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Abstract
Price bubbles provide a unique opportunity to study the financial acumen of shareholders. We focus on the 1720 South Sea episode as experienced by the Royal African Company whose stock was more speculative than other joint stocks. During 1720 the company had a new large stock issue. This paper examines the financial acumen of those women who traded senior and engrafted stock across 1720. We find that depending on the pricing regime, these women at worst broke even on their activities or had positive speculative gains. Our findings are consistent with a growing literature on the positive link between gender, capital gains and financial markets.
Acknowledgements
The authors gratefully acknowledge the financial support of the National Science Foundation for this project and wish to thank the editor and referees for their many helpful suggestions. All errors unfortunately remain our own.
Notes
1. Theoretical work in the area of endogenous growth shows that financial intermediation can increase not only the level of growth but also the rate of growth for an economy. Models, as exemplified by the work of Bencivenga & Smith (Citation1991: pp. 195–209), Romer Citation(1989), Levine (Citation1991: pp. 1445–1465), Greenwald & Stiglitz (Citation1993: pp. 77–114), and Greenwood & Jovanovic (Citation1990: pp. 1076–1107), demonstrate how financial markets can generate economic development.
2. Secondary markets in securities, as in any re-sale market, obviously need formal institutions to enforce contracts and property rights and informal institutions that enable participants to trust each other without elaborate contracts or constant litigation. The formal institutions were already in place in England by 1689 and the informal institutions were probably in place by 1720.
3. It was not until the mid–1850s with the General Limited Liability Act that companies could achieve limited liability status without individual parliamentary approval.
4. There was, in effect, competition between these three companies for the right to be involved in refinancing operations. In the 1720 swap, the South Sea Company might have faced a winner's curse where the price the South Sea Company paid for the right to undertake the debt/equity swap was higher then the return it made from the operation.
5. The book value of £100 provides an index against which to measure the market price.
6. All trading companies were seriously affected by these wars, but the Royal African Company may have been even more seriously affected. The Navy tried to provide protection to the merchant marine by having ships sail in convoys with naval protection. However, the timing of Royal African trade was such that it was not able to take advantage of the convoys and thus was more open to piracy (Carlos & Kruse, Citation1996).
7. In fact, because there was no legally defined mechanism for doing so, it was very difficult to wind up a joint-stock chartered company.
8. This agreement with Joseph Taylor occurred one week before the first South Sea Company money subscription for £2,250,000. Little is known about Joseph Taylor other than that he was a merchant in the City. He appears nowhere else in the available records of the Royal African Company. However, one Joseph Taylor, esq., of London bought £500 of Bank of England stock on 27 April 1720. There is another record for a Joseph Taylor, merchant, of Surrey who bought £4,100 of Bank of England stock on 5 May 1720. We do not know if these are all the same Joseph Taylor.
9. For Chandos' role in the Pitt/Middleton/Law bet on East India Company stock, see Neal (1994). In 1744, the Duke of Chandos' estate, Canons, had to be razed and parts sold to reduce his debts.
10. Buying by installments was the common procedure: in this case, 5 per cent payable on 1 June, 5 per cent payable on 1 September, and 7 per cent payable on 1 December 1720 The Minute Book of the Royal African Company Court of Assistants (T70/90) gives the installments as noted in the text. In undated, unsigned loose pages at the back of Minute Book of the General Court (T70/101), the reported installments pattern has an up-front payment of 5 per cent. The potential existence of this extra 5 per cent does not change the model or the results presented in the next sections and the initial selling price still remains lower than the book value and higher than the price paid by Joseph Taylor.
11. It was because of this promised dividend that the Company had to record the stock transfers of the engrafted stock in a separate transfer book until after the dividend payment. The transfer books were also used to determine ownership and hence the right to vote in the company's General Court; to be eligible to stand for the Court of Assistants; and also in some issues pertaining to the posting of bonds for company servants.
12. The price data, compiled by Larry Neal, are available from the Inter-University Consortium for Political and Social Research at the University of Michigan at www.icpsr.umich.edu. See ‘Course of the Exchange, London 1689–1823 and Amsterdamsche Beurs, Amsterdam, 1723–1794′.
13. Assuming that all similarly named individuals are indeed the same person biases the level of market activity downwards in that we get a potential underestimate of the number of people involved in the market. The Bank of England dealt with this issue by designating same named but different individuals with a number, i.e. John Smith (1), John Smith (2) in the Alphabet ledgers.
14. We do not have information on the exact price at which any person sold or bought, so we attribute the average price for the day to all shares traded on that day. The Royal African Company, as with the other joint-stock companies, was not interested in the price any given person paid for his or her shares but rather to know which individuals owned the Company's stock.
15. Another benchmark is to ask what £24 in the eighteenth century would be worth today. The current value of £24 valued using a price index is £2,626 (John McCusker, ‘How Much is That’ www.eh.net).
16. This decision to allow shareholders to mortgage shares back to the company for cash was announced one week after the registration of redeemable annuities at the Bank of England and one month after the books of the South Sea Company were closed in preparation of payment of a £10 per share dividend. The closing of the books meant that no transfers could be registered. This was standard practice at the time and was done to allow companies to determine current ownership of shares and payment of dividends. An interesting question is where the money for this mortgage programme came from. The company did have the money it received from Joseph Taylor, but it clearly needed more than this to run the programme. Unfortunately, we do not have the complete cash books for the company. The quotation given does say that the company has cash on hand. How much it was and from where it came is unknown.
17. Because we are working with the transfer books for the Royal African Company, we only know if those who mortgaged stock purchased more Royal African Company shares because that would be listed in the transfer books. However, part of a larger project entails the creation of asset ownership by individuals which would provide information on portfolio holdings by individuals before, during and after the South Sea Bubble.
18. In addition, in November, the Company announced a new schedule for the last payment of 7 per cent owed on the engrafted shares; payable now in two separate payments of 4 per cent and 3 per cent respectively.
19. Market activity in 1720 in all joint-stock company shares was high. As noted earlier, the capital stock of the Royal African Company (£450,000) turned over one and a half times. However, this company was not an outlier, the capital stock of the Bank of England (£5,559,995) and that of the East India company (£3,194,080) also turned over one and a half times. In addition there was the activity in the South Sea company with its roughly £11 million of capital stock.
20. Those most active in the market tended to be goldsmith bankers or others involved in financial services activities, such as William Mead, Solomon Fernandez Nunes and George Middleton, who played the role of broker. Their activities drove up the average size of the per person transaction.
21. Because the holders of the senior stock were compensated for this new offering with the promise of a 10 per cent dividend in April 1721, the difference in dividend payments meant that these two shares bore different market prices. In all other respects the senior and engrafted shares were indistinguishable and the correlation between the movement in the price of both stocks is very high at 0.9962.
22. In order to do this for the senior stock we would have, in effect, to recreate the ledger books determining when any given individual obtained her stock.
23. While no person should be listed as selling only, there are a few women for whom we have no purchase recorded. This probably reflects the volume of transfers that had to be recorded in a very short space of time.
24. The total book value of engrafted stock mortgaged was £124,000 but only £41,400 was redeemed. All of those redeeming their stock were men.
25. In her will, probated 12 July 1754, she refers to her nephew, Earl Ferrars (TNA, Prob. 11/709: Last Will and Testament, Lady Anna Elinora Shirley).
26. Lady Evelyn Pierrepont (d. 1727) married John Leveson Gower (1694–1754). He was created Earl Gower in 1746.
27. We are immensely grateful to an anonymous referee for this quotation and source.