Although few people realize it, the Great Depression hit Europe when the Creditanstalt bank of Vienna collapsed in May 1931 and began a domino effect that spread to the rest of Europe. The collapse of the Creditanstalt is seen as the trigger to the great deflationary spiral in Europe between 1931 and 1933. The reason for the impact of the Creditanstalt on Germany and the rest of Europe was that it not only was the largest bank in Austria, but it was larger than all the rest of the banks in Austria put together. The bank had ties to the rest of Europe and the collapse of the Creditanstalt led to a Europe-wide crisis.  

The Growth of the Creditanstalt

The Creditanstalt bank was founded in 1855 as the Österreichische Credit-Anstalt für Handel und Gewerbe and was associated with the Rothschilds from its beginning.  When the Austro-Hungarian Empire collapsed at the end of World War I, the Creditanstalt continued to offer commercial, investment and savings to customers in the Successor States to the Empire as well as Amsterdam, Berlin, Bucharest, Paris and Sofia.  Its shares were traded on eleven exchanges, including New York. The Creditanstalt became the largest bank in Austria through a series of forced mergers.  The Bodencreditanstalt took over the bankrupt Union Bank and the Verkehrbank in 1927, and the Creditanstalt took over the Bodencreditanstalt in 1927 with 90 million schillings of capital, but 140 million schillings of accumulated losses. The Bodencreditanstalt had already absorbed a multitude of small- and medium-sized banks and in 1927 was on the brink of failure.  The Bodencreditanstalt relied upon the discount window of the Austrian National Bank to survive, but when the Austrian National Bank closed its discount window, an acquisition by the Creditanstalt was arranged by the government creating a bank that was larger than the rest of the Austrian banks put together.  Unfortunately, this only delayed the inevitable collapse, concentrating the accumulated losses of Austrian industry in a single superbank. After the hyperinflation of 1923-1924, Austrian banks failed to restore adequate capital endowments so that any ventures of its banks were increasingly debt financed.  In 1925, Creditanstalt’s equity was only 15% of what it had been in 1914 and its debt/equity ratio rose from 3.64 in 1913 to 5.68 at the end of 1924 and to 9.44 at the end of 1930. Part of the increase in the size of the bank came from loans which the Creditanstalt made to businesses in the successor states. The Creditanstalt did not want to restrict its operations to Austria and ignore the rest of the former Austro-Hungarian Empire. The Creditanstalt borrowed money, primarily from Great Britain and the United States, but this was only on a short-term basis and any failure to renew these loans would lead to the demise of the bank.  Acquisition of the Bodencreditanstalt added to the bank’s problems, and when the bank’s performance began to falter in 1930, the Creditanstalt bought up its own shares to keep the price of its stock from falling. On May 11, 1931, the Creditanstalt announced that it had lost more than half of its capital, a criterion under Austrian law by which a bank was declared failed.  The bank’s losses amounted to 140 million schillings, equal to 85% of its equity. Not only was the Creditanstalt the biggest bank in Austria, but it was bigger than all the other Austrian banks put together. The Creditanstalt’s balance sheet was the size of the government’s expenditures and 70% of Austria’s corporations did business with the Creditanstalt. It had business interests in eleven banks and forty industrial enterprises of the Successor States and counted 130 domestic and foreign banks among its creditors. Over 50% of its stock was foreign held.  Talk about too big to fail! The next day, the Austrian government announced a program to rescue the bank with 160 million schillings, 100 million from the Austrian government, 30 million from the National Bank and 30 million from the Rothschilds in Amsterdam.  The announcement of the bank’s failure led to a concern that other Austrian banks might be in danger of failure.  If the largest bank in Austria were on the verge of failure, could other Austrian banks be far behind? This led to a run on Austrian banks and a massive increase in the money in circulation, which rose from 305 million schillings on May 7, 1931 to 1,141 million on May 31 as Austrians pulled their money out of their banks. Austria’s bailout failed to stop the bleeding and on May 29, the BIS arranged an additional credit of 100 million schillings.  The loan had been delayed by the French who objected to Austrian participation in the Zollunion with Germany. The 100 million schilling credit was exhausted in five days and the Austrian National Bank sought a private 150 million schilling loan from abroad. People in Austria were afraid that the inflation of 1924 would return and both the banks and the Austrian currency would collapse. They began converting their schillings into foreign currency to avoid the impact of a devaluation. Austria’s foreign reserves declined from 850 million schillings in May to 300 million schillings by the end of the year. The announcement of the losses of the bank raised questions about its solvency, but the run on the bank that followed created problems of illiquidity. The gradual decline in the price of Creditanstalt shares in Vienna and their collapse in May is seen below.   Total losses of the Creditanstalt came to 828 million schillings of which 600 million were losses on bad loans.  The Austrian government guaranteed all the losses of the Creditanstalt on June 27, 1931 but this meant guaranteeing 1,200 million schillings of bank liabilities when the federal budget was 1,800 million schillings. In August, the League of Nations arranged a 250 million schilling loan from seven governments which covered the losses of the Creditanstalt, but the Austrian schilling continued to hemorrhage foreign reserves.  On October 9, 1931 the Austrian government introduced exchange controls on the Austrian schilling. The run on Austrian banks triggered runs on Hungarian, Czech, Romanian, Polish and German banks. On June 19, 1931, President Hoover declared that there should be a one-year moratorium on the payment of war debts and reparations.  The Danatbank failed in Germany on July 13 leading to a bank holiday on July 14 and 15 in Germany and the closure of the Berlin Stock Exchange until a brief reopening in September. The Reichsbank guaranteed the deposits of all of the banks except for the Danatbank and the banks reopened later in July. The Germans had learned from Austria’s failure to provide a lender of last resort to stem the tide.  The Berlin Stock Exchanged closed again in September and remained closed until April 1932 when the stock exchange reopened. It took until January 1933 for the Creditanstalt crisis to be finally resolved when the Austrian government took over the bank and issued preferred stock to foreign creditors. The government provided annuities for claims against the bank.  The total losses of the bank amounted to 1,070 million schillings, 7 times the original losses, with the Austrian National Bank bearing the burden of 700 million schillings in losses. On May 5, 1934, the Austrian schilling was devalued by 28%. As the chart of the Austrian Stock Exchange shows below, the devaluation of the schilling stopped the decline in Austrian shares.    

The Great Depression Begins in Europe

The crisis proceeded to Great Britain which went off the Gold Standard on September 21, 1931 after its gold reserves shrank from £200 million to £5 million.  Twenty-five countries soon followed in Britain’s footsteps, depreciating their currency against the U.S. Dollar or leaving the gold standard.  By the end of 1931, the Depression was global.  The United States stayed on the Gold Standard until April 1933 when President Roosevelt took the United States off the Gold Standard.  By 1933, the globalized financial system that had prevailed until 1914 was broken and national economies existed almost independently of each other.  It would take another 50 years for the world to recover and return to a globalized economy. It wasn’t so much that the collapse of the Creditanstalt caused the collapse of the global financial economy, but it set in motion a chain of events that revealed the poor condition of European economies and the fragility of the financial system which quickly fell apart and led to the beginning of the Global Depression of 1931-1933.  The principal problem was that no lender of last resort, either domestic or international, stepped in when the collapse of the Creditanstalt first occurred to guarantee the bank’s liabilities and stop the rot from spreading. The fear of another domino collapse of the global economy occurred in 2008 when Lehman Brothers went bankrupt and there was a fear that the larger banks would withdraw credits from General Electric, McDonalds and other global corporations leading to a second collapse in the global financial system.  Luckily, Bernanke, Paulson and Geithner remembered how the lack of a lender of last resort in the Creditanstalt collapse of 1931 had precipitated the failure of the global financial system in the 1930s.  They made sure the collapse of Lehman didn’t create similar problems and prevented a repeat of the Global Deflation of 1931-1933.

Global Financial Data has the most extensive database on historical stocks available anywhere in the world.  GFD has collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War II, and many companies in emerging markets listed their shares on the London Stock Exchange before a stock exchange even existed in that country. After World War I, many companies listed on the New York Stock Exchange.  Using data from London and New York, we can calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were calculated. This is one in a series of articles about those countries.  

Chinese Stocks Before World War II

Shares traded in Shanghai before any trading of Chinese shares occurred in London.  The Shanghai Stock Exchange began trading in 1866 and included several banks and other companies. By the 1930s, Shanghai was the financial center of China with trading occurring in stocks, debentures, government bonds and futures.  In 1937, Japan occupied Shanghai, and on December 8, 1941, share trading in Shanghai was halted by the Japanese.  Share trading resumed in 1946, but was discontinued when the Communists seized power in 1949.  The stock market remained closed until November 1990 when the Shanghai Stock Exchange reopened.  Today, the Shanghai Stock Exchange is one of the largest in the world with $4 trillion listed on the Shanghai stock exchange. Wenzhong Fan has put together an annual index of stocks listed on the Shanghai Stock Exchange using data from The North China Herald that stretches from 1871 until 1940. The market index he created using this data is illustrated in Figure 1 above.  It would appear that stocks did very well after World War I, with the index rising in price to almost 20,000 providing an annual return between 1871 and 1940 of 7.9%, but this was primarily because of the inflation that ravaged China during the 1930s.  If the values are converted into USD as is illustrated in Figure 2 below, the returns are still positive, but the increases are much more moderate. The index provided an annual return of 2.35% between 1871 and 1940, not 7.9%. Although Fan’s index is based upon a larger sample of stocks than was available on the London Stock Exchange, the data are annual rather than monthly so GFD’s China indices can provide detail that Fan’s indices cannot. It is interesting looking at the sectors that are covered by the stocks that were listed in Shanghai to see both which sectors are included and which are excluded.  The major omission is railroads, which the Europeans wanted to build to exploit Chinese resources and the isolationist Chinese mandarins opposed. Between 1881 and 1895 only 18 miles of railways were built per year in China, but when the Chinese government realized how railroads could help the government put down the Boxer Rebellion between 1899 and 1901, a railway boom ensued, though one managed by the government for military purposes. By 1911, 6,000 miles of railway had been laid. However, transport stocks were not completely ignored in China. There are a large number of shipping, canal and dock companies that traded on the Shanghai Stock Exchange.  One unexpectedly large sector in Shanghai was Plantations since there were numerous rubber estates located around Shanghai. There were also a large number of finance companies, including banks, insurance and real estate companies as well as utilities, but no other sectors stand out as representing a large number of companies in China.   The Shanghai Stock Exchange was modest in size.  Starting off at $23 million in market capitalization in 1871, the market increased in size to $1.7 billion at its peak in 1925, but declined in size to $235 million upon its closure in 1941. This amount was just a fraction of China’s GDP because key sectors, such as railroads, were not publicly traded, and the companies that were publicly traded only existed in the main cities such as Shanghai and Hong Kong where foreigners were allowed to live and trade.  

Shanghai Stocks Listed in London

The data from London only cover the period from 1896 until 1930.  During that period of time, GFD’s index of Chinese shares, illustrated in Figure 3 below, rose from 100 to 158 on a price basis providing an annual increase of 1.36% and from 100 to 634 on a return basis providing an annual return of 5.58% and a dividend yield of 4.16%.  This compares favorably with Fan’s return of 4.54% during the same period of time. There was never a grass roots effort to develop the economy through capital markets or to integrate the Chinese economy with the rest of the world. The companies that were listed in London represented a handful of companies that tried to develop Chinese resources, not Chinese entrepreneurs trying to raise capital for domestic production.  It should be noted that by comparison, the market cap of Shanghai shares listed in London was only $35 million in 1925, but Hong Kong shares listed in London, mainly the Hong Kong and Shanghai Bank (HKSB), was $110 million.  Because of China’s isolation, British capital never played an important role in China outside of Hong Kong. China defaulted on most of its sterling loans in 1924 and 1925.  The market recovered in the 1930s, rising above par and peaking in 1936, when an effort was made by China to rehabilitate these loans in 1936 and 1937.  However, the invasion of China by Japan in 1937 when the Japanese captured both Shanghai and Nanjing drove the price of Chinese bonds down since investors knew that little money would be available for paying coupons.  Chinese bonds rallied back between 1939 and 1945 as investors regained faith that the Allies would help China remove the Japanese from the country and enable China to deal with the default on their government bonds, but the civil war in China after World War II put paid to any chance investors were going to receive payment on the coupons, much less have the bonds redeemed.  

Hong Kong Stocks Listed in London

The Hong Kong Stock Exchange was set up in 1891 when the Association of Stock Brokers in Hong Kong was established. It was renamed the Hong Kong Stock Exchange in 1914. The Hong Kong Stockbrokers Association was founded in 1921 and merged with the Hong Kong Stock Exchange in 1947.  Three new exchanges were founded between 1969 and 1972 and they all merged into a single exchange in 1986. The Hang Seng Index was introduced on July 31, 1964 and is still the benchmark for Hong Kong 54 years later, but what happened to Hong Kong Stocks before 1964? The GFD Hong Kong index included only two stocks in 1964, the Hong Kong and Shanghai Bank and the Indo-China Steam Navigation Co., but HKSB listed on the London Stock Exchange from 1868 until the present providing an incomparable set of data to analyze.   The bank stock’s performance between 1868 and 1969 is shown below in Figure 6 which illustrates over a century of stock prices in Hong Kong.  The expected peaks and declines can be easily picked out. The decline in the early 1890s was driven by the banking crisis in Hong Kong which occurred in 1890; however, the 1895 Treaty of Shimoneseki opened up the Chinese market to foreign investors and the stock market boomed for the next 10 years.  There was a rubber boom between 1909 and 1910 driving prices up, but the Revolution of 1911 which overthrew the Ch’ing Dynasty had little overall impact on the stock market. There was cotton speculation in 1919 and a second rubber boom in 1925, both of which are illustrated by peaks in the stock market index. However, in 1931, Japan invaded northern China, seized Shanghai in 1937, and the Shanghai Stock Exchange closed on December 5, 1941. The index performed relatively well during the 1940s, but collapsed in 1949 after the Communists took over China.  Once the threat of the Communists taking over Hong Kong receded, the index rose steadily until the 1960s when Hong Kong became the entrepôt for southern China. The London Stock Exchange listed shares in Hong Kong companies such as the Hong Kong and Shanghai Banking Corporation (1868-), China Submarine Telegraph Ltd. (1870-1873), Hong Kong and China Gas Co. (1865-1920) and Indo-China Steam Navigation Co. (1940-1952, 1956-1969).  Data on these four shares was used to put together the index provided in Figure 6. The index of Hong Kong Stocks rose from 100 in December 1868 to 680 in December 1968, providing an annual price increase over those 100 years of 1.94%.  The return index rose from 1 to 1300 during the same period of time, providing an annual return of 7.43% and an annual dividend yield of 5.38% over those 100 years.  Granted, the index primarily keeps track of one stock, the Hong Kong and Shanghai Banking Corp., but the bank did provide a consistent level of return to its shareholders.  If you compare the performance of Hong Kong stocks between 1896 and 1930 with those in Shanghai, the Hong Kong Shares returned 2.68% per annum and 8.72% after including dividends, clearly superior to the 5.58% total return that Shanghai stocks provided.  

What if?

It is unfortunate that the number of Chinese stocks that listed in London is so limited, but it does provide us with insight into the performance of shares that would otherwise be unavailable.  One alternative would be to use the Far Eastern Economic Review to create a broad index of stocks between the end of World War II and the creation of the Hang Seng Index in 1964. Of course, the ultimate speculation, which can never be answered, is what might have happened if the Communists had never seized power in 1949.  The Taiwan Stock Exchange began operating on February 9, 1962 and helped Taiwan to establish its technological prowess in semiconductors and other areas of technology.  What if the Shanghai Stock Exchange had never closed in 1949? How different would China be today if the Kuomintang had defeated the Communists? Unfortunately, we shall never know.

Global Financial Data has the most extensive collection of CAPE Ratios available anywhere.  Our CAPE Ratios cover over 50 countries and the CAPE Ratio for the United States begins in 1841, 40 years before the CAPE Ratios that were calculated by Shiller using data from the Cowles Commission. The Cyclically-Adjusted Price-Earnings (CAPE) Ratio is an inflation-adjusted average of earnings paid over the past 10 years relative to the current price of the market. A recession can have a dramatic impact on the CAPE Ratio, pushing it up as earnings decline, reducing the average amount of earnings paid over the past ten years.  A recession can have a particularly large impact if net earnings turn into losses which are netted out against profits in the future.  Although losses for the stock market as a whole are rare, they do occur. The last time the S&P 500 reported a net loss was in the fourth quarter of 2008, which was the first quarterly loss the S&P 500 had registered since 1936! Since 1871, the S&P 500 has never registered net losses for a full year, only for quarters in 1936 and 2008. We can see the impact of this loss on the CAPE Ratio by comparing the 7-year CAPE Ratio with the 10-year CAPE Ratio.  The 7-year CAPE Ratio has already removed the 2008 losses from its calculations while the 10-year CAPE Ratio will begin excluding the losses in 2019. As the graph below illustrates, the 7-year CAPE Ratio dipped below the 10-year in 2016 just as the 2008 losses were removed from the calculations.  Since then, the 7-year CAPE Ratio has remained below the 10-year CAPE Ratio and is currently about 4 points below. We would anticipate that the 10-year CAPE Ratio will see a similar drop even if there were no change in the price of the S&P 500, and with the S&P 500 flirting with a bear market, this will drive the CAPE Ratio down even further. It appears that the 10-year CAPE Ratio for the S&P 500 peaked in January 2018, ten years after the quarterly loss, and is now on a steady downward path for the next few years if only because the losses and low profits of 2008 will no longer be included in the calculation of the 10-year CAPE Ratio.  How much the current bear market drives down the CAPE Ratio remains to be seen.  

Global Financial Data has the most extensive database on historical stocks available anywhere.  In particular, we have collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War I and many countries in emerging markets listed shares on the London Stock Exchange before a stock exchange even existed in that country.  This enables us to calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were introduced. This is one in a series of articles about those indices. Singapore is one of the most important financial centers in Asia, and has grown from a small island of 1.6 million in 1960 to over 5 million people with a per capita income of over $55,000. Any information about the historical performance of stocks in Singapore is a welcome addition to the financial history of the city-state.  

Singapore Before Singapore.

Stamford Raffles founded Singapore as a trading post of the British East India Company in 1819.  The city became part of the Straits Settlements in 1826 and its capital in 1836. The British were defeated in the Battle of Singapore on February 15, 1942 when 60,000 British troops surrendered to the Japanese in one of the worst defeats of British forces in history. The Japanese surrendered on August 15, 1945, but the failure of the British to protect Singapore from the Japanese lowered Britain’s standing in the eyes of Singaporeans. Malaysia and Singapore were granted self-government in 1959, but because of economic and political differences, Singapore seceded from Malaysia and became an independent republic on August 9, 1965. The Malayan Stock Exchange was set up on May 9, 1960.  Floors for trading shares were set up in both Kuala Lumpur and in Singapore.  After Singapore seceded, the structure of the stock exchange remained the same, but its name was changed to the Stock Exchange of Malaysia and Singapore.  When currency interchangeability was terminated between Malaysia and Singapore in 1973, the Stock Exchange of Singapore separated from the Kuala Lumpur Stock Exchange. As this brief history shows, there was no trading of Singapore stocks in Singapore before 1960.  Singapore stocks were traded in London or not at all. GFD has been able to collect data on a handful of Singapore stocks in order to put together an index of Singapore shares before local trading began.  

Singapore Shares Before Independence

Singapore, as well as most of Malaysia, was a center for rubber production before World War II. The largest of these companies was the Straits Rubber Co., Ltd. which was registered in 1909, reorganized in 1919, and was acquired by Consolidated Plantations in 1972. Two other Singapore rubber companies registered in London were the Bukit Sembawang Estates and the Singapore United Rubber Plantations.  These three companies made up the Singapore shares that traded in London before 1960. In essence, GFD’s Singapore stock index is an index of rubber companies. The market capitalization of these three companies remained small peaking at $2 million in 1920, and remaining below $1 million between 1921 and 1957. There is a gap in the index between 1957 and 1961 and after 1961, the Singapore Traction Co., Bajau Rubber and Produce Estate were added to shares of the Straits Rubber Co. to represent Singapore stocks in London.  The price index of Singapore stocks from 1915 until 1957 is provided below in Figure 1. One dollar invested in Singapore stocks in 1915 would have returned $0.48 by 1957, an annual loss of 1.73%.  Return data goes back to 1920 and $1 invested in Singapore stocks in 1920 would have return $2.97 in 1957, and annual return of 2.90%. Stocks would have provided an annual dividend yield of 5.05% during that same period of time. The data begin again in 1961 and continues until 1977.  Actual data from the Singapore Stock Exchange begins in 1965.  We can chain link GFD’s data to the Financial Times Straits Times Index and extend that index back to 1961 providing even more long-term data than was previously available.  

Conclusion

Singapore illustrates the benefit of using data from the London Stock Exchange to learn about the past of Asian markets.  Though Singapore is no longer an emerging market, it has become a major financial center of the world with per capita income of over $55,000 per person.  However, before gaining its independence, Singapore was a major port that shipped rubber to the rest of the world and the Straits Rubber Co. was the largest corporation in the country.  The performance of the stock market followed changes in the price of rubber for decades, but once Singapore gained its independence, rubber lost its importance, and it is today one of the financial capitals of the world.