What are shares really for?
BY EVA CHENG
Supporters of capitalism often claim that shares are issued to channel "savings" for productive activities, which would otherwise be underfunded and "malnourished" causing the economy and jobs to suffer.
They also claim that speculation in shares arose only as a minor outgrowth which helps "market liquidity" — allowing shareholders to buy and sell the shares more readily and making it easier for the shares to reach a fair market price.
This is, at best, a very partial picture. In trying to sell the "glorious" history of the stock markets (that is, of British imperialism), the London Stock Exchange, in its 1986 publication The Stock Exchange: A marketplace for tomorrow, inadvertently tells a more revealing story. Following are some highlights.
The first-known joint-stock company was formed in 1553 by 240 London merchants to finance an expedition to China and the Indies. This was one of British capitalists' early attempts to expand foreign markets, as indicated in the company's name: The Mysterie and Companie of the Merchant Adventurers for the Discoverie of Regions, Dominions, Islands and Places Unknown. Such expeditions were too costly for any individual capitalist to finance.
One of the ships reached Russia by accident and that team was able to strike a lucrative trade treaty with the ruler, Ivan the Terrible. "The idea was quickly followed by others, which financed some of the greatest voyages of discovery."
An active market sprang from the shares in such "trading expeditions" at the Royal (stock) Exchange. To help track the prices of these many shares for those trading them, daily price lists were on sale by 1698. More shares were gradually issued to finance other capitalist ventures.
To finance his war with France, Britain's King William in 1694 borrowed £1.2 million at an interest rate of 8%. As a bait, the king promised that the lenders would be given the monopoly of note issue in Britain. The entire loan was speedily subscribed and the lenders formed the Bank of England, which later became Britain's central bank.
This loan also marked the beginning of a significant market of government debt, which was fuelled by the many wars between 1739 and 1815 that paved the way for Britain's expansion as an imperialist power.
To expand the funding base for government borrowings, Chancellor of the Exchequer (treasurer) Robert Harley planned to transfer the entire national debt of £9 million — a huge sum in those days — into a new joint-stock company for trading in the stock market.
The South Sea Company was thus formed in 1711. It was to be given the monopoly of trade to South America and the Pacific. Trade with Spanish America looked highly lucrative at the time and subscriptions for South Sea shares poured in.
"People sold their jewels and hurried to buy, counting themselves lucky to be in. Gambling fever swept the City like the plague ... nearly 100 other bubble companies sprang up ... 'A company for carrying on an undertaking of great advantage but nobody to know what it is' disposed of 1000 shares in six hours."
Between 1719-20, there were 190 new issues of shares, including of the infamous East India Company. South Sea's share price kept rocketing until its spectacular collapse in 1720 (the "South Sea bubble").
The lesson wasn't remembered for long. Share market activities were subsequently significantly revived by developments such as increased canal constructions in the 1790s, a foreign investment boom, mainly in South and Central America, between 1822 and 1825, and the first railway boom in 1824.
The introduction of steam power opened the prospect of goods being transported more easily and quickly, and thus enormous profit potential. This contributed to another major boom for the shares of railway companies in 1844-46, known as the "railway mania".
A major reduction in the denomination of shares between 1800-50 brought shareholding to much broader layers of the population. During the 1850s gold boom, hundreds of companies were floated on the London stock exchange for mining in California, Australia and elsewhere.
"The (American) Confederates raised most of the money for guns, ships and supplies in Europe ...
"Between 1880 and 1930 companies were floated to produce new inventions, such as the telephone, the motor car, the aeroplane, the phonograph and the electric light bulb ... [and] gold and diamond mines in South Africa."
In 1911, Britain was to raise £2 million to finance its construction of a railway in China's Hu Kuang province to consolidate its control of China. But France, Germany and the US also wanted to make use of that loan to raise funds to enhance their control, resulting in the loan amount raised to £6 million.
These imperialist powers sought to finance the loan repayment by taxing the Chinese people. This triggered a major revolt which helped bring down the Manchu dynasty that same year, marking the end of feudal rule in China.