The Worst Debt-Crisis Solution a Country Ever Concocted
As the U.S. government lurches from crisis to crisis in resolving its long-term debt problems, Congress has debated a number of bad ideas, from indiscriminate spending cuts to minting a $1 trillion platinum coin. Plenty of countries have taken even less honorable roads to resolution, from devaluing their currency to outright default.
But arguably no country can match either the ingenuity or despicableness of the British when they tackled their own fiscal woes in the early 1700s. Faced with a ballooning national debt, English policy makers combined a complex debt-for-equity swap with promotion of the trans-Atlantic slave trade.
England pioneered the modern system of finance in the 1690s, by creating the Bank of England, developing a generally circulating credit currency, establishing sophisticated stock and bond markets, and introducing a long-term public debt secured by earmarked future tax receipts.
This system enabled England to prevail in a 20-year military conflict against a more populous, resource-rich and battle-weary France. But by 1710, England’s national debt had grown out of control and the new system of finance was stretched to its limit.
Much like today, the ruling party’s ability to survive in office depended on its capacity to come up with a restructuring plan that would satisfy the bond market. The key was to restore investor confidence in the likelihood that the debt would be adequately serviced and eventually paid off.
Recognizing that mere palliatives wouldn’t suffice, the Tory minister Robert Harley started the South Sea Co. in the spring of 1711. The new company was given the right to create a capital stock of 10 million pounds, which it would issue to the public in return for the deeply discounted unsecured government bonds in circulation. To make this public-for-private, debt-for- equity swap attractive to bondholders, Harley committed future tax receipts to pay interest on the debt the company absorbed. More importantly, he awarded the company England’s monopoly rights to provide Spain’s American colonies with African slaves -- a contract obtained as a spoil of victory in the war against France.
Harley hoped that investors’ dreams of great profits from the Atlantic slave trade would entice them to give up their bonds and accept stock in the South Sea Co.
Credit, as is often forgotten, is nothing more than belief, confidence and imagination. If enough people believe that a certain amount of value will be generated in the future or in a distant place, that value can be used today, either for consumption, investment or debt restructuring. It is this capacity to transfer value through time and space that gives credit an appearance of magic. It is also this capacity, of course, that makes credit precarious and subject to manipulation, well-intentioned and otherwise.
Harley’s Tories and the Whig opposition clearly recognized that for the South Sea scheme to work a favorable perception of the slave trade was necessary. To move public opinion in the right direction, each side employed a series of authors to write propaganda journalism. While the Whig writers sought to undermine confidence in the scheme, Harley’s side hired scribblers, including the novelists Daniel Defoe and Jonathan Swift, who extolled the plan’s virtues and promises.
Defoe jubilantly wrote that “Mr. Harley’s Proposal, of providing effectually for the payment of the Publick Debts of the Nation, and of Establishing a Trade to the South-Sea of America, hath fill’d the Hearts of all good Subjects with Joy.” Swift added that Harley’s innovation, if properly managed, could become “the greatest Restoration and Establishment of the Kingdom’s Credit.” Unsurprisingly, the two didn’t emphasize that England’s credit would now be dependent on the death and suffering of African captives. And their propagandistic projections succeeded in making the future profits of the trans- Atlantic slave trade seem almost limitless, which contributed to the success of the South Sea Co. in restoring confidence in the nation’s financial system.
By 1715, government bonds were once again trading at par and the Exchequer was able to borrow at favorable rates. Slavery, which now seems incompatible with finance, was in fact central to its survival at a formative moment of modern capitalism.
(Carl Wennerlind is an associate professor of history at Barnard College, Columbia University. He recently published “Casualties of Credit: The English Financial Revolution, 1620- 1720.” The opinions expressed are his own.)
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