Hoppit, Julian (1986) “Financial Crises in Eighteenth-Century England”, The Economic History Review, 39/1, 39-58.
“Because the financial system in the 18th century was evolving and becoming more sophisticated, […] the nature of crises developed and changed”. Historians have long disagreed on the very definition of what constituted a crisis in early modern England (p.40). The author defines a crisis as a moment when expectations change leading owners of wealth to abandon a type of asset for another leading to the falls in prices of the former. The more widely available the newly-sought asset is, the lesser the crisis.
We can divide 18th-century finance into three areas: public, private and corporate. Crises could affect all of these at the same time or simply one of two (p.41). Crises in corporate finance were rare; it commanded limited amounts of money and the Bubble Act prevented too much speculative activity.
Public finance had developed after the Glorious Revolution and the so-called Financial Revolution. Yet creditors’ trust in the government’s ability to honor its debt was limited and shocks such as the outbreak of a war could undermined their confidence (p.42). In the area of private finance, crises were often caused by the frenetic attempts of speculators to convert their paper instruments (e.g. bills of exchange) into coinage when confidence in the creditableness of borrowers was weakened (p.43).
The crises’ consequences
The author counts thirteen crises (1701, 1710, 1715, 1720, 1726, 1745, 1761, 1763, 1772, 1778, 1788, 1793, 1797) based on figures and the opinion of contemporaries. He uses the following indicators: prices of the Bank of England’s, the East India Company and the South Sea Company shares for public finance and the availability of bullion at the Bank of England (in times of crisis, it would be low as investors try to buy it as safety) for private finance. The exchange rates of the pound (in time of crisis, investors would typically look for foreign currencies) and the incidence of bankruptcy provide evidence for the both private and public.
Some crises led to a limited increase of bankruptcies (1701, 1715, 1720, 1745, 1761, 1763). The early crises were typically limited to the public sector (although the private sector also experience a few dramatic downturns in the early century: 1710, 1726). Overall, crises after 1770 seem to have had a much more general and spectacular effect on the English economy as indicated by the much lower incidence of bankruptcy indicates (p.45).
Even the collapse of the South Sea bubble led to surprisingly few business going under, indicating that the effects of the crises were limited to a few provincial speculators, and some London merchants heavily involved in finance (p.47).
“Alone among the crises of the 18th century 1763 was largely Continental in origin, arising from two main sources: the raising of loans for Prussiand postwar (p.49) reconstruction, and the collapse in Amsterdam of key lynchpins of the international monetary order.” But overall, in the later 18th century, crises in public finance became less significant. The Hanovrian regime was more secure and public credit had been tested over time and had lost its novel and experimental character (p.50).
After 1770, the number of bankruptcies during crises went up and the phenomenon was not limited to London any more. In the second half of the century, growth led to intense financial activity which induced risk-taking and speculation (p.51). Maturation of such investments as turnpikes, plantations in America and canals was long, the unrealistic expectation of investors were severely checked in 1772 (p.52). The effects on the whole economy (as observed though bankruptcies) was widespread and deep.
The 1793 crisis (the most important in the century) had very similar development, although this time centred on domestic cotton industry (p.54). When doubts started to arise on the viability of some project, investors rushed to exchange their securities for coins. The obliteration of the credit market weakened many companies that had previously widely borrowed and many collapsed as paying instruments were simply out of reach (p.55).
“In part, the crises of 1772, 1778, 1793 and 1797 can all be seen as the early growing pains of the first industrializing nation” (p.56).
Some blog posts about the South Sea Bubble