The Great Crash of 1762
Bryan Taylor, Chief Economist, Global Financial Data
There are years that are remembered by all investors when bull markets hit tops or bear markets hit bottoms. Some of the years associated with global market tops are 1720, 1929, 1987 and 2007. Similarly, there are years when global markets hit bottoms in 1848, 1932, 1974, 2009 and 2020. But some market bottoms have been forgotten. Who discusses the Great Crash of 1762 when, because of war, global stock markets hit their lowest levels of the 1700s until the Napoleonic Wars drove European corporations into bankruptcy? Very few people remember this because no one today was around in 1762.
The debts accumulated by Britain and France during the War of the Spanish Succession (1701-1714) led to attempts by both countries to convert their debt into equity, leading to the Mississippi bubble of 1719 in France and the South Sea bubble of 1720 in Britain. The Anglo-French bubbles carried all the stocks in Amsterdam, London and Paris up to levels they would not return to for over 100 years. After the stocks crashed and investors lost their money, people were cautious about investing for the rest of the century. People felt safer putting their money in bonds and wanted to avoid the risk of stocks. The Bubble Act, passed in Britain, discouraged corporations from raising capital for the next 50 years. After 1720, stocks entered into a long-term bear market that lasted for the next forty years.
The Seven Years’ War
What turned markets around in the 1760s was the Seven Years’ War. There were no general European wars between the War of the Spanish Succession (1701-1714) and the Seven Years’ War (1756-1763). The war was a series of conflicts fought in Europe, North America, and India. It was possibly the first global war fought by Europeans. Britain, along with its ally of Prussia fought against France, which was allied with Austria, Spain, Sweden and Russia. Russia switched sides in 1762 when Peter III became Tsar. In North America, the war was known as the French and Indian War and began in 1754 while in India the Carnatic Wars began in 1744 and brought the British East India Co. and the French East India Co. in conflict with one another. Although the Netherlands remained neutral during the war, it did affect the Netherlands’ commerce. All of these wars were brought to a conclusion by the Treaty of Paris for Britain and France and the Treaty of Hubertusburg for Prussia and Austria in February 1762.
During the 1700s, stocks and bonds followed each other, hitting peaks and bottoms at similar points in time. GFD’s World Stock Index and GFD’s London Stock Index both peaked in September 1752, as can be seen in Figure 1. The price on the British Consol hit 106.75 in December 1752. Thence, stock and bond markets began a long steady decline for the next ten years. Financial markets remained weak and the poor performance of Prussia against Russia and Austria in the Seven Years’ War contributed to the decline. By the end of 1761, Prussia was close to collapse and Berlin was having to prepare for a siege. Prussia’s troops were dwindling and Britain was threatening to pull its subsidies to Frederick the Great of Prussia. If Frederick had been defeated in the Seven Years’ War, he would have been known as Frederick the Loser. Between May 1761 and January 1762, the British market declined by over 20%, putting the market almost 40% below its 1752 peak.
The turning point came in January 1762. Two important events occurred that turned the tide in Britain’s favor. Spain entered the war on January 4, 1762 on the side of France. Britain declared war on Spain on January 18, 1762, and Portugal entered the war on the side of Britain. Spain lost Havana and Manila to Britain and Britain stopped the invasion of Portugal.
The Empress of Russia, Elizabeth, died on January 5, 1762, and was succeeded by Tsar Peter III who switched Russia from allying with the French to the British. Peter III ended Russia’s occupation of East Prussia and Pomerania and mediated Frederick’s truce with Sweden. Peter III then placed his troops under Frederick’s command who then drove the Austrians out of the territories they had occupied. Peter III died on July 9, 1762, but by then, the tide had shifted. Peter III was succeeded by Catherine the Great who withdrew from the war. Now, instead of facing defeat, Prussia had regained its territory, but after six years of war, Britain, Prussia and Austria were facing bankruptcy. The only solution was to sue for peace.
Figure 1. British Stock Market, 1750 to 1780
The Treaty of Paris
The Seven Years’ War ended with the signing of the Treaty of Paris on February 10, 1763. Although Britain and France returned much of the territory they had seized during the war, Britain maintained control over the territories they had captured in North America. Britain gained the land east of the Mississippi from France and Florida from Spain. France kept the land west of the Mississippi and in Quebec. Prussia and Austria signed a separate peace treaty under the Treaty of Hubertusburg five days later.
The price of the consol hit its low at 61.5 (yield of 4.88%) on January 28, 1762. By March 1763, the price had risen to 95 (yield of 3.16%). GFD’s UK index bottomed out on February 4, 1762. By February of 1763, the British market index had risen by almost 50%. East India Stock also bottomed on February 4, 1762. Dutch East India Co. stock hit its low on January 25, 1762, and by the end of 1765 was up over 80%. The French stock market hit its bottom in May 1762 and recovered from there, doubling in price by 1765. All of Europe benefited from the return to peace.
Britain had stopped the expansion of France in Europe and stock markets rose in value for the rest of the 1760s while the yield on bonds declined. Markets rallied after 1762 and during the next six years, the British Market had its strongest bull market between the 1720 Bubble and the Napoleonic Wars.
Britain may have gained much of the North American continent from the French as a result of the Treaty of Paris, but they were soon to lose the territory they had won in the American Revolutionary War. Markets peaked once again in 1768 and began a steady decline until the late 1770s, as Figure 1 shows, when the American Revolutionary war pushed the British stock market and bond yields back to the levels they had been at during the Seven Years’ War. The American Revolutionary War gave the United States its independence but added to the rising debt of Britain.