Most people know the basic story of the French Revolution. France’s aid to the United States indebted the nation leading to new taxes that fed a revolt against the king and the aristocracy. The Estates General was convened in May 1789, and on July 14, 1789, the Bastille was stormed marking the beginning of the French Revolution. The Declaration of the Rights of Man was passed and feudalism was abolished in August 1789. France became a republic in September 1792 and in January 1793, King Louis XVI was executed. A dictatorship gained power in 1793 under Robespierre and the Committee of Public Safety which introduced the Reign of Terror. In 1795, the Directory assumed control over France, suspended elections and repudiated debts. The Directory remained in power until 1799 when Napoleon Bonaparte overthrew the Directory in a coup and became the leader of France.
But what about investors? How were they affected by the French Revolution? The king lost his head, but investors lost their money.
Before the Revolution
Few people realize how active the Paris stock market was during the 1700s. The Paris stock exchange was founded on September 24, 1724, though shares in the French East India Co. (Compagnie des Indes) had traded in Paris for years. GFD has data on over 70 securities that traded on the Paris bourse in the 1700s. This includes 15 common stocks in 7 different companies, one corporate bond, 50 different government bonds and 6 issues of scrip, all faithfully recorded from issues of the Gazette de France. And this ignores the fact that Parisian investors were also able to invest in stocks and bonds in London and in Amsterdam during the 1700s.
It is interesting to note that French East India Co. stock suffered more volatility during the 1700s than shares in either London or Amsterdam. Compagnie des Indes shares rose over 4000% during the bubble in 1718 and 1719, only to lose 99% of their value during the crash that followed. There were five bull markets in which shares rose by over 90% in Paris in the 1700s and three bear markets in which shares fell by over 50%. The Paris stock exchange was not for the feint of heart. The rise and fall of Compagnie des Indes shares are illustrated in Figure 1.
The Paris stock exchange was formally closed on June 27, 1793 and all joint-stock companies were banned on August 24, 1793. But once the joint-stock companies were shut down, who would dispose of the assets of the companies? French East India Co. officials bribed government officials so the company, rather than the government, could oversee its liquidation, but once these bribes were uncovered, several of the company officials involved were arrested and later executed. The liquidation of the company produced only three ships which were liquidated in July 1795, and as a result, shareholders in the Compagnie des Indes lost virtually everything.
Bondholders met a similar fate. France defaulted on its pre-revolutionary debt in 1796, giving shareholders 1/3 the value of their old bonds in new 5% consolidated bonds which didn’t pay any interest until 1802. A similar loss occurred to Dutch shareholders, who also lost 2/3 of the value of their bonds. English bondholders suffered no default.
After the Revolution
Investors were decimated by the French Revolution. Bondholders lost 2/3 of the value of their bonds, and the French Revolution officially abolished joint-stock companies in 1793. Investors received very little compensation for their shares. Officials caught up in the bribery scandal in 1793 lost their lives. The Assignats, which were issued during the revolution, became almost worthless during the inflation that ravaged France. After inflation, 100 Francs in Assignats in 1789 were worth less than 5 centimes by 1796. More people were put to death for counterfeiting the eventually worthless Assignats than for any other crime committed during the French Revolution.
Just as the ancien regime collapsed during the French Revolution, so did the country’s finances. Investors were unable to sell their shares and bonds and fled to England where, at least, they wouldn’t lose their lives. As the Napoleonic Wars dragged on, other countries defaulted on their debts. The Swedes, Dutch, Portuguese, Spanish and Russians all suspended interest payments at some point during the Napoleonic Wars. Only English finances survived the Napoleonic wars intact.
After Napoleon gained power during a coup on November 9, 1799, he worked to rehabilitate France’s finances. Napoleon replaced the Livre Tournois with the French Franc. The 5% Consolidated Bonds were issued to replace outstanding French debt. Initially, the price of the bonds sank to 9.25 at the end of 1798, but once the government started paying interest, the price of the bonds recovered and the yield on the bonds fell as is illustrated in Figure 2. Napoleon established the Banque de France in 1801 to provide France with a central bank similar to the one that England had. The company’s shares became the largest joint-stock company on the bourse and traded in Paris until the bank was nationalized in 1946.
The re-establishment of France’s finances was a success. Between 1800 and 1914, Paris was the center of finance in continental Europe providing shareholders and bondholders during the 100 years before 1914 with one of the highest returns of any European country.
Investors and the French Revolution
Global Financial Data has collected centuries of data on interest rates. We wanted to highlight two data sets from the GFD Indices that cover government bond yields from 1285 to 2019 and that cover central bank deposit rates from 1522 until 2019. With these two charts, you can see how unusual the current decline in interest rates is, pushing yields down to levels that hadn’t been reached during the past seven centuries.
Government Bonds
Figure 1 provides data on the yields on government bonds from 1285 until 2019. During the past 700 years, the financial center of the world has passed from Italy to the Netherlands to England to the United States. We have used data from each of these countries to create the graph provided below. Data includes the Prestiti of Venice from 1285 to 1303 and from 1408 to 1500, the Consolidated Bonds of Genoa from 1304 to 1408, the Juros of Spain from 1504 to 1518, Juros of Italy from 1520 to 1598, government bonds of the Netherlands from 1606 to 1699, English bonds, primarily the British Consol from 1700 to 1918 and United States 10-year bonds from 1918 to 2018.
Figure 1. Global Long-term Government Bond Yields, 1285 to 2018
The general trend in yields has been for rates to decline over the past 700 years, especially since 1550. Before then, yields often spiked when wars in Italy and elsewhere put the payment of interest and the redemption of the bonds at risk. Under normal circumstances, bonds would yield about 6%, but in two cases, failure to pay interest on outstanding bonds pushed yields up to almost 20% before the end of the wars eliminated the possibility of further default.
Since 1600, when Dutch bonds were substituted from Italian bonds, the risk of default has been virtually eliminated driving yields down from 6% in 1600 to close to zero today. In fact, many European and Japanese government bonds pay a negative yield. Since there is little risk of default, increases and decreases in yields have primarily been driven by inflation during the past three centuries, which explains both the rise in interest rates around World War I and between 1950 and 1980. As long as central banks can control inflation, government bond interest rates are likely to remain low for some time to come.
Central Bank Rates
Using treasury bills as a short-term alternative to cash began primarily during World War I. Consequently, treasury bills cannot be used to provide a long-term chart of interest rates; however, the interest rate central banks pay on deposits provide centuries of data.
Figure 2 provides a graph of interest rates over the past 500 years. The graph uses the deposit rate of the Bank of St. George in Genoa from 1522 to 1625, the legal limit on English loans from 1625 to 1692, the deposit rate for the Bank of England from 1693 to 1913, the Discount Rate of the Federal Reserve Bank of New York from 1913 to 2002 and the Federal Funds Target Rate since 2003.
Figure 2. Central Bank Deposit Rate, 1522 to 2018
As the graph shows, the deposit rate has fluctuated between 2% and 4% during the past 500 years. There were periods, such as the early 1600s, during World War II and during the past 10 years when interest rates fell below 2%, but these were exceptions to the rule. The highest short-term interest rates occurred in 1981 when inflation drove interest rates to double-digit levels for the first time in history. On the other hand, the Great Recession after 2008 drove interest rates to negative levels in Japan and Europe and almost to zero in the United States. These are truly unprecedented times.
Conclusion
This blog has provided over 700 years of history on bond yields and deposit rates in Europe and the United States. During the past seven centuries, the center of the financial world passed from Italy to the Netherlands to England and to the United States. We have used yields from each of these countries to put together these long-term charts. Both short-term and long-term yields today are driven by inflation rather than risk, and as long as inflation remains low, yields are likely to remain low for some time to come.
Global Financial Data has generated indices on the United States and the World Index excluding the United States since 1792. This enables us to compare the performance of stocks in the United States with the rest of the world over the past 225 years. Generally speaking, US stocks underperformed the rest of the world in the first half of the 1800s, but strongly outperformed the rest of the world since the Civil War. After a decline in the relative performance between 1967 and 1988, American stocks have generally outperformed the rest of the world over the past 30 years. Will this trend continue?
Figure 1. United States 100 Index Divided by GFD’s World x/USA Index, 1792 to 2018
During the civil war, the United States went off the gold standard and the U.S. Dollar declined in value relative to other currencies. This decline more than offset the inflation that occurred during the Civil War and the net effect was a further decline in U.S. stocks relative to the rest of the world. However, once the Civil War ended, U.S. stocks began a stead rise in value as the American economy industrialized. By the 1890s, Standard Oil was the largest company in the world. The rise in American stocks relative to the rest of the world was modest until 1896, but after that, American stocks began a steady rise in value relative to the rest of the world for the next 70 years.
Figure 2. USA-100 and World x/USA Price Indices, 1864 to 2018
Table 1 provides a comparison of the returns during different periods of time to stocks in Europe, the World x/USA and to the United States. During the three eras, the United States underperformed the rest of the world only during the Free Trade Era, and most of this occurred before the civil war when finance firms dominated the American market. However, since 1864, American stocks have outperformed the rest of the world and European stocks in every era.
Table 1. Price Index Annual Returns to Europe, World x/USA and USA-100
If you look at total returns including dividends, you get similar results.
Table 2. Return Index Annual Returns to Europe, World x/USA and USA-100
The peak in the relative outperformance of U.S. to the rest of the world occurred in 1967, but during the next 20 years, between an underperforming stock market and a decline in the value of the Dollar, U.S. stocks fell back to the level they had been at before Pearl Harbor. The decline in the relative performance of U.S. Stocks was also driven by the Japanese bubble of the 1980s. It should be remembered that in 1989, the capitalization of the Japanese stock market was larger than that of the United States. Today, the capitalization of the Japanese stock market is less than 20% of the American stock market.
Figure 3 compares the U.S. market to Europe since 1900. The relative decline in U.S. stocks relative to Europe in the 1980s was not as sharp as the World excluding the United States index. Figures 1 and Figure 3 are very similar up until the 1960s, but the two of them diverge in the 1980s. The U.S./Europe graph declined back to the level it has been at in the 1920s, and reached a lower low in 2008 when the Financial Crisis drove the U.S. stock market down to new lows. Since then, however, U.S. Stocks have risen to new highs relative to Europe.
Figure 3. American stocks relative to European Stocks, 1900 to 2018
Since 1988, the United States has outperformed the rest of the world as globalization, computers, and biotechnology have driven the American market forward. It should have been obvious that the U.S. stock market was undervalued relative to the rest of the world at the bottom of the financial crisis in 2008. Now both graphs are at peaks relative to the past with the U.S./European graph reaching new highs. The question is whether the U.S. market will run out of steam and reverse relative to the rest of the world, or continue its steady increase in value.
US and the World in the 1800s
Figure 1 shows the relative performance of GFD’s US-100 index and GFD’s World x/USA index between 1792 and 2018. Between 1792 and 1864, American stocks underperformed the rest of the world. There were two reasons for this. Until the 1830s, the U.S. stock market included finance stocks almost exclusively. Banks could not operate across state lines and many of the banks could only operate from one location. Thus, the opportunities for growth were limited. If you include the dividends American banks paid, they provided a positive return of 4% per annum before the Civil War, but on average, the price of stocks declined in the United States between 1792 and 1860 by about 1% per annum. In Europe, on the other hand, increases in the share price of canals and railroads supplemented the growth of central banks, providing positive, if modest returns.
Figure 1. United States 100 Index Divided by GFD’s World x/USA Index, 1792 to 2018
During the civil war, the United States went off the gold standard and the U.S. Dollar declined in value relative to other currencies. This decline more than offset the inflation that occurred during the Civil War and the net effect was a further decline in U.S. stocks relative to the rest of the world. However, once the Civil War ended, U.S. stocks began a stead rise in value as the American economy industrialized. By the 1890s, Standard Oil was the largest company in the world. The rise in American stocks relative to the rest of the world was modest until 1896, but after that, American stocks began a steady rise in value relative to the rest of the world for the next 70 years.
The United States Outperforms the Rest of the World
The United States suffered from neither the destruction of World War I and World War II nor the economic chaos, inflation and nationalizations that plagued Europe in the first half of the 1900s. Between 1914 and 1929, American stocks rose rapidly in price relative to the rest of the world. U.S. stocks fell back during the Great Depression of the 1930s and hit another low point in 1941, right before Pearl Harbor was attacked, but the next 25 years showed steady growth of U.S. stocks relative to the rest of the world. Almost all of this advance happened in the 1940s as Europe was devastated by World War II. However, even as Europe recovered from the war, American stocks continued to outperform the rest of the world until 1967. Figure 2 compares the performance of the US-100 and the World x/USA index between 1864 and 2018.
Figure 2. USA-100 and World x/USA Price Indices, 1864 to 2018
Table 1 provides a comparison of the returns during different periods of time to stocks in Europe, the World x/USA and to the United States. During the three eras, the United States underperformed the rest of the world only during the Free Trade Era, and most of this occurred before the civil war when finance firms dominated the American market. However, since 1864, American stocks have outperformed the rest of the world and European stocks in every era.
| Period | Years | Europe | World x/USA | USA |
|---|---|---|---|---|
| Free Trade | 1799-1914 | 1.58% | 1.80% | 0.91% |
| Regulation | 1914-1981 | 1.93% | 2.65% | 4.38% |
| Globalization | 1981-2018 | 7.15% | 6.27% | 8.25% |
| Post-WWI | 1914-2018 | 3.74% | 3.91% | 5.73% |
| Post-Civil War | 1864-2018 | 2.67% | 2.79% | 4.63% |
| All | 1792-2018 | 2.44% | 2.64% | 2.96% |
| Period | Years | Europe | World x/USA | USA |
|---|---|---|---|---|
| Free Trade | 1799-1914 | 5.30% | 5.58% | 7.10% |
| Regulation | 1914-1981 | 6.00% | 6.79% | 0.98% |
| Globalization | 1981-2018 | 10.56% | 8.95% | 11.13% |
| Post-Civil War | 1864-2018 | 5.98% | 5.98% | 9.13% |
| Post-WWI | 1914-2018 | 7.59% | 7.55% | 2.71% |
| All | 1792-2018 | 6.28% | 6.40% | 8.20% |
Figure 3. American stocks relative to European Stocks, 1900 to 2018
Since 1988, the United States has outperformed the rest of the world as globalization, computers, and biotechnology have driven the American market forward. It should have been obvious that the U.S. stock market was undervalued relative to the rest of the world at the bottom of the financial crisis in 2008. Now both graphs are at peaks relative to the past with the U.S./European graph reaching new highs. The question is whether the U.S. market will run out of steam and reverse relative to the rest of the world, or continue its steady increase in value.
American Strength or Foreign Weakness?
Of course, one could argue that it isn’t so much American strength as foreign weakness that has enabled American stocks to forge ahead over the past one hundred and fifty years. While the rest of the world has suffered from wars, defaults, inflation, nationalizations and other impediments to growth in the value of stocks, the United States has suffered from this less than other countries. But will this trend continue? Interest rates have fallen throughout the world revealing little expectation of growth in Europe, Japan or the rest of the world. The United States has outperformed the rest of the world during the past 150 years, and until there are policy changes promoting growth in the rest of the world, there seems little reason to believe that this trend will soon reverse itself.
GFD is revising its stock index for Australia because it can now use data on Australian shares that were listed in London to supplement the data that already exists from Sydney and other Australian exchanges. Australia has one of the highest returns of any stock market in the world, but this is in part due to problems with the indices that were calculated in the 1950s and the biases in that data. Historical data for Australia was calculated by Lamberton in the 1950s, but the data are limited to commercial companies and ignores returns to mining and finance companies. A similar problem exists with the indices calculated by Schumann and Scheurkogel for South Africa. Once you add in the returns to finance and mining companies, Australian returns decline to a more realistic level.
The Lamberton Australian Stock Exchange Indices
When Lamberton completed his calculation of returns in 1957, he lacked the computers that were needed to create market-cap weighted indices that are now recognized as the standard for stock market index calculations. Consequently, he used short cuts that created biases in his indices. First, the price indices were unweighted giving small companies the same weight as large companies. Second, the dividend data were unweighted measures of the yield on all shares. Third, the data that were used were monthly averages rather than end-of-the-month values. Fourth, there was rapid turnover in the stocks which were few in number. In 1880, the index included just five members, and of the 40 members in 1920, just 11 remained in 1925. These four factors bias the results of the Lamberton indices. Lamberton’s biases have crept into the data in two other ways. First, most people have used the returns to commercial/industrial stocks to calculate the returns to Australian stocks and have ignored mining and finance stocks. The commercial/industrial shares had excessively high returns that exceeded the returns on finance and mining shares. Second, the calculation of dividends was equal-weighted rather than market-cap weighted. It has been estimated that Lamberton’s methodology added at least two percentage points to the actual dividend yields on Australian stocks. According to Lamberton’s calculations, the average dividend yield was 6.77% between 1882 and 1957, which is about 2 percentage points higher than the 4.45% dividend yield that was paid to British shares in London between 1882 and 1957. Lamberton also calculated three indices for stocks in Australia: mining, finance and commercial/industrial shares. The mining share index was calculated from 1875 until 1910, and during that time, mining stocks declined in price by 0.80% per annum. During the same period of time, finance stocks increased 1.57% per annum while commercial/industrial shares increased by 3.56% per annum. If you cover the full period from 1875 to 1955, annual returns on the commercial/industrial shares was 4.08% and the return on the finance shares was 1.01%. If you add the 6.77% dividend yield on commercial shares from 1882 to 1957, you get an annual return over 10% for 80 years during a period when shares in London returned 5.92% on average. Since many Australian shares traded in London, it seems hard to believe that a 4% difference in the rate of return to Australian and British shares could persist for 75 years. Why would someone invest in non-Australian shares if they knew they were going to get a 4% lower return each year? On the other hand, “real time” data exists for Australian indices between 1958 and 2018. During that period of time, share prices in Australia rose 6.23% per annum and 11.83% after dividends while inflation rose 4.67%. This gives an annual real total return of about 7% after inflation between 1958 and 2018. This is much lower than the Australian data from 1882 to 1958 and comparable to returns in the United States and other countries. By calculating indices for mining and finance shares that were listed in London, we can make direct comparisons between Lamberton’s equal-weighted results and GFD’s returns to test the validity of Lamberton’s results. To use one example, between 1887 and 1888, Lamberton’s mining index tripled in price, then lost half of its value, but GFD’s Materials index hardly budged during the same period that Lamberton’s index tripled. When we looked at the actual data, we found that over one-third of the total market cap in the GFD index came from Day Dawn Block & Wyndham Gold Mining Co. Ltd. which declined in price during that period of time, offsetting the increases in the other shares. Hence, an equal-weight index rose while the cap-weighted index remained flat. It is well known that equal-weighted indices outperform market cap-weighted indices because small companies often outperform large companies. Other examples could be provided that show how using an equal-weighted index created an upward bias in the Lamberton data. GFD has calculated return data for Australian stocks that were listed on the London Stock Exchange between 1825 and 1985. Most of the companies that were listed were finance and mining companies rather than commercial/industrial stocks. By combining the data for commercial/industrial stocks from Lamberton, the data on mining and finance stocks from GFD, and the GFD dividend data, we can obtain a data series that is more representative than the equal-weighted Lamberton data. We allocated 50% of the weight to commercial/industrial stocks and 50% to finance and mining shares. After making this change, we recalculated the Australian index and found that the price data for the GFD/Lamberton index rose by 3.19% per annum between 1882 and 1936 rather than the 4.66% increase which occurred for the Lamberton Commercial and Industrial index. Moreover, before 1875, we were able to use the returns on Australian stocks that were listed in London to extend the Australian index back another 50 years to 1825. This was when the first Australian company, the Australian Agricultural Co., listed on the London Stock Exchange. The returns to the old Australia All-Ordinaries (green) and GFD’s new All-Ordinaries (black) is illustrated in Figure 1.
The data in the file for the Australian dividend yield (SYAUSYM) reflect the dividend yields calculated by GFD from the 1830s to the 1950s while the Lamberton dividend yield data are preserved in the file SYAUSYQ. We have recalculated the Australian indices, using the combined monthly Lamberton/GFD data in the Australia ASX All-Ordinaries Price Index (_AORDD) and Return Index (_AORDAD) rather than relying purely on Lamberton as was done in the past. Because Lamberton didn’t calculate dividend yield data before 1882, the ASX All-Ordinaries Return index only goes back to 1882. With the addition of data from London, the index can begin in 1825, not 1882. Updated Stock Market Returns for Australia We divided the results into pre-Lamberton (1825-1882), Lamberton (1882-1936), and post-Lamberton eras (1936-2018). The results of the new indices are provided below.
| Nominal Price | Nominal Return | Inflation | Real Price | Real Return | Dividend Yield | ||
| Pre-Lamberton | 1825-1882 | 3.05% | 7.99% -0.17% | 3.22% | 8.18% | 4.80% | |
| Lamberton | 1882-1936 | 3.32% | 9.48% | 0.61% | 2.70% | 8.82% | 5.95% |
| Post-Lamberton | 1936-2018 | 5.53% | 12.17% | 4.93% | 0.57% | 5.99% | 5.39% |
| All Years | 1825-2018 | 4.17% | 9.77% | 2.19% | 1.94% | 7.42% | 5.37% |
The returns now seem more realistic. Using data from London between 1825 and 1882, Australian stocks returned 7.99% per annum and rose in price, on average, by 3.05% providing a dividend yield of 4.80%. The numbers are higher during the Lamberton period, though not as unrealistic as they were before. Between 1882 and 1936, the Lamberton data produced an annual nominal return of 12.09%, but with the new data, this has been reduced to 9.48%. Although the nominal return since 1936 is higher, most of this is due to inflation since the real return between 1936 and 2018 was 5.99%. Between 1958 and 2018, the real return was 6.59%. During the entire period covered, from 1825 until 2018, stocks rose in price by 4.17% before inflation and 1.94% after inflation. Including reinvested dividends, stocks returned 9.77% before inflation and 7.42% after inflation. The dividend yield was 5.37%. The real return to Australian stocks was higher before 1936 than it was after 1936, but this can be explained by the fact that Australia was an emerging market which had to compensate investors for the higher risk inestors took by investing in Australia. By comparison, between 1825 and 2018, US Stocks returned 7.10% after inflation, versus 7.42%, for Australia. Once you make these adjustments, the return on Australian stocks seems more realistic. For this reason, we will use the GFD/Lamberton data for our returns to Australia in the future. The result is illustrated in Figure 2.
Conclusion
Global Financial Data is attempting to redress some of the biases in indices that were calculated between the 1930s and 1950s before computers made it easier to calculate total returns. The only way to do this is to collect data from companies that were listed in New York and in London as well as on local exchanges and calculate the returns on those stocks. Although historical indices provided the best information that was available at the time, the indices calculated for the United States, the United Kingdom, Australia and other countries were quite limited in their methodology. They also used a small sample of shares, used monthly averages rather than monthly closes, lacked accurate dividend information, and were unable to begin their indices when shares began trading, leaving decades of stock market performance out of their calculations. Global Financial Data is attempting to correct these shortcomings and produce indices that are cap-weighted and provide both price and return indices, as well as calculation of the dividend yield, equity premium, and returns to bonds and bills. The US-100 and UK-100 indices are prime examples of what can be done with the data that GFD has collected. Australia is another example of a country whose historical indices were insufficient and for which GFD has recalculated indices to improve our estimates of past stock market behavior.
