Expert in 17th Century English Economic History Sees Parallels to Today’s Fiscal Crisis

February 22, 2013

History Professor Carl Wennerlind’s most recent book focuses on a financial system come undone, a public looking to its government for answers, and a monetary system badly in need of trust and transparency.

No, it’s not about the U.S. in the aftermath of the 2008 fiscal meltdown. Rather, its topic is the establishment of the Bank of England in 1694 and the events leading to its founding.

Wennerlind, an associate professor of history at Barnard, sees parallels between then and now, chief among them how deeply credit is embedded in our culture. “Credit is a remarkable human accomplishment that sets us apart from prior ages,” he said at a recent discussion at Café Columbia, an informal discussion series by University professors. “You can’t have a thriving, rapidly growing society without credit.”

Without access to extensive borrowing, people, companies and governments cannot operate properly. A big debt burden seems possible when there is optimism about the availability of revenue to service the debt. In times of crisis, any debt burden looks imposing.

That was the situation in which England found itself in the late 17th century, after decades of political upheaval that included the beheading of one king, a civil war, the restoration of another king and the Glorious Revolution, during which a Dutch regent was invited to take the English throne.

As if that weren’t enough, England was enmeshed in a bitter war against France that it couldn’t afford and desperately needed to boost its economy to grow itself out of the crisis. But there simply was not enough money, or “coin,” for people to conduct transactions and for commerce to expand.

Counterfeiters abounded, and coin clippers shaved off the edges of silver coins and melted them down to sell as bullion, undermining public confidence in the integrity of the monetary system. The philosopher John Locke warned that the counterfeiters constituted a greater threat to England’s safety than Louis XIV’s army.

There were mass hangings in central London to show the public that the government was serious about supporting the currency. As warden of the mint, Sir Isaac Newton investigated and prosecuted wrongdoers.

The government sought to resolve the crisis by establishing a national bank and the first generally circulating paper currency. The Bank of England issued capital stock and made a 1.2 million pound loan to the government, in paper money backed by a reserve of silver coin. At the same time, sophisticated stock and bond markets emerged in London. “England was thus arguably the place where modern financial capitalism arose,” Wennerlind said.

Wennerlind’s analysis of the crisis, Casualties of Credit: the English Financial Revolution, 1620-1720, was published in 2011 after six years of research that included trips to England to study original documents in the British Library.

His research got easier when Columbia Libraries acquired a database with electronic versions of tens of thousands of pamphlets written at the time by such authors as Daniel Defoe, Jonathan Swift and Christopher Wren.

The modern era of financial capitalism ushered in bubbles and bailouts. In the early 18th century, when the English government faced limits on what it could borrow, the South Sea Company sold stock in return for government bonds–and was given a monopoly on the slave trade from Africa to South America.

Soon the stock price began to soar. But when war broke out between England and Spain and trading to South America became impossible, the company had to look for other ways to boost its stock price.

A complicated mix of fraud and financial euphoria sparked a rapid stock market boom and subsequent bust—the infamous South Sea Bubble. The government’s efforts to save the nascent financial system involved a bailout of the Bank of England.

Not unlike some present-day fraudsters, Wennerlind said, those responsible for history’s first stock market crash, in which an enormous amount of financial assets went up in smoke, largely avoided serious legal repercussions.

Wennerlind, who was born in Sweden and came to the U.S. at 18 to attend the University of South Florida on a tennis scholarship, says he became interested in economics and the origins of capitalism when he saw poverty, racism and a crumbling infrastructure while traveling in the American South.

“What economists were offering wasn’t helping,” said Wennerlind, who earned his Ph.D. from the University of Texas at Austin. “I became interested in examining how, where and for what reasons economics originated and evolved.”

Wennerlind started out in the economics department at Barnard but for the past eight years has been part of the history department, teaching students at Barnard and Columbia economic history with colorfully titled courses like “Filthy Lucre: A History of Money.”

—by Georgette Jasen