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Before the Cult of Equity: The British Stock Market, 1829-1929

Journal: European Review of Economic History

Date: 20211101

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

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

This study examines the British stock market from 1829-1929, when it was the largest in the world, analyzing over 1,000,000 security-month observations from approximately 4,500 companies.

Data Sources

The research combines data from the Course of the Exchange (1829-1868) and Investor's Monthly Manual (1869-1929) to create comprehensive monthly indices of stock market performance.

Analysis Approach

The study constructs market capitalization-weighted indices for 22 domestic sectors and analyzes capital gains, dividend yields, and total returns across different industries.

Dramatic Growth in Market Size and Composition 1869-1929

  • Market capitalization grew nearly ten-fold from £0.52 billion in 1869 to £4.94 billion in 1929
  • Domestic shares declined from over 90% in 1830s to about 50% by 1929
  • Demonstrates the increasing internationalization of the London market

Evolution of Industrial Composition 1829-1929

  • Early dominance of canals/insurance (83% of market cap in 1829) shifted to railways/banks/insurance (81% in 1869)
  • By 1929, new industries emerged including oil, chemicals, food/drink/tobacco
  • Shows transformation from infrastructure/finance focus to broader industrial base

Modest Equity Risk Premium 1829-1929

  • Average annual nominal return was 5.4% with real return around 5.0%
  • Equity premium over bills was just 1.9% compared to 5.3% in 1930-2015
  • Indicates relatively low risk perception during this period

Sector Performance Variation 1829-1929

  • Best performing sectors: retail, breweries, banks, and insurance
  • Mining was worst performing sector with highest volatility
  • Shows significant dispersion in returns across industries

Decline in Uncalled Capital 1829-1929

  • Uncalled capital ratio declined significantly across all sectors
  • Remained important only in banking and insurance by 1929
  • Reflects maturation of financial markets and reduced risk perception

Contribution and Implications

  • Provides most comprehensive monthly dataset of British share prices for 1829-1929 period
  • Challenges previous findings about superior returns on foreign vs domestic investments
  • Documents evolution from infrastructure/finance focused market to diversified industrial base

Data Sources

  • Market capitalization chart based on data from Table 6
  • Sector composition visualization derived from Tables 5-7
  • Returns analysis based on Table 2
  • Sector performance comparison uses data from Table 9
  • Uncalled capital trends from Table 11