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.
The index had large increases when World War I began as the demand for rubber increased. When the war was over, the demand for rubber collapsed and the price of rubber stocks declined as well. A graph of the price of rubber between 1910 and 1960 is provided below in Figure 2. Both rubber price spikes in 1925 and in 1950 are reflected in the index with shares rising in price, and declining thereafter. Who in today’s modern Singapore of crazy, rich Asians would have realized the intimate relationship between the price of rubber and the performance of the stock market before the city gained its independence?
From a price point of view, investors lost money during the 50 years the GFD index covers. The only return was from dividends which could be reinvested in the company. The log graph below shows the impact of reinvesting dividends on the total return. Clearly, with reinvested dividends the return is positive.
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.
Though few people have heard about the collapse of the Hatry Group of companies in September 1929, some people have claimed that it triggered the New York stock market crash of October 1929 and ultimately the Great Depression. Our review of the facts has led us to believe that the collapse of the Hatry Group had little impact on financial markets, despite the claims to the contrary. Hatry no more caused the crash of 1929 than Bernie Madoff caused the Great Recession of 2008.
Clarence Hatry: Flamboyant Entrepreneur
Clarence Hatry was a dedicated self-promoter who never had a chance of being part of the British upper crust. Hatry was the son of a prosperous Jewish silk merchant and was bankrupt by the age of 25. He built his fortune by speculating in oil stocks and promoting industrial conglomerates. Like any entrepreneur, he had spectacular successes and spectacular failures. He built a retail conglomerate, the Drapery Trust, which he sold to the department store Debenhams. He engineered the merger of the London bus corporations into the London General Omnibus Company, ran a stockbroking firm that specialized in municipal bonds, set up the Photomaton Parent Company, which operated a chain of photographic booths, and controlled the Associated Automatic Machine Corporation which owned vending machines on railway platforms. He certainly knew how to diversify his holdings.
The Collapse of the Hatry Group
Hatry’s hubris led him to think that he could rationalize the British steel industry by merging a number of steel and iron companies into the United Steel Companies which he bought for $40 million in what was to be a leveraged buyout, but at the last moment, the bankers withdrew their financing. Hatry began scrambling for cash, and even went to Montagu Norman, the head of the Bank of England to get a bridge loan for the acquisition. Now, you have to understand, this was equivalent to P.T. Barnum going to J.P. Morgan to borrow money for his museum. Norman simply told Hatry he had paid too much for United Steel. Hatry began borrowing money against his companies and eventually committed petty fraud, by forging City of Wakefield 4.5% bonds which he used as collateral to raise money. Corporation and General Securities Ltd. had issued the bonds, raising £750,000 of which only £450,000 was turned over to the city of Wakefield. Rumors about Hatry’s overextension began to circulate and the value of his companies began to plunge. By September 17, Hatry had assets of £4 million and liabilities of £19 million. Hatry knew the end was nigh. If Hatry didn’t know how to enter British society in proper fashion, he certainly exited in proper British form. Hatry called his accountant and admitted to his forgery. His accountant called Sir Archibald Bodkin, the director of public prosecutions and advised him of the “stupendous” scandal and that Hatry would turn himself into the office the next morning. The next day, Hatry had lunch at the Charing Cross Hotel, and went to Sir Bodkin’s office in the Guildhall, where he and three other directors were refused bail. They were remanded to custody.
Hatry’s Revenge
Hatry was sentenced to 14 years in prison for his fraud, of which he served 9 years. While Hatry was in prison, he worked in the prison library. After Hatry was released, he bought into Hatchard’s bookstore in Piccadilly, which is the oldest bookstore in London. The bookstore was doing poorly and Hatry discovered the reason for the store’s poor performance was that many of its customers were using the bookstore as a library and weren’t paying for their books. Hatry told the customers that he planned on removing the books from the book store window and putting a list of what the members of the British elites owed in the bookstore window. This unique method of debt collection worked, the customers settled their bills, and the bookstore was successful. Hatry got payback against the elites who had rejected him.
Global Financial Data has produced indices that cover global markets from 1601 until 2018. In organizing this data, we have discovered that the history of the stock market over the past 400 years can be broken up into four distinct eras when economic and political factors affected the size and organization of the stock market in different ways. Politics and economics define the limits of financial markets by determining whether companies can exist in the private or the public sector, by controlling the flow of capital in financial markets, and by determining the level of regulation that companies face in maximizing their profits.
The first era covers the period from 1600 until 1815 when financial markets funded government bonds and a handful of government monopolies. The British East India Company was established in 1600. For the next 200 years, financial markets traded a very limited number of securities. After the bubbles of 1719-1720, shares traded more like bonds than equities. Investors were more interested in getting a secure return on their money than investing for capital gains.
The second period from 1815 until 1914 was one of expanding equity markets, globalization of financial markets, and a reduction in the importance of government bonds relative to equities. This changed in the 1790s when first canals, and later railroads changed the nature of financial markets forever. Investors discovered that transportation stocks could provide reliable dividends as well as capital gains. For the next hundred years, investors had the opportunity to invest in thousands of companies that could generate capital gains as well as dividends. Financial markets became globalized and the transportation revolution enabled the global economy to grow. By 1914, capital flowed freely throughout Europe and the rest of the world, enabling investors to optimize returns globally.
The era of globalized financial markets came to an end on July 31, 1914 when the world’s stock markets closed down when World War I began. During the war, capital was directed toward paying for the war. Attempts to restore globalized financial markets after the war failed. Financial markets operated on a national level, not on an international level. Before World War I, markets provided similar returns because they were integrated. After the war, national equity market returns diverged because capital was unable to flow to the countries with the highest rates of return. After World War II, Europe nationalized many of its main industries and the United States regulated industries.
It wasn’t until the 1980s that equity markets became globalized once again when deregulation and privatization swept over the world’s stock markets. The poor performance of markets and the economy in response to the OPEC Oil Crisis of the 1970s brought the role of government in regulating the economy into question. Privatization swept over the capitalist economies, and the former Communist countries opened stock markets and began to integrate with the world’s financial markets. The global market capitalization/GDP ratio increased dramatically. There is no definitive date when this transition occurred, so the bottom of the bear market in bond and equities in 1981 is used as the starting point of this new era.
The Fifth Era: Financial Singularity
Computer scientists talk about the possibility of a technological singularity, when the creation of artificial superintelligence could create computers that exceed human intelligence and lead mankind into a new era. There is a lot of debate about whether this will ever occur or could occur, but some scientists believe it is only a matter of time. We could also think of a future in which there is a financial market singularity, a point at which global financial markets become integrated into a single, 24-hour market that operates independently of national borders and exchanges. With the advent of artificial intelligence and blockchain, a financial singularity has become not only possible, but probable. The main question is not whether this will occur, but when it will occur and how. Equity markets are fully globalized today, and barring any dramatic change in the global political economy, they are likely to remain fully integrated for some time to come. Although there is always the threat of re-regulation of different parts of the economy, nationalization of entire industries seems unlikely. Nationalized firms would be unable to survive in the globalized world that exists today. Asia will continue to increase its share of global market capitalization at the expense of Europe. Today, financial markets are driven by technology which makes it easier and cheaper to integrate financial markets into a single market. The foreign exchange market is a global market that trades 24 hours a day. Money is digital and moves around the world on electronic networks. At some point in the future, equity and bond markets will trade 24 hours a day in a single market. How long it takes to reach that point depends upon technology and politics. Computers will enable markets to become more integrated in the future. Both artificial intelligence and blockchain will enable financial markets to move away from the exchange-based markets that exist today and be replaced by markets that never sleep and reside in the cloud. There is no reason why global financial markets shouldn’t become fully integrated in the near future just as regional stock exchanges have integrated into national exchanges in most of the countries in the world. What still needs to be done is for markets to move toward singularity. Politicians in Europe, America and Asia need to provide the institutional framework that will enable the financial singularity to exist. If politicians fail to create the conditions for integrating national markets into a single international market that operates 24 hours a day, markets will integrate independently of national exchanges. History has shown that existing exchanges rarely lead the way in introducing new technology. Electronic exchanges are born independently of existing exchanges. NASDAQ grew as a challenge to the NYSE and AMEX in 1971. Instinet, Island, Archipelago, BATS, the Investors Exchange and others grew independently of the major exchanges while dark pools trade hundreds of millions of shares daily. Yet, in all of these computerized changes, existing exchanges such as the NYSE was an adapter, not a disrupter, and has been forced to play technological catch-up. During the past 20 years, the NYSE has been behind the curve, following technological changes, not leading them, as its share of the trading of NYSE stocks has slowly declined. Twenty years ago, 80% of trades in NYSE-listed stocks were traded on the NYSE. Today only 30% of consolidated trades take place on the NYSE. More NYSE shares are traded through Nasdaq than on the NYSE, and about 40% of trading is off the exchanges in dark pools. If the stock market in the first half of the 20th Century was 1,000 floor traders trying to out-trade each other, and the second half of the century was 1,000 money managers trying to outsmart one another, the stock market of the 21st century may be 1,000 computer engineers trying to out-program one another. Over the past two centuries, exchanges have lost their advantage of providing price transparency, liquidity and timely execution at a minimal cost. Bonds, commodities and foreign currency have all migrated from exchanges to over-the-counter computers. Institutions trade between themselves and the retail market in shares is collapsing as index funds and ETFs continue to grow in popularity. The NYSE and other exchanges have lost their advantages in the market and their very existence is now in question. Given this, it is our prediction that the financial singularity will occur independently of efforts of existing exchanges to merge into a single market. We believe this will happen in the 2020s, but when and how, we do not know. But even when all this happens, and exchanges disappear, companies will still raise capital by issuing shares to the public, billions of people will still rely upon stocks for their investments, and we will still worry about whether the stock market will go up or go down tomorrow. If you would like to read the full version of this article on the Five Eras of financial markets, please go to: The Five Eras of Financial Markets.
Global Financial Data has produced indices that cover global markets from 1601 until 1815 as a first step toward creating a World Index that provides data on equities from 1601 until 2018. As we have discussed in another blog, “The Fifth Financial Era: Singularity,” you can divide financial market history over the past 400 years into four eras of Monopolies and Funds (1600-1815), Globalization (1815-1914), Regulation and Nationalization (1914-1981) and the Return to Globalization (1981-). At some point in the near future, global markets should move toward singularity in which a single market for stocks and bonds operates over the entire planet.
It cannot be understated how much equity markets were transformed between the 1700s and the 1800s. Before 1815, financial markets were primarily geared toward issuing government equities and bonds to investors who wanted consistent, reliable dividend and interest income from their investments. During the 1700s, few investors saw equity markets as a way of generating capital gains by allocating money to new industries. In fact, what differentiates equities in the 1600s and 1700s from the two centuries that followed is the lack of capital gains and investors’ almost total dependence on dividends as a source of return.
The First Financial Revolution
The First Financial Revolution occurred in the early 1600s when the Dutch West India Company, the Dutch East India Company and the English East India Companies were established. The Dutch East India Company was founded in 1601 and continued until it ceased operations in 1799. The Dutch West India Company was established in 1621, went bankrupt in 1674 after losses during the Anglo-Dutch War, and reorganized as a new Dutch West India Company in 1674. The English East India Company was established in 1600 and continued in existence until 1874. Before 1600, merchants had formed “shares” in voyages that ships made to the far east, but the innovation that occurred in 1600 was to vest ownership in a single company, and not in individual voyages. This provided economies of scale and allowed capital from one voyage to be reinvested in other voyages. Shares in these companies were traded at London coffee houses and on the exchanges in Amsterdam and Paris. Of course, many international corporations existed in the 1600s, but few were of sufficient size to enable shares to be traded on a regular basis. In the 1500s, English companies were established enabling the British to trade with Guinea, Senegal, Russia and the Levant, but most of these companies were too small to create a financial market for their shares. What is important about the First Financial Revolution was that it established the principal of founding corporations that could issue shares which did not expire. Shareholders could buy and sell their shares to others, and receive dividends if the company were profitable. A second wave of incorporations occurred in the 1690s. In the Glorious Revolution of 1688 English parliamentarians overthrew King James II and established a constitutional monarchy in England. This not only brought a Dutch ruler to London, but also brought Dutch capital and Dutch financial knowledge. The Phipps treasure-seeking expedition of 1687-1688 paid a 10,000% dividend to shareholders encouraging other corporations to be established. In 1694, the activity in stocks in London was sufficiently large that John Houghton wrote articles on share trading and published a list of the prices of shares traded in London. In January 1698, the Course of the Exchange began its regular bi-weekly publication which lasted into the 1900s. The Amsterdamsche Courant published Dutch share prices fortnightly beginning in 1723, and Les Affiches de Paris began publishing the price of shares traded in Paris in 1745. Between these three publications, we have been able to put together data on share prices from 1601 until 1815. The 1600s and 1700s were a period of almost continual war in Europe and the debt of the English, Dutch and French rose as a result. Governments in the Netherlands and Great Britain began issuing debt that had longer maturities, in some cases creating annuities that provided annual payments as long as the bondholder was alive. These debt instruments eventually were converted into perpetuities which never matured just as shares in the East India Company and the Bank of England never matured. Given the choice of obtaining a perpetuity that paid a fixed yield from a government or variable dividends from a corporation, most investors chose to invest in the government security. Because of its consistency in payment, Britain was able to increase its debt to twice its GDP by 1815 while the yield on government debt fell from 8% in 1701 to 3% in 1729 when the annuities were introduced. Between 1688 and 1789, British government debt grew from £1 million in 1688 to £244 million in 1789 and £745 million in 1815. During that same period of time the market cap of British shares grew from £1 million in 1688 to £30 million in 1789 and £60 million by 1815. The market cap of shares, which was equal to outstanding government debt in 1688 shrank to less than 10% of government debt by 1815. Although the number of available bonds and shares was limited, the market was global. In the 1780s, government debt from Spain, Austria, Russia, Sweden, France and Great Britain all traded in Amsterdam. But the Napoleonic wars led to default by all of these countries except Great Britain. By 1800, the Dutch West India Company and Dutch East India Company as well as the French East India Company were all driven into bankruptcy.Equity markets in the 1600s and 1700s
Data on companies from the 1600s is extremely limited. Data are available for only two companies from the Netherlands, the Dutch East India Company (1601-1698) and the Dutch West India Company (1628-1650). The data before 1690 depends almost exclusively on the Dutch East India Company which was the largest corporation in the world in the 1600s and one of the largest corporations in financial history. For more information on the Dutch East India Company, see the blog, “The First and the Greatest: The Rise and Fall of the United East India Company.” Nevertheless, we have price data, shares outstanding and dividend information, the three primary components that are needed to put together a stock market index. Unlike corporations in England, shares in the Dutch East India Company were allocated by municipality, many dividends were paid in kind, shares could not be traded and cleared as easily as they were in London, and the company never issued new shares, but instead issued so much debt that the company eventually went bankrupt. The key event for financial markets between 1600 and 1815 was the Bubble of 1719-1720. The Dutch, French and British governments all issued large amounts of debt to fight the War of the Spanish Succession between 1701 and 1713. John Law offered the French a way of converting their government debt into equity in the French East India Company. In Britain, investors were allowed to convert their debt into shares in the South Sea Company. Enthusiasm for the shares and government manipulation drove prices of the stocks up to unsustainable levels. Governments in both Paris and London passed laws that directed all capital into the French East India Company and the South Sea Company, but after the crash, companies were restricted from raising additional capital and few companies issued new shares for the rest of the 1700s. Almost all of the activity in the Netherlands came from the Dutch West India Company and the Dutch East India Company. The only other company of any prominence was the Societeit von Berbice which settled Dutch Guyana. The French East India Co. was the primary corporation that traded in Paris until the Caisse d’Escompte and Compagnie des Eaux de Paris began trading in 1787. These corporations ran into problems during the French Revolution. On August 24, 1793, the Committee of Public Safety banned all joint-stock companies and seized the assets and papers of the French East India Company. Directors of the company bribed French officials so the company could oversee its liquidation rather than the government. When this was discovered, key Montagnard deputies were executed, leading to the downfall of Georges Danton. We have to rely on the London Stock Market for most of the companies that make up the world index between 1692 and 1815. Among the more important companies for which we were able to collect data on prices, dividends and shares outstanding were the Royal African Company (1692-1742), the East India Company (1692-1815), the Bank of England (1694-1815), the New East India Company (1698-1708), the Million Bank (1700-1749), the South Sea Co. (1711-1815), the London Assurance Co. (1720-1750) and the Royal Exchange Insurance Co. (1735-1753). The Bank of Scotland was founded in 1695, the Royal Bank of Scotland in 1727 and the British Linen Co., which acted as a bank, in 1745, but unfortunately, data on these and other companies was unavailable for inclusion in the index. Although London lacked a formal exchange until 1801, trading occurred at coffee shops around Exchange Alley and the prices of shares were recorded in The Course of the Exchange. In addition to shares, the 3% Annuities began trading in 1729 and the 3% Consolidated Bonds in 1757. Other government debt was issued and traded, but most of the activity in London, Paris and Amsterdam was in English bonds. Only companies for which we were able to obtain share price data, share outstanding data and dividends are included in the index. Any company that lacked all of these three variables was excluded.
Figure 1 illustrates the performance of GFD’s Global Index of Stocks from 1601 until 1815. The data from 1601 until 1692 is exclusively from the Dutch East India Company. After the Glorious Revolution in 1688, interest in London shares increased. The price of shares rose from 1692 until 1718, leading to the explosion that occurred during the Bubble of 1719-1720. Although the South Sea bubble is probably the better known of the two bubbles, the rise and fall was even more dramatic in France, where shares of the French East India Company went from 315 livres in 1718 to 10,000 livres in 1719. In England, South Sea Company shares rose from 100 pounds to 1000 pounds then fell back to 100.
The relative impact of the Bubbles of 1719-1720 is illustrated in Figure 4 with the French index showing the greatest volatility, the English index increasing several fold, and the Dutch index increasing the least. After 1720, there was very little activity in any of the three indices. The Dutch index gradually declined as the Dutch East India Company’s excessive debt grew. The French East India company collapsed during the French Revolution, but British stocks maintained their value.
The behavior of bonds is illustrated by the graph of the English Annuity/Consol in Figure 5. The wars the English fought in the 1700s drove the price of English bonds down and increased the yield during the Seven Years War (1754-1763), American Revolution (1776-1783) and French Revolutionary Wars (1792-1802). The price of bonds declined and the yield on bonds increased over the course of the 1700s.
Returns to Stocks and Bonds
Table 1 shows the returns to stocks and bonds in France, the United Kingdom, the Netherlands, the United States and the world from 1602 until 1815. Unfortunately, the years covered by each country differs so direct comparisons between the returns to stocks and bonds in different countries is difficult. What is obvious is the overall lack of capital gains. Almost all of the return came from dividends for stocks and interest for bonds.| Table 1. Annual Returns to Stocks and Bonds, 1602 to 1815 | |||||
| Country | Securities | Years | Price | Dividends | Return |
|---|---|---|---|---|---|
| France | Bonds | 1746-1815 | -0.23 | 3.17 | 2.93 |
| France | Stocks | 1718-1793 | -1.78 | 6.95 | 5.05 |
| France | Stocks | 1801-1815 | -1 | 5.31 | 4.26 |
| Netherlands | Bonds | 1788-1815 | -6.27 | 2.85 | -3.6 |
| Netherlands | Stocks | 1602-1794 | -0.24 | 4.76 | 4.51 |
| United Kingdom | Bonds | 1700-1815 | -0.23 | 4.46 | 4.22 |
| United Kingdom | Stocks | 1692-1815 | 0.08 | 4.57 | 4.65 |
| United States | Bonds | 1786-1815 | 3.54 | 4.86 | 8.57 |
| United States | Stocks | 1791-1815 | -0.76 | 6.5 | 5.69 |
| World | Bonds | 1700-1815 | 0.2 | 5.52 | 5.73 |
| World | Stocks | 1602-1815 | 0.95 | 5.7 | 6.7 |
