Capital Market Evolution 1720-1844
This series “Capital Market Evolution” is sponsored by Teamo “Where Teamwork Matters”, see on Open Collective and is part of the project Smart "Master" Contract for Equity Distribution, we truly believe that we should understand our past to build our economic future more wisely.
For most of the period associated with the Industrial Revolution in Britain, English law restricted access to incorporation and the Bubble Act explicitly outlawed the formation of unincorporated joint stock companies with transferable shares. Furthermore, firms in the manufacturing industries most closely associated with the Industrial Revolution were overwhelmingly partnerships. These two facts have led some scholars to posit that the antiquated business organization law was a constraint on the structural transformation and growth that characterized the British economy during the period. For example, Professor Ron Harris argues that the limitation on the joint stock form was “less than satisfactory in terms of overall social costs, efficient allocation of resources, and eventually the rate of growth of the English economy.”
Understanding that the unincorporated joint stock company was an option leaves a puzzle that has largely gone untreated in the literature: Why were most manufacturing firms in the modern sector partnerships? Legal characteristics of the partnership form made it difficult for partnerships to attract outside equity investment from impersonal, formal capital markets and thereby may have limited the amount of capital that could be aggregated in a single firm. In particular, joint and several liability of partners for the obligations of the partnership surely gave outside investors pause in taking an equity position in a partnership. Partnership interests lacked the liquidity of transferable joint stock shares with an active secondary market. Furthermore, partnerships did not have the default liquidation protection of joint stock firms; partners’ personal creditors could force partial liquidation of the firm’s assets. With all of these deficiencies, why then were manufacturing firms in the modern sector overwhelmingly organized as partnerships?
In the period roughly between 1690 and 1725, the first key ingredients of a modern capital market developed in England. First and foremost among these was the development of a market for government securities. Under William of Orange, the government began issuing perpetual annuities made free of risk of default.13 Three chartered business corporations rose to ascendancy in this period: the East India Company, the Bank of England, and the South Sea Company.14 These so-called “moneyed companies” played a unique role in facilitating the financing of the government debt, and their success was associated with legal privileges that granted them exclusive rights and restricted entry into their markets. The success of these financial innovations facilitated the development of the first stock market institutions in London, including a stock exchange,
In turn, the development of primitive capital market institutions led to a boom in joint stock company formation. By 1695, some 150 joint stock companies were in existence.15 However, with the important exception of the moneyed companies, most of these companies were short lived, and by 1717, only three companies other than the moneyed companies were listed on the Course of the Exchange, an early financial publication.16 This development of the first capital market institutions in England, known as the “Financial Revolution,” was primarily focused on public finance rather than the finance of business. On the eve of the Industrial Revolution, the London stock exchange still played little role in funneling savings into private capital investment.
The concern that delegating control would result in mismanagement was reflected in the popular pamphlets distributed in the period.100 And contemporary political economists shared this view, including, perhaps most famously, Adam Smith, who wrote:
The directors of [joint stock companies], . . . being the managers rather of other people’s money than of their own, it cannot be well expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. . . . Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. . . . They have, accordingly, very seldom succeeded without an exclusive privilege; and frequently have not succeeded with one.
After the 1720 Bubble Act we witness a +100 years hiatus on the capital market that was characterized by war, Napoleonic Wars (1803–1815), Fourth Anglo-Dutch War (1780–1784), American War of Independence (1775–1783), we witness the rise of power of the Rothschilds family and the bankruptcy of the Dutch East India Company (VOC) 15 years after losing the war to the British. One area of the capital market that sees itself prospering was the insurance business with the emergence of Lloyd’s that make London an insurance powerhouse.
The Gold Standard Industrial Revolution
In modern times, the British West Indies was one of the first regions to adopt a gold specie standard. Following Queen Anne's proclamation of 1704, the British West Indies gold standard was a de facto gold standard based on the Spanish gold doubloon. In 1717, Sir Isaac Newton, the master of the Royal Mint, established a new mint ratio between silver and gold that had the effect of driving silver out of circulation and putting Britain on a gold standard.[self-published source]
A formal gold specie standard was first established in 1821, when Britain adopted it following the introduction of the gold sovereign by the new Royal Mint at Tower Hill in 1816. The United Province of Canada in 1854, Newfoundland in 1865, and the United States and Germany (de jure) in 1873 adopted gold. The United States used the eagle as its unit, Germany introduced the new gold mark, while Canada adopted a dual system based on both the American gold eagle and the British gold sovereign.
Australia and New Zealand adopted the British gold standard, as did the British West Indies, while Newfoundland was the only British Empire territory to introduce its own gold coin. Royal Mint branches were established in Sydney, Melbourne, and Perth for the purpose of minting gold sovereigns from Australia's rich gold deposits.
The gold specie standard came to an end in the United Kingdom and the rest of the British Empire with the outbreak of World War I.
From 1750 to 1870, wars within Europe as well as an ongoing trade deficit with China (which sold to Europe but had little use for European goods) drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller numbers, and there was a proliferation of bank and stock notes used as money.
In the 1790s, the United Kingdom suffered a silver shortage. It ceased to mint larger silver coins and instead issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, the Bank of England began the massive recoinage programme that created standard gold sovereigns, circulating crowns, half-crowns and eventually copper farthings in 1821. The recoinage of silver after a long drought produced a burst of coins. The United Kingdom struck nearly 40 million shillings between 1816 and 1820, 17 million half crowns and 1.3 million silver crowns.
The 1819 Act for the Resumption of Cash Payments set 1823 as the date for resumption of convertibility, which was reached by 1821. Throughout the 1820s, small notes were issued by regional banks. This was restricted in 1826, while the Bank of England was allowed to set up regional branches. In 1833 however, Bank of England notes were made legal tender and redemption by other banks was discouraged. In 1844, the Bank Charter Act established that Bank of England notes were fully backed by gold and they became the legal standard. According to the strict interpretation of the gold standard, this 1844 act marked the establishment of a full gold standard for British money.
In the 1780s, Thomas Jefferson, Robert Morris and Alexander Hamilton recommended to Congress the value of a decimal system. This system would also apply to monies in the United States. The question was what type of standard: gold, silver or both. The United States adopted a silver standard based on the Spanish milled dollar in 1785.
Permanent issue of banknotes
The sealing of the Bank of EnglandCharter (1694). The Bank began the first permanent issue of banknotes a year later.
The modern banknote rests on the assumption that money is determined by a social and legal consensus. A gold coin's value is simply a reflection of the supply and demand mechanism of a society exchanging goods in a free market, as opposed to stemming from any intrinsic property of the metal. By the late 17th century, this new conceptual outlook helped to stimulate the issue of banknotes. The economist Nicholas Barbon wrote that money "was an imaginary value made by a law for the convenience of exchange." A temporary experiment of banknote issue was carried out by Sir William Phips as the Governor of the Province of Massachusetts Bay in 1690 to help fund the war effort against France.
The first bank to initiate the permanent issue of banknotes was the Bank of England. Established in 1694 to raise money for the funding of the war against France, the bank began issuing notes in 1695 with the promise to pay the bearer the value of the note on demand. They were initially handwritten to a precise amount and issued on deposit or as a loan. There was a gradual move toward the issuance of fixed denomination notes, and by 1745, standardized printed notes ranging from £20 to £1,000 were being printed. Fully printed notes that did not require the name of the payee and the cashier's signature first appeared in 1855.
Central bank issuance of legal tender
Originally, the banknote was simply a promise to the bearer that they could redeem it for its value in specie, but in 1833 the second in a series of Bank Charter Acts established that banknotes would be considered as legal tender during peacetime.
Until the mid-nineteenth century, commercial banks were able to issue their own banknotes, and notes issued by provincial bankingcompanies were the common form of currency throughout England, outside London. The Bank Charter Act of 1844, which established the modern central bank, restricted authorisation to issue new banknotes to the Bank of England, which would henceforth have sole control of the money supply in 1921. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold or up to £14 million in government debt. The Act gave the Bank of England an effective monopoly over the note issue from 1928.
The previous attempt to issue banknote before the Bank Charter Act of 1844 resulted in many failed attempt plagued by massive inflation, which fuelled bubble like the South Sea Company and the Missippi Company.
ARC: Inside this era, five major developments occur for the capital market, insurance market becomes structured, paper money becomes legal tender, central banking, public bond for financing war, and unincorporated company partnership.
One similarity that strikes me is the development of unincorporated partnership during the early era of the industrial revolution with the after effect of the Bubble Act and the development of the tech startup ecosystem after the dot.com bubble burst.
The insurance market is a major thing, when XL Catlin start providing insurance for crypto exchange  this is where bitcoin did breakout from is the bottom range of ($200-$300 USD).
I always say the equivalence of proof of stake is crypto fiat, now we are the early days of central banking service for staking commonly know Staking as a Service , Why Coinbase’s Move Into Proof-of-Stake Matters. With the latest development into stable coin and crypto lending, the seed is planted for a Mississippi Company bubble 2.0.
Thanks for reading, I truly apologize for not producing a better series, I’m lacking time, we are always looking to add more contributor to join Teamo mission “Where Teamwork Matters”. To be a Teamo contributor you need to ask yourself two questions, the first question are you ready to “create richness” for all stakeholders, the second question are you ready to “share the pursuit of happiness”, if the answer yes on both questions welcome on board.