Welcome to my newsletter, Age of Invention, on the causes of the British Industrial Revolution and the history of innovation. You can subscribe here:
Last week, we explored the transformative 1620s. This week, I’d like to provide a short introduction to the 1720s - a decade that’s mostly ignored or forgotten. Just as before, I’ll be focusing on what the decade meant for British institutions and innovation.
It was, most noticeably, an age of schemes.
Over in France, a Scottish banker named John Law had in the late 1710s overseen an ambitious scheme to reorganise the government’s finances. He ran the Mississippi Company, one of the many companies with monopolies on France’s international trade. His scheme was for the company to acquire all of the other similar monopolies, so that it could have a monopoly on all of the country’s intercontinental trade routes. By 1719, the Mississippi Company had swelled into a Company of the Indies, which in turn had purchased the right to collect French taxes, from which it took took its own cut. In exchange for acquiring these monopolies, Law’s new super-monopoly would buy up the French government’s accumulated war debts, allowing repayment on more generous terms. By allowing the state to borrow more cheaply, the scheme was to be a key plank in improving French military might.
Meanwhile, in Britain, a very similar project was afoot. Following the War of the Spanish Succession, one of the things Britain won from France was the asiento - the monopoly on supplying African slaves to Spain’s colonies in America. The asiento was given to the South Sea Company, which had the monopoly on British trade with South America, and which in 1720 began to follow a scheme similar to Law’s. Given developments in France, it would not do for the British state to be left behind in terms of its capacity to take on more debt for war. Thus, with political support, the South Sea Company began to buy up the government’s debt, persuading its creditors to exchange that debt for increasingly valuable company shares.
In 1720, both schemes came crashing down. In the case of Law’s scheme, he had printed paper currency with which people could buy his company’s shares, but in 1720 discovered he had printed too much. When he prudently tried to devalue the company’s shares to match the quantity of paper notes, the devaluation spun out of control. In the case of the South Sea Company, the causes of the crash were a little more mysterious, perhaps even verging on the mundane. One explanation is that too many wealthy investors simply tried to sell their shares so that they would have ready cash to spend on holidaying in Europe, precipitating a minor fall in the share price which then led to a more widespread panic. Regardless, it did not end well. The company itself continued for many years thereafter - it even got involved with whaling off the coast of Greenland - but the collapse of its share price ended its chance to restructure the government’s debts.
Importantly, as a result of the South Sea affair, Parliament introduced major restrictions on new companies. The famous “Bubble Act” of 1720, for example, prevented the formation of any new joint-stock companies with transferable shares - the kind of basic corporate form that we take for granted today - unless specially incorporated by act of Parliament or by royal charter. Curiously, the restriction was not a reaction to the crash. The Bubble Act actually preceded it, having been created by the South Sea Company itself. In order to funnel more investor money into puffing up the value its own shares, it had used its political connections to get Parliament to essentially ban the creation of any stock-market competitors. But despite the short-term aims of the act, the restrictions remained in place for well over a hundred years. Many of the most capital-intensive innovations of the British Industrial Revolution, including the rise of factories and the spread of the steam engine, thus took place despite severe limitations on companies’ ability to form and raise funds. Elements of incorporation like limited liability - again something we take for granted today - would not be made widespread until the mid-1850s.
And, culturally, the South Sea crash led to widespread distrust of schemes. The public vilified “stock-jobbers” who sold company shares, as well as the “projectors” who put such schemes together. Although the word projector had initially been similar to how we’d use entrepreneur today, the label took on an increasingly negative connotation in the early eighteenth century. The projectors were not all fraudulent, however, and the more careful business plans were often vilified too. Real innovation and finance were affected alongside the pipe-dreams of a few over-excited entrepreneurs with a plan to reduce the national debt.
Despite these problems, innovation in Britain in the 1720s was very much on the rise. There was so much going on, I think it’s worth a post of its own next week.
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