This piece was originally published on June 4 2022 to mark Queen Elizabeth II's platinum jubilee. We are re-publishing it following the sad news of Her Majesty's death on September 8 2022.
Rates rising from a record low; inflation surging to 10% for the first time in decades; a dangerous conflict in the east with superpowers backing opposing sides. Sound familiar? This could be a recent scenario but was in fact the situation at the start of Queen Elizabeth II’s reign.
The UK’s longest-serving monarch has been on the throne for 70 years and this week the country is celebrating its first ever platinum jubilee. When she succeeded her father, George VI, on February 6 1952 the City of London was clinging on to its position as a world capital for raising finance.
The government of Southern Rhodesia, part of the British Empire, was seeking to raise £7.5m via an issue of 30-year bonds paying a 4.5% coupon. The market was closed on the day of the king’s death but the next day the bookbuilding took place.
“The list of applications was closed within a few minutes of being opened,” reported The Times, noting that larger applications had been scaled back to 59% of their bids. A Gilt-edged security had not offered as high a coupon for 20 years so the issue was expected to be a success, the newspaper said.
It seemed the market had got used to the recent rate rises but The Times cautioned that “this is only one swallow, however. It does not follow that market is yet in a state to cope happily with a succession of £7.5m issues or a £75m issue."
That said, the Rhodesia issue had been helped by institutions accumulating funds “pending the stabilising of yields at a level sufficient to protect them adequately against the worst reasonable assumptions about the average rate of interest over the next 25 years".
Dealers were even “talking tentatively of a premium of a quarter-plus” on the issue price showing the demand for the notes. Little did investors know that inflation and interest rates would soar over that 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 properly independent in 1980. This also saw the new country of Zimbabwe reach an agreement with its creditors to repay them.
Imperial issues dominated the London market that month. Uganda followed swiftly in Rhodesia’s footsteps, raising £5.98m via a discounted issue of 17-year bonds priced at a discounted 89 pence in the pound with a coupon of 3.5%.
Overall this was the busiest February since the war, with £56.38m raised, excluding UK government issues, according to data compiled by the Midland Bank (an institution to be bought by HSBC in 1992). In today's terms, that was the equivalent of just £1.13bn.
This was still slow compared with pre-1939. “The flow of issues has not been unduly large compared with what used to be normal before the war,” said The Times.
The Bank of England annual report for 1952 detailed £1.2bn of new issues, mainly from three UK Gilt issues.
New world
Over in New York, the world’s most active capital market then and now, times were moving on quite rapidly from the Second World War. The biggest deal of the week was a US$39m issue of common stock by chemicals producer Monsanto on the day of the queen’s accession. That was the equivalent of US$427m now.
The New York Times said the issue (managed by Smith Barney, which after various iterations became part of what is now Citigroup in 1998) was fully subscribed on the day it was launched. Of the 22 other firms supporting 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 most daring and delicate post-war financing deals”, reported the newspaper.
Other deals in the market that day were three public utility and rail companies. Louisville Gas and Electric, Pennsylvania Power and Illinois Central Railroad raised US$22.1m between them, offering coupons of between 2.5% and 3.15%.
Investors could also back the US$22.5m IPO of Owens-Corning Fiberglass Corp, in a deal underwritten by a syndicate of 133 firms, led by Goldman Sachs, Lazard and White, Weld & Co (later bought by Merrill).
The New York Times reported that “the advance interest of investors in the big offering had surpassed that in any comparable offering of new common stock in recent years” with that being put down to the company’s “extraordinary record of growth since 1938”. Sales were up 25 times.
In the end, 1952 turned out to be the best year for fundraising in the US since the war. According to the SEC annual report for that year US$9.05bn was raised via 665 issues, which was a 40% increase on the previous year.
The SEC said these “expanding figures … reflect informed underwriters' opinion that the public has a growing ability and willingness to invest in additional securities”.
German settlement
In the secondary market, the pricing of German notes was of keen interest as a conference of creditors and Germany’s representatives was about to start later that month in London to decide how to treat the defeated nation’s outstanding pre-war debts.
Some of the most frequently traded were the Young and Dawes loans issued before Adolf Hitler came to power. They were changing hands at between 45 pence and 65 pence in the pound in early February.
That was far above what Germany was hoping to pay. “The German negotiators have prepared a starting position which is very far away from anything that the creditors could possibly accept,” said The Times of February 28. “Permanent writing-down of the debts of solvent non-Reich debtors seems out of the question.”
However, the paper did concede that Reich loans could be written down “on account of the loss of eastern territory”. A deal was agreed in August cutting the total owed by Germany in half and extending their maturities by over 30 years with a five-year grace period.
Creditors, principally the US and UK, realised it was important to allow Germany to recover and support the newly created North Atlantic Treaty Organization as a bulwark against the USSR and its allies.
War remained uppermost in people’s minds, with the three victors of the previous conflict – Harry Truman in the US, the USSR’s Josef Stalin and newly reelected Winston Churchill in the UK – all still in power at the start of the queen’s reign.
Churchill had just returned from nearly a month in the US, reassuring Truman and Congress of his firm commitment to Nato. UK defence spending was around 6% of GDP. At this stage the Korean War had already claimed over 100,000 US injured or killed.
“Firms in the US thought the Korean War against communism could become as big as the Second World War. There was some buying of commodities in anticipation of a prolonged engagement, sparking inflation, but the war turned out to be more limited,” Christian Keller, head of economics research at Barclays, told IFR last week.
Another crisis confronting Churchill was in the Middle East, where Iran had nationalised Anglo-Iranian Oil’s assets in the country. The company was the predecessor of BP and its Abadan plant there was one of the biggest UK investments overseas.
Flying high
There were inklings of how jet travel might revolutionise communications. Churchill had travelled back from the US across the Atlantic by liner. But the queen had returned to the UK by plane. BOAC, eventually to become part of British Airways, was advertising a return tourist class fare from New York to London for US$486.
The inventor of the jet engine Sir Frank Whittle was advising BOAC on the use of jets in civil aviation. According to The Times he was upset at how things had developed and was “giving serious consideration to proposals he has received that he should continue his research overseas”.
He had recently visited the US to discuss a proposition, as many entrepreneurs would do in future years. Whittle developed his concept during the war as a serving RAF officer and had given his invention to the UK government. They had in turn allowed the US to use the patents for US$4m.
Although the queen’s reign started with excess war spending, rates rises and an inflation shock, these storm clouds were relatively short-lived across the West.
“The 10 years after the Second World War were a time of great supply shocks during which industry had to shift from being part of a centralised war economy,” said Keller.
“Inflation in the UK in the first two years of the 1950s was very high but then it came down without creating a lot of unemployment. At the same time, three-month Treasury bills were roughly flat at around 2% and only rose very slowly. Central banks did not act as much as they might do today.”
By the time Harold Macmillan succeeded as prime minister in 1957, after the imperial debacle at Suez, he could justifiably say to voters, who were also enjoying the benefits of the nascent welfare state, that most people “had never had it so good”.
