The Mechanics of the 1720s Schemes for the Reduction of Public Debt in France and England, and the Subsequent Rise of Speculation in Early Equity Markets

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The Mechanics of the 1720s Schemes for the Reduction of Public Debt in France and England, and the Subsequent Rise of Speculation in Early Equity Markets

Student Number: 7421133.

This thesis is 8,349 words long, excluding the bibliography.

This thesis is submitted in part fulfilment of the requirement for the degree of Bachelor of Arts in the Honours School of Economics and Economic History at the University of Manchester.

Table of Contents

• Background History: p. 3-4.

• Introduction: p. 5-7.

• Section 1: p. 8-14.

• Section 2: p. 15-23.

• Section 3: p. 24-28.

• Section 4: p. 29-35.

• Conclusion: p. 36.

• Bibliography: p. 37-38.

A brief background history

The many costly wars of Louis XIV and the conflicts over the issue of Spanish succession (1701-1714), dominated the direction of European funds in the latter years of the seventeenth century and the early eighteenth century, leading to the creation of successive amounts of public debt to finance the many campaigns taking place. Throughout this time, a financial revolution would take place, whereby systems that pooled wealth and supplied easy credit would be created; giving rise to a new class of businessmen who would grow rich from lending both to the English and French governments the money to continue their feverish war-mongering. The creation of institutions such as the Bank of England in 1694, and the formation of wealthy banking families and goldsmiths such as the Paris Brothers in France, would surface on the back of the need for credit. Through the issue of all kinds of annuities with different maturity rates, all commanding their own set of interest; both countries would commit themselves to servicing debt, many times struggling to pay off the interest. Much as in the case of modern economies these issues would ultimately lead to a need for systems of managing the debt and seeking discount rates on payable interest in order to limit default to creditors and stop the need for currency devaluations as to not destroy confidence in public credit, which had proved itself a fundamental tool in public finance. In England, the need for reducing the Exchequers burden in servicing the public debt would create an atmosphere that would enable the restructuring of the astute Sword Blade Bank and its directors, into a trading company endowed with a monopoly over commerce within the area described as the South Seas, who in exchange for such would commit to the procurement and management of a portion of the floating debt. In France a combination of shifts in Political power, an absolutists economic framework and a need for a radical revitalization of the economy weighed down by inefficiency and credit commitments, would create the perfect staging ground for the system of an exiled Scottish gambler by the name of John Law, whose revolutionary ideas in finance, would revitalize French commerce, and lead to the creation of a trading conglomerate of an unprecedented size, which among other functions would enact a system for administering public credit.

Introduction

In this paper I will set out to analyse and create a concrete, complete picture of the mechanics on which two historic and ingenious schemes for alleviating masses of public debt where built. I will examine the schemes´ functionalities and question their fundamental designs as systems principally developed for managing the public debt accumulated; debt whose financial commitment ultimately preceded the arduous economic instability that plagued the French economy and hampered the English Exchequer in the first fifteen years of the 1700s. Finally I will explore and offer evidence of the schemes sanction in the creation of what can be considered runaway speculation on each companies...
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