After 1688, Britain underwent a revolution in public finance, and the cost of borrowing declined sharply. Leading scholars have argued that easier credit for the government, made possible by better property rights protection, lead to a rapid expansion of private credit, and see the Industrial Revolution as a result of the preceding revolution in public finance. However, some prominent economic historians, on examination of this hypothesis, conclude that the financial revolution led to an explosion of public debt, but it stifled private credit.This resulted in a markedly slower growth in the English economy.
Numerous entrants tried their hand at the new business of deposit banking – few survived and fewer thrived. Government regulations such as setting a maximum interest rate caused severe misallocation of credit. A misguided attempt to lighten the nation's debt burden led directly to the South Sea Bubble in 1720, and frequent wars caused banks to call in loans, leading to sharply slower economic growth. Wartime borrowing crowded out investment.
Far from fostering economic development, England's financial revolution after 1688 did much to slow it down. The South Sea Bubble, apparently, was preceded by a discursive bubble. Early modern capitalist markets evolved, financial systems developed, and English economic institutions changed. There was a chronic shortage of currency in 17th century England, and the fiscal pressures of near- continuous war with France ensured that public credit remained a problem. 18th century finance can be divided into three areas – public, private and corporate.Crises could affect all of these at the same time or simply one of two.
Crises in corporate finance were rare because it commanded limited amounts of money and the Bubble Act prevented too much speculative activity. Public finance had developed after the Glorious Revolution. However, creditors' trust in the government's ability to honor its debt was limited and shocks such as the outbreak of a war could undermine their confidence.In the area of private finance, crises were often caused by the frenetic attempts of speculators to convert their paper instruments (e. g.
ills of exchange) into coinage when confidence in the credit ability of borrowers was weakened. In 1720, in return for a loan of ? 7 million to finance the war against France, the House of Lords passed the South Sea Bill, which allowed the South Sea Company a monopoly in trade with South America. The company underwrote the English National Debt, which stood at ? 30 million, on a promise of 5% interest from the government. Shares immediately rose to ten times their value, speculation ran wild and all sorts of companies- some lunatic, some fraudulent or just optimistic- were launched.The country went wild, stocks increased in all these and 'dodgy' schemes, and huge fortunes were made.
Then suddenly, the 'bubble' in London burst. The stocks crashed and people all over the country lost all of their money. Suicides became a daily occurrence. The gullible mob, whose innate greed had lain behind this mass hysteria for wealth, demanded vengeance. The South Sea Company Directors were arrested and their estates forfeited.
The Chancellor of the Exchequer and several members of Parliament were expelled in 1721.Robert Walpole, who had been against the South Sea Company from the beginning, took charge and sorted out this terrible financial mess. He was made Chancellor of Exchequer and he divided the National Debt that had been the South Sea Company into three – between the Bank of England, the Treasury and the Sinking Fund. The Sinking Fund was made up of a portion of the country's income that was put aside every year, and eventually stability returned to the country.
