Hey Bud, Wanna Buy a Central Bank? Part 2

England

Founded: 1694

Nationalized: 03/31/1946

Annual Return from 1694 to 1946: (Bank 5.26%, Stocks 5.79%, Bonds 3.97%)

Shares Outstanding: 1694 (12,000 shares), 1708 (31,750 shares), 1717 (51,750 shares), 1722 (91,750 shares), 1728 (101,000 shares), 1746 (116,868 shares), 1816 (148,868 shares), 1835 (145,530 shares)

Market Capitalization: 1694 ($3.16 million), 1725 ($41.32 million), 1750 ($51.80 million), 1775 ($56.392 million), 1800 ($64.47 million), 1825 ($156.51 million), 1850 ($150.69 million), 1875 ($185.21 million), 1900 ($232.13 million), 1925 ($176.09 million), 1945 ($233.646 million)

              The Bank of England was founded in 1694 to provide the government money to finance the war against France.  In exchange for a perpetual loan, the investors were able to establish the Governor and Company of the Bank of England. As we discussed in Complete Histories – Bank of England Stock, the bank was allowed to issue banknotes, redeemable in silver coin and trade in bills and bullion. The bank could hold deposit accounts and issue deposit receipts/checks. The bank issued loans by discounting bills and provided loans to the East India Company and the South Sea Company. The bank received a monopoly in 1697, which was strengthened in 1708.  The bank consolidated its role as banker to the government in 1715 when it took on the responsibility of managing the government’s debt.  In 1775, the Bank received a virtual monopoly on issuing banknotes when a minimum denomination was placed on banknotes.  Britain went off the gold standard in 1797 but returned to the gold standard in 1821.

              Great Britain had note issuing banks in Scotland where the Bank of Scotland, founded in 1695 and the Royal Bank of Scotland, founded in 1727, existed, and in Ireland where the Bank of Ireland (founded 1783) issued banknotes. Joint-stock banking and branching did not exist in England, though it did in Scotland, until 1826.  As the number of banks in England grew, the Bank of England began to act like a central bank, overseeing the country’s banking system.  In 1833, joint stock banks were allowed to operate in London, though not to issue banknotes, and Bank of England notes were declared legal tender. The Bank acted as lender of last resort during both the Overend, Gurney and Co. crisis in 1866 and the Barings Brothers Crisis in 1890.  The Bank was formally nationalized in 1946 with shareholders receiving 3% bonds in exchange for their stock.  The bank was independent and changed its discount rate to protect the nation’s gold reserves; however, the Bank and government clashed in 1917 and the Bank became subservient to the Treasury.

              During most of its history, from 1694 until the 1860s, the Bank of England had the largest market capitalization of any corporation in the world.  In 1865, the London and Northwestern Railway became larger than the Bank of England and the Standard Oil Company became bigger than the L&NW Railway in 1890.  Both the Bank of England and the London and Northwestern Railway were nationalized after World War II.

              As Figure 11 shows, Bank of England stock followed the path of the stock market in the 1700s, though it underperformed overall. The stock performed well during the first quarter and last half of the 1800s but underperformed severely during the first 20 years of the twentieth century as interest rates and inflation rose.  The stock bounced back after World War I.

 

Figure 11. Bank of England stock and UK-100 Stock Price Index, 1694 to 1946


 

France

Founded: 1800

Nationalized: 1946

Annual Return from 1801 to 1946 (Bank 6.58%, Stocks 6.84%, Bonds 5.28%)

Shares Outstanding: 1801 (30,000 shares), 1803 (45,000), 1806 (90,000), 1849 (91,250), 1857 (182,500)

Market Capitalization: 1801 ($7.57 million), 1825 ($34.13 million), 1850 ($39.41 million), 1875 ($136.31 million), 1900 ($135.59 million), 1925 ($93.34 million), 1945 ($52.91 million)

              The Caisse des Comptes Courants was dissolved and reorganized as the Banque de France in 1800.  After the collapse of the assignats, Napoleon wanted a new bank to manage the public debt and discount government paper. Its competitor, the Caisse d’Escompte du Commerce was forced to merge with the Banque de France in 1802.  In 1803, the Banque de France received the exclusive right to issue banknotes.  Nine regional banks were formed between 1817 and the 1830s which had the right to issue banknotes, but after the banking crisis of 1848, the Banque de France regained its monopoly over issuing banknotes. Government financing demands led to a lack of convertibility in 1813 and between 1848 and 1850.  Banknotes were made legal tender during these periods, and they permanently became legal tender in 1870. Convertibility of the Franc was suspended in 1936 when France went off the Gold Standard. The Banque de France had the most extensive branching system in France until the early 1900s, extending to 160 branches in 1900 and 259 branches in 1928. Between 1800 and 1936, there was no provision for direct government involvement in the bank, though few major decisions were taken without consulting the government.  In 1945, the Banque de France was nationalized.

              As Figure 12 shows, Banque de France stock suffered major declines during the Napoleonic Wars and during the 1848 revolution. The stock increased in price during the inflations of the 1920s and 1940s.  Other than that, the bank followed the path of the French stock market.

 

Figure 12. Banque de France stock and France All-Tradable Index, 1800 to 1946


 

Germany

Founded: 1876

Nationalized: 1945

Annual Return from 1847 to 1875 (Bank, 8.5%, Stocks 4.16%, Bonds 4.64%)

Annual Return from 1876 to 1945: (Bank 44.44%, Stocks 44.92%, Bonds 44.61%)

Shares Outstanding: 1847 (150,000 shares), 1860 (200,000), 1876 (1,200,000), 1901 (1,500,000), 1904 (1,800,000), 1923 (1,500,000), 1939 (2,700,000)

Market Capitalization: 1847 ($12.52 million), 1860 ($19.25 million), 1875 ($32.26 million), 1876 ($43.67 million), 1900 ($42.56 million), 1925 ($47.7 million), 1944($156,530 million)

              Germany has had several central banks during the past two hundred years reflecting the political changes that have occurred in Germany. The Royal Giro and Loan Bank was established by Frederick the Great in 1765 to help aid the reconstruction of Germany after the Seven Years’ War.  In the 1800s local states and principalities established banks which also had the right to issue currency.  The Prussian government established the Prussian Bank in 1846, which functioned as both a bank of issue and a discount bank. The bank acted as a lender of last resort during the Banking Crisis of 1857. The number of note issuing banks rose from 9 in 1851 to 27 by 1857 and 54 by the 1870s. By the 1870s, paper money represented only about 25% of the circulating money supply, and two-thirds of the banknotes were issued by the Prussian Bank. The performance of the Prussian Bank with the general stock market is illustrated in Figure 13. The Bank suffered severe declines in 1854, 1857-1859 and 1866.  Overall, the Prussian Bank outperformed the stock market in general.