Ye Olde Credit Crisis: 18th Century U.K. Bank Warning for Sale

Ye Olde Credit Crisis: 18th Century U.K. Bank Warning for Sale

By Scott Reyburn
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April 17 (Bloomberg) -- The Bank of England should take care when it invests public funds in risky or money-losing ventures, according to documents being sold by Christie's International.

The warning is no reference to the U.K. central bank's role in the rescue of Northern Rock Plc. The London-based auction house said it refers to what might be called ``ye olde credit crunch'' of 300 years ago.

The 1715 pamphlets ``The Ruine of the Bank of England, and All Publick-Credit Inevitable'' and ``The Directors of the Bank of England, Enemies of the Great Interest of the Kingdom'' may fetch as much as 20,000 pounds ($40,000) in a London sale on April 30.

The forecasts of doom were written by John Holland, co- founder of the Bank of Scotland, who criticized the British government for converting the national debt into the stock of the ill-fated South Sea Company.

``Holland is trying to warn people that the government is getting into a messy situation by involving itself with the South Sea Company,'' Julian Wilson, a specialist in Christie's books and manuscripts department in London, said in a phone interview.

In 1711, the British government converted 10 million pounds of its war debt into the stock of the newly established South Sea Company, which had been granted exclusive trading rights in Spanish South America. The promise of a monopoly led to the share issue being heavily subscribed and quickly rising in value. Meanwhile, little trading took place in the South Seas itself.

South Sea

Wilson said ``The Ruine'' attacks the Bank of England's plans to convert a further 800,000 pounds of debt into the South Sea's speculative stock.

``This is indeed very Dreadful to think on, and will put many thousand Families under the greatest Consternation and Distress,'' wrote Holland.

The South Sea stock price reached a high of 950 pounds in July 1720, collapsing to less than 200 pounds in September, economic historian Larry Neal said in his 1990 study, ``The Rise of Financial Capitalism: International Capital Markets in the Age of Reason.''

Among the most famous of the thousands of victims of the bubble was the scientist Isaac Newton who, according to his niece, lost 20,000 pounds. ``I can calculate the motions of the heavenly bodies, but not the madness of people,'' said Newton.

In September 1720 the Bank of England attempted to support the South Sea share price by promising to exchange the company's bonds for silver at a price of 400 pounds, according to http://www.moneyweek.com in November 2007. Panicking South Sea stockholders immediately lined up outside the company offices to get their savings, moneyweek said, echoing the panic around the time of the 55-billion pound rescue for Northern Rock.

Holland's criticisms are part of a bound collection of early 18th century pamphlets and petitions in the library of the Foljambe family of Osberton Hall, Nottinghamshire.

Christie's 205-lot sale of the Foljambe Library is expected to raise up to 2.5 million pounds, the auction house said.