A 1690s Stock Market Bubble

The 1690s saw major developments supporting London’s role as a financial center. During that decade, the Bank of England was founded, the government was raising larger loans to fund a war against France, and the stock market was growing. The latter was driven by the founding of many new companies and initial public offerings that placed shares in the hands of a wider group of investors. Activity was brisk enough to set off a stock market bubble in the early 1690s, one which deflated sharply by 1696.

Financial Innovations

In London, the 1690s were a decade of ‘Financial Revolution’. Financial and commercial practices became more sophisticated and took place on a larger scale. This was not all home grown; Dutch and Huguenot immigrants to England, the latter leaving France when laws there became less welcoming of Protestants, brought financial capital and commercial expertise to their new country.

These newcomers also founded companies that would raise capital and bring more activity to the London financial markets. For example, Huguenots were associated with the creation of the ‘White Paper’, ‘Linen’ and ‘Lustring’ companies in the 1680s, the shares of which would feature prominently in the coming bubble. Further reinforcing the foreign origins of finance in London at the time, the set of novel practices introduced into English finance were sometimes referred to simply as ‘Dutch finance’.

The 1680s and 1690s saw credit become more available. A credit instrument, the bill of exchange, became so common that by the 1690s, the volume of bills outstanding was believed to exceed currency in circulation.

These years also saw a few successful ventures plant seeds in the minds of investors and speculators. The success of the English East India Company, paying out large dividends to its investors, provided new capital for investment. These shares delivered a 1,200% return between 1660 and 1688. Inspiration for new speculative ventures also came in part from a very successful treasure-hunting partnership of William Phipps in 1687, who delivered his partners a return of 10,000% when he came across a horde of Spanish precious metals in a shipwreck.

Joint-Stock Companies

The formation of new companies accelerated after William Phipps returned with treasure. Many of these companies, established by ‘projectors’ as their founders and promoters were called, were literal treasure-hunting projects in the manner of William Phipps. These ventures for ‘taking up wrecks out of the sea’ were setting out for waters from Portugal to Jamaica. One such company, the Company for Raising Wrecks in England, received a patent for a diving bell. The writer and financial speculator Daniel DeFoe was employed as secretary-treasurer for one of these companies. That said, projectors extended their company formation activity beyond these shipwreck diving ventures.

The Company for Raising Wrecks in England was not unusual in receiving a patent. Patenting some new product was a common practice of the projectors. Between 1691 and 1693, sixty-one new patents were given to joint-stock companies and their sponsors, the quickest pace up to then and the most until the 1760s. For comparison, the prior pace had been about two a year. These patents included ones for burglar alarms and fishing implements, but the largest category of patents was for military supplies.

The recipients of patents were not entirely the same as those in earlier eras. It seems Dutch and Huguenot immigrants obtained a large fraction of these many extra patents. Between 1660 and 1699, more wholesalers and financiers were identified in patent documents than were craftsmen and manufacturers; though courtiers and those in or near government were still the largest cohort.

Some of the projectors were active in many different ventures simultaneously. One was Thomas Neale, a Member of Parliament and head of the Mint, who was connected with thirty-nine ventures and ten attempted English and Irish patents of which five were obtained. Another was Ralph Backnall, a brewer also involved in water and sewer utilities; he was involved in at least four companies.

In all, perhaps one hundred new joint-stock companies were formed in England between 1688 and 1695. As there was a war underway against France, the War of the Grand Alliance, some of these companies were founded to replace imports that were no longer available. Others related to the war effort more directly, either producing weapons or financing the war. The Bank of England, formed in 1694, was one of the latter. New companies established in this era also included insurance firms.

IPOs

Companies formed in the early 1690s and earlier began raising larger sums from new investors in public offerings; twenty-three major joint stock companies offered shares to the public between 1691 and 1695. Among them was the Royal Lustring Company, established to manufacture a French cloth product no longer available due to the war, which raised £62,000.

Eager to heighten interest from investors, projectors realized that patents could form part of a publicity strategy. Accordingly, old patents that had lapsed were reintroduced and new ones were secured as well. In some cases, patents themselves were divided into shares without companies being formed at all. For example, John Williams, a patent holder for a diving suit to recover shipwrecked treasure, divided his patent into 600 shares of £20 each; Daniel DeFoe invested in this venture, buying ten shares. A brass-making company, supported by a patent and backed by Thomas Neale, raised £12,000. The Company of Glassmakers, also supported by a patent, raised £25,000 during a spate of IPOs.

Shares were attractive investments because they were somewhat liquid securities that could serve as a store of wealth in a period when merchants were unable to deploy financial resources in trade ventures while much seaborne trade was disrupted. During the war, investors in these new companies included prominent men in trade like John Hearne, a Member of Parliament and governor of the East India Company.

“a great many stocks have arisen since this war with France; for trade being obstructed at sea, few that have money were willing it should lie idle, and a great many that wanted employment studied how to dispose of their money, that they might be able to command whensoever they had occasion, which they found they could more easily do in joint-stocks, than in laying out the same in lands, houses or commodities, these being more easily shifted from hand to hand” – John Houghton in A Collection for the Improvement of Husbandry and Trade

Trading Bubble

The early-to-mid-1690s were not just years of more frequent IPOs, trading on London’s stock market was also more rapid than usual. By 1695, the combined capitalization of British companies was £4.5 million, though most of this in East India Company and Bank of England stock alone. In the past, older joint-stock companies had a few concentrated owners and thus their shares traded little. The new companies’ shares, by contrast, were bought by a multitude of smaller investors and their shares traded hands more often. That said, even trading activity in the older companies did pick up. The transfer books of the Hudson’s Bay Company record only twenty-six trades in 1689, but 149 in 1691, and 109 in 1692.

Later map (1740s) of Exchange/Change Alley

A publication called A Collection for the Improvement of Husbandry and Trade tracked stock prices and increased its listed shares from ten in 1682 to fifty-seven by 1694. Actually engaging in the work of trading shares were ‘jobbers’ and brokers. Stockjobbers, or jobbers, were akin to market makers buying and selling shares which they often held in inventory, at least for short periods. Brokers meanwhile arranged trades on a commission basis. Their trading was done at Change Alley, between Cornhill and Lombard Street, and Jonathan’s Coffee House, which opened in 1680. This was the London Stock Exchange in the late-17th century.

Standardized share sale agreements were in use, but not all trades were simple. Already in the 17th century, many traded in derivatives of shares, mostly stock options. The ledgers of one broker, Charles Blunt, a cousin of the man would be one of the projectors behind the South Sea Bubble over twenty years later, show that his clients conducted 576 derivatives trades between 1692 and 1695 or about 39% of the transactions in his ledgers.

Example of a standard options contract (Source: Guildhall Library London, Papers of Thomas Bowrey, MS3041/9; retrieved via Anne L. Murphy’s The Origins of English Financial Markets)

Stock prices generally rose as a bubble got underway. Shares in Estcourt’s Lead Mine rose from £10 to £17 between February and October 1693 alone. Longer term gains were extraordinary too; shares in the Linen Company rose from £10 to £45 between 1690 and 1693. DeFoe wrote that shares in the East India Company traded at three-to-four times their intrinsic value.

Crash

The stock market firmly turned in 1696. This was attributed to rising wartime taxes, the recoinage of the money supply, and a run on the banks, including the Bank of England. The recoinage was forced by a long degradation in the quality and quantity of coins in England partly caused by the high value of precious metals during the war. It led people to hoard or export old coins that were being demonetized, driving them out of circulation and reducing the money supply. In any case, the companies formed in the boom years often themselves did little to develop a business around the patents obtained. So, some of the change was simply a product of the companies’ management and their outcomes.

Some didn’t even make it to 1696 as various ventures turned into disasters well before then; Daniel DeFoe was bankrupt with debts of £17,000 by 1694. The Company of Glassmakers also seems to have done poorly, its shares falling and then disappearing from the market altogether in 1694. The pace of new patents had already slowed from about twenty per year in 1691-93 to 11 in 1694. Trading activity had been cooling off somewhat after 1692 too. The transfer books of the Hudson’s Bay Company show that trading activity returned to pre-bubble levels in 1696 but had already been sliding since a 1691 peak.

During the crash, White Paper Company shares dropped 70%, as did those in the Hudson’s Bay Company. Linen Company shares dropped 90%. Companies were also dissolving regularly. In fact, a majority of the joint-stock companies in existence in England and Scotland in 1693 would fail by 1696.

The crisis dissipated by March 1697, perhaps driven by the prospects for peace. Financial market activity would not inflate once more until the South Sea Bubble. Patent applications also cooled off. Just three patents were granted in 1697 and in the next decade, nearly all years would see five or fewer patents enrolled. New regulations were brought in after the crash but many of these simply confirmed rules already in existence. They regulated the number of jobbers and brokers, banned proprietary trading, and capped broker commissions. Trades in derivatives were to be registered but it seems that many trades, and perhaps the activities of brokers altogether, occurred on an unregistered basis regularly.

Lesson

In stimulating financial market activity, the war against France, underway in the 1690s, was a rather double-edged sword. In the beginning, the war encouraged the creation of new companies. Also, wealth previously invested in ships and inventories engaged in seaborne trade was being diverted into new ventures. However, the war also resulted in new taxes and a recoinage of English money that was to a rather considerable degree a botched exercise. These contributed to a crash by 1696. However, the stimulus of war arrived well before its destruction.

More from the Tontine Coffee-House

Read about how the Bank of England was founded to raise a loan in the War of the Grand Alliance, the recoinage of English money in 1696, and ‘Million Adventure Lottery’ organized by Thomas Neale. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.