Visualizing History

What happened the last time DC’s Capitol was attacked.

(Source: Global Financial Data)

From the Archives

The Financial History of the United States: 1789 – 1860 (1885)

Investor Amnesia Course

Course Update

Towards the end of last year I launched a brand new online financial history course covering Bubbles, Manias & Fraud. The course boasts more than six hours of content split into 37 videos across seven riveting topics like Railway Mania, the South Sea Bubble, Brewery Mania, and more. Students are taught this fascinating material by the world’s foremost investors and financial history experts.

Well I am very happy to say that the launch has been a resounding success, with more than 300 students enrolled. Check out the stellar teaching ‘faculty’ below:

Sunday Reads

The burning of the White House, August 1814

The past week had a very ‘2020’ feel to it as once again the future of our nation was thrust into a pool of uncertainty following the insurrection and violence in our nation’s capital, at the Capitol.

As someone who lives only a 15-20 minute walk from the Capitol building it was surreal to watch all of the chaotic scenes unfolding on my TV, knowing that this was occurring just a short walk away. One of my friend’s a street over from me texted that the cops outside his window told pedestrians they were patrolling the street because of a bomb threat in the area. It was a crazy day.

As many have pointed out, however, this was not the first time our nation’s capitol building had been desecrated – albeit the last time was at the hands of external enemies. The excerpt below from The Conversation offers an excellent overview:

Painting showing the attack by British forces on Washington in 1814.

“As rioters forced their way into the US Capitol Building on January 6, astounded CNN presenters noted that this was the first time something like this had happened for more than 200 years. And that on the occasion it was the British, an enemy power, which was responsible.

This was in August 1814 when British troops led by General Robert Ross occupied Washington DC for two days and set about methodically destroying the city’s public buildings, including the Capitol and the White House.

The War of 1812 had been underway for two years. It was a war the British had not sought. For the British its roots lay in debates over maritime rights, which had been conceded on the eve of the conflict, but news of these concessions only arrived across the Atlantic after the United States had declared war.

American politicians expected to win quickly, and many hoped that they could also conquer British Canada. The Americans burned several Canadian towns including the upper Canadian capital of York, now Toronto, but the war remained a stalemate…

In August 1814, a British naval force commanded by Vice Admiral Sir Alexander Cockburn sailed up the Patuxent River in the northern Chesapeake Bay and landed 4,500 men near the village of Benedict in Maryland.

It was not initially clear where the British intended to attack. Washington was only 30 miles away, but it was not strategically important, and little had been done to erect defenses. American forces made a dismal attempt to halt the advance at Bladensburg, where the British had to cross the eastern branch of the Potomac River. So many American militiamen fled the field of battle that British troops called the affair the Bladensburg Races, and from that point they met only scattered resistance.

There was now widespread panic in Washington. The president’s wife, Dolly Madison, hastily organized the evacuation of the most important items in the President’s House, not yet called the White House. So hasty was the evacuation that when British troops arrived, they found dinner waiting.

Terrible Spectacle

As British troops advanced into Capitol Square, they met scattered sniper fire. Firing several rounds into the Capitol building to discourage the snipers, they forced their way inside with little difficulty. The men were impressed by the grandeur of the interior. It was not what they expected but was of imposing proportions with high ceilings and classical columns, Americanized with carvings of ears of corn decorating the capitals, while the well-proportioned rooms were filled with fine furnishings.

It also proved more difficult to burn than they expected – the roof was iron and the floors and walls were stone. The troops busied themselves piling up all the furniture, books and papers and eventually started a blaze which lit the night sky over the city.

Upon seeing the flames, the French minister to the US, Louis Sérurier observed: “I have never beheld a spectacle more terrible and at the same time more magnificent.” Most of the interior was completely gutted. The heat was so intense that in places the stone columns and floor were turned to lime, and the roof collapsed.

19th-century painting of the US Capitol building after being burned by British troops.
The US Capitol following British attempts to burn the building in 1814.

Not content with destroying the Capitol, the British burned the President’s House. (Despite the legend it is not called the White House because it was painted white to hide the scorch marks.)

The most infamous act was probably the destruction of the Library of Congress and all of its papers and books. British commanders ordered their men to target only public buildings and spare private buildings and the US Patent Office and many Washington residents later commended their restraint.

But at the printing office of the National Intelligencer newspaper, in an episode not dissimilar from turning off a Twitter account, Admiral Cockburn ordered his men to destroy all the letter C’s so the newspaper could no longer print what he saw as their lies about him.

Pyrrhic Victory

After two days, the British force withdrew. The burning of Washington was symbolic rather than strategic for it had a population of only 8,000 and the long-term disruption to the government was minimal. Perhaps the most significant strategic loss for the United States was the destruction of the Washington Navy Yard and several ships under construction. This was not done by British troops, however, but by American forces on the Navy secretary’s orders to prevent the enemy from capturing important supplies.

19th-century painting of burning buildings seen from across a rvier.
Painting of the burning of the Washington Navy Yard, 1814, view from the Anacostia River

In many ways, the burning of Washington backfired on the British as it created much sympathy for the American cause in Europe. The burning of the public buildings also achieved little in the long-term.

The Capitol survived. Its design was extremely resilient, and the structure remained intact. After only five years of reconstruction, Congress was again able to hold its meetings there.”

A remarkable account, right? What historians have pointed out, however, is that this burning of the nation’s capital proved to be a seminal moment for American society, as Americans used it as a rallying call to come together as a united front. In the midst of a terrible week such as this, we can only hope that the events at our Capitol this week will have a similarly unifying affect.

While the Capitol violence this week is an important single event, the overarching themes relate to political movements, recognition of government leaders, and uprisings. That said, this week’s article will look at the relationship between these three themes and financial markets. I was hoping that 2021 would allow for more cheery Sunday Reads topics, but here we are…!

The Quantitative Easing (and Fall) of the Roman Empire

6 ways climate change and disease helped topple the Roman Empire - Vox

In the last few years, whenever America experiences terrible events like the ones of this week there are comparisons to the fall of the Roman Empire. Whether this comparison is valid or not, it is an interesting topic to explore. Particularly through the lens of financial history. This article takes a look at the fall of Rome, quantitative easing, inflation suicide, and much more. Definitely read this.

“In A.D. 33, Rome, whose still winsome bellicosity gave her trammel over the accumulated metals of most of the known world, suffered an economic recession. M. Cocceius Nerva, a keen but unambitious lawyer, was in that year in the capital city, the seat of his friend the emperor Tiberius. The two enjoyed the society of one another, as it tended to produce counsel on the affairs of state which was unmolested by either jealousy or ambition. Now Nerva had chosen to starve himself to death; there was no one to witness but the emperor. During the slow suicide, Tiberius let soften the veil of the purple, confessing to Nerva that although as a general matter he did not care who died and who lived, his conscience would be gravely disturbed if Nerva pressed through his campaign all the way to death. Tiberious demanded a reason; he received none; there was none that would satisfy. It was in fact “a close acquaintance with the ills of the state” that had fixed Nerva to take his own life “while his honor was still uncompromised and his welfare still unthreatened from without.” It was economic ills which motivated the suicide.

Nerva was early; it was four hundred years before the Visigoths penetrated the pocked walls and actuated with force the fall of the Roman Empire; yet the awful seed of fragility had been glimpsed by Nerva, and his mental bravery was unequal to his sense of personal legacy. “Nerva could no longer bear to associate with Tiberius, chiefly because [Tiberius] had revived the laws on loan-contracts which Caesar had enacted, [and] this was bound to damage credit and be very upsetting [for the inability of many respected citizens to comply with a sudden request for repayment of what they had borrowed would be exposed.] So he starved himself to death.”

Investors and the French Revolution

“Most people know the basic story of the French Revolution.  France’s aid to the United States indebted the nation leading to new taxes that fed a revolt against the king and the aristocracy. The Estates General was convened in May 1789, and on July 14, 1789, the Bastille was stormed marking the beginning of the French Revolution. The Declaration of the Rights of Man was passed and feudalism was abolished in August 1789. France became a republic in September 1792 and in January 1793, King Louis XVI was executed. A dictatorship gained power in 1793 under Robespierre and the Committee of Public Safety which introduced the Reign of Terror. In 1795, the Directory assumed control over France, suspended elections and repudiated debts. The Directory remained in power until 1799 when Napoleon Bonaparte overthrew the Directory in a coup and became the leader of France.

But what about investors?  How were they affected by the French Revolution? The king lost his head, but investors lost their money.”

The Bond Market and the Legitimacy of Vichy France

vichy france

This article provides a fascinating look at how markets react to situations when there is not uniform recognition of a new government’s status. For those that need a brief refresher, see the description below:

After France’s military defeat in June 1940, the French government asked Marshall Henri Philippe Pétain, the French hero of World War I, to create a government that would negotiate an armistice with Germany. As a result, two zones were created: one under German occupation, the other in theory under French rule. A new capital city, Vichy, was designated for the latter. In practice Vichy’s collaborationist government remained dependent on Germany.”

However, this led to geopolitical issues around who should be viewed as the legitimate rulers of France:

Général Charles de Gaulle refused to accept German control and continued the war from Great Britain. By the end of 1940 de Gaulle had brought several French  colonies to his side. De Gaulle’s political legitimacy remained an issue during the war.

For Vichy’s government, he was a traitor, for the Allies, a military supporter. On September 24 1941, de Gaulle created the Comité National Français (CNF) in order to “have a structure that would bring him closer to the Allied governments in exile in London.” However the Allies considered the CNF as representing no more than the French troops fighting with the Allied ones. On September 28, 1942, the Soviet Union recognized and offered support to the CNF. Up to 1942, in spite of Vichy’s collaboration with Germany, Pétain was viewed as France’s legitimate ruler by the American government. Pétain lost this recognition when the German Army invaded the Vichy zone on November 11, 1942.”

With such lack of clarity over who the legitimate governing body was in France, how did investors respond to this uncertainty?

‘During World War II, the spread between the 3% Rentes and the Vichy government bonds reflected French investors’ perception of the shifting fortunes of war and the willingness of future post-war government to repay the debt issued by the collaborationist regime. Structural breaks in this spread do not always match with the dates of major military events but are more closely related to the political ones, emphasizing the struggle for legitimacy by rival claimants to power.’

China and the World Financial Markets 1870-1930: Modern Lessons From Historical Globalization

There were already concerns from some investors over the strength of China’s credit system, and the outbreak of coronavirus has only exacerbated these concerns. This article takes a look at the integration of China into world financial markets from 1870 – 1930. It’s a very informative paper for how to view China’s relationship with the West today.

“This paper focuses more narrowly on the process of securitization of the assets of Chinese firms and government debt that began to occur in the late 19th Century, both inside and outside of China. Over the period 1870 to 1930, the Chinese financial system underwent extraordinary change. Chinese enterprise in major port cities developed from family-based, private equity ventures and quasi-public firms, to publicly-held corporations which could tap both domestic and foreign savings through both international and domestic stock and bond markets.”

For a while, this system was great. Just take a look at how relatively stable the yields on China’s debt was at the time:

However, as you probably guessed, things eventually turned.

Foreign investment over the period 1870 to 1930 financed remarkable growth in the Chinese economy, however it came at a price – the most visible of being preferential government concessions to foreign investors, and partial foreign control over government finances. From the foreign perspective, these concessions were simply investor protections.

From the Chinese perspective, however, these terms were viewed as an affront to Chinese sovereignty and an impediment to the development of a domestic corporate sector. As a consequence, the terms of Chinese external investments contributed to a backlash against foreign ownership of Chinese capital and foreign encroachment on Chinese sovereignty.

Although a vigorous capitalist system grew in cities like Shanghai in the late 1920’s and 1930’s, the seeds of resentment towards foreign capital became a popular catalyst for the Leninist revolution in 1949, an event that shifted China away from widespread economic and financial relationships with large sectors of the developed world. Only in the last two decades has China returned to the global financial community and in the last decade China has begun to rebuild her own domestic capital market.”

Bloomberg’s Tracy Alloway wrote about how Trump’s New Trade War Tool Might Just Be Antique China DebtIn her article, she notes:

“The U.S. once referred to the money that flowed into China at the turn of the 20th century as “dollar diplomacy”—a way of building relations with the country (and its massive untapped market) by helping it industrialize. The Chinese have another term for it: For them it fits squarely into China’s “Hundred Years of Humiliation,” when the Middle Kingdom was forced to agree to unfair foreign control.”

Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections

“Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.”