Capital markets when the queen ascended the throne

This coin was originally released on June 4, 2022 to mark Queen Elizabeth II’s Platinum Jubilee. We are republishing it following the sad news of Her Majesty’s passing on September 8, 2022.

Rate up from record low; inflation climbing to 10% for the first time in decades; a dangerous conflict in the east with superpowers backing opposing sides. Sound familiar? This might be a recent scenario, but it was actually the situation at the start of Queen Elizabeth II’s reign.

Britain’s longest-serving monarch has been on the throne for 70 years and this week the country celebrates its first-ever Platinum Jubilee. When she succeeded her father, George VI, on February 6, 1952, the City of London clung to its position as the fundraising capital of the world.

The government of Southern Rhodesia, part of the British Empire, was seeking to raise £7.5 million through a 30-year bond issue paying a coupon of 4.5%. The market was closed on the day the king died but the next day book building took place.

“The slate of nominations closed within minutes of opening,” the Times reported, noting that larger nominations had been narrowed down to 59% of their bids. A Gilt-edged security hadn’t offered such a high coupon in 20 years, so the issue had to be a success, the paper said.

It seemed the market had gotten used to the recent rate hikes, but the Times warned that “it’s just a swallow, though. It does not follow that the market is yet in a position to deal happily with a succession of £7.5m issues or a £75m issue.”

That said, the Rhodesia issue had been aided by institutions hoarding funds “pending the stabilization of yields at a level sufficient to protect them adequately against reasonable worst-case assumptions about the average interest rate over the past 25 coming years”.

Dealers “even tentatively spoke of a premium of a quarter and more” on the issue price indicating demand for the tickets. Little did investors know that inflation and interest rates would skyrocket during this period.

Rhodesia would go on to default after Prime Minister Ian Smith declared unilateral independence in 1965. Eventually the country would follow most British colonies and become truly independent in 1980. This also saw the new country of Zimbabwe enter into a agreement with its creditors to repay them.

Imperial issues dominated the London market that month. Uganda quickly followed in Rhodesia’s footsteps, raising £5.98 million via a discounted 17-year bond issue at the discounted price of 89 pence a pound with a coupon of 3.5%.

Overall, it was the busiest February since the war, with £56.38 million raised, excluding UK government issues, according to data compiled by Midland Bank (an institution to be taken over by HSBC in 1992). In today’s terms, that was equivalent to just £1.13 billion.

It was still slow compared to before 1939. “The flow of problems was not unduly large compared to what was normal before the war,” the Times said.

The Bank of England’s annual report for 1952 detailed £1.2 billion of new issues, mainly from three issues of British gilts.

New world

In New York, the busiest capital market in the world then and now, times had passed quite quickly since World War II. The biggest deal of the week was a $39 million common stock issue by a chemical producer Monsanto the day of the accession of the queen. It was the equivalent of US$427 million now.

The New York Times said the issue (managed by Smith Barney, who after various iterations became part of what is now Citigroup in 1998) was fully subscribed on its launch day. Of the 22 other companies backing the offer (including First Boston, Lehman Brothers, Merrill Lynch and Drexel and Co), only Goldman Sachs and Lazard survive as independent entities.

It was “successfully marketed by the nation’s investment banking machinery in a transaction likely to go down in underwriting annals as one of the boldest and trickiest post-war financing deals”, reported the newspaper.

Other trades in the market that day involved three utility and railroad companies. Louisville Gas and Electric, power of pennsylvania and Illinois Central Railroad raised $22.1 million between them, offering coupons between 2.5% and 3.15%.

Investors could also back the $22.5 million IPO of Owens-Corning Fiberglass Corpunder a deal underwritten by a syndicate of 133 companies, led by Goldman Sachs, Lazard and White, Weld & Co (later acquired by Merrill).

The New York Times reported that “advanced investor interest in the Big Offering has exceeded that of any comparable offering of new common stock in recent years”, this being attributed to the company’s “record extraordinary growth since 1938”. Sales were multiplied by 25.

Ultimately, 1952 turned out to be the best year for fundraising in the United States since the war. According to the SEC’s annual report for that year, $9.05 billion was raised via 665 issuances, a 40% increase from the previous year.

The SEC said these “increasing numbers … reflect informed underwriters’ view that the public has a growing ability and willingness to invest in additional securities.”

german colony

In the secondary market, the pricing of German banknotes was of keen interest as a conference of creditors and representatives from Germany were set to begin later that month in London to decide how to deal with the unpaid debts of of the defeated nation.

Some of the most frequently traded loans were the Young and Dawes loans issued before Adolf Hitler came to power. They were changing hands between 45 and 65 pence in the pound in early February.

It was well above what Germany hoped to pay. “German negotiators have prepared a starting position that falls far short of anything creditors could possibly agree to,” The Times said on February 28. .”

However, the newspaper admitted that the Reich loans could be written off “due to the loss of eastern territory”. A deal was reached in August, halving the total owed by Germany and extending their maturities by more than 30 years with a five-year grace period.

Creditors, mainly the United States and the United Kingdom, realized the importance of allowing Germany to recover and support the newly created North Atlantic Treaty Organization as a bulwark against the USSR and its allies.

The war remained at the center of people’s minds, with the three victors of the previous conflict – Harry Truman in the United States, Josef Stalin in the USSR and the recently re-elected Winston Churchill in the United Kingdom – all still in power at the start of the reign of the queen.

Churchill had just returned from nearly a month in the United States, reassuring Truman and Congress of his firm commitment to NATO. UK defense spending was around 6% of GDP. By this point, the Korean War had already left over 100,000 injured or killed in the United States.

“Corporate America thought the Korean War against Communism could become as big as World War II. There were some commodity purchases in anticipation of an extended engagement, triggering inflation, but the war proved more limited,” Christian Keller, head of economic research at Barclays, told IFR the week. last.

Another crisis Churchill faced was in the Middle East, where Iran had nationalized Anglo-Iranian Oil assets in the country. The company was the predecessor of BP and its Abadan plant was one of Britain’s biggest overseas investments.

fly high

There were ideas about how air travel could revolutionize communications. Churchill had returned from the United States across the Atlantic by ocean liner. But the queen had returned to the United Kingdom by plane. BOAC, which will eventually become part of British Airways, advertised a return economy class fare from New York to London for US$486.

The inventor of the jet engine, Sir Frank Whittle, advised BOAC on the use of jets in civil aviation. According to the Times, he was upset with the way things had turned out and was “considering seriously the offers he had received for him to continue his research abroad”.

He had recently traveled to the United States to discuss a proposal, as many entrepreneurs would do in the years to come. Whittle developed his concept during the war as a serving RAF officer and had given his invention to the British government. They in turn had authorized the United States to use the patents for US$4 million.

Although the Queen’s reign began with excessive war spending, rate hikes and an inflationary shock, these storm clouds were relatively short-lived across the West.

“The 10 years after World War II were a time of great supply shocks during which industry had to move away from being part of a centralized wartime economy,” Keller said.

“Inflation in the UK during the first two years of the 1950s was very high, but then fell without creating much unemployment. At the same time, three-month Treasury bills remained roughly flat at around 2% and have only increased very slowly.Central banks have not acted as much as they could today.

By the time Harold Macmillan took over as Prime Minister in 1957, after the imperial debacle at Suez, he could rightly tell voters, who were also enjoying the benefits of the nascent welfare state, that most people ” had never been better.”

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