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In the late 1700s, France ran a persistent deficit and by the late 1780s struggled with how to balance the budget and pay down the debt. After heated debate, the National Assembly elected to issue a paper currency bearing an attractive 3 percent interest rate, secured by the finest French real estate to be confiscated from the clergy. Assignats were first issued in December 1789 and initially were a boon to the economy. Yet while the first issues brought prosperity, subsequent issues led to stagnation and misery. In this edition of Crisis Chronicles, we review how fiat money inflation in France caused the collapse of the French assignat (subscription required) and describe some interesting parallels between the politics of French government finance (subscription required) in the late 1700s and more recent fiscal crises.
Today, a leisurely trip down a canal on a quiet Sunday afternoon is a reminder of an unhurried time away from the hectic pace of modern commerce. But this was not always so. From the late 1790s into the early 1800s, canal transport was a crucial element of the industrial revolution—a time when barges were loaded with raw materials and goods rather than tourists and holidaymakers. By the mid-1700s, manufacturing was evolving from a cottage industry to a factory system in which goods could be produced en masse. But mass production required heavy raw materials like coal and a way to ship sometimes fragile goods such as pottery to market. And while more roads were being built or improved, they weren’t very efficient—one horse could pull a ton on land, but up to thirty or even fifty tons on a boat. So when the Third Duke of Bridgewater built a canal to transport coal directly to Manchester and Liverpool, the price of coal was halved, but the Duke’s profits soared. In this edition of Crisis Chronicles, we explore England’s Canal Mania, drawing on studies from The Economic History Review on Manchester, the Thames, and British Public Finance.
As we observed in our last post on the Continental Currency Crisis, the finances of the United States remained chaotic through the 1780s as the young government moved to establish its credit. U.S. Congress was finally given the power of taxation in 1787 and, in 1789, Alexander Hamilton was appointed as the first Secretary of the Treasury. Hamilton moved quickly to begin paying off war debts and to establish a national bank—the Bank of the United States. But in 1791, a burst of financial speculation in subscription rights to shares in the new bank caused a tangential rally and fall in public debt securities prices. In this edition of Crisis Chronicles, we describe how Hamilton invented central bank crisis management techniques eight decades before Walter Bagehot described them in Lombard Street.
During the late 1770s, a newly founded United States began to run up significant debts to finance the American Revolution. With limited access to credit and little to no tax base, the Continental Congress issued the Continental to finance the war. But by the end of the decade, inflation was nearly 50 percent, a suit cost a million Continentals, and the phrase “not worth a Continental” had entered the national lexicon. With the help of our fourth U.S. president, James Madison, we review why the Continental experiment ended so badly.
During the decade prior to 1772, Britain made the most of an expansion in colonial lands that required significant capital investment across the East and West Indies and North America. As commodities like tobacco flowed from colonial lands to Britain, merchandise and basic supplies flowed back to the colonies. With capital scarce in the American colonies, colonial planters were eager to borrow cheap capital from British creditors. But because planters often maintained open lines of credit through multiple trade channels, creditors had no way of knowing a particular planter’s indebtedness. So when two banks in London failed, contagion spread and the credit boom suddenly ended. In this edition of Crisis Chronicles, we learn the perils of private indebtedness and offer an inverse comparison of today’s “originate-to-distribute” mortgage market.
During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.
Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicles we meet the South Sea’s lesser-known cousin, the Mississippi Bubble.
In 1720, the South Sea Company offered to pay the British
government for the right to buy the national debt from debtholders in exchange
for shares backed by dividends to be paid from the company’s debt holdings and
South Sea trade profits. The Bank of England countered the proposal and the two
then competed for the right to buy the debt, with South Sea ultimately winning
through bribes to the government. Later that year, the government moved to
divert more capital to South Sea shares by hampering investment opportunities
for rival companies in what became known as the Bubble Act, and public
confidence was shaken. In this edition of the Crisis Chronicles, we explore the
rise and fall of the South Sea Company and offer a cautionary look at the
current reach for yield.
In the late 1600s, England operated a bi-metallic monetary system of high-value gold coins and lower-value silver coins. In the early 1690s, however, the market price of silver began to rise at a time when the mint price of gold was higher than the market price. Thus, gold bullion was flowing to the mint while silver coins were flowing to the commodity markets. By 1695, nearly half of the silver specie was missing from coin in circulation in England as coins were “clipped” (shaved) with the result that their face value no longer reflected the metal content. Ironically, low-weight coin was still accepted for tax payments. In this post, we recount England’s efforts to remedy the “ill state of the coin of the kingdom” during the re-coinage of 1696.
As Mike Dash notes in his well-researched and gripping Tulipomania, tulips are native to central Asia and arrived in the 1570s in what’s now Holland, primarily through the efforts of botanist Charles de L’Escluse, who classified and spread tulip bulbs among horticulturalists in the late 1500s and early 1600s. By the early 1630s, the tulip was a fixture in Dutch gardens. But Tulip Mania didn’t begin until the summer of 1633, when a house in Hoorn was exchanged for three rare tulips and a Frisian farmhouse was traded for a number of tulip bulbs. The lure of profit enticed novice florists to enter the tulip trade with minimal investment and small parcels of land, harkening back to the days of farmers taking up coin clipping during the Kipper und Wipperzeit. In this edition of Crisis Chronicles, we exchange the trading floors of today for the alcohol-fueled exchanges of the past as we dig up Tulip Mania.
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