A History of Boats, Canals & Finance

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Visualizing History

Source: Global Financial Data

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From the Archives

History of the American Whale Fishery (1878)

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Sunday Reads

Suffice it to say that no matter how bad a week you may have had, the Captain of Ever Given’s was worse. Unless you have been living under a rock for the last week, odds are good that you saw this image below:

Just to briefly recap the events of this week, Bloomberg provides a useful summary:

“The forecast for Tuesday, March 23, showed wind gusts of more than 40 miles per hour and sand storms sweeping through northern Egypt. Indeed, such weather is common in the Sinai desert at this time of year.

The Suez Canal—one of the most critical, yet precarious waterways on the planet—remained open. Ships were starting to form the daily convoy as the gusts picked up. One of the world’s biggest container vessels, the Ever Given, joined it. The decision would reverberate globally within hours.

By 7:40 a.m. local time, the megaship—loaded with containers that would stretch more than 120 kilometers (75 miles) end to end and carrying everything from frozen fish to furniture—was stuck. Its grounding would not only lay bare the intricacies of navigating a man-made trench of water in a vessel the size of the Eiffel Tower, but also the fragility of a global network of markets and economies that takes for granted the flow of goods through it.”

Bloomberg points out that an astonishing 12% of global trade is conducted through the Suez Canal, and there are estimates that the blockage is costing roughly $400 Million an hour in trade. So, it’s a pretty important canal. 

The Suez Crisis

For me, this week has been fun because it offered a very rare instance of where the research for my college dissertation on the Six Day War came in handy. Why? Well, this is certainly not the first time that the Suez Canal has found itself at the center of international controversy. In fact, this week pales in comparison to the infamous Suez Crisis of 1956, which was a humiliation for Israel, France, and Great Britain. Before we dive into that any further, however, we should look back to the canal’s founding.

Here’s a fun fact for you, did you know that the Suez Canal was a publicly traded company until Egyptian President Gamal abd-al-Nasser nationalized the canal in 1956? The team at Global Financial Data offers more:

“The Suez Canal was constructed between 1859 and 1869 and was officially opened on November 17, 1869. Dreams of building a canal between the Mediterranean and the Red Sea go back almost 4,000 years, but until the 1800s, no one had succeeded in building a useable canal.  In 1856, Ferdinand Lesseps obtained a concession from Sa’id Pasha, the Khedive of Egypt and Sudan to create a company that would construct a canal open to ships from every nation. The Suez Canal Co. was founded on December 15, 1858 with the Egyptian government owning 44% of the shares, and French and Egyptian investors owning the rest. The company issued 400,000 shares at 500 francs ($100) each, giving the company a market cap of $40 million. Work on the canal began on April 25, 1859.

Both the transcontinental railroad in the United States and the Suez Canal were opened in 1869 making it easier to conduct trade around the world. Sa’id Pasha defaulted on government bonds in 1875, and he sold his 44% stake in the Suez Canal Co. to Britain which became the largest shareholders in the canal. The British invaded Egypt in 1882 to suppress the Urabi Revolt and in 1888, the Convention of Constantinople declared the canal a neutral zone under the protection of the British.  The canal was nationalized in 1956 and shareholders were paid off by 1962, though hardly at a rate that was in their favor.“

In summary, the Suez Canal venture began as a shared interest among Egyptian, French and British investors. Before long, however, the British found themselves in full control following the default of Sa’id Pasha, the Khedive of Egypt, and after the Convention of Constantinople formalized Britain’s role as “protectorate” of the canal. As is so common throughout history, Western interference in this region of the world later led to the type of pushback seen in the Suez Crisis of 1956, when the anti-British President Nasser decided to nationalize the canal and charge for its use. As this obviously hurt the British and French, the two powers met in secret with Israel to form the infamous “Protocol of Sevres”.

Essentially, the plan was for Israel to initiate hostilities against the Egyptians, which would give Britain and France the opportunity to “intervene”. As one of today’s links states: “Britain and France hoped to claim that they were merely separating the warring parties in order to safeguard an international waterway.”

Their plan failed spectacularly, leading to international humiliation for the French, English, and Israelis. As the second article in today’s Sunday Reads covers in detail, the United States was able to force Britain into withdrawing troops for economic reasons.

“Once all parties had agreed to the cease-fire, the US used all the economic means at its disposal to force an unconditional withdrawal by the Anglo-French force. It was not able to immediately end the British and French action though, because the British Cabinet thought that the bridgehead its forces still held gave it a significant bargaining counter with Egypt. The US administration then used various economic means including blocking access to IMF credit and preventing Britain from using US government securities as collateral against new commercial borrowing.

Intense economic and diplomatic pressure first led to Macmillan’s key statement to parliament on November 13 that the sterling parity could not be held indefinitely and then to Eden’s withdrawal on November 23 on the grounds of ill health. When the US voted with the Eastern Bloc and the non-aligned nations in the Security Council on November 24 it became evident that the economic pressure would not cease. Britain and France gave way and withdrew from their bridgehead at the beginning of December 1956. In response to their withdrawal, the US immediately granted Britain an Export-Import (EXIM) Bank loan of $500 million and dropped its objections to Britain drawing the first two tranches of its IMF quota.”

Prinz Valdemar

Moving away from the Suez Canal, this was also not the first time that the blockage of an important waterway had a serious financial impact. Looking back to the Florida land boom of the 1920s, the sinking of Prinze Valdemar in Miami’s harbor proved to be one of the key triggers of the real estate crash. We will cover this in more detail later, but at a high level:

“The huge gray-hulled sailing ship bumped up against a sandbar, swung sideways, and wedged itself across the mouth of the eighteen-foot-deep channel. As the tide began to recede, the weight of the outgoing seawater swung the giant keel out from under the vessel so that her cargo of supplies shifted. The old ship, her iron sides grinding, groaning, and creaking, cap- sized in a slow-motion pantomime that took an agonizing four minutes to play out, allowing her crew ample time to leap overboard into the lukewarm, blue-green waters of Biscayne Bay…

The governor’s office in Tallahassee was flooded with telephone calls and telegraphs demanding that Governor John Martin fire the harbormaster. Overnight all the frantic building construction up and down the East Coast was forced into a near-complete standstill. By now, the state’s entire transportation system — its rails, its roads, and its seaports; the infrastructure that built and sustained the great boom — was either clogged, stalled, or broken.

This forced recess gave developers a chance to review their projects. One by one, in offices across the state, they pulled out their drawings and their blueprints, their contracts and their budgets, and spread them out on their drafting tables to reconsider every nuance of their ambitious plans. A few of them, after doing so, decided that the prudent course of action was to pull back a little. In Wall Street parlance, they opted to take some of the risk off the table; but they would be the exceptions.“

With those two fun examples in mind, let’s dive in to today’s links!

The Suez Canal and the Egyptian Stock Market

Why This is Relevant:

A fun look back at the financial origins of a very topical location: The Suez Canal.

“There were a number of companies that listed in London and Paris as well as on the Cairo and Alexandria Stock Exchanges in the 1800s and 1900s. The first company for which GFD has data is the Bank of Egypt which traded in London from 1856 until 1910.  Several other companies came along in the 1860s including the Egyptian Commercial and Trading Co. (1863), Societe Financiere d’Egypt (1864) and the Anglo-Egyptian Banking Co. (1865-1920). However, the largest company in Egypt, the Compagnie universelle du canal maritime de Suez (Suez Canal Co.) went public in 1858 and ran the Suez Canal until it was nationalized by Egyptian President Gamal Abdel Nasser in 1956.  GFD has data on the Suez Canal from its IPO in 1862 until 1940. During the late 1800s, the Suez Canal Co. was one of the largest stocks by capitalization that traded on either the Paris or the London Stock Exchange.”

Visualizing History:

“The largest company in Egypt, the Compagnie universelle du canal maritime de Suez (Suez Canal Co.) went public in 1858 and ran the Suez Canal until it was nationalized by Egyptian President Gamal Abdel Nasser in 1956.”

“The Suez Canal Co. was a French company with operations in Egypt with the British owning the largest number of outstanding shares.  The Suez Canal Co. played such a prominent role in Paris that David le Blis included it as one of the stocks in their index of 40 shares that traded in Paris between 1852 and 1987. The Suez Canal Co. consistently represented over 75% of the market cap of the Egyptian stock market.  When the Egyptian government nationalized the canal in 1956 and paid it off in 1962, there were few Egyptian shares left for investors to trade in either Egypt or London. Nevertheless, during most of its history, the Suez Canal Co. provided a liquid market which generated decent returns to its shareholders.”

Suez and Sterling, 1956

This week was not the first time that the Suez Canal has held international attention. This paper looks at the economic impact of the Suez Crisis in 1956 on Britain, and how the United States was able to wield it’s economic might against Britain in order to force their withdrawal from Egypt. As the author’s write:

“The US administration then used various economic means including blocking access to IMF credit and preventing Britain from using US government securities as collateral against new commercial borrowing.”

The paper is an interesting look at how far reaching the ramifications of events occurring in a small canal in Egypt can stretch.

Summary:

“Daily data on spot and forward dollar/sterling exchange rates and on Britain’s foreign exchange reserves are used to reassess the financial history of the 1956 Suez crisis. We find that support of sterling at its Bretton Woods lower bound lost credibility as early as July. Reserve losses also are consistent with an exchange rate crisis. We provide the first econometric study of foreign exchange market intervention in the pre-convertibility phase of the Bretton Woods system. The Bank of England’s interventions reacted strongly both to official sterling and to the transferable sterling market in New York, which suggests that convertibility was a central goal of policy.”

Visualizing History:

Figure 1: Spot exchange rate: Official sterling, New York (1956)

“Figure 1 shows the sterling spot rate during the Suez crisis and in the months before and after it took place… The horizontal, dashed line shows the central parity, while the upper and lower edges of the figure coincide with the Bretton Woods band, {e, e}. In early July, sterling was below its $2.80 parity, a condition attributed by The Economist to a balance of payments deficit in 1955 having reduced reserves, and to an expectation of grain imports from the dollar area later in 1956. The nationalization of the canal triggered a decline in the exchange rate from above 2.79 to just above the bottom of the Bretton Woods band. The Economist described $2.7825 as the effective support point and this floor is evident in figure 1.”

Notable Quote:

“From the moment the Canal was nationalized the sterling exchange rate ceased to be credible and such credibility as had been regained was decisively reduced by the invasion. At the end of November these pressures came to a head, as reserve losses and falling exchange-rate credibility coincided and reserves fell below $2000 million. Moreover, the rate of reserve loss was greater than in other sterling crises.”

The Road to ETFs

Prinz Valdemar & The Florida Land Bubble Crash

The Suez Canal blockage is not the first time that there have been serious knock-on effects from a ship blocking a waterway. This excerpt from the excellent book “Bubble in The Sun” details how the Prinz Valdemar blocked Miami’s harbor and helped trigger the collapse of Florida’s epic real estate bubble in the 1920s.

Summary:

“As the Prinz Valdemar entered Government Cut, the Clyde Line ship George Washington, loaded with one hundred impatient passengers bound for New York, began to sound its ship’s whistle, announcing its intention to depart the harbor the moment the Prinz Valdemar had cleared the channel. At that moment, an accident occurred that seemed foreordained. Someone ignored a command, or missed a signal, or a gust of wind blew in from offshore, or the tide shifted — no one could be entirely sure which of these factors was most responsible for the mishap that followed.

The huge gray-hulled sailing ship bumped up against a sandbar, swung sideways, and wedged itself across the mouth of the eighteen-foot-deep channel. As the tide began to recede, the weight of the outgoing seawater swung the giant keel out from under the vessel so that her cargo of supplies shifted. The old ship, her iron sides grinding, groaning, and creaking, cap- sized in a slow-motion pantomime that took an agonizing four minutes to play out, allowing her crew ample time to leap overboard into the lukewarm, blue-green waters of Biscayne Bay. As her five masts gradually genuflected, water rushed over her gunwales until she came to rest on her side, half submerged, so that she stoppered the channel like a cork in a bottle, preventing all but the smallest boats from passing in and out of the harbor. Frantic efforts were made to right the great ship. Thick ropes called hawsers were cleated to her decks and hauled by the tugboats to try to pull her upright. When these efforts failed, a pair of dredging vessels were assigned to carve out an eighty-foot-wide temporary channel that could bypass around her. Both dredgers struck coral and broke down. A second vessel, the steamer Lakevort, tried to squeeze past the wreck only to run aground herself, further complicating the salvage operation.

Meanwhile, on board the George Washington, now trapped in the harbor, hysteria mounted. The governor’s office in Tallahassee was flooded with telephone calls and telegraphs demanding that Governor John Martin fire the harbormaster. Overnight all the frantic building construction up and down the East Coast was forced into a near-complete standstill. By now, the state’s entire transportation system — its rails, its roads, and its seaports; the infrastructure that built and sustained the great boom — was either clogged, stalled, or broken.

This forced recess gave developers a chance to review their projects. One by one, in offices across the state, they pulled out their drawings and their blueprints, their contracts and their budgets, and spread them out on their drafting tables to reconsider every nuance of their ambitious plans. A few of them, after doing so, decided that the prudent course of action was to pull back a little. In Wall Street parlance, they opted to take some of the risk off the table; but they would be the exceptions.”

Visualizing History:

Notable Quote:

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