Many of the basic institutions of European business life had developed before 1715—banks and insurance firms in the Renaissance, for example, and chartered trading companies in the sixteenth century.
Mercantilism had matured in the Spain of Philip II, in the France of Louis XIV and Colbert, and in Britain between 1651 and the early eighteenth century. The steady growth of seaborne trade, stimulated by an increasing population and a rising demand for food and goods, was a main force in quickening the pace of commerce.
The growing maritime trade increased the demand for insurance of ships and cargoes. In London early in the century marine insurance brokers gathered at Edward Lloyd’s coffeehouse in Lombard Street to discuss business, news, and politics. Thus was born Lloyd’s of London, a firm that developed the standard form of policy for marine insurance and published the first detailed and accurate shipping newspaper. Another great London institution to emerge from the informal atmosphere of the coffeehouse was the stock exchange.
Marine insurance prospered in part because improved charts and the installation of lighthouses and buoys made navigation safer. Captains could determine their geographical position at sea by using two new instruments, the sextant and the chronometer. The sextant, an elaboration of the telescope, showed the altitude of the sun at noon and thus indicated the ship’s latitude. The chronometer, a clock unaffected by the motion of the ship, was kept on Greenwich mean time (the time at the meridian running through Greenwich, near London). The two new instruments also made it possible to calculate the ship’s longitude.
On land, improvements in communication and transport came much more slowly. Except for the relatively good highways of France, European roads were scarcely more than wide paths. The shipments of goods overland remained slow, unsafe, and expensive until after 1750, when the construction of turnpikes and canals gradually improved the situation.
Business people faced the handicaps imposed by restrictive guild regulations, by the many different coins, weights, and measures, and by the numerous local tolls. Sweden, for example, minted only copper money, including a coin weighing 43 pounds. Baden, one of the smaller German states, had 112 separate measures for length, 65 for dry goods, 123 for liquids, and 163 for cereals, not to mention 80 different pound weights. Even in France, a relative model for uniformity and centralization, all sorts of local taxes and other obstacles to internal trade persisted.
The survival of local vested interests showed the limitations of the power of the mercantilist state. Although mercantilism required the regulation of trade on a national basis, no eighteenth-century government had the staff needed to make national regulation effective. Austria, Prussia, and some other German states endeavored to assimilate mercantilism into a more systematized policy called cameralism (from camera, the council or chamber dealing with expenditures and income). Their main effort was directed toward planning state budgets, especially the increase of revenues. Other states often relied heavily on private companies and individuals to execute economic policies.
Thus the English and Dutch East India companies exercised not only a trading monopoly in their colonial preserves but also virtual sovereign powers, including the right to maintain soldiers and conduct diplomacy. Inventors worked on their own, not in government facilities. On the whole, private initiative accomplished more than governments did, though it could also get out of control, as demonstrated by two speculative booms early in the century—the Mississippi Bubble in France and the South Sea Bubble in England.
In 1715 hardly a state in Europe could manage the large debts that had piled up during the recent wars. Yet all of them had to find some way of meeting at least part of the large annual interest on bonds and other obligations or else go bankrupt. The governments of France and England transferred the management of state debts to joint-stock companies, which they rewarded for their risk taking with trading concessions. The commerce of the companies, it was hoped, would prove so lucrative that their profits would cover the interest charges on government bonds.
John Law (1671-1729), a Scottish mathematical wizard and financier, presided over the experiment in France. Law asserted that the limited supply of silver and gold made it difficult to increase the amount of specie (coined money) circulating in any country, and therefore made it difficult to promote business. Paper money, Law concluded, was the solution—paper money backed by a nation’s wealth in land and trade.
The death of Louis XIV gave Law his opportunity. The regent for Louis XV, the duke of Orleans, permitted Law to set up a central bank in Paris. Whereas the value of French money had been sinking as the government progressively debased the coinage, Law’s bank issued paper notes of stable value. Business activity at once increased. Next, Law set up the Compagnie des Indies, commonly called the Mississippi Company, which received a monopoly of commerce to and from the Louisiana colony.
Law’s system reached to almost every corner of the French economy. Merging with the royal bank, his company took over the government debt and agreed to accept government bonds in partial payment for shares of Mississippi stock. Many bondholders responded enthusiastically to Law’s offer. Law, however, had to sell additional shares of Mississippi stock to obtain sufficient working capital for his company. To attract cash purchasers, he promoted a boom in Mississippi stock. Investors caught the fever of speculation, and by the close of 1719 Mississippi stock was selling at forty times its par value.
The Mississippi Bubble soon burst. As the price of Mississippi shares rose higher and higher, cautious investors decided to cash in. They sold their shares, received payment in banknotes, then took the notes to Law’s bank and demanded their redemption in specie. The bank exhausted its reserves of gold and silver and suspended specie payments in February 1720. Law was forced to resign in May 1720; he fled France shortly thereafter.
Within a few weeks of Law’s resignation the South Sea Bubble burst in London. Management of the English government’s debt had been assigned to the Bank of England. Founded in 1694 as a private institution, the bank issued notes and performed other services for the government during the last wars against Louis XIV; but in negotiations for the privilege of managing the debt, the bank was outbid by the new South Sea Company, which paid the government an exorbitant sum. The resources of the company were slim, consisting largely of the right to exploit the trading concessions that Britain obtained at the end of the War of the Spanish Succession. These privileges were limited to furnishing Spain’s American colonies with forty-eight hundred slaves annually and sending one ship a year to Panama for general trade.
The South Sea Company invited government creditors to transfer their bonds into company stock. The directors of the company bought and sold shares in secret to create a more lively market, encouraged purchases of stock with a down payment of only 10 percent in cash, and spread reports of forthcoming sailings by the company’s ships on voyages that did not take place.
The gullibility of the investing public, though remarkable, was not inexhaustible. South Sea shares fell; Parliament ordered an investigation and, to protect the company’s creditors, seized the estates of its directors, who had in the meantime destroyed the company’s books and fled the country.
The bubbles were an extreme instance of the economic growing pains suffered as Europe groped for solutions to new and baffling financial problems. Law’s system released French business from the depression induced by the defeats of Louis XIV. It also stimulated settlement in Louisiana. The Mississippi Company, reorganized after 1720, consistently made a large profit. In England the strongest institutions rode out the bursting of the South Sea Bubble; the East India Company continued to pay an annual dividend of 5 to 10 percent, and the Bank of England again became the financial mainstay of the realm.
In the political shakeup following the collapse of the Bubble, the Whig statesman Robert Walpole (16761745) came to power with a program of honoring the debt as a national debt. This was a novel concept in an age when most states treated their debts as the monarch’s personal obligation. No subsequent stock crisis assumed the proportions of that of 1720, and thereafter British banking grew rapidly and on a stable foundation.
