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Cuban Capitalism Before the Revolution
Global Financial Data has information on 7 Cuban companies that traded in London before 1932 and 20 companies that traded in New York between 1905 and 1961. Before 1870, two Cuban mining companies listed in London, El Compañia Consolidada de Minas del Cobre (The Cobre Mining Co.) (1838-1867) and the Santiago de Cuba Mine (1849-1859). The Cobre mine was located at the southern tip of Cuba near Guantanamo. It was the oldest mine in the new world, having been founded in 1544. In the 1830s, a British entrepreneur bought the abandoned mine and brought Cornish miners and mechanics to get copper from the mine. The Cobre was a successful company for almost 30 years with a capitalization of about $5,000,000 in 1864. At its height, the mine was producing 67,000 tons of copper per year, but operations were suspended in 1869 when the quality of the ore declined, and the mine went bankrupt in 1869 causing a complete loss of capital to investors. The next phase in Cuban capitalism was an attempt to provide transportation to the island by building railroads and warehouses so the sugar and other crops produced in Cuba could be exported to the rest of the world. Cuba remained under the control of the Spanish until the Spanish-American war in 1898 in which America defeated Spain and exerted its influence over the island for the next 60 years. Among the Cuban companies that listed in London were the Cuba Submarine Telegraph Ltd. (1870-1928) and Western Railway of Havana (1895-1913). After the Spanish-American war, a number of new companies were established in London, including the Cuban Central Railroad (1901-1918), and the United Railways of Havana and the Regla Warehouses (1906-1932). The world’s railroads were funded through London, so it should be no surprise that London funded Cuba’s railroads as well. Most of the companies that listed in New York produced sugar or tobacco, or provided services to the population of Havana. Of the 20 Cuban companies that listed in New York, eleven were sugar companies and two were tobacco companies (the Cuban Tobacco Co. and the Havana Tobacco Co.). The remaining stocks included the Banco Nacional de Cuba, The Cuba Co., which ran both the Consolidated Railroads of Cuba and the Compañia Cuban which owned about 300,000 acres of land on which it raised sugar, and the Havana Electric Railway Light and Power Corp. which consolidated the Havana Electric Railway with the Compañia de Gas y Electricidad de Habana, which had a perpetual gas and electricity franchise in Havana.
So how did Cuban capitalism do? Not very well, actually. The chart above provides a graph of Cuban stocks in London and New York from 1870 to 1960. Sugar and tobacco drove the market more than anything else. There was a global sugar shortage in the 1910s and Cuban stocks benefited from this, but the price of sugar collapsed in 1920 and never recovered. Cuban sugar producers were devastated, and many were forced to sell to American companies which bought up sugar fields in order to export sugar from Cuba to the United States.
Before this decline, the market capitalization of Cuban stocks risen from $40 million in 1915 to $135 million in 1926, only to decline to $2 million by 1932, rising back to $75 million by 1946 before declining to zero in 1961 as is illustrated below.
The decline in the price of sugar drove the price of the Cuban Co. down from 50 in July 1925 to 1 in December 1931. It wasn’t until World War II that Cuban stocks began to recover in price as exports of sugar and tobacco were sent to the United States and the rest of the world. But there was always tension between the elites of Havana, the foreigners, mainly Americans, who invested in Cuba, and the people of Cuba who did not seem to benefit from the investment in sugar and tobacco. As can be seen in the graph above, the price of sugar remained stagnant during the 1900s and there was no other industry that could boost the Cuban economy.
Returns to Cuban Stocks
What differentiates the return on Cuban stocks from shares in other countries is the three strikes that have been thrown at investors during its history. The Cobre Mining Co. was abandoned in 1869 causing a complete loss to investors. A second collapse in Cuban share prices occurred in the 1920s when the decline in the price of sugar and in the Cuban economy caused Cuban stocks to lose over 90% of their value. The third loss occurred when Fidel Castro overthrew the Batista government and nationalized Cuban corporations generating a complete loss to shareholders. Up until nationalization, Cuban stocks had provided modest returns. $1 invested in Cuban stocks in 1870 would have yielded $0.50 by 1961, an annual loss of 0.75%, but with reinvested dividends, the $1 invested in Cuban stocks in 1870 would have returned $48.75 providing an annual return of 4.36% over the 91-year period and an annual dividend yield of 5.15%. Without reinvesting dividends, shareholders would have had no return to speak of. Nevertheless, when the government nationalized all the corporations in Cuba, investors lost everything. It should be remembered that Cuba never had a growth industry. Its main sector was agriculture, primarily sugar and tobacco, and other companies provided the infrastructure to ship Cuban goods abroad. Tourism from the United States played an important role in the economy until 1959, but it was hardly a growth industry. During the 2000s, Cuba’s revenues from tourism remained constant at about $2.5 billion. Cuba’s exports are about $1 billion per year, but imports are over $5 billion. So was Cuba a good investment? No. Cuban investors lost their money three times in the past. Cuba remains opposed to almost any expansion in the private sector. Citizens are restricted almost exclusively to running a small restaurant, a bed and breakfast or driving at taxi. When you look at the three times that investors lost virtually every penny they invested in Cuba in the 1860s, 1930s and 1960s, one can almost be grateful to Castro for keeping investors out of Cuba so they wouldn’t get wiped out a fourth time.![](/images/wp-content/uploads/2019/10/Blog-1208x720-15-1024x576.jpg)
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.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.![](/images/wp-content/uploads/2019/10/Blog-1208x720-18-1024x576.jpg)
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.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.
Only six stocks that were listed on the Shanghai Stock Exchange traded in London. These were the British and Chinese Corp. (1909-1930), China Mutual Steam Navigation (1896-1900), Chinese Engineering and Mining (1907-1930), the Pekin Syndicate (1900-1930), Shanghai Waterworks (1923-1927) and Shanghai Electric Construction Co. (1924-1926).
As is true of most emerging markets during this period of time, little return was provided by changes in the price of the underlying stocks. Most of the return came from dividends that investors would have had to reinvest in the stock market. The return index for Chinese Stocks is illustrated in Figure 4 below.
The Performance of Chinese Government Bonds
Probably the best long-run chart of Chinese finance is the price of Chinese government bonds that were listed in London. As Figure 5 shows, Chinese bonds traded above par until the beginning of World War I in 1914, but after that, Chinese bonds began a fairly steady decline as the political situation in China worsened and China defaulted on its bonds. Surprisingly, the declaration of the Chinese republic in 1912 had little impact on the value of Chinese bonds, but after the declaration of World War I, interest rates rose, and Chinese bonds declined in value with new lows in 1916, 1920 and 1927.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.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.![](/images/wp-content/uploads/2019/10/Blog-1208x720-19-1024x576.jpg)