of 1973 and 1979 brought the role of government in regulating the economy into question.  In the 1980s, privatization swept over capitalist economies, and governments promoted trade and freer markets. Communist countries collapsed and sought free markets over socialism. The former Communist countries opened stock markets and began to integrate into the world’s financial markets. The global market capitalization/GDP ratio had its most dramatic increase in history, rising from the lowest levels in the twentieth century to over 100% in some countries. 

There is no definitive date when the transition to supply-side growth occurred.  Was it during the collapse of fixed exchange rates in 1973?  London’s Big Bang in 1987? The fall of the Berlin Wall in 1989? The opening of China’s stock exchange in 1990? Or the collapse of the Soviet Union in 1991? From a financial point of view, the most important transition was the bottom of the bear market in bonds and equities in 1981. We use this as the starting point of the new era of Globalization.  Although the general trend was upward, it was not a smooth ride. The Mexican Debt Crisis in 1982, the 1987 market crash, the Savings & Loan Crisis in the late 1980s and 1990s, the Asia crisis in 1997, the Russian crisis in 1998, all proved to be hiccups in the general growth of the global economy.

Technology aided economic growth as computers, satellites, telecommunications, biotechnology, and other innovations drove growth.  The world wide web came into existence and was the foundation of the internet revolution of the 1990s.  The combination of privatization, expanding markets and technological change produced the greatest expansion in stock market history and the highest returns in decades for almost every country in the world.  Declining bond yields meant that fixed-income investors received high returns.  Everywhere one looked, returns were high.


1999-2019          Irrational Exuberance

Wars:                                          Afghanistan and Iraq (2001-2019)

Inflation:                                     Declining from 5% to around 2%.

Trade:                                          China, India, other countries integrate into global supply chains

Government Intervention:           Governments spent more money to support the economy

Government Debt:                       Increased as governments ran budget deficits

Stock Market Capitalization:       (109% to 114%) Fluctuated with business cycle, stayed high

Stock and Bond Returns:             World x/US (2.27% and 3.40%), USA (3.02% and 3.04%)

Bear Markets:                             Internet Bubble (2000), Great Financial Recession (2008)

Exchange Rates:                         Floating

The Internet Bubble in the late 1990s, 9/11 in 2001, the Afghan and Iraq Wars, the Global Financial Crisis of 2007-2009, the Eurozone Crisis of Portugal, Ireland, Italy, Greece and Spain all contributed to the volatility of this period.  But none of these crises was able to keep stock markets from rising in value or stock market capitalization from remaining high.  Bonds continued to provide high returns as bond yields continued to decline. By the end of the 2010s, yields had been pushed down to negative levels in Europe and negative real levels in the United States.  Bond yields and central bank policy rates were at their lowest levels in history.  Rates simply could not decline anymore.  Interest rates continued their 40-year decline but set up the prospect of a sudden rise in rates when inflation hit in the 2020s.

Although returns to stocks and bonds were spectacular in the 1980s and 1990s, returns between 2000 and 2019 were lower as two bear markets of 50% declines in 2001-2003 and 2008-2009 restrained returns.  Rather than stimulate the economy through government expenditures, as during Keynesianism, Central Banks lowered interest rates to negative levels in some countries.  Quantitative Easing was used to drive long-term interest rates down.  Interest rates reached levels where they could decline no more.

Emerging markets drove returns between 2003 and 2008 as did real estate.  Technological innovations in the 2010s benefitted American internet firms as several companies reached trillion-dollar capitalizations, more than the capitalization of most countries’ entire stock markets or economies.



2019-                   Nationalism

Wars:                                          Ukraine (2022-)

Inflation:                                     Unexpected spike drives inflation to levels not seen since the 1980s.

Trade:                                         Trade restrictions with Russia and China. More domestic production

Government Intervention:           Governments spent more money to support the economy

Government Debt:                       Increased as governments ran budget deficits

Stock Market Capitalization:       (over 100%) Fluctuated with the business cycle

Stock and Bond Returns:              World x/US (-4.18% and -10.49%), USA (2.51% and -8.66%)

Bear Markets:                              Covid (2020), Inflation and Ukraine (2022)

Exchange Rates:                           Floating


We may now be entering a new era of higher interest rates, a reduction in international trade and lower returns to stocks and bonds. Central banks pushed interest rates down to their lowest levels in history between 1981 and 2021, but stimulus to the economy and labor shortages pushed inflation to levels that hadn’t occurred in the developed world since the 1980s.  This pushed central banks to dramatically raise interest rates in the 2020s and break the 40-year downtrend in interest rates that persisted since 1981.  In addition to this, the war in Ukraine and the threat of war over Taiwan pushed up commodity prices feeding the inflation that followed.  It is uncertain how these trends will continue during the rest of the decade, but the economy appears to be headed in a different direction.



Evidence on Stock Returns

              Tables 1 and 2 illustrate the returns to stocks in nineteen different countries and for three global indices between 1815 and 2019.  This allows us to compare and contrast the annual returns to stocks during each of the financial eras that we have discussed.  All data have been converted into US Dollars and adjusted for inflation so the stock returns for all the countries can be compared directly with one another between countries and over time.

              The table focuses on the countries for which total return equity data are available back to World War I or before.  The table makes it obvious how much returns can vary from one era to the next and from one country to another. Intercountry returns were fairly similar during the period of Free Trade and the Gold Standard between 1848 and 1914 since capital was free to flow from one country to another. 

However, during the period of World Wars between 1914 and 1945, returns varied dramatically. Investors in both Germany and Japan had net annual losses while returns to other European countries were small. Returns to the Anglo countries (Australia, Canada, the United Kingdom, and the United States) and South Africa were high between 1914 and 1929. The worst performers were Austria, Germany, and Italy where investors lost 17.33%, 5.72% and 6.39% per annum.  Returns to non-European countries were similar to returns in the pre-war years.

              During the post-war recovery, returns generally exceeded the returns during the War years, especially in Europe. Both Germany and Japan provided strong returns as they bounced back from the devastation of World War II.  Returns in the period of Globalization between 1981 and 1999 were often greater than during the post-war recovery. The last two columns show the returns during the periods between 1981 and 1999 and between 2000 and 2019. To date, returns in the 2000s have been lower than returns in the 1900s in most of the countries included in the table, with negative returns in Italy and Japan.  This raises the question of whether returns will continue to be lower in the rest of this century than they were in the previous.

              Another factor to notice is the consistency of the returns in countries that were not directly affected by the destruction of World War I and World War II versus the inconsistency of the countries that were.  Australia, Canada, Ireland, and the United States all had consistent returns during the twentieth century while France, Germany, Japan, and others did not. Data provided by Dimson, Marsh and Staunton fail to differentiate between the different eras that financial markets have gone through.  Simply calculating the rate of return over long periods of time but failing to differentiate the causes of varying returns over time and between countries can lead analysts to make wrong conclusions about what returns are likely to be in the future. War, inflation, the government and free trade clearly impact returns.









































































New Zealand




South Africa















United Kingdom






United States












World x/USA












Table 1.  Annual Returns to Stocks in Real USD, 1815-1914



































































































New Zealand







South Africa




























United Kingdom







United States














World x/USA















Table 2.  Annual Returns to Stocks in Real USD, 1914-2019


              Equity returns have clearly been lower during the past 20 years than during many previous eras in equity market history. Part of this is because stock markets achieved spectacular gains in the 1980s and 1990s as they recovered from the low returns of the 1970s. Also, stock markets went through two major bear markets in which stocks declined over 50% in 2001 and in 2008. Stocks had further declines during the 2020 Covid Pandemic and during the 2022 bear market when Central Banks raised interest rates and Russia invaded Ukraine. Despite these declines, markets still seem overvalued.


              The evidence presented in Table 1 shows there are clear differences in returns between different eras. Differences in returns between countries before World War I were similar, but significantly different between 1914 and 1945. Almost every country in the world had significantly higher returns between 1981 and 1999 when inflation rates and bond yields fell, countries privatized firms the government owned and countries opened up to international trade.  Returns were lower between 1914 and 1945 when war, inflation, nationalization, and autarky plagued economies.  Although the period between 1999 and 2019 was a period of low inflation and low interest rates, it was also a period of low returns to equity investors with investors in Japan and Spain worse off after inflation in 2022 than they were in 1999.

              The primary causes of lower returns are war, inflation, government over-regulation and autarky.  All of these factors lower returns to investors.  In periods where these factors are particularly common, such as 1914-1945, returns are lower.  In periods when these factors are absent, such as before World War I or 1981-1999, returns are higher.  Unfortunately, although governments may understand the impact that these factors have on financial markets, the past shows that governments put their own concerns ahead of those of investors.

              This analysis shows how returns to investors can increase or decrease over time.  Inflation is the primary enemy of fixed-income returns, but inflation is often driven by war, government control over monetary policy and autarky. Free markets increase returns to stocks and bonds and the historical evidence proves this point.





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