London - Capital of England

The micro-foundations of the early London capital market: Bank of England shareholders during and after the South Sea Bubble, 1720–251 By ANN M. CARLOS AND LARRY NEAL SUMMARY Using two sources, Bank of England Transfer Books and Stock Ledgers, this article explores the nature of the ‘customer base’ for Bank shares during and after the South Sea Bubble. This examination uncovers the nature of individual participation in this early capital market. The Transfer Ledgers record roughly 7,000 transfers during 1720, while the Ledger Books from 1720–25 record over 8,000 individuals holding stock. The analysis finds the customer base had breadth and depth, comprising individuals from across the social spectrum, from all over England and Europe. The market was diverse and liquid. Activity during the Bubble came from those living in and around London, with most traders participating in the market only twice at most. While the majority of participants were men, there was a sizeable female presence. Men as a group lost money from their market activity, but women made money. In the five years after the Bubble, the customer base was sustained. The analysis argues that the secondary market in financial assets cannot be dismissed as mere gambling devices, and that the basis for a mutually productive interaction between the financial sector and the real sector of the economy was already in existence and was sustained through the shock of the South Sea Bubble and its collapse. I iscussions of the development of English capital markets generate an interesting and unresolved tension between the disruptive and possibly irrational South Sea bubble in 1720 on the one hand, and the strength, 1 A very early draft of this paper was presented at the Economic History Society meeting 2002. This paper has benefited greatly from comments and suggestions by the anonymous referees and participants in workshops at Trinity College Dublin, University of Oxford, University of British Columbia, and University of California, Los Angeles. The authors gratefully acknowledge the financial support of the National Science Foundation. We must acknowledge the help and expertise of the Bank of England archivists, especially Henry Gillett and Sarah Millard. All errors unfortunately remain our own. D EARLY LONDON CAPITAL MARKET FOUNDATIONS 499 © Economic History Society 2005 Economic History Review, LIX, 3 (2006) durability, and sheer vitality of eighteenth-century English public finance on the other. Indeed, the role of the South Sea bubble in the long-run development of modern financial markets, and especially of the London stock market, remains an open issue, both for historians and economists. The first historian of the episode, Adam Anderson, hoped that his chronicle might ‘serve for a perpetual memento to the legislators and ministers of our own nation, never to leave it in the power of any, hereafter, to hoodwink mankind into so shameful and baneful an imposition on the credulity of the people, thereby diverted from their lawful industry’.2 The most recently published account of the South Sea Bubble ‘claims no more than to have reaffirmed Anderson’s cautionary conclusion that from time to time markets can go mad’.3 Yet, even Adam Anderson acknowledged that no lasting damage was done to the development of the British financial sector, and virtually all subsequent treatments of the South Sea episode have confirmed Anderson’s implicit assessment.4 The absence of impact of the bubble episode, especially in relation to the subsequent development of the public capital market, raises what we consider to be two contrasting views. Was the British economy so backward in 1720 that a financial shock of the magnitude of the South Sea Bubble affected but a small sliver of the economy, as some argue?5 Or was it possible that the institutional framework of the British financial sector had, even by 1720, acquired the resiliency necessary to withstand such a shock and recover quickly? In this article we argue that the financial sector was resilient and so able to absorb the price movements across 1720.6 Our investigation, focusing on the market for Bank of England stock, provides measures of the depth and breadth of the capital market during and after 1720. We focus on Bank stock that was widely understood at the time to be the least speculative stock among the major joint-stock companies whose shares were available to investors.7 Our examination uncovers the nature of individual participation in this early capital market, what stock market specialists today call the ‘customer base’. We are impressed with the characteristics of this early customer base, unique in Europe for its diversity and size, and with 2 Anderson, Historical and chronological deduction, pp. 91–2. 3 Dale, First crash, p. 183. 4 At least, that is our reading of Andreades, History; Brewer, Sinews of power; Carswell, South Sea Bubble; Clapham, Bank of England; Dickson, Financial revolution; Harris, Industrializing English law; and Scott, Constitution and finance. Even Anderson, Historical and chronological deduction, omits further mention of the South Sea when he moves on to the years after 1723, when the final breakup of the Company was accomplished. 5 Hoppit, ‘Myths’. 6 For a contrasting view, see Ibid., who concludes ‘Fundamentally, the Bubble was about high politics, high finance, and high society’, p. 158. His assessment is based on the participation of investors in the South Sea Company at the time, while ours is based on an analysis of the entire range of investors in the Bank of England. 7 Over the previous five years of increasingly active stock market activity, the coefficient of variation of Bank of England stock was only 7.8%, compared to 19.0% for East India Company stock and 9.9% for South Sea Company stock. (Calculations from ICPSR Study 1008, COEDAILY.dat, available at: http://webapp.icpsr.umich.edu/cocoon/ICPSR-PRA/01008.xml).