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Before the cult of equity: the British stock market, 1829–1929

Journal: European Review of Economic History

Date: 2021

Author: Gareth Campbell, Richard S Grossman, John D Turner

Abstract:
We analyze the development and performance of the British equity market during the era when it reigned supreme as the largest in the world. Using an extensive monthly dataset of thousands of companies, we identify the major peaks and troughs in the market and find a relationship with the timing of economic cycles. We also show that the equity risk premium was modest and, contrary to previous research, domestic and foreign stocks earned similar returns for much of the period. We also document the early dominance of the transport and finance sectors and the subsequent emergence of many new industries.

Link: Google Scholar

Background and Context

Time Period & Scope

Analysis of the British stock market from 1829-1929, when it was the largest in the world, examining monthly data on thousands of companies across multiple sectors.

Dataset

Comprehensive database of over 1 million security-month observations covering approximately 5,900 securities from 4,500 companies, drawn from the Course of Exchange and Investor's Monthly Manual.

Methodology

Construction of monthly capital gains, dividend yield, and total return indices weighted by market capitalization, analyzing 22 domestic sectors and comparing domestic versus foreign investments.

Evolution of Market Size and Composition 1829-1929

  • Total market capitalization grew dramatically from £42.6m in 1829 to £4,240m in 1929
  • Growth accelerated particularly after 1870s when Britain's financial markets were most dominant
  • By 1929, market capitalization reached 108% of UK nominal GDP

Average Annual Returns by Major Components 1830-1929

  • Dividends were the main driver of returns, averaging 5.0% annually
  • Capital gains contributed only 0.5% on average per year
  • Total returns averaged 5.4% annually over the 100-year period

Sector Performance Comparison 1830-1929

  • Best performing sectors were retail, breweries, banks and insurance
  • Mining was the worst performing sector with only 2.1% average annual returns
  • Traditional sectors like banking maintained strong performance throughout the period

Decline in Uncalled Capital 1829-1929

  • Uncalled capital ratio fell from 0.52 in 1829 to 0.14 in 1929
  • Decline was particularly pronounced in banking and insurance sectors
  • Reflects reduced need for contingent capital as financial markets matured

Market Dominance Shift from Transport & Finance to New Industries

  • Transport and finance sectors declined from 81% of market cap in 1869 to 39% by 1929
  • New industries like oil, chemicals, food, drink and tobacco grew to dominate by 1929
  • Reflects Britain's industrial transformation during this period

Contribution and Implications

  • First comprehensive monthly analysis of British stock market returns during its period of global dominance
  • Challenges previous assumptions about superior returns on foreign versus domestic investments
  • Documents the transformation of Britain's industrial base through stock market composition
  • Provides foundational data for future research on market efficiency, risk premiums and business cycles

Data Sources

  • Market Size Chart: Constructed using data from Table 6 showing total market capitalization
  • Returns Chart: Based on data from Table 2 showing average annual returns components
  • Sector Performance Chart: Derived from Table 9 showing returns by industry sector
  • Uncalled Capital Chart: Created using data from Table 11 showing ratio of uncalled capital
  • Industry Dominance Chart: Calculated from market capitalization data in Table 6