England
Founded: 1694
Nationalized: 03/31/1946
Annual Return from 1694 to 1946: (Bank 5.26%, Stocks 5.79%, Bonds 3.97%)
Shares Outstanding: 1694 (12,000 shares), 1708 (31,750 shares), 1717 (51,750 shares), 1722 (91,750 shares), 1728 (101,000 shares), 1746 (116,868 shares), 1816 (148,868 shares), 1835 (145,530 shares)
Market Capitalization: 1694 ($3.16 million), 1725 ($41.32 million), 1750 ($51.80 million), 1775 ($56.392 million), 1800 ($64.47 million), 1825 ($156.51 million), 1850 ($150.69 million), 1875 ($185.21 million), 1900 ($232.13 million), 1925 ($176.09 million), 1945 ($233.646 million)
The Bank of England was founded in 1694 to provide the government money to finance the war against France. In exchange for a perpetual loan, the investors were able to establish the Governor and Company of the Bank of England. As we discussed in Complete Histories – Bank of England Stock, the bank was allowed to issue banknotes, redeemable in silver coin and trade in bills and bullion. The bank could hold deposit accounts and issue deposit receipts/checks. The bank issued loans by discounting bills and provided loans to the East India Company and the South Sea Company. The bank received a monopoly in 1697, which was strengthened in 1708. The bank consolidated its role as banker to the government in 1715 when it took on the responsibility of managing the government’s debt. In 1775, the Bank received a virtual monopoly on issuing banknotes when a minimum denomination was placed on banknotes. Britain went off the gold standard in 1797 but returned to the gold standard in 1821.
Great Britain had note issuing banks in Scotland where the Bank of Scotland, founded in 1695 and the Royal Bank of Scotland, founded in 1727, existed, and in Ireland where the Bank of Ireland (founded 1783) issued banknotes. Joint-stock banking and branching did not exist in England, though it did in Scotland, until 1826. As the number of banks in England grew, the Bank of England began to act like a central bank, overseeing the country’s banking system. In 1833, joint stock banks were allowed to operate in London, though not to issue banknotes, and Bank of England notes were declared legal tender. The Bank acted as lender of last resort during both the Overend, Gurney and Co. crisis in 1866 and the Barings Brothers Crisis in 1890. The Bank was formally nationalized in 1946 with shareholders receiving 3% bonds in exchange for their stock. The bank was independent and changed its discount rate to protect the nation’s gold reserves; however, the Bank and government clashed in 1917 and the Bank became subservient to the Treasury.
During most of its history, from 1694 until the 1860s, the Bank of England had the largest market capitalization of any corporation in the world. In 1865, the London and Northwestern Railway became larger than the Bank of England and the Standard Oil Company became bigger than the L&NW Railway in 1890. Both the Bank of England and the London and Northwestern Railway were nationalized after World War II.
As Figure 11 shows, Bank of England stock followed the path of the stock market in the 1700s, though it underperformed overall. The stock performed well during the first quarter and last half of the 1800s but underperformed severely during the first 20 years of the twentieth century as interest rates and inflation rose. The stock bounced back after World War I.
Figure 11. Bank of England stock and UK-100 Stock Price Index, 1694 to 1946
France
Founded: 1800
Nationalized: 1946
Annual Return from 1801 to 1946 (Bank 6.58%, Stocks 6.84%, Bonds 5.28%)
Shares Outstanding: 1801 (30,000 shares), 1803 (45,000), 1806 (90,000), 1849 (91,250), 1857 (182,500)
Market Capitalization: 1801 ($7.57 million), 1825 ($34.13 million), 1850 ($39.41 million), 1875 ($136.31 million), 1900 ($135.59 million), 1925 ($93.34 million), 1945 ($52.91 million)
The Caisse des Comptes Courants was dissolved and reorganized as the Banque de France in 1800. After the collapse of the assignats, Napoleon wanted a new bank to manage the public debt and discount government paper. Its competitor, the Caisse d’Escompte du Commerce was forced to merge with the Banque de France in 1802. In 1803, the Banque de France received the exclusive right to issue banknotes. Nine regional banks were formed between 1817 and the 1830s which had the right to issue banknotes, but after the banking crisis of 1848, the Banque de France regained its monopoly over issuing banknotes. Government financing demands led to a lack of convertibility in 1813 and between 1848 and 1850. Banknotes were made legal tender during these periods, and they permanently became legal tender in 1870. Convertibility of the Franc was suspended in 1936 when France went off the Gold Standard. The Banque de France had the most extensive branching system in France until the early 1900s, extending to 160 branches in 1900 and 259 branches in 1928. Between 1800 and 1936, there was no provision for direct government involvement in the bank, though few major decisions were taken without consulting the government. In 1945, the Banque de France was nationalized.
As Figure 12 shows, Banque de France stock suffered major declines during the Napoleonic Wars and during the 1848 revolution. The stock increased in price during the inflations of the 1920s and 1940s. Other than that, the bank followed the path of the French stock market.
Figure 12. Banque de France stock and France All-Tradable Index, 1800 to 1946
Germany
Founded: 1876
Nationalized: 1945
Annual Return from 1847 to 1875 (Bank, 8.5%, Stocks 4.16%, Bonds 4.64%)
Annual Return from 1876 to 1945: (Bank 44.44%, Stocks 44.92%, Bonds 44.61%)
Shares Outstanding: 1847 (150,000 shares), 1860 (200,000), 1876 (1,200,000), 1901 (1,500,000), 1904 (1,800,000), 1923 (1,500,000), 1939 (2,700,000)
Market Capitalization: 1847 ($12.52 million), 1860 ($19.25 million), 1875 ($32.26 million), 1876 ($43.67 million), 1900 ($42.56 million), 1925 ($47.7 million), 1944($156,530 million)
Germany has had several central banks during the past two hundred years reflecting the political changes that have occurred in Germany. The Royal Giro and Loan Bank was established by Frederick the Great in 1765 to help aid the reconstruction of Germany after the Seven Years’ War. In the 1800s local states and principalities established banks which also had the right to issue currency. The Prussian government established the Prussian Bank in 1846, which functioned as both a bank of issue and a discount bank. The bank acted as a lender of last resort during the Banking Crisis of 1857. The number of note issuing banks rose from 9 in 1851 to 27 by 1857 and 54 by the 1870s. By the 1870s, paper money represented only about 25% of the circulating money supply, and two-thirds of the banknotes were issued by the Prussian Bank. The performance of the Prussian Bank with the general stock market is illustrated in Figure 13. The Bank suffered severe declines in 1854, 1857-1859 and 1866. Overall, the Prussian Bank outperformed the stock market in general.
Figure 13. Prussian Bank and German Composite Index, 1846 to 1875
After Germany was unified in 1871, the Mark was adopted as the new unit of account and Germany adopted the Gold Standard in the Coinage Acts of 1871 and 1873. The Reichsbank replaced the Prussian Bank in 1876 with shareholders receiving one share of the Reichsbank for one share of the Prussian Bank. The Reichsbank took on the responsibilities of the Prussian Bank and acted as both a direct lender to business and as a lender of last resort to the banking system. Only four banks were allowed to issue currency after the 1870s. The Reichsbank was privately owned but managed by the government. The Reichsbank adjusted its discount rate to maintain its reserves and used open-market operations to influence the economy. During World War I, the Reichsbank’s main duty was to fund the war and when Germany was forced to provide reparations after the war, the result was hyperinflation.
A new currency, the Rentenmark, was issued in 1923 by the Rentenbank. In 1924, a new, and independent, Reichsbank was formed to oversee Germany’s financial system. The Reichsbank gradually lost its independence and in 1937, the Reichsbank became subject to Hitler’s instructions. The Reichsbank was dissolved in 1945. The Bank Deutscher Länder and regional central banks replaced the Reichsbank in 1948. The capital of the Bank Deutscher Länder was owned by the regional central banks. The Bank Deutscher Länder could issue notes, undertake open market operations, dictate discount rates and act as the government’s bank. The Bundesbank replaced the Bank Deutscher Länder in 1957 whose principal duty was to safeguard the value of the German currency. The Bundesbank was instrumental in the founding of the European Central Bank.
Figure 14. Reichsbank stock price, 1876 to 1944
Indonesia/Netherlands Indies
Founded: 1828
Nationalized: 1951
Annual Return from 1877 to 1950 (Bank 5.19%, Stocks 6.03%, Bonds 3.84%)
Shares Outstanding:1827 (60,000 shares), 1922 (90,000 shares)
Market Capitalization: (1877, $4.17 million), 1900 ($4.29 Million), 1925 ($11.79 million), 1950 ($2.64 million)
De Javasche Bank was founded on January 24, 1828, and was nationalized in 1951 Its name was changed to the Bank Nasional Indonesia on July 1, 1953. The Java Bank issued currency, regulated the Netherlands Indies Gulden, and acted as a commercial bank along with the Netherlands Trading Society, Nederlandsch-Indische Handelsbank and the Nederlandsch-Indische Escompto Maatschappij. When the Japanese invaded the Netherlands Indies in 1942, they shut down the Java Bank and replaced it with their own central bank, the Southern Development Bank. The Java Bank reopened in the summer of 1945 after the Japanese surrendered.
Between 1877 and 1950, De Javasche Bank stock underperformed the index for the Netherlands Indies; however, Java Bank stock outperformed bonds. A comparison of the two is provided in Figure 15 which also shows that Java Bank stock was less volatile than the stock market in general.
Figure 15. De Javasche Bank stock and Netherlands Indies Price Index, 1877 to 1930
Netherlands
Founded:1814
Nationalized: August 1, 1948
Annual Return from 1816 to 1942: (Bank, 6.38%, Stocks, 6.19%, Bonds, 4.66%)
Shares Outstanding: 1816 (50,000 shares), 1840 (100,000 shares), 1864 (150,000 shares), 1899 (200,000 shares)
Market Capitalization: 1816 ($2.09 million), 1825 ($2.79 million), 1852, ($5.09 million), 1875 ($20.79 million), 1900 ($15.68 million), 1925 ($15.32 million), 1942 ($15.17 million)
The French ended their occupation of the Netherlands in 1813. The country was in a depressed condition, so King William I decreed that De Nederlandsche Bank would be established in March 1814 to promote economic recovery. The Bank would rediscount trade bills, extend secured advances, trade precious metals and receive current account funds for the government. In 1838 when its charter was renewed, the Bank was allowed to extend its deposit activities to the private sector and to discount paper besides bills. The Bank Act of 1863 formally restricted other institutions from issuing banknotes and changed the legal status of the bank to a limited company. The Bank became a bank to other banks and acted as a lender of last resort during the financial crisis of 1857.
The Nederlandsche Bank was nationalized in 1948 and was given the duty to regulate the nation’s money and keep the value of the currency stable. The bank ended its commercial banking functions in 1948. The government did not own any shares in the bank between 1847 and 1948 when it was nationalized. The success of the Nederlandsche Bank’s management of the currency is reflected in the fact that the Netherlands was one of the few countries whose currency appreciated against the US Dollar in the twentieth century. As Figure 16 shows, De Nederlandsche Bank underperformed the Dutch stock index between 1873 and 1940. Although the Bank stock didn’t decline as severely after World War I as the Danish stock market, it did share in the 1929 decline, though it recovered in the 1930s.
Figure 16. De Nederlandsche Bank stock Price and Netherlands All-Share Index, 1815 to 1942
Spain
Founded: 1856
Nationalized: 1962
Annual Return from 1856 to 1960: (Bank 8.17%, Stocks 5.77%, Bonds 5.74%)
Shares Outstanding:1856 (100,000 shares), 1874 (200,000 shares), 1882 (300,000 shares), 1921 (354,000 shares)
Market Capitalization: 1856 ($12.43 million), 1875 ($32.32 million), 1900 ($108,88 million), 1925 ($146,35 million), 1950 ($16,63 million), 1960 ($19,86 million)
The Banco Nacional de San Carlos was established as a private bank in 1782. The bank extended loans, discounted bills and serviced the nation’s debt. The bank was the only one in Spain authorized to issue its own banknotes. The bank collapsed under the weight of its debts in 1800. The bank was recapitalized in 1829 as the Banco Espanol de San Fernando and took over the functions of the previous bank, including the right to issue banknotes. The bank merged with a smaller bank in 1847 to create the Nuevo Banco Espanol de San Fernando.
A new government in 1856 led to new legislation that changed the bank’s name to the Banco de España. The government strengthened its control over the bank. The bank acted as the government’s bank, issued banknotes, discounted paper, and provided commercial lending and deposit activity. In 1874 when the bank’s charter was renewed, it gained the exclusive right to issue banknotes in exchange for a 135 million pesetas loan to the state. The banknotes were made legal tender. The bank was a lender of last resort during the banking crisis of 1913-1914. The 1921 General Banking Act regulated the bank’s activities as a private bank and as a central bank for the government. It became responsible for regulating the external value of the peseta. During the Spanish Civil War, there were separate Bancos de Espana in the Nationalist and Republican portions of the country, each of which issued their own peseta. It was decided in 1931 that the government would set rediscount rates for the bank, and in 1962, the bank was nationalized. The bank had never had a large degree of independence.
The performance of Banco de Espana stock relative to the Spanish stock market is illustrated in Figure 17. The Banco de Espana avoided the declines of the stock market of the early 1860s, 1880s and 1890s, but the price of the stock remained stable until the Spanish Civil War broke out. After the war, Spanish stocks rose rapidly while Banco de Espana stock rose less.
Figure 17. Banco de Espana stock and Madrid SE General Index, 1854 to 1960
United States – First Bank of the United States
Founded: 1791
Nationalized: 1812 (charter not renewed)
Annual Return from 1791 to 1812: (Bank 4.68%, Stocks 5.20%, Bonds 5.87%)
Shares Outstanding: 1791 (25,000 shares)
Market Capitalization: 1791 ($14.8 million), 1800 ($13.75 million), 1815 ($9 million)
The President, Directors and Company of the United States was founded by Alexander Hamilton as part of his program to provide a sound monetary foundation to the new country. It was chartered for twenty years on February 25, 1791. Speculation in the stock in 1792 led to the first bull and bear markets in the United States. The bank was a national bank that did not set monetary policy, regulate private banks, hold other banks’ excess reserves, or act as a lender of last resort. As we discussed in Did Bernanke Study the First Bank of the United States, the primary purpose of the bank was to issue credit to the private and public sectors and hold government funds. The First Bank of the United States was the only bank in the United States that was allowed to operate across state lines. The government owned $2 million of the bank’s $10 million in stock. Because of opposition to increased federal power, the bank’s charter was not renewed in 1811, and the bank was purchased by Stephen Girard. The bank paid off its shareholders and closed in 1814.
Figure 18. First Bank of the United States stock and GFD US-100 Index, 1792 to 1814
United States – Second Bank of the United States
Founded: 1816
Nationalized: 1837 (charter not renewed)
Annual Return from 1816 to 1837: (Bank 1.94%, Stocks 5.02%, Bonds 5.55%)
Shares Outstanding: 1816 (350,000 shares)
Market Capitalization: 1817 ($54.25 million), 1830 ($45.5 million), 1840 ($22.88 million)
The United States found itself indebted as a result of the War of 1812 and many people thought a second Bank of the United States would provide relief to the economy. The War ended in 1815 and the second Bank of the United States was established by Congress in April 1816 and received a twenty-year charter. The bank had similar duties to the first bank – it would act as a fiscal agent for the government, issue and redeem banknotes, and it would take deposits and act as a commercial bank. The government owned 20% of its $35 million capitalization.
The bank had 25 branches throughout the United States. The bank provided commercial loans to the western part of the United States and helped provide money for the growing economy. The bank did not regulate other banks or act as a lender of last resort. By holding onto state banknotes or redeeming them, the bank could regulate the money supply of the country. Andrew Jackson opposed the renewal of the bank’s charter and the bank failed to get the requisite two-thirds vote of the Congress to override the President’s veto of the bank’s charter. As we discussed in The Bank War, the government withdrew its deposits from the bank and moved them to state banks. The bank became a state-chartered bank in Pennsylvania in 1836, but the bank collapsed during the Panic of 1837. The bank suspended payment in October 1839 and the bank began its liquidation in February 1841.
Figure 19. Second Bank of the United States and GFD USA-100 Index, 1837 to 1856
Conclusion
On average, central bank stocks performed about the same as the stock market, and better than bonds. In some countries, the central banks performed better than the stock market in uncertain times, and in some periods worse. Overall, central banks were a good, safe investment. During the 1700s and early 1800s, there were often few alternatives for investors other than government bonds. In some cases, central bank stocks were the only equity that was available to investors, but over time, countries allowed more commercial banks to come into existence, and during the 1830s and 1840s, the number of railroads exploded as railroads became the principal investment in the stock market.
Both Banks of the United States failed to get their charters renewed, and when the Federal Reserve was established in 1913, the government learned from its mistake. Shares were not made available to the public, but they were owned by commercial banks. The Federal Reserve acted as a bank to other banks, not as a commercial bank. The charter was not placed up for renewal after 20 years, and the Federal government was given control over the operation of the Federal Reserve Bank.
As national banks became central banks and industrials played a more important role in the economy, the performance of central banks relative to the rest of the stock market declined. Beginning in 1936, and especially after World War II, countries began nationalizing their central banks. England, France, and Germany nationalized their central banks immediately after World War II ended. Other countries followed over the next few decades. Today, there are only five central banks that are publicly traded; however, you cannot take control of the central bank by buying its shares, the dividends generally are restricted, and the central banks have underperformed the rest of the market.
Should you add a central bank to your portfolio? Probably not.
Bibliography
Acres, W.M. The Bank of England from Within, Oxford: Oxford University Press, 1931
Austrian National Bank, Striking a Balance: 175 Years of Austrian Central Banking, Vienna, 1991
Banco de Espana, El banco de Espana: Dos Siglos de Historia 1782-1982, Madrid: Banco de Espana, 1982
Bank for International Settlements, Eight European Central Banks, Basle: BIS, 1963
Bank of Japan, The Bank of Japan: Its Function and Organization, Tokyo: Economic Research Department 1964
Banque de France, The Banque de France: History, Organization, Role, Paris: Direction de la Communication, 1992
Bholat, David and Karla Martinez Gutierrez, “The Ownership of Central Banks,” Bank Underground, October 18, 2019
Bowman, W.D., The Story of the Bank of England: From its Foundation in 1694 until the Present Day, London: Herbert Jenkins, 1937
Brussels Times, “National Bank of Belgium Announces Loss for First Time in 70 Years,” September 22, 2022
Capie, Forrest, Charles Goodhart, Stanley Fischer and Norbert Schnadt (eds), The Future of Central Banking: The Tercentenary Symposium of the Bank of England, Cambridge: Cambridge University Press, 1994
Conant, C.A., A History of Modern Banks of Issue, London: G.P. Putnam’s Sons, 1909
Danmarks National Bank, Central Bank Responsibilities and Tasks, Copenhagen, 1991
De Kock, M.H., Central Banking, 4th Edition, London: Staples Press, 1974.
De Nederlandsche Bank, De Bank 1814-1964 (Jubilee Issue on the Occasion of the 150th Anniversary of the Netherlands Bank, Amsterdam 1964
Edvinsson, Rodney, Tor Jacobson and Daniel Waldenstroem, Sveriges Riksbank and the History of Central Banking, Cambridge: Cambridge University Press, 2018
Giuseppi, J. The Bank of England: A History from its Foundation in 1694, London: Evans Brothers, Ltd. 1966.
Holdsworth, John Thomas and David R. Dewey, The First and Second Banks of the United States, Washington: Government Printing Office, 1910
Kauch, P. La Banque Nationale de Belgique 1850-1918, Brussels, 1950
Koning, J.P. “Central Banks that Trade on the Stock Market,” Moneyness, February 4, 2013.
Parat, J.P. and M. Lutfalla, A Monetary History of France in the Twentieth Century, 1989
Poschinger, H. von Bankwesen und Bankpolitik in Preussen, 3 vols., Berlin: 1878
Reichsbank, Die Reichsbank 1876-1900, Berlin: Reichsbank Press, 1901
Reichsbank, Die Reichsbank 1901-1925, Berlin: Reichsbank Press, 1926
Rossouw, Jannie, “Private Shareholding: An analysis of an eclectic group of Central Banks,” South African journal of Economic and Management Sciences, Vol, 19, No. 1, 2016.
Schweizerische Nationalbank, 75 Jahre Schweizerische Nationalbank, Zurich: Schweizerische Nationalbank, 1982
Swissinfo.ch, “The mysterious rise in the shares of the Swiss National Bank,” August 30, 2017.
Van der Wee, H. and K. Tavernier, La Banque Nationale de Belgique et l’histoire monetaire entre les deux Guerres Mondiales 1918-1940, Brussels, 1975
Watts, G.S. (edited by T. K. Rymes), The Bank of Canada: Origins and Early History, Ottawa: Carleton University Press, 1993
