Complete Histories: Bank of England to 1694

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The stock for which Global Financial Data has the longest history is the Bank of England stock, or as it was originally known, the Governor and Company of the Bank of England.

The origin of the Bank of England lies in naval warfare.  In 1694, the French had the strongest navy in the world and following the 1690 Battle of Beachy Head, England needed to rebuild its navy, but King William III lacked the resources and the credit to do so.

This problem was resolved by creating the Bank of England.  In exchange for creating a limited liability corporation, which would act as a bank for the government and have the right to issue banknotes, the shareholders would loan the bank £1,200,000 at 8% interest.  The Royal Charter was granted on July 27, 1694 and the £1,200,000 was subscribed in only 12 days.  Over time, the Bank of England took on the responsibilities of managing the government’s debt, becoming a banker’s bank, controlling interest rates through discounting and establishing a base interest rate, having the exclusive right to issue banknotes within 20 miles of London, and then within the entire country, and the other duties that are now associated with a central bank.

The Bank of England was nationalized on October 29, 1945.  Shareholders received £400 in bonds for each £100 in par value of bank stock with bonds paying 3% interest (as opposed to the 12% yield) with bonds redeemable at par on April 5, 1966.

The Bank of England’s stock traded for over 250 years before its nationalization.  The stock participated in the South Sea Bubble of 1720, though only doubling in price rather than showing the ten-fold increase South Sea Stock enjoyed before collapsing. The Bank of England stock, along with East Indies Co. stock and South Sea Co. stock were the three companies whose shares were safe enough, because of their government connection, to trade regularly on the London Stock Exchange during the eighteenth century.  Until the rise of canals and the liquidity created by the Napoleonic Wars, stock trading remained almost non-existent between 1720 and 1800.

Only British government bonds were safer than Bank of England stock; however, Bank of England stock had the potential for dividend increases that the government stock did not. Although the dividend fluctuated in its first dozen years, the dividend settled down to infrequent changes after the 1720 South Sea Bubble.

As you can see by the 250-year chart of Bank of England stock, the shares showed no real trend during the 1700s, rose in price during the Napoleonic Wars as England left the gold standard and suffered inflation, declined in price from around 1818 to 1845 during the deflation that followed, rose in price for the rest of the 1800s as the Bank gradually increased its dividend, plunged until 1920 as inflation occurred without any compensating rise in the dividend, then gradually rose in price until the Bank was nationalized in 1945. The behavior of the Bank of England’s stock encapsulates the general behavior of the British stock market over that 250-year period.

Bank of England stock was about as safe as they come.  There was virtually no risk of bankruptcy since the Bank was backed by the British government.  The Bank’s stock could participate in market fluctuations because the Bank could raise its dividend as profits rose.  This provided investors some protection against inflation.

By contrast, British consols, which were originally issued in 1729 and still trade today cannot raise their interest payments.  In fact, as a result of two refundings, the consols pay 2.5% today rather than the original 3%, while the dividend on Bank of England stock rose from 8% in 1694 to 12% in 1945 and the price of the stock quadrupled over time.

Nevertheless, most of the return to Bank of England shareholders came through the dividends.  £100 invested in Bank of England stock in 1694, assuming all dividends had been reinvested and there were no taxes, would have resulted in £41,870,819 by 1945.  By contrast, £100 invested in British Government consols during the same period would have resulted in only £2,637,476, a 20-fold difference. Bank of England stock clearly provided the superior return.  Of course, in order to have gotten this, you would have had to live 250 years, but let’s not waste our time on details.

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Ralph Dillon
Complete Histories: Bank of England to 1694, August 12, 2013
Global Fianancial Data

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