Download How did US corporate securities markets differ from Europe`s before

Rethinking Corporate Finance: How did US corporate securities markets differ from Europe’s before
1914?
Leslie Hannah (LSE)
ABSTRACT
By any reasonable measure, corporate securities markets in the US, Germany and France remained
smaller (relative to GDP) than the UK’s before 1914. The US had proportionately larger markets than
France and Germany if we include regional markets and the bonds of its (massively more leveraged)
corporations and exclude securities structured by government in France and Germany, notably
guaranteed railways and mortgage-backed bonds. These distinctions had implications for investor
choice, capital supply, innovation, corporate governance, the distribution of risk and the limits of
laissez-faire. Those applying financial models historically need to be aware of how pre-1914 stock
markets differed from today.
Economic historians have long extolled the gains from financial development. 1 By
combining the capital of thousands of small investors, stock markets enabled the achievement of
economies of scale or scope in large enterprises which would have posed serious challenges for
most personally-owned enterprises using bank loans. They raised the rate of capital accumulation by
increasing returns and diversifying risks, unshackled manager selection from the constraint of wealth
ownership, and - if markets were not themselves monopolised or unduly restricted - reduced
barriers to entry and cronyism that protected established incumbents. 2 Corporate (and government)
securities offered a more diverse menu of risks and returns than banks and personal enterprise.
More liquid securities markets enabled banks to increase lending while maintaining liquid reserves
and provided new instruments of macro-economic policy intervention.
This positive catalogue has few echoes in standard economics texts, where index
references to “stock market” or “corporation” focus on the problems of “agency” and “information
asymmetry” unleashed by the divorce of ownership from control, or monopolistic or oligopolistic
inefficiencies. Concern that financialisation may undermine relationships with stakeholders or cause
1
Rosenberg and Birdzell, How.
2
Rajan and Zingales, Saving Capitalism.
1
disruptive speculative booms and growth-destroying financial crises have been prominent both
historically (Germany’s clampdown on corporations and bourses in 1884-96) and today (with a postGFC rash of critiques of excessive financial development). 3 Longitudinal and cross-section studies
find complex and changing relations between stock-exchange development and economic growth, 4
and there were surely also historical variations in the structure and contribution of securities
markets. Historical studies - recently boosted by cheap offshoring of data input – have extended
testing of securities models over time.
Our purpose here is the prior task of delineating pre-1914 markets and how capital
supply, investor controls and other structural aspects differed among them. There is a dismaying
proliferation of incompatible historical claims about markets in the four largest industrialised
economies, which then accounted for more than half of global securities. Recent estimates for 19121914, on the conventional scalar (domestic equity market capitalisation/GDPx100), have placed US
market size at between 16% and 109%, British at between 19% and 133% and French at between
40% and 78%: ranges which would support any ranking. 5 The consensus on Germany - 44-47% - in
the same four studies is not reassuring, since two simply reproduce a 40-year-old estimate which
inappropriately includes the capital of unquoted companies and measures all at par, not market. 6
Some analysts of the US lament the backwardness of its core equity markets, or explain why
Germany had larger equity markets. 7 More generally scholars debate why (unlike today) civil law
3
Kay, “Other;” Zingales, “Does.”
4
Levine, “Bank-based;” Eckbo, Handbook.
5
Rajan and Zingales, “Great Reversals;” La Porta et al, “Economic;” Musacchio, “Law;” Moore, “World.”
6
Goldsmith’s (Comparative) estimates, despite these problems, were adopted on the influential advocacy of
Sylla (“Schumpeter”) and, fortunately, the two large errors cancelled out.
7
O’Sullivan, “Expansion;” Calomiris, “Costs.”
2
countries did not have smaller markets than common law ones. 8 Yet judicious choice among these
estimates would suggest such explained outcomes cannot be observed.
We explore the reasons for such chronic discord and scholarly “explanations” of
outcomes that may never have happened. These have only feint echoes in recent work by financial
economists, who use official statistics from the exchanges themselves (also available historically,
albeit too often ignored) and from regulators and statistical agencies (both rarer historically). The
core empirical consensus in modern studies partly derives from their failure to address one issue
which has (creditably) perplexed historians: the extent to which, in eras of globalisation (notably pre1914 or post-1980), “national” equity market capitalisation reflected not domestic activity, but
activities of multinationals abroad. We identify three further reasons why pre-1914 markets have
generated discord. First, major stock exchanges were then less dominant and regional and informal
markets prospered. Second, the clear modern distinction between bonds and equities was muddied,
with many hybrids differentially distributed. Historical markets may be better understood if - like
contemporaries - we consider how bonds and hybrids interacted with the market for purer equities
on issues of corporate control or capital supply. Third, there are wide discrepancies between some
new datasets derived from the financial press and contemporary reports by stock exchanges
themselves.
Boundary issues were most problematic in common law countries, with markets less
clearly delineated historically than in the more regulated markets of today. In section 2 we
supplement one recent estimate for the UK in 1913, reconciling it with LSE statistics, which
unambiguously indicate a larger, and faster-growing, domestic securities market. In section 3 we
propose new national totals for the US, based on neglected contemporary statistics. In section 4 we
compare consensus estimates on the French and German markets. In conclusion, we propose ways
8
Musacchio and Turner, “Does.”
3
forward for choosing among data sets according to the different questions the proliferating
literature addresses. These guidelines may assist financial economists unfamiliar with the historical
background of financial markets to navigate between the Scylla of extending testing historically and
the Charybdis of misunderstanding what is measured. Counting securities is positively misleading, if
not driven by an historical understanding of the questions to which markets provided (or failed to
provide) an answer.
I
The London Stock Exchange was the world’s largest securities market until the 1920s and
so globally orientated that it was thought to trade one-third of the world’s securities (at a time when
its host economy accounted for only 8% of global GDP). 9 The LSE released comprehensive data on its
listings in Burdett’s Official Intelligence (later the Stock Exchange Official Intelligence, and hereafter
SEOI), first published in 1882. The listing department (headed by Burdett and in a position to know)
provided end-year totals (with earlier decennial estimates going back to 1853) for the values of all
listed securities, disaggregated for governments and railways into domestic, colonial and foreign,
and for other corporates into around two dozen industrial sectors. It did not (except for government
and most railways, which accounted for most bonds) separate bonds from shares, nor (for remaining
corporates) domestic from overseas. It also reported par, not market values, though this is easily
corrected by applying the sectoral market/par ratios published monthly in the Banker’s Magazine. 10
Finally the SEOI only totalled officially-listed securities, including the largest and most frequentlytraded, but excluding the more numerous, mainly smaller and less closely-vetted “special
settlement” securities and others (including many listed on two dozen provincial exchanges but
traded in London). The highly competitive LSE (which had more brokers than Paris, Berlin and the
9
Hannah, “Leading.”
10
The use of par makes little difference to aggregate values, but generally (except in the US) overstates the
value of government and corporate bonds and understates equity values.
4
NYSE combined) promiscuously cross-listed securities from provincial and overseas markets,
encouraged on-exchange trades well beyond the official list, and discounted commissions for
bankers 11 and large orders (a practice banned by the NYSE until 1976). 12 In this unusually
competitive and integrated national market, more than 5 in 6 UK quoted companies were not
included in its official list totals, but featured in the SEOI.
The contributions of later scholars are therefore essential for delineating the full size and
shape of this corporate securities market and two are central to our composite estimate. Richard
Grossman calculated the values of the ordinary shares of around 950 domestic companies listed by
the Investor’s Monthly Manual (hereafter IMM) - most of the LSE official list - in 1913. His totals
(Table 1, line 1) - 44% of GDP at par and 73% at market - are more compatible with the LSE’s own
data (allowing for its more expansive definitions) than some previously published estimates.
However, his longitudinal data - showing roughly constant equity capitalisation at par over the
previous half-century - suggest the IMM simply increased its listings more slowly than the
exchange, 13 so had become less representative by 1913. He omits preference shares and corporate
bonds, plus all securities of the thousands of other British companies featuring in the SEOI but not
the IMM. 14 The key for completing the picture was provided by Alan Essex-Crosby, who counted the
values at par of all 5,337 British-registered companies in the SEOI (overlapping with some but not all
11
The LSE shared commission 50/50 with bankers placing retail customer orders.
12
though it had recently begun attempting to enforce fixed commissions.
13
His IMM capital figures for 1869-1913 (p. 475) contrast with the Railway Returns for 1869-1913, the SEOI for
1863-1913, Essex-Crosby for 1884-1914 and IMM securities including bonds and preferences in 1869-1913.
14
In 1911 87% of 339 large, independent, British-owned companies with more than £1m share capital had LSE-
listed securities, while less than 10% of smaller quoted companies were officially-listed.
5
Table 1. Quoted UK Corporate Securities in the LSE’s Stock Exchange Official
Intelligence, December 1913.
At par (£m)
1. IMM-listed ordinary shares (Grossman)
At market (£m)
1,065
1,750
2. “Junior market” ordinary shares
636
1,045
3. All quoted preference shares
957
834
4. Total quoted shares (1 + 2 + 3)
2,658
3,629
5. All quoted corporate bonds
1,034
931
6. Total UK quoted corporate securities (4 + 5)
3,692
4,560
7. GDP
2,411
2,411
8. Ordinary shares/GDP (1+2/7 x 100)
71%
116%
9. Corporate shares/GDP (4/7 x 100)
110%
151%
10. Corporate securities/GDP (6/7 x 100)
153%
189%
39%
26%
11. Leverage (5/4 x 100)
Sources: Line 1. Grossman, “Bloody Foreigners,” pp. 475-6. His graphs indicate a figure approaching £1.8b for
domestic UK ordinary shares in 1913 at market and above £1b at par. The 30 July 1914 Stock Exchange Daily
Official List included 1,852 companies, compared with around 1,400 (68% domestic) reported by Grossman
(whose IMM source includes some provincially-listed companies). Some of these 452+ omissions are firms only
listing bonds or preferences or foreign listings, but others are smaller officially-listed domestic ordinary shares.
He refers to his 1,400 total (and 950 domestic shown here) as “equities listed on the London Stock Exchange.”
As the large (included) provincial issues and small, numerous (omitted) LSE listings to some extent balance, this
is reasonable, if not strictly accurate.
Line 2. Essex-Crosby (“Joint-stock”) tabulates the ordinaries of all 5,337 British-registered companies in SEOI
1915 and, omitting 121 foreign railways (which we can be sure had no British operations, though directed and
financed from there), gives a total of £1,219m at par, which I reduce by 1% to allow for additions between 1
January 1914 and the closure of the stock exchange in July 1914 and by 5% to allow for unquoted ordinary
shares (Essex-Crosby’s totals are for all the capital of any company with one quoted security: he included a
company’s ordinary shares even if only its bonds or preferences were quoted), leaving £1,146m. Essex-Crosby
omitted all statutory, chartered and Irish companies (Ireland, part of the UK in 1913, was semi-detached when
he was writing). For UK railways (all of them statutory corporations) Board (1917) gives £493m ordinary shares
in December 1913. The SEOI says £432m were officially-listed and we allow £14m for non-LSE-listed issues,
conservatively deducting £47m for those that may have been inter-corporately or privately held. A further
£107m for remaining Essex-Crosby omissions is estimated from sampling the SEOI. The figure shown at par for
additional ordinaries is this total minus line 1. Grossman’s market/par ratio (164% from line 1) is very similar to
the relevant BM monthly index for 18 December 1913 (159%). Grossman’s data indicate that small IMM firms
had higher market/par ratios than large ones (email to the author, 9 October 2009) but I conservatively
assume these extra (mainly small) companies had Grossman’s overall market/par ratio.
Line 3. The procedures in line 2 are repeated, substituting an estimate of 3% for unquoted preferences and
omitting the deduction of line 1. Market/par ratios are estimated by sampling prices for the relevant securities.
Line 5. The procedure of line 3 is repeated for bonds, substituting an estimate of 1% for unquoted bonds.
Line 7. www.measuringworth.com
6
of Grossman’s count of statutory, chartered and Irish-, as well as British-registered companies), 15
usefully disaggregating them by sector into ordinaries, preferences and bonds. In Table 1 we have
combined the two, eliminating duplication, and added our estimates for 700 companies in the SEOI
excluded by both. This aggregates around 6,250 British companies in the listing department’s SEOI
publication, whether officially-listed or merely traded. 16
Today’s clear distinction between corporate bonds (paying fixed interest) and shares
(paying variable dividends) was then blurred, with hybrids proliferating in many exotic varieties.
Some contemporaries thought in terms of a continuum of choice among various characteristics, not
a sharp dichotomy. Meeting in 1900 under the chairmanship of Alfred Neymarck (doyen of
contemporary analysts), an international meeting of experts recommended standardised statistics
combining all “valeurs mobilières,” rather than separating stocks from bonds. 17 Some corporate
bonds were not only convertible to equity 18 (as today) but a minority then had votes, and in other
countries some even paid variable interest. 19 There were “deferred” shares, their small numbers
15
Registered companies were those perfunctorily registered under the Companies Acts; chartered and
statutory companies were those individually authorized by “royal” charter (subject to parliamentary approval)
or by private act of parliament. The latter were until 1948 subject to the Companies Clauses Acts, not the
Companies Acts.
16
The corporate accounts and correspondence with these companies (on which SEOI entries were based) are
preserved in Guildhall Library, London.
17
Direction, “Valeurs.”
18
Before 1914 “equity,” though rarely used in the financial sense, described common and preferred stock
collectively (e.g. Meade, “Capitalization,” p. 50); much later, some redefined it as only ordinary shares.
19
notably US “income” bonds. Other variations included different cash flow and bankruptcy priorities; with
votes or without (or votes only when preference dividends were in arrear).
7
combined with ordinaries in the British statistics: they were super-equities, 20 incentivising managers.
Preference shares (sub-equities) were more ubiquitous and some - though legally equities - in an
economic sense resembled bonds. Some were cumulative (that is, if the fixed dividend went unpaid,
no dividend on the ordinaries could be paid until the backlog had been made up), though (unlike
most bonds) they did not allow recourse to foreclosure or judicial re-structuring. Others - notably
participating preferences, which shared residual profits after a basic dividend on ordinaries had been
paid - resembled equities. No contemporary statistics distinguished among preferences (nor has any
modern scholar) and many countries’ statistics do not even distinguish ordinaries from preferences.
Contemporary references to shares should thus be construed as conforming to the legal definition,
but a higher portion of British (and American) than German and French quoted shares was
preferred. 21 In Table 1, 36% of quoted shares at par were preferences and 23% at market: ordinaries
having registered stronger capital gains over the previous decades.
The LSE official list (approximated by line 1 for ordinaries) covered about two-thirds 22 of
quoted domestic shares in Table 1, but this enhancement of Grossman’s count is incomplete. A rival
directory, Skinner’s Stock Exchange Year Book, lists nearly twice as many British companies as the
SEOI, but many additions appear to be small and traded only intermittently. 23 Some Lancashire
cotton mills – individually small but collectively Britain’s largest manufacturing industry - were not
20
usually receiving dividends only after declaration of a specified target dividend on the ordinaries.
21
4% of German shares at par were preferred (KSA, Statistisches Jahrbuch, p. 398); probably less in France. In
the US at par 30% of shares in large industrials were preferences and in railways 16% (Bunting, Rise, pp.18-19;
HSUS, p. 4-935), more at market.
22
A higher portion of preferences were officially-listed than ordinaries.
23
Houston and Dunning (UK Industry, pp. 37-40) report 13,500 companies listed in the 1914 Stock Exchange
Year Book, 12,770 not registered overseas, about double the 6,250 in the SEOI. There were several thousand
more registered “public” companies than in any directory, but many were de facto private and not traded.
8
traded in London, but there was a local market: for decades mill shares had been traded by dozens
of Oldham brokers in local pubs or rented rooms (not a formal exchange). 24 Firm size distributions
were highly skewed (a few hundred companies accounted for more than half the values of the 6,250
quoted companies in table 1) and further marginal additions from Skinner might have only a modest
effect.
Even without such additions, these figures for equity capitalisation compel rejection of
the lower figures noted above in the range for the UK; indeed they exceed the highest previous
estimates for equity market capitalisation. 25 Are they, then, inappropriately inclusive? Assuming
accurate counts by Grossman and Essex-Crosby, 26 our net addition (4% at par for companies they
both omit less unquoted securities of quoted companies) relies on sampling and may be too large or
too small, so modest differences from other countries’ ratios should not be over-interpreted. The
market price adjustments for non-IMM firms are also based on partial indexes, so the right hand
column is susceptible to sampling error absent from the par column.
The choice of measure also depends on the question asked. If one is interested in the
capital subscribed by investors to these enterprises, the left hand columns (at par) would serve
(albeit imperfectly 27) better than the right (at market): the latter reflected future prospects
24
Thomas, Provincial; Toms, “Rise.”
25
Rajan and Zingales and Goldsmith agreed that the UK had the largest market, but measured only LSE official
list securities at par (109%), while Moore aggregates only companies listed in the Economist at market (133%);
neither undercount is outweighed by including many foreign companies (unwittingly except for the latter).
Even scholars aware of Essex-Crosby’s data (e.g Gallman and Davis, Evolving, pp. 160-62) failed to understand
its implications, judging the UK market relatively restricted from (correct) data showing that most UK
investment came from reinvested profits not stock exchange issues, without noting that this was - in most
places and periods - the norm (Sylla and Smith, “Information,” p. 193 reinforce this point).
26
For whether they correctly defined “British” companies see section 4.
27
UK IPOs were usually - but not always - around par value.
9
additionally built on reinvested profits and new organisational capabilities developed. If one is
interested only in frequently-traded securities, line 1 (and others similarly based on a selective
periodical source) includes many such, though other (including foreign and government) bonds and
shares accounted for at least as many securities that contemporary commentators classed as very
frequently traded on the LSE, with negligible bid-offer spreads. The IMM domestic companies
(numbering around a thousand) 28 capture most companies described by Foreman-Peck and
Hannah 29 as having strong shareholder rights (some statutorily compelled to adopt high standards
and others voluntarily complying). The market growth and ownership consequences conventionally
predicted for such shareholder protections can indeed be observed. The several hundred of these
firms whose shareholdings have been analysed had large free floats of stock: their directors owned
only 3.4% of their shares at par, a level comparable to markets with the most dispersed ownership
today. 30
The five thousand or so other companies in Table 1 on what might today be called
the LSE’s “junior market” (plus possible additions from Skinner) varied widely in tradability,
governance standards, incentive structures and performance. Vetting by exchanges was perfunctory,
and some were quite informally traded (in one case - Jesse Boot’s retail chemist chain - literally
“over-the-counter” at the pharmacies themselves, as well as on the Sheffield Stock Exchange). High
listing standards on the official list probably increased market size by attracting investors on the
“buy” side, as those advocating shareholder primacy today argue. Yet some brokers - more
complacently trading anything in which they could match bargains - may also have extended
28
Besides the 950 Grossman companies, some only listed preferences and/or bonds.
29
“Corporate Law.”
30
Foreman-Peck and Hannah, “Extreme Divorce;” Acheson et al (“Active Controllers”) and Campbell and
Turner (“Substitutes”) for dispersion in earlier, smaller firms.
10
markets, because on the “sell” side firms found their low standards congenial. In many cases these
firms had one large shareholder and local acquaintances, suppliers or customers willingly bought
shares, placing their trust in his reputation or relationship - for better or worse (and maybe both) more than in formal governance rules. 31 Many owner-entrepreneurs evaded the loss of voting
control (implied by exchange rules requiring owners to sell at least two-thirds of an IPO to public
subscribers) by issuing to outsiders only fixed-interest securities such as (often vote-less) preference
shares or bonds and/or retaining most ordinaries on the junior market. For investors the quid pro
quo in such IPOs was not formal shareholder protections but enhanced performance incentives:
post-IPO owners were motivated to avoid losses (by newly exposing them to bondholder
foreclosure) and grow profits to more than cover cash flows to investors (because any nowleveraged increment in distributable profits was entirely theirs). 32 When this worked it could work
very well. Courtaulds, a silk manufacturer, in 1904 raised £229,125 by issuing only fixed-interest
securities to fund the purchase of patents and construction of an experimental rayon factory. Ten
years later the owners floated their controlling ordinaries on the LSE for many millions, having
become the world’s largest rayon producer, employing thousands on both sides of the Atlantic. 33
Burhop et al 34 have emphasised that many issues made in London were markedly less
successful, even suggesting British investors would have been better off if the junior market had
been closed down on the German model. One might quibble that their small IPO sample and short
assessment period missed impressive companies - like Shell and Marconi - launched on the LSE
31
Franks et al, “Ownership.” Even among IMM-listed firms, those with weaker shareholder protections tended
to have dominant shareholders (Acheson et al, “Common Law”); the many thousands of traded but unlisted
companies have not been analysed, but probably included a higher proportion of such companies.
32
Foreman-Peck and Hannah, “Ownership.”
33
Coleman, Courtaulds; London Guildhall Library, LSE Stock Exchange archives, files MS 18001 93B 108 and
171B 280.
34
“Regulating.”
11
junior market. Yet many off the official list were indeed risky start-ups (which are not permitted on
exchanges today and were impossible on the NYSE or Berlin before 1914) or buy-outs with untried
management. Being smaller, they were naturally more likely to fail, or, very occasionally, massively
succeed. Today the LSE lists only 642 domestic companies on its junior market, valued at less than
3% of GDP, 35 around one-tenth of the junior market figures for 1913. Much of this “missing” finance
today is actually the province of specialist venture capital and private equity firms, not stock
exchanges. Start-up and venture financing requires close monitoring and stewardship and there
were financial trusts and private bankers like Charles Morrison providing such services before 1914,
yet (as today) there were also promoters and managers tempted to make a fast buck, offering more
misrepresentation than substance. 36 Judging the balance between the two is not easy, but there is a
case for analysing the junior market separately, as we analyse venture and vulture capital today. The
difficulties of sampling in markets for innovation in which most initiatives fail while a few produce
quite exceptional returns are well known. 37
III
The US had similar informal markets, but America’s formal markets were obviously
different from the UK’s in that the number of corporations with common stock listed on the NYSE,
hovered around 200 in 1900-1914. 38 British regional exchanges like Liverpool or Edinburgh equalled
this number, already exceeded by London in the 1840s, when the LSE’s ratio of corporate capital to
GDP was already well ahead of the NYSE’s. 39 Commentators have attributed the NYSE’s
extraordinarily limited listings (by European standards) to its superior quality control, though this is
35
End-June 2016 data for the Alternative Investment Market (AIM), downloaded from
www.londonstockexchange.com/statistics, 28 July 2016.
36
Michie, “Options;” Franks et al, “Ownership;” Nye, “Company Promoter;” Taylor, Boardroom.
37
Nanda and Rhodes-Kropf, “Financing.”
38
Cowles, Common Stock; Hilt and Frydman, “Investment Banks,” p. 58;
39
Burdett, Official Intelligence, p. xvi; Morgan and Thomas, Stock Exchange, pp. 279-80.
12
disputed and both the LSE and the NYSE explicitly denied certifying quality in the sense that
investors might understand that claim. 40 Others emphasize the NYSE’s greater monopoly power,
which optimized transaction fees by concentrating dealings on highly-liquid securities of giant
merged firms (discouraging domestic rivals from trading them), rather than creatively funding
rapidly-growing “gazelles.” The listings that the NYSE discouraged - such as mines and medium-sized
enterprises - were arguably ill-judged: some performed well elsewhere or on European exchanges. 41
However, the NYSE improved quality by pressuring firms to publish accounts from 1896, getting
more serious with the abolition of the permissive unlisted department in 1910. Many American
industrialists resisted such policies (refusing to publish accounts even to the extent of delisting),
which European exchange-listed companies (and those US banks and utilities already required by
regulators to publish accounts) took in their stride. 42 Whatever the reasons, it took a dozen US stock
exchanges to equal the thousand corporations on the LSE domestic official list alone. 43 Nonetheless,
firm size distributions were highly skewed and giant corporations were most likely to be listed on the
NYSE, so this is the natural starting point for measuring US securities.
40
Davis and Neal, “Evolution;” O’Sullivan, “Yankee Doodle;” White, “Competition.”
41
Among rejected firms were Du Pont (too small a free float) and Standard Oil (speculative mining), which
prospered, while receivership was routine among listed firms (section 4, below). The NYSE’s minimum size was
higher than European exchanges, encouraging uneconomic mergers, while missing out on the outperformance
sometimes diagnosed for small-caps.
42
Hannah, “Pioneering;” Edwards, “Accounting;” Watts and Zimmerman, “Agency Problems.” Contrary to
standard expectations about the reduction of information asymmetries, the intensification of NYSE efforts to
enforce such disclosure rules before 1914 was followed by a decline in the securities/GDP ratio; see also
Cheffins et al, “Shareholder Protection” for similar later experience.
43
O’Sullivan (“Expansion,” p. 523) counts 930 in 1915, excluding overlapping cross-listings and with data
missing for Los Angeles and San Francisco.
13
Table 2 shows six surviving enumerations between 1902 and 1921, some certainly - and
the rest apparently - provided by the exchange itself. They valued securities at par, showing less
than 2% compound annual growth in real terms over that period. 44 Contemporaries reported par
Table 2. NYSE Stocks and Bonds: Ratios (%) to GDP 1902-21.
1902
1911
1914
1917
1920
5
4
4
3
2
3
+Industrial/Miscellaneous Stocks
13
12
13
14
10
12
+Railroad Stocks
19
16
18
11
8
9
=All Corporate Stocks at par
38
32
35
29
20
24
+ all Corporate Bonds at par
24
25
30
21
17
18
=All Corporate Securities at par
62
57
64
50
37
42
Market Capitalization: stocks
25
23
21
19
16
16
: bonds
23
22
25
15
11
14
: all corporate
48
45
46
35
27
29
Utilities/Finance Stocks
1921
Sources: Raw data on par values of securities from Pratt, Work (1912), pp. 81-2 and (1921), p. 53; Comptroller,
Report 1914, pp. 105-6; Martin, New York, p. 179; Meeker, Work, pp. 541-2, relating to 30 January 1902, 18
October 1911, 1 December 1914, 31 December 1917, 26 May 1920 and 13 October 1921 (the pre-1910
unlisted department is included). I have been unable to trace the 1906 enumeration summarized by Pratt or
the 1913 Senate source summarized by Michie (London, p. 168) but the abbreviated figures Michie reports for
stocks are 2% higher than used here for 1914 and for bonds presumably include government and municipal
bonds. Street railways are included with Utilities/Finance (all being quintessentially local securities). GDP
figures are taken from www.measuringworth.com, making allowance for the differing observation dates by
adjusting the GDP by the appropriate change from the previous year’s GDP assuming it was equally spaced
throughout the year. No-par stocks (rare before 1914) are omitted but adding them at Meeker’s (p. 542)
valuation would add just over 1% of GDP at par to the 42% of GDP shown for all securities in 1921. No
deduction is made in this table for foreign securities: see Tables 3 and 4.
The 7th to 9th lines are converted from par to market by the ratios reported by the New York Times at the
relevant dates for 25 railway stocks, 25 industrial stocks and 40 corporate bonds, with utilities and
miscellaneous stocks converted at the 50-stock average and finance stocks (which generally were higher than
par, but were a small and declining part of the NYSE) assumed to have a market/par ratio of 200% at all dates.
The Times did not report ratios for 1902 and 1911: I have estimated those years by backward extrapolation of
the 1914 figures by the Cowles monthly index for stocks and the reciprocal of the annual railroad bond yield
for bonds.
44
from $7,498m in 1902 to $23,796m in 1921 (or to $10,866m adjusting by the GDP deflator).
14
values as appropriately measuring the quantity of stocks, undistorted by short-term market price
fluctuations and par values are here converted to the conventional ratios to GDP, also correcting for
the rapidly-growing economy. All these GDP ratios are well below those for the LSE domestic official
list alone in 1913 (Table 1) and the NYSE was not, by these measures, catching up. 45 That is partly
because of a lull after the rapid expansion of industrial listings in the 1897-1902 merger wave, 46
which decisively changed a NYSE landscape until then overwhelmingly dominated by railroads. 47
Many citing Navin and Sears 48 on this expansion forget that the glass they showed nearly half full
was also more than half empty and long remained so: for these two decades NYSE stocks were
growing more slowly than the US economy. Railway securities were still worth more than other
45
NYSE listings grew faster than the LSE’s in 1902-1914, but US GDP (buoyed by massive immigration)
expanded faster still relative to the UK, resulting in NYSE capitalisation/GDP ratios declining, while the UK’s
were still rising. Moore’s totals (“World,” Table IV, converted to comparable GDP conventions to Table 2) at
market for NY securities in the Commercial and Financial Chronicle suggest a faster decline, with January GDP
ratios of 30% for 1902, 28% for 1912, 25% for 1915, 16% for 1918 and 17% for 1920 and 1922, the higher
figures reflecting the net effect of inclusion of the curb market and exclusion of infrequently-traded NYSE
securities.
46
In that period 56 large industrial mergers listed on the NYSE had $3,671m authorized share capital (Nelson,
Merger, p. 92), which is actually higher than Pratt’s figure for all NYSE-listed industrial stocks in January 1902,
though the latter is issued capital, which would be below that authorized.
47
In 1890 there were perhaps 100 US “industrial and miscellaneous” securities listed on the Boston exchange,
71 on the LSE and only 28 on the NYSE.
48
“Rise.”
15
corporate securities on the NYSE at par as late as 1921, three decades after the LSE’s domestic
corporate securities passed that milestone. 49
The lower lines (converted to market prices) show US securities (particularly common)
generally trading below par. Specifying how J P Morgan should pay him for Carnegie Steel (allegedly
making him America’s richest man, so hardly incapable of bearing equity risk), Andrew Carnegie was
not alone in 1901 in insisting on bonds and disdaining equities: leading Wall Street banks had only
recently begun promoting industrial equities, later than European bankers. 50 There is consensus
among modern financial economists that in all countries equities in the long-run have outperformed
fixed interest since 1900 but that was not the experience of New York in 1900. 51 Prospectus issues of
equity advertised directly to the public and institutions, similar to modern IPOs, were the norm in
the UK, but in the US many new issues had features of modern mezzanine finance: they were first
taken up by banks and rich individuals and later retailed to investors by these underwriters in
collaboration with brokers. 52 Corporate bonds on the NYSE were consistently worth about the same
as stocks before 1914 and the quantity of corporate bonds was increasing faster than GDP or
equities, even as bond prices wilted. The stocks/GDP ratio declined faster at market than at par
(though temporary respites in booms like were not captured in the table): the Cowles equity index
fell 15% over these two decades. 53 Exceptional post-war volatility, severing stable relationships
between investor cash flows and market prices and elevating capital gains and losses to larger shares
49
Table 2 shows railroad stock as a minority at par by 1917/21, but adding railroad bonds (as with the LSE)
delays the transition a few years; in both countries the transition was earlier at market prices.
50
Carosso, Investment Banking, pp. 43-4.
51
Snowden, “American,” p. 393.
52
Greenwood, Foreign Stock Exchange, p. 195; Meeker, Work, pp. 258-9.
53
Preferred stocks are excluded by the Cowles index but this table include them with common stocks and until
the war they held their value better.
16
in annual returns, together with increasing numbers of no-par stocks, had by then eroded any
meaning par values had once had. 54
The NYSE was less than half the US story in aggregate value terms. Aware of its low
penetration, international market analysts urged the compilation of more comprehensive national
statistics to facilitate meaningful comparisons. 55 In 1907 Moody’s Manual rose to that challenge,
though its statistics have since been neglected. 56 In his swansong preface of that year, the Manual’s
founder, John Moody, reported the aggregate par values of securities traded anywhere in the US:
Table 3. Quoted Stocks in Moody’s Manual 1907 and NYSE stocks end-1906.
Sector
Moody’s Manual
US stocks
All stocks
$m
NYSE
NYSE
All stocks
share
$m
$m
%
Steam Railroads
5,280
5,978
4,825
83
Industrials*
9,553
10,286
3,325
32
Utilities†
4,344
4,455
921
21
Finance
1,500
1,500
326
22
Total at par
20,677
22,219
9,397
42
Total at market
17,782
19,108
7,800
41
Ratio to GDP (par)
66%
71%
30%
42
Ratio to GDP (market)
57%
61%
25%
41
* Including mining and miscellaneous
† tramways and the NY subway are grouped with other local utilities, not railroads.
54
From 1924 the NYSE began publishing figures for all listed stocks at market prices annually, revealing a more
intense spurt off the table to the right, a generation after the first. The stock/GDP ratio increased from 31% in
1924 to 69% at the interwar peak (for this ratio) of 1928, before falling back again.
55
Neymarck, “Statistique,” 1905, pp. 346-7.
56
A JSTOR search reveals no references over the last fifty years to his 1906 or 1916-22 totals.
17
Sources:
Cols 1 and 2: Moody, “General Exhibition,” pp. 26-9. Moody only counted financial companies’ numbers not
values. In 1907 there were 6,429 national banks with $834m capital and (omitting private commercial banks
and other non-corporates) 9,967 state banks, 794 trust and loan companies and 1,415 savings banks with
capital of $792m (Comptroller, Annual Report 1907, pp. 35-6, 40, 50-1). This excludes insurance and other
financial companies and the IRS counted 29,822 financial corporations with $2,724m share capital at par in its
first survey of 1909/10. Many banks were family-owned and traded only locally if at all, which may partly
explain why Moody only listed 13,500 financial corporations. We have estimated the par value of the latter at
$1,500m, which implies the excluded financial institutions are smaller than those included.
Col. 3. We have interpolated a 1906 figure from Pratt’s (Work, 1912, pp. 81-2 and 1921, pp. 53, 132) figures for
NYSE stocks in 1902 (including the unlisted department which closed in 1910) and 1911, using his data on new
listings in the interim. In the absence of disaggregated listing flow data, we derive sectoral shares from the
means of 1902 and 1911.
Col. 4. Col 3/col.2 x 100
Line 6. Adjusted by average market/par ratios estimated by sampling the Commercial and Financial Chronicle
and the Manual of Statistics.
Lines 7-8. For all columns the GDP - $31,336m - is for the US only.
1,512 railroads, 1,655 utilities and 2,390 industrial, mining and miscellaneous corporations. He
merely counted the further 13,500 financials that he listed (their values in Table 3 are our estimate)
and the directory also omitted some small issues. Outnumbering NYSE corporations by nearly a
hundred times, Moody’s additions had only about one-sixtieth the mean equity capitalization of the
NYSE-listed, though they included some giants: notably Standard Oil and Singer Manufacturing
(traded on the NY curb), Du Pont (listed on San Francisco), Eastman Kodak (listed on the LSE) and
Procter & Gamble (listed on Cincinatti). 57 Excluding the (exceptionally numerous and small) US
financial corporations, the companies included in this table are comparable in size to those on the
LSE (official list and junior market combined) in Table 1. 58
57
Standard Oil listed in 1918, Eastman Kodak in 1920, Singer and Procter & Gamble in 1926 and Du Pont in
1935.
58
The average equity capitalization of 5,557 US non-financials in Table 3 for 1906 was $2,660,068 (£546,552),
lower than the £580,460 in the UK in 1913, though the US average capitalization including bonds was larger (as
might be expected given its larger economy). This may surprise Chandlerian caricaturists of comparative
18
Moody’s late 1906 aggregations 59 did not separate NYSE listings from others, but Table
3 interpolates an end-1906 figure for NYSE stocks, which appear less dominant than a generation
later. 60 The NYSE was the national stock market for railroads, most of which were listed there,
accounting for 55% of its stock values at market, 61 but was less dominant in other sectors generating
90% of GDP. Its share of industrial and miscellaneous stocks was below one-third and in finance and
utilities (the classic regional securities) below a quarter. Banks - which in the past had dominated
New York - were delisting and migrating to auction and informal markets. 62 Railroads apart, around
three-quarters of US quoted stocks (by par value) were not traded on the NYSE. The second US
exchange (Boston) was less than half the size of Britain’s number two (Manchester), 63 but the US
had more regional exchanges (particularly if the more informal ones are included) and used OTC
markets, local auctioneers and bond houses more.
The ratio of all quoted domestic corporate stocks at market to GDP at the end of 1906
was 66% at par, and 57% at market: US financial stocks were normally well above par and others
business history, but, even confining the comparison to giant firms, it was Germany - not the UK - that
proportionately lagged the US (Wardley, “World’s Largest”).
59
December (and June) 1906 balance sheets dominate entries, though some relate to March 1907.
60
Moody distinguished domestic from foreign stocks (cols 1 and 2) but the NYSE (col 3) did not, so the
coverage ratio in col 4 includes foreign corporations (mainly Canadian and Latin American railways and mines),
which (as the NYSE was more international) has the effect of overstating the NYSE’s domestic coverage. This
would fall below 40%, if corrections were made for this and for omissions and low free floats caused by
intercorporate holdings.
61
On a comparable (gross of intercorporate) basis, there were $6,804m US railroad stocks at the end of 1906,
suggesting the NYSE share was 71%, though that needs be reduced to allow for foreign railways.
62
Hilt, “When.” Bank and trust company stocks fell from 4% to below 1% of par values in 1902-1914. The
Cowles NYSE index omits financial stocks.
63
Michie, London, p.168; Powell, Evolution, p. 538
19
usually below, 64 though 1906 was the (then all-time) peak of stock prices. Moody’s detailed
enumeration was not repeated by his successors, though the eponymous Manual did retrospectively
assess the total for “securities in the hands of the American public,” at market values for 1916, 1920
and 1922, without as clearly specifying methodology. 65 Corporate equities amounted to 48% of GDP
in 1916, 34% in 1920 and 42% in 1922, paralleling the wartime slump in the NYSE stock values/GDP
ratio (Table 2).
Interpolating Moody’s ratios for 1906 (57%) and 1916 (48%) suggests a 1913/14 figure
for all US shares at market prices around 51% of GDP, above some estimates but below the
highest. 66 Adding Hickman’s January 1914 figure for all US corporate bonds converted to market
prices by the New York Times bond index (41% of GDP) 67 produces a total of 92% of GDP for all
quoted US corporate securities. These figures are only one-third of the market capitalisation of
British equities in Table 1 and about one-half the British level for all corporate securities. 68 Thus on
64
This was not because US corporations had failed to reinvest profits and grow organisational capabilities (the
reasons most European stocks were well above par). Contemporaries saw it as resulting from the American
propensity to “water” capital: common had been issued well below par, and sometimes for no consideration.
65
Moody’s Manual 1923, pp. xliv-xlv. This does not specify whether US corporate securities owned by
foreigners were deducted, as the description implies. Moody did not deduct them in 1907 and (given the
imprecision of then available data) they were probably included later, too.
66
Notably Goldsmith’s 95% of GDP (adopted by La Porta et al and Musacchio). The original source (Goldsmith,
appendix) shows (appropriately for Goldsmith’s purposes, but not for La Porta’s, Musacchio’s or ours) that this
included unquoted shares.
67
Hickman (Volume and Statistical), with NYSE share for straight bonds (the great majority) assumed to apply
to all bonds. An alternative calculation for bonds using Moody’s data shows higher totals and Hickman
excluded sterling bonds of US corporations, strengthening our points made about high leverage.
68
Conversion from par to market (as in Table 2) is based on smaller samples of contemporary price ratios than
are available for the UK, though the direction of the US adjustment is clearly appropriate. The New York Times
20
the indicators favoured by modern researchers the UK market was proportionately much larger than
the USA’s, and even in absolute terms an economy with one-third the GDP of the US (at market
prices) had a national market for corporate equities about the same size. 69 Moreover, even its
exceptional 1920s bull market was insufficient to propel the US to as high a ratio in 1929 as the UK in
1913. 70 Scholars who explained why the UK struggled to emulate US equity market development, or
failed to match America’s lead in divorcing ownership from control, 71 were not only barking up the
wrong tree but were not even in the same wood as contemporary statisticians. Such scholars were
“declinists” (in relation to Britain), which raises the question of whether the reverse of their
hypothesis (more consistent with the evidence) applies: perhaps Britain suffered from being too
financialised compared with the US? Denigration of Britain’s liberal and extended securities markets
is a venerable tradition, 72 though recent scholarship has been inclined to discount it. 73
indexes (as described in Table 2 notes and applied here to all US securities) mirror movement in broader
indexes (such as the BM American rails or Cowles NYSE indexes). Wider sampling from the IMM, SEOI and
Commercial and Financial Chronicle suggests that the direction of the adjustment they indicate is correct and
the regional picture very similar to New York. Bond prices of 82.73% of par (New York Times, 1 December
1914).
69
At current prices and exchange rates (www.measuringworth.com). Maddison (World Economy, pp. 427, 462)
put the US real GDP at 2.3 times the UK’s.
70
The Cowles index rose from a post-war low of 51.9 in August 1921 to a peak of 225.2 in September 1929.
The GDP ratio for the NYSE alone was 69% in 1928, 62% in 1929 and 53% in 1930, while US stocks on 23 major
exchanges in 1930 at market totalled 89% of GDP, a little higher if smaller and informal markets were included
(Moody (1933), pp. a106-7). Assuming a constant non-NYSE share, the national ratio would have peaked at
116% in 1928.
71
Chandler, Scale; De Long, “What.”
72
Hobson, Imperialism; Pollard, Britain’s Decline; Kennedy, Industrial Structure.
73
Goetzmann and Ukhov, “British;” Chabot and Kurz, “That’s;” Foreman-Peck and Hannah, “Some.”
21
The plausible errors in our derivations from SEOI and Moody are hardly sufficient to
reverse such marked differentials and in some respects we may have understated the British lead.
US plutocrats like the Rockefellers and Du Ponts were massively wealthier than the richest Britons; 74
and US railways were more prone to maintain intercorporate shareholdings. 75 Thus many of the
shares they held (counted by Moody as publicly quoted) were not available to investors,
exaggerating the size of the US “free float” relative to the UK’s. 76 Contrariwise, both securities
markets shaded into informal markets whose outer boundaries are uncertain and our use of
contemporary investor manuals to resolve this may result in fuller UK coverage, given its compact,
integrated national market. Yet around 25,000 domestic firms are included in Moody 77 and only
6,250 in the SEOI, if anything under-representing a British economy whose population was then 47%
of the USA’s. As many additional firms featured in the Stock Exchange Year Book as those the SEOI
included for the UK, but, if the same is true of the US, evidence escaped Moody and lies interred in
local newspaper reports or state and corporate archives, awaiting discovery by more diligent
modern scholars. Yet Moody included thousands of US banks for which the market consisted of
“over-the-counter” sales of stock (literally: small banks offered their stocks to selected local clients,
not on transparent public markets or through OTC dealers). Bonds were issued by many fewer
companies than stocks. Hickman counts only 6,324 publicly-held straight bonds in 1912 and 88% of
74
Rubinstein, Wealth; Davis, “Capital Markets.”
75
Clark and Galloway, Internal Debts, p.115. Hickman excluded intercorporate bond-holdings from the figures
in our tables, but the ICC data on both stocks and bonds understated the holdings of non-ICC-regulated
holding companies (Railroad Securities Commission, Report, p. 20)
76
This does not apply to bonds because Hickman eliminated intercorporate holdings.
77
We lack a precise count for 1914, but Moody’s annual prefaces 1907-1914 assert constant increases on the
known count of 19,057 in 1907.
22
them (39% by par value) were not listed on any stock exchange but traded by bond houses, overthe-counter or by auction. 78
It is true that three-quarters of British firms beyond our chosen boundary had since
1907 (as “private” rather than “public” companies) been legally forbidden to have more than 50
shareholders or offer securities to the public, while no such legal limit applied to US firms beyond
Moody’s boundary, though the great majority of these were also close corporations whose shares
had no public market. As in the UK, the addition of small firms whose shares were only
intermittently traded would probably increase ratios only modestly, so for the US to approach British
quoted equity levels would require absurd assumptions: that no UK companies beyond the SEOI
were traded, while all known (ca 290,000) US corporations beyond Moody were freely tradable at
par (par being the only measure the IRS could report for the overwhelming majority that were
plainly close corporations). 79 Moreover the marginal additions that could be more plausibly justified
- with very different governance and control features than major markets - would arguably change
the nature of what we are measuring. As in the UK, there is conflicting evidence: less formal auction,
broker, bond house or angel network markets beyond the major exchanges sometimes worked well
in promoting innovation, 80 yet many investors were defrauded. 81
Other national differences were as striking as market sizes. The NYSE then listed only half
by value of US corporate securities (less of stocks, more of bonds), while the LSE’s (domestic) official
list had a larger (two-thirds) share of the national market shown in Table 1 and the LSE more nearly
78
Hickman, Statistical, p. 52; see also Ferderer, “Advances.”
79
Hannah, “Global.” The IRS (Commissioner, Report, p. 18) reported $64,071.3m (par) share capital in the fiscal
year ending June 1914 in all 316,909 “corporations, joint stock companies or associations and insurance
companies,” but around half this capital in 25,000 corporations are in our population.
80
Lamoreaux et al, “Financing Innovation;” Cull et al, “Historical financing;”
81
Brace, Value, pp. 235-7; Mahoney, “Origins;” Seligman, Transformation.
23
approached 100% if we include the “junior” market, offering clients provincially-listed securities not
only directly but through national and regional bank chains. NYSE brokers opened numerous
regional offices, similarly serving clients throughout the US, and also dealt in regional stocks not
listed on the NYSE (via curb brokers), but the US domestic market remained less centralised than the
UK’s, unsurprisingly given the continental distances involved.
Their risk profiles also diverged markedly by 1913. With the large UK lead concentrated in
equities, there was higher market leverage (bond market cap/share market cap x 100) in the US
(83%) - and especially on the NYSE (115%) - than in the UK (26%). 82 This distinctive US taste for high
bond leverage developed gradually from equal leverage before 1850 in railways, long the dominant
corporate securities in both countries and a sector for which long-run series survive. 83 The change is
sometimes explained by the preference of distant foreign investors in the US for secured bond
contracts and another explanation consistent with this chronology is John James’ “crowding-in”
effect on corporate securities of the federal government’s rapid repayment of civil war debt, which
had accounted for most of the securities quoted on the NYSE after the war. 84
82
See Tables 1 and 2, figures at market not par. The LSE official list only published leverage data for railways,
which (correcting its par figures by the BM index) was 36% at market at end-1913 and probably lower for
others, especially financials. A stock market might appear highly leveraged, while its component corporations
were not, if firms listing bonds and stocks were different, but this was not generally the case. In 1914 the US
corporate sector (quoted and unquoted) had a ratio of all debt (including bank loans, trade credit etc, as well
as bonds, none separately reported) to share capital at par of 58%, with public utilities (including rails) being
the most leveraged, at 91%, and industrials the least, at 33% (Commissioner, Report). Similar total leverage
figures are not available for the UK, but nationally (if not on the more rail-orientated LSE) bond leverage was
slightly higher in non-railways than railways (unlike the US, where bond leverage for industrials had only
recently and slowly developed).
83
Hawke and Reed, “Railway;” Poor, History.
84
James, “Public Debt.”
24
Differential leverage raises the question whether, in equating bonds in the UK and US,
we may be comparing apples with persimmons. We might expect higher defaults if underlying
business risks were comparable and that was indeed the outcome: the NYSE had a high churn rate of
listed firms and corporate default was routine: in 1914 more than 6% of currently listed bonds by par
value were in default. 85 It is no accident that it was in the US that Moody in 1909 invented the new
business of rating corporate bonds (the now-ubiquitous AAA etc grades). Those who argue that
American investment bankers were also innovating bond quality monitoring 86 can reasonably take
comfort that this high default rate marked progress: an amazing 36% of bond values nationwide had
defaulted in 1873/5 and 19% in 1892/4, but European investors still viewed America’s uniquely
untamed financial crises as the Wild West. 87 In the UK, legislation limited leverage ratios in statutory
companies to 50% (a level exceeded by the US average) and registered companies to 100% (a level
exceeded by the NYSE average), but, as the low UK average suggests, these were rarely binding
constraints because most UK companies voluntarily chose leverage below the notional cap. 88 British
railways (all statutory) had not defaulted since the 1860s and UK listed firms experienced defaults
about one-thirtieth the NYSE level. 89 European bonds were considered safe investments, but the
85
Goetzmann et al, “New historical database,” p. 17; Comptroller, Annual Report 1914, p. 105. The 13 railroads
in receivership in 1914 had an aggregate leverage ratio of 233% at par (Dewing, Financial, vol. 5, p. 24, n. 32).
86
Hilt and Frydman, “Investment Banks.”
87
Giesecke et al, “Corporate Bond;” Calomiris and Haber, Fragile, p. 183; Neymarck, “Statistique;” Kobrak,
Banking.
88
The limits could be raised with parliamentary or shareholder approval, respectively. An IPO market rule of
thumb was 50% and equity holders had strengthened their charter rights to restrict dilution by new debenture
issues (Acheson et al, “Common Law,” p. 19)
89
Among the 339 British-owned quoted corporations with more than £1m share capital in 1911 (more than
were listed on the NYSE) only two (Dunderland, a Norwegian iron ore mine, and Waring & Gillow, a furniture
multinational) - accounting for less than 0.2% of their capital - were in the process of liquidation by
25
pre-1914 NYSE was stuffed with what were later to be called “junk” bonds, requiring investors to be
as wary (or diversified) as they were with equities. 90 The Railway Securities Commission bemoaned
US investors’ “almost universal failure to recognize the distinctions which exist and should exist
between bonds and stocks:” with identical average yields of 4.5%, 91 both were significantly exposed
to risks of reduction. Contemporary international investors recognised that supposedly “fixed”
interest securities in the US were not as fixed as in Europe and obtained bond interest from US
corporate issuers near to the yield of “blue chip” equities in Europe. 92 There is a case - when
evaluating the supply of risk capital - for considering stocks and bonds together, like many
contemporaries.
This structure had profound implications for the US market for corporate control.
Modern discussions emphasise shareholder protections (which were developed earlier in London
and Berlin than New York) in reducing information asymmetries and agency problems. Efficiencyenhancing reallocations of managerial control are now initiated variously by large-block-holders,
proxy battles, and contested takeover bids. There were parallels before 1914 and the British habit of
appointing shareholder investigation committees to discipline and sometimes replace corporate
management spread to the US, 93 but bondholder interventions in corporate governance
bondholders. Smaller UK quoted companies were also less leveraged than US counterparts and default was
rare (Coyle and Turner, “Law,” p. 823)
90
Long before Milken, higher returns from a diversified portfolio of “junk” were debated among practitioners
(Fridson, “Fraine’s”).
91
Railroad Securities Commission, Report, pp. 33-5.
92
Edelstein, Overseas Investment. Moreover, while some UK corporate bonds paid less than bank interest
(reflecting their liquidity advantages over term loans), the reverse applied for many US corporate bonds,
overpricing the default risk (Giesecke et al, “Corporate bonds”).
93
Foreman-Peck and Hannah, “Corporate Law;” Hannah, “Shareholder Dog;” Adler, British Investment, p. 188;
Tufano, “Business Failure.”
26
predominated in America, precisely because high leverage made that not the exception but the
norm. Between 1870 and 1897 some 752 railways entered equity receivership (not counting those
otherwise foreclosed) 94 and this continued as mergers induced larger lines to over-leverage. By 1914
most US railways had experienced bondholder interventions. These sometimes merely resulted in
the appointment of existing management as receivers (judges perceiving knowledge to be more
important than impartiality in restructuring creditor claims), but investment bankers and
bondholders could and did insist on changes in policy and board composition at such junctures. 95
Non-railways (leveraged more by preferences than bonds and less exposed to foreclosure) were also
at risk: managerial changes at American Bicycle in 1902, US Shipbuilding (Bethlehem Steel) in 1903,
Westinghouse Electric in 1907, Allis-Chalmers in 1912, H B Claflin (the world’s largest dry goods
wholesaler) in 1914, and International Mercantile Marine and International Steam Pump in 1915
were the consequence of interventions by bondholders (and/or holders of short-term commercial
paper) not shareholders. Supposedly “non-voting” bondholders acquired voting control at such
critical times, so the freedom from investor control of US corporate management - to some business
historians, 96 consciously contradicting modern finance theory, a driver of business efficiency perhaps understates investor disciplines on management in the American system.
IV
Measuring French and German private sector quoted securities is facilitated by the
convergence of modern counts with contemporary official statistics for the market capitalisations of
94
Swain, “Economic Aspects,” pp. 67-8, 99, n.1.
95
Roy, Socializing, pp. 108-10.Older notions favouring bondholders were reinvigorated in 1913 by Northern
Pacific Railroad vs Boyd (Dodd, “Fair,” pp. 784-5).
96
Chandler, Scale; Roe, Strong Managers; Lazonick, “US Stock Market;” O’Sullivan, “What.”
27
their major markets (Table 4). The Paris parquet accounted for 77% and the Berlin Bőrse for 86% of
their national equities in line 1, so they were more dominant than the NYSE. Peripheral German
exchanges could not adopt more permissive governance standards to encourage extra listings 97 and
the low nationwide tally of around 1,700 listed companies worth 42% of GDP are the full story for
Germany. 98 Since Germany’s post-Gründerboom clampdown on liberal incorporation (in 1884 AG
legislation) and informal markets and futures trading (in 1896 stock exchange legislation), off-
Table 4. Size and Leverage of Quoted Securities by Alternative Definitions, ca 1913.
UK
US
151
51
42
41
38
41
4
5
189
92
46
46
(3a range for alternative “domestic” definitions
159-208
84-100
43-49
42-52)
4.”Private Sector” Leverage (Bonds/Equities x 100)
26
83 100
9
12
5.Selected other “Business Securities”/GDP x 100 101
na
na
87
42
1.Equity Capitalisation/GDP x 100.
2.Corporate Bond Capitalisation/GDP x 100
3.All ”Private sector” Securities/GDP x 100
97
Germany 99
France
Though they were allowed to list companies in the size range M0.5-1m, which needed special permission on
Hamburg, Frankfurt or Berlin.
98
1579 AGs and KGaAs, plus authors’ estimate for Gewerkschaften and other companies
99
Our denominator (following Burhop) is the NNP of M53.7b, absent consensus on adjustment to
GDP.
100
115% on NYSE, 58% in other markets.
101
Panama bonds and municipal electricity securities might appear for the US here, but similar investments
elsewhere are excluded; only French and German mortgage-backed and railway securities are included.
28
6.”Business Securities”/GDP x 100
189
92
123
88
All calculations in this table are at market prices from unrounded data: with that proviso, line 3 is
lines 1 + 2; line 6 is line 3 + 5; line 4 is line 2/line1 x 100.
Sources: UK: Table 1, except for line 3a. For the upper limit to the range we add back £454.5m (19% of UK
GDP) for the share capital of the 112 British-registered foreign railways in Essex-Crosby, excluded from our
compromise estimate. Houston and Dunning (UK Industry, pp.37-40) suggest around a fifth of British
companies by number principally operated abroad and we have used that ratio to define the lower boundary.
Note that Grossman admits he does not know how his database defined “domestic” firms. This is of little
concern here because removing misclassified companies (by Essex-Crosby’s clear and unequivocal definition)
from Grossman’s line 1 in Table 1 would result in an equivalent increase in line 2, leaving the national total
unchanged
US: for equities an interpolation of the 1906 and 1916 figures from Moody (see text at n.?, above); for bonds,
Hickman’s January 1914 figure. No authentic estimates exist of the range (line 3a), including companies
classified by Moody as foreign or excluding US-registered firms mainly operating abroad such as the MacKay
cable companies, United Fruit, Mexican Petroleum, the Manila Railway or Havana Cigar. Our conjecture - what
US scholars might have omitted, had they shared European post-colonial urges to deny such companies’
American-ness - is based on Wilkins, Emergence and NYSE listings.
Germany: We follow Burhop and Lehmann (“Geography”) on Berlin for our central estimate, adding 4% of GDP
for bergrechliche Gewerkschaften (a form of mining enterprise, favoured for its lax publicity requirements, see
Anon, “Essener Bőrse;” Kocka and Siegrist, “Hundert;” we assume half were listed off Berlin), which they omit
(email from C Burhop to the authors). The Preussische Statistische Landesamt had long been making monthly
valuations of all Berlin-listed Prussian Aktiengesellschaften (AGs) and in 1912 extended coverage to all German
AGs on the exchange. For 31 December 1913 (on their 24th extended iteration, so presumably quite reliably)
the official statisticians reported 907 domestic AGs with share market capitalisation (converted to the
conventional ratio) of 28% of GDP. Burhop and Lehmann (“Geography”) and Rajan and Zingales (“Great
Reversals”) were unaware of this official estimate for exactly the date they targeted and they report higher
figures at market prices: 932 AGs with 33% of GDP and 1,054 companies with 35%. Discounting any errors of
transcription/calculation, there are two plausible explanations of this wide 28-35% range. First the highest
figure probably included not only AGs but also bergrechtliche Gewerkschaften, the Reichsbank and the
Preussische Bank (Seehandlung), which the official statistics omitted but should be included for comparison
with other countries. Second, it is a matter of judgment whether to include listed stocks which hardly traded
or enterprises mainly operating abroad. Adding an estimate of 3% for non-AGs to the AG-only totals, Berlin can
be described as in the range 31-35% (which we adopt as the marker for estimating the range in line 3a).
Burhop and Lehmann also measure the firms quoted on Germany’s 22 other official exchanges, eliminating
cross-listings with Berlin, suggesting a net addition of 649 AGs, with share capital at market of 5% of GDP.
Rajan and Zingales cite contemporary views suggesting a higher share for regional exchanges (which may refer
to trading not listing), but the official estimate of the ratio of Prussian AG listings on Berlin to those elsewhere
(KSA, Statistisches Jahrbuch, pp.230, 233, 340) is compatible with Burhop and Lehmann. At the end of 1912, of
M3,098m Schulden (mainly issued by AGs and Gewerkschaften), M2,303m (only 4% of GDP at par, slightly less
at market) were listed on exchanges (Statistisches Jahrbuch 1915).
Line 5. For the state railways we have used their capital employed of M18,873m (Statistisches Jahrbuch 1915,
pp. 398, 401) though, given their profitability, they would presumably have been worth more if floated as
conventional corporations. The bonds of 98 Bodenkreditinstitute quoted on stock exchanges amounted to
M16,584m and the Pfandbriefe of 38 Hypothekenbanken to M11,116m at par. Assuming the small portion of
their capital financed by other means balanced their below-par quotations, we have added the par figures to
the rail estimate, producing a total of M46,573m.
France: The Paris parquet from time to time published official figures and from 1904 standardised their
publication every six months, but (following Neymarck’s recommendations) did not distinguish shares from
corporate bonds, though did separate French securities from foreign and provide market as well as par
valuations (Direction, “Valeurs,” p. 311; Moreau-Néret, Valeurs, pp. 296-7). Subsequent attempts to exclude
bonds for 1913 show a wide range. Some figures include the Suez Canal (which we eliminate as similar
overseas-registered companies are excluded from other countries’ totals) and we need also to eliminate (as
29
quasi-governmental and included in line 5) the six main rail networks and Crédit Foncier. Eliminating these
eight enterprises from Bozio’s (Capitalisation, p. 81)
count (using 1913 valuations from Denuc, “Dividendes”) reduces his total to 484 companies listed on the Paris
parquet, with equity market capitalisation of F17.0b or 33.5% of the GDP of F50.8b. Hautcoeur (Marché, pp.
43-4) excludes the same eight companies plus 29 railways which were not government guaranteed: to
standardise we add back these 29 railways, giving 365 companies valued at F13.7b or 27% of GDP. Bozio’s
extra 119 companies with F3.3b capital appear to be companies mainly operating abroad, which Hautcoeur
explicitly excludes. We use the arithmetic mean (F15.4m, 30%) for the parquet. There is little debate about
additional equities on the Paris coulisse and six provincial bourses, together constituting all official exchanges
(Bozio, Capitalisation, p. 81). He bases his estimate on modern studies of regional bourses, but this is
compatible with contemporary official estimates (Direction, “Valeurs”). Eliminating cross-listings, he adds 692
companies and F5.5b (11% of GDP, 41% with the parquet). The range in line 3a is the Bozio-Hautcoeur range
for parquet equities applied to all securities. Inappropriately higher estimates include Rajan and Zingales
(inferring capitalisation only indirectly from tax data including unquoted companies) and Goldsmith (who
extrapolated 1898 data to 1913, without allowing for de-listings).
Hautcoeur (p. 43) estimates private sector corporate bonds (excluding those for the six major railways and
Crédit Foncier in line 5, but including some unquoted bonds of quoted companies) at F2109m; we add F315m
for other exchanges based on 1900/01 ratios indicating that Paris was more dominant in bonds than shares
(Hautcoeur, p. 53).
Line 5 includes the F10,514m bonds of the five major, remaining government-guaranteed, French railways, the
F3,359m bonds of the railways the state had acquired and the F5,461m bonds of the Crédit Foncier (Michel,
Dette, p.34; Peschaud, Politique, p. 195), with valuation at 90% of par, in line with the market average. It also
includes F? shares of the Crédit Foncier and F3,416 shares of the six major railways (Denuc, “Dividendes”).
exchange trading by banks was confined to matching bargains in listed domestic equities. 102 All
other external funding was essentially private equity, 103 bank lending or trade credit, because offexchange IPOs or public trading were illegal. Unlisted corporate bonds were traded off exchanges,
but the German corporate bond market was small. 104 With the lowest market-wide leverage of only
102
Prion, “Bőrsenwesen,” pp. 1053-4; Kikisch, Markt, pp. 9-13; Fohlin, Finance Capitalism, pp. 248-52, 303.
103
“Private equity” now describes the provision of growth, buyout and venture capital to (often, but not
exclusively) private companies by principals or intermediaries who themselves may be private or quoted. Such
institutions existed (with less regulatory separation) before 1914, though we are here using the term to mean
any “outside” investor in unquoted securities.
104
At the end of 1912, of M3,098m Schulden (mainly issued by AGs and Gewerkschaften), M2,303m (only 4%
of GDP at par, slightly less at market) were listed on exchanges.
30
9% (line 4), pre-war investors in German bonds rarely lost their principal: Berlin-listed companies,
though much smaller, failed less frequently than the NYSE’s. 105
Considering national stock market size relative to a country’s economic size, the focus
should be on companies operating nationally and all estimates in Table 4 of course exclude foreignregistered companies listed on their stock exchanges, like the Suez Canal or Canadian Pacific
Railway, which - though drawing capital and partly managed from Paris and London - were
registered in Alexandria and Montreal. Some researchers (Essex-Crosby on the UK, Bozio on France)
include all home-registered companies, which has the merit of clarity and replicability, though
national registration did not require that companies mainly operated there. Thus Bozio accounts the
Banque de l’Indochine French, while Essex-Crosby denies the (Asian-registered) Hongkong &
Shanghai Bank (a leading London securities underwriter and exchange banker) Britishness, but
includes Vienna General Omnibus (with only a brass plate, investors and directors In London) as a
British company. There might even be doubts about New Zealand & Australian Land: all its farms
were overseas, but it was managed from its Edinburgh headquarters by British career managers,
exporting seeds, livestock, farm equipment and farmers from the UK and distributing their dairy and
meat produce throughout the UK under the “Edendale” label, one of the best-known British
brands. 106 There might be fewer doubts about J & P Coats’s Britishness, even though it had more
sewing-cotton factories outside the UK than at its large Paisley HQ. The problem is that once we go
beyond automatic (if occasionally absurd) rules we enter the realm of subjectivity. To give some
sense of the plausible range of adjustments between the more expansive and stringent definitions
105
Burhop et al, “Law.” The average equity capitalisation of 932 Berlin-listed AGs in 1913 was $4.5m,
compared with $37m for the NYSE-listed (assuming there were 210) and the size gap would more than double
if bond capital were included. The position of US stockholders was even more precarious (Comptroller, Annual,
p. 106): many more NYSE-listed stocks paid no dividend than in Germany (KSA, Statistisches Jahrbuch, pp. 4023).
106
Tennent, “Management;” more generally, Corley, “Free-standing.”
31
variously adopted we show ranges various scholars have adopted in line 3a, where, for France, the
high is Bozio’s broad definition and the low Hautcoeur’s (limited to firms mainly operating
domestically). International comparisons may not require removal of all companies operating
abroad: choice within the range depends on specifics like whether the USA’s United Fruit is similar to
the UK’s New Zealand and Australian Land. For users requiring a quicker fix we hazard compromise
estimates in line 3. Slightly deeper surgery would be implied by deducting all overseas direct
investment from the highest value in the range: 55% of GDP for the UK, 17% for France, 7% for the
US and 6% for Germany. 107 This would be inappropriate for making comparisons with modern data,
where such adjustments are never made.
German and French securities/GDP ratios (whether the line 3 compromise or anywhere in the
line 3a ranges) are lower than for the UK and US, but - equally striking - are based on fewer
companies: only 26 per million people (Germany) or 28 (France) compared with 118 in the UK and
252 in the US. The view that universal banking in Germany developed larger equity markets than the
government-hobbled US financial system explains an outcome that is unobservable. 108 To the
contrary, Germany’s ban on peripheral markets imposed real restraints, but support for start-ups
and innovation - undertaken on the Anglosphere’s informal markets - was clearly not absent in
Germany. Traditional historiography does not see its economy as lacking technological sophistication
or innovative capacity. Such support - prior to formal IPO - was (necessarily) managed off-exchange
by joint stock banks, private banks, rich individuals and inventive professors, or undertaken in
collaboration with existing quoted firms, because start-up IPOs on public markets were forbidden
107
Dunning, Explaining, p. 74. These values are differently measured than in Table 4 and some direct
investments were by unquoted businesses (Worswick and Tipping, Profits, pp. 116, 121).
108
Calomiris, “Costs.” Tracing his cited evidence to its source, it is clear that he inappropriately included
unquoted and financial companies for Germany, while excluding them for the US.
32
and informal markets practically non-existent. 109 While this limited equity market development, it
remains a moot point which approach then provided the most effective stewardship of innovation,
though hysteresis may help explain why Germany today lags the Anglosphere’s venture capital
markets. 110
France’s quoted corporate securities are the same as Germany’s (except by Bozio’s
most expansive definition), but are less than a full count: its market boundary was not as absolute as
Germany’s. Facing no legal prohibition, French bankers and other company promoters placed their
securities with local capitalists and traded them, though Paris brokers successfully lobbied against
proposed new exchanges (inconceivable in the Anglosphere). 111 Investor directories did not suggest
informal markets as large as the Anglosphere’s, but the outer boundaries of tradable securities
109
Vereinigte Glanzstoff (a German rayon rival of Courtaulds, sponsored by Bergisch-Markischen Bank, with
another rival sponsored by the Silesian millionaire, Prince Henckel von Donnersmarck), Telefunken (an
electronics equivalent of Marconi, jointly sponsored by Siemens and AEG) and Deutsche Petroleum (a rival of
Shell sponsored by Deutsche Bank) were launched off markets, with IPOs years after launch. None were as
successful as their British matches, launched closer to start-up on public markets, but they may not be
representative. Of course, individuals or institutions might buy interests in unquoted AGs, KGs or GmbHs
(subject to stringent rules such as notarization), but it was more expensive to convert from GmbH to AG than
from unquotable to quotable status in English law (while in American state laws no legal conversion was
normally required).
110
Allen and Gale (Comparing) argue that stock market finance may have an advantage in funding innovative
industries.
111
Hautcoeur, “Marché,” p. 27. Lorraine bankers made markets for corporate securities in Nancy, despite their
failed 1908 attempt to establish an exchange (Brocard, “Mission”).
33
markets were similarly ill-defined. 112 Neither the French nor German data include tantièmes or
Tantiemen, naturally enough since they were not securitised and tradable like deferred shares (the
British equivalent board incentive). Their omission understates contractual claims on the variable
profits of French and German quoted companies, though in Germany their share had fallen
considerably, to below 2%. 113
Caution is advisable before concluding - from the three top lines of the table - that US
markets were better developed, because the German and French figures are restricted to what
contemporaries (and modern scholars) recognised was the clearly private sector, though this
included some government-influenced entities (such as the Banque de France and the Reichsbank,
their investor-financed central banks). 114 The proper boundaries of corporate bond markets raise
larger (and neglected) questions in continental markets, where the state had a heavier hand when
faced with the mid-nineteenth century need to attract capital in unprecedented amounts to build
rail networks. Britain was the only country to maintain a largely laissez-faire approach; even the US
had supported railways by state shareholdings, loans and land grants, but by the 1870s it, too, was
committed to a purely capitalist regime, braving the consequent wave of bankruptcies (worse than
Germany’s 1874 crisis, which drove that country’s bureaucracy to more state interventions). 115 As
112
The contemporary Chaix and Desfossés directories show only modestly larger numbers than the exchanges,
though the number of French SAs complying with post-1907 publicity required for appeals to the public for
funds was much higher than the numbers listed (Freedeman, Triumph, p.24).
113
Bayer and Burhop, “Corporate Governance;” for possibly higher figures for France, see Bozio, Capitalisation,
p. 99; for the rarity of US equivalents see Devoe, Where, pp. 341-2.
114
The Banque de France equity capitalisation (Hautcoeur, “Marché,” p. 50) alone accounted for 1.7% of GDP
in 1913
115
Berk’s (Alternative Tracks) painting of US development as historically contingent, not economically
necessary, fits evidence that other countries either avoided the problem (the UK’s low leverage) or solved it by
government guarantees (France) or nationalisations (Germany).
34
leverage climbed to US levels, the French government pre-empted the bankruptcy consequences by
guaranteeing bond interest for the six main rail systems from 1859. That encouraged even higher
leverage, which by the end of 1912 had reached 1,541% at par and 538% at market; from 1883,
shares also had a minimum dividend guarantee from government and behaved in the market like
bonds. 116 France’s six government-protected regional rail monopolies could sustain higher leverage
that bankrupted US railways facing more competition, but guarantees mattered: when the Ouest
approached bankruptcy in 1908, the outcome was not default but nationalisation. French investors
understandably continued to treat domestic railway bonds - a large part of their portfolios - as close
substitutes for government rentes: utterly different from their holdings of American or Russian rail
bonds. With different support, the Crédit Foncier by 1913 virtually monopolised the French
mortgage market under the strict supervision of the Ministry of Finance, which appointed some
board members. It could lend no more than 50% of valuation on mortgages repayable over 10-75
years, charging a maximum of 60 basis points above its own cost of capital (in the previous decade
mainly 3%, occasionally 4%) and it also made loans to local governments. With its long-term assets
(in law or in fact) government-guaranteed, it was permitted a maximum leverage ratio as high as
2,000%, far in excess of levels that propelled ordinary companies into receivership.
These two massive components of the French quasi-governmental, investor-financed
“corporate” sector were almost as large as France’s purely private sector. Both are shown in line 5
but excluded from the top three lines, which include British and American railways (which could not
possibly have matched French government-guaranteed leverage). German equivalents were even
larger. German mortgage-backed securities (Pfandbriefe and Hypothekenschulden) were more
varied, with some local government and mutual as well as corporate intermediation but also
significantly government-regulated, again supporting massively higher leverage than feasible in the
private sector. Germany’s eight major rail systems were government-owned and partly financed by
116
Denuc, “Dividendes” p. 757.
35
government railway bonds (their leverage ratio was infinity: sovereign equity did not exist). 117
Adding Germany’s quasi-government “business” sector in line 5 would propel Germany to above the
US and French level (line 6). One might quibble about such adjustments, though they recognise that
investor portfolios everywhere were massively committed to railways, albeit via different securities.
Including highly-leveraged mortgage-backed bonds more fully delineates the bond market, but
biases the comparison against the UK and US, in that their mortgage institutions (building societies
etc.) leveraged in different (un-securitised) ways.
The Belle Epoque is conventionally viewed as the heyday of laissez-faire, but governments
structured securities markets in important ways. Even in the laissez-faire UK (where free trade
policies drove security issues by British companies offshoring production) 118 and US (where extreme
protectionism had the opposite effect and government policy drove banks off markets and
“crowded-in” corporate bonds), such (largely unintended) effects of government on securities
market size cannot be ignored, but in continental Europe more direct policy influences
predominated: the impact of their quasi-government securities was not marginal, but fundamental.
Include all such securities as corporate (as the Paris bourse did in its official statistics) and the French
and German markets bear comparison with the US; exclude them and the US clearly leads. Again,
the decision on what to measure depends on the question asked. Students of the choices available
to investors or capital invested in business activities through quoted securities, or the extent of
professional management not tied to ownership, will include such government-backed business
enterprises. Those otherwise interested - in calculating the equity premium or (unregulated)
117
Bonds of M12,245m ($2,914m) at par (Kőnigliche, Statistisches Jahrbuch 1915, pp. 165, 317) made Prussian
State Railways the world’s largest quoted business; with profits of 6.39%, it would have IPOd above par.
118
On the impact of low tariffs, see Rajan and Zingales, Saving Capitalism; Foreman-Peck and Hannah,
“Diffusion.”
36
leverage choices, or believing private enterprise drives efficiency more than government 119 - will
focus instead on a more limited range of securities, though they might be unwise to assume that
interactions with the massive quasi-government sector had no influence on the outcomes which
interest them.
V
These observations have implications beyond the four major markets we have directly
addressed. Railways were nationalised in some common law countries, or were government-owned
but privately operated (or vice-versa); government guarantees, explicit or implicit ,were ubiquitous,
but not always effective (some private railways could borrow more cheaply than the governments
guaranteeing their bonds), cedulas (an equivalent of Pfandbriefe) dominated stock exchanges in
some of the Spanish-speaking world; sometimes hybrid securities were illegal or unknown,
sometimes vote-less, sometimes without fully limited liability; some civil law countries had most of
their corporations or stock exchanges organised under common law, in others their bond (or even
share) market mainly existed abroad. Ambiguities about the boundaries of “domestic” securities
markets and their determinants were ubiquitous. Modern simplicities targeted by Rajan and Zingales
or La Porta et al sometimes elude the historian.
Much modern work on historical finance concerns the rate of return on equities or bonds
and the equity premium: a key focus of recent research is whether there is survivor bias in long-run
analyses. Correctives to a US-based core literature have focused on adding markets that disappeared
(Russia, China, Poland) or small neglected markets (Finland, Australia). However, this study suggests
that the largest omissions from existing composite indexes may be in large continuing markets:
notably US and UK securities not on the NYSE (to which the Cowles is confined) or the LSE official list
119
Foreman-Peck and Millward, Public; Bogart, “Global perspective;” more broadly, compare Thumrongvit et
al, “Linking.”
37
(a subset included in standard UK indexes). The returns to banks and railways varied markedly, 120
but users of the available indexes do not always realise that the NYSE index before 1914 is mainly
railways, which are negligible components of the French and German equity indexes; while banks
dominate French and German indexes but are absent from the NYSE index. Whether preferences, or
other hybrids, are included in “equity” indexes varies internationally. For some purposes, we may
not be interested in the more peripheral and informal markets, even if their risks and returns were
different from core markets, because they served different purposes more akin to modern venture
capital. However, a global index of frequently-traded corporate securities is not sensibly created by
combining indexes based on 200 companies on the NYSE, 1,000 or so officially listed in London, and
so on (as some weighted 121 indexes attempt), because national exchanges listed companies of
markedly different scales and sectoral composition. It would be better to assemble a global “top
500” or “top 1000” index, containing the world’s frequently-traded equities and reweighted
annually.
Returning to the issues with which we began, ranking European securities markets is
relatively simple. Absolutely or relative to GDP, at par or market, measuring only the largest market
or including regional, curb and informal markets, including or excluding foreign and colonial
companies, with or without corporate bonds, preferences, government or quasi-government
enterprises or Tantiemen, or even deducting agriculture from the GDP denominator (because farms
were rarely quoted), the results are unequivocal: the UK corporate securities market was larger than
France or Germany (which were roughly equal). 122 The joker in the pack is the USA. The NYSE was
very large (second only to the LSE by domestic equity capitalisation) but so was its host economy, so
120
Denuc, “Dividendes.”
121
Weights are sometimes GDP (which our results indicate are inappropriate) but substitutes are sometimes
scarcely any better.
122
Some of these adjustments are reported in Table 4, the others are excluded for space reasons.
38
- expressed as a ratio to GDP - its equity capitalisation was smaller than Paris or Berlin. The US ranks
higher after certain adjustments: measuring at par rather than market (as contemporary boosters of
the NYSE favoured); including regional exchanges and informal markets; and adding corporate
bonds; but ranks lower if Tantiemen or government-related enterprises are included and preferred
excluded. No such adjustments elevate the US to UK levels.
Choosing alternative dates within the decades preceding 1913 would also affect
differentials, though not as in the Whig picture of the US inexorably powering toward its manifest
destiny as overlord of capitalism’s most sacred temples, while European bourses faltered. In the
decade or so before World War One, it is true, the LSE - after massive 1880s and 1890s expansion –
barely kept pace with the growth of its domestic economy, instead focusing expansion on financing
Canada’s growth, 123 but Berlin’s domestic equity capitalisation - recovering from those same
decades’ flat performance (constrained by nationalisations and over-zealous regulation) – was
expanding faster domestically; while French and US exchanges actually lagged the growth rates of
their domestic economies. 124
American exceptionalism showed not in stock-exchange-led growth but in distinctively
high corporate leverage, quite different not only from laissez-faire and equity-orientated Britain but
from the government-structured (and, until they were unexpectedly destroyed by wartime and postwar inflation, largely risk-free) bond markets of continental Europe. Corporate governance and risk
profiles differed among these countries (and from today). No nation came close to the US in
combining extreme leverage with tolerance of routine receiverships and bondholder-driven control
changes of its giant quoted enterprises. Canada had three main rail systems: the Canadian Pacific
123
Stone, Global.
124
Essex-Crosby, “Joint Stock Companies;” Foreman-Peck and Hannah, “Extreme Divorce,” p.5; Neymarck,
“Valeurs Mobilières;” Tables 2 and 3 above: Bozio, Capitalisation, p. 81; see also Moore (“World” Table V) for
compatible broader measures including foreign listings.
39
(mainly equity-financed on the British model) and two highly-leveraged networks (on the American
model). When the latter duly approached bankruptcy in 1914, receivership was shunned in favour of
government loan guarantees and both were soon nationalised as the Canadian National Railway. 125
In its heartland to the south, the American way also faltered between the wars: the federal
government intervened in the mortgage market (with mortgage-backed securities on the FrancoGerman model); subsidised railway finance and strengthened ICC control (to forestall bondholders
initiating bankruptcies); and, through the SEC, reinforced shareholder-first governance mechanisms
(on the British model). 126 By 1950 equities dominated US corporate securities markets, as on the LSE
before 1914, and US private sector corporate bonds fell to the low level of France and Germany
before 1914.
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