The Financial Revolution: A Brief Introduction

Newton’s London was the centre of a revolution in global trade and finance. This was the period in which the city overtook Amsterdam as the capital of international exchange. Much of the silver and gold bullion that passed through Newton’s hands was obtained from Peru and what was known as the ‘Gold Coast’ in Africa, and then went via goldsmithing and the East India Company channels to India and China. The Mint was powering the expansion of the British Empire in the eighteenth century.

Long-distance international trade and war encouraged the introduction of new financial mechanisms, many of them modelled on Dutch practices. The Bank of England was founded and a Million Adventure lottery run in 1694 to raise money for the Exchequer, creating the first national debt and supporting the increasing circulation of Bills of Exchange, the forerunner to paper banknotes. Meanwhile, joint-stock trading companies, insurance and investment plans, and new forms of assessing the risks and benefits of financial trading were devised for everything from the manufacture of paper and textiles to the hunt for sunken treasure ships. Public enthusiasm for investment opportunities was stoked by a growing press culture which reported stock prices and exchange rates, debates raging about public debt, trade balances with France or financial union with Scotland, as well as advertisements for new commercial ventures.

State debt was in the millions in the early eighteenth century. In 1711 Robert Harley, Tory First Lord of the Treasury and Chancellor of the Exchequer, joined with the banker John Blunt to create the South Sea Company, a joint-stock whose profits could be used to pay down the public debt. In return for a trade monopoly for the east coast of South America, given by the crown, the company would give all holders of government debt shares in the company, turning public debt into private opportunity.

The scheme captured the imagination of the public, and there was enthusiastic purchase of shares. But when the company failed to make their anticipated income they simply issued more stocks, artificially inflating their value. This created what became known as the ‘South Sea Bubble’ – the first modern financial speculation crisis. Confidence in the company began to falter, and so creditors raised interest rates and suspended loans. The stock collapsed, and many investors lost fortunes, including a range of courtiers, nobles, government ministers – Isaac Newton himself supposedly lost around £20,000.

Britain’s economy, security and leadership were severely undermined by the crisis. Amid outrage and (accurate) accusations of corruption, Robert Walpole, First Lord of the Treasury, Chancellor of the Exchequer, and Britain’s first prime minister, constructed a bail-out scheme designed to avoid a public audit of the Company’s murky records. He negotiated for the Bank of England and the East India Company to take on nearly £4 million of South Sea government debt, split its stocks between the Bank and the East India Company, and ordered the South Sea Company to place its silver holdings in the Mint, keeping the company and the markets afloat, and helping investors recoup a portion of their investment.