The Origins Of Both Endogenous Money And The Industrial Revolution

Written by Philip Pilkington

The latest issue of the Review of Keynesian Economics (ROKE) is out and it looks like this publication is taking off fast. It includes, among other things, an introduction by the president of the Argentinian central bank (which is available free online) and a book review by me (which is not). But here I want to focus on one paper in particular. It is by William E. McColloch and is entitled A Shackled Revolution? The Bubble Act and Financial Regulation in Eighteenth Century England (it is available free in working form here).

The paper in question is arguing against the story told by some economists that the Bubble Act of 1720 was passed in response to the infamous South Sea Bubble getting out of hand and that this then constrained the ability of private firms to borrow and incorporate until its repeal in 1825. McColloch argues that this was not the case. On careful examination it appears that the Bubble Act was passed in order to keep the South Sea Bubble afloat as it ensured that competitors could not soak up the liquidity that the South Sea Company required to avoid falling into the abyss.

In this post, however, I want to focus on the latter aspect as it ties into debates regarding the endogeneity of money and the role of governments and central banks in the economy. First, however, I should probably give some quick historical background as many may be unfamiliar with the relationship between the South Sea Bubble and contemporary forms of credit creation.

The South Sea Company came into existence in 1711. The main reason for its birth was because government borrowing was becoming increasingly costly. Even though the Bank of England had been established in 1694 its powers were not yet fully realised. Add to this the loss of confidence among the public in government debt due to the funding of the War of Spanish Succession (1701-1714) and you can explain the spiking interest rates at the time.