Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

108 Money, Bank Credit, and Economic Cyclesnever achieved. In short, the Bank of England eventuallyfailed, despite its privileged role as the government’s banker,its monopoly on limited liability in England and its exclusiveauthorization to issue banknotes. As a result of its systematicneglect of the safekeeping obligation and its practice ofgranting loans and advances to the Treasury against thebank’s deposits, the Bank of England suspended paymentsin 1797 after various colorful vicissitudes, including theSouth Sea Bubble. 117 Also in 1797, the same year the Bank ofEngland was forbidden to return deposits in cash, it wasdeclared that taxes and debts were to be paid in bills issuedthe bankruptcy of many private banks that had extended loans to thecrown or had directly bought treasury bonds with funds from demanddeposits. See Kindleberger, A Financial History of Western Europe, pp.53–54.117 In 1720 the South Sea Company devised an ambitious plan to takeover Britain’s national debt for a sum of money. This company emergedfrom the Tory party, just like the Bank of England, and was intended tohelp finance the war. In return, the government granted privileges tocertain corporations. The actual aim of South Sea Company promoterswas to speculate with company stock, to the extent that governmentdebt obligations were accepted in payment for new stocks. During thatyear the Bank of England extended loans on its own securities to facilitatetheir acquisition, just as the South Sea Company had done. This setoff an inflationary process in which the price of company and bankstock was driven to great heights, generating huge profits. Speculators,including many company officials, took advantage of these benefits.A portion of profits was invested in land, the price of which alsorose significantly. All of this speculative and inflationist mania came toan abrupt halt during the summer of 1720, at the same time John Law’snetwork of speculation began to deteriorate in Paris. Once prices beganto fall it became virtually impossible to stop their plunge. South SeaCompany stock prices plummeted from 775 points in September to 170in mid-October and Bank of England stocks dropped from 225 points to135 in just one month. Parliament responded by passing the Bubble Act,which from that time on severely limited the establishment of corporations.However, it was not until 1722, and after much difficult negotiation,that the financial problem was alleviated. That year Parliamentapproved an agreement between the Bank of England and the South SeaCompany, stipulating that the former was to receive four millionpounds of the latter’s capital through yearly payments of 5 percent,guaranteed by the Treasury. See also the end of footnote 43 of chapter 7.