The decline of Britain’s stockmarket should be seen in a broader

IT IS TEMPTING to look at Britain’s history and conclude that the loss of its empire made the relative decline of its stockmarket inevitable. But Britain’s is hardly the only one to have ballooned and shrivelled in the centuries since the idea of raising capital by selling equity to the public gained popularity. The fortunes of the world’s big exchanges have fluctuated throughout history. In recent decades two important trends have driven those shifts: the rise of Asian equities and the growing significance of the technology sector. Britain’s market has been clobbered more forcefully than those of its peers, exacerbating its decline. But these are merely the latest twists in 200 years of stockmarket history.

America’s and Europe’s stockmarkets first took off in the 19th century. Successive crazes for investing in canals, Latin America and railways led to the creation of hundreds of companies that raised capital in London, explains Bryan Taylor of Global Financial Data, a provider of historical statistics. “Once most of Europe’s railroads were built by the 1850s, British investors started financing the American ones instead,” he says. Britain’s stockmarket became a conduit for investment in a range of companies in Canada, India, South Africa, Australia and South America.

It was not the only hub for raising capital for overseas ventures. By the early 20th century, the shares of hundreds of firms were being traded simultaneously in London, New York, Paris and Berlin. America’s domestic growth was striking, too. The First Bank of the United States raised $10m ($291m today) at its incorporation in 1791. The incorporations of dozens of other banks and insurance firms followed. By 1911 the combined value of the British, American, French and German markets reached a high of $49bn—over $1.4trn today—a 175-fold expansion on a century before.

Two world wars later, a hobbled and fragmented European market offered little by way of challenge to America’s dominance (see chart 1). During the fighting bourses had largely been shuttered. When exchanges were able to open, they had frequently been subject to price restrictions that limited trading. Currencies were devalued and capital controls imposed, complicating cross-border flows. Hyperinflation in Germany and much of eastern Europe, combined with the rise of communism, had wiped out many investors. For decades after the end of the second world war, governments’ willingness to regulate and nationalise many industries kept European equities firmly in check.

The challenge to America, when it appeared, came from Asia. The gradual return of globalisation (which did not rebound to pre-first-world-war levels until the 1990s, as measured by flows of capital and goods) brought with it a dramatic rise in Asian exports. Japanese equities, in particular, flourished. Before…