William Hogarth – The South Sea Bubble
The South Sea Company was founded in 1711. The company was part of the treaty during the War of Spanish Succession, which was traded in return for the company’s assumption of debt run up by England during the war. The South Sea Company collapsed in 1720.
- Central banks appear more powerful than at any time in their history – has something changed?
- Not really – because of their role in government debt management and fractional reserve banking, central banks have always possessed this power
The main driver of stock market performance, since the 1980’s, has been interest rates. It will continue for the foreseeable future. Its influence has increased inexorably over the past thirty years but the mispricing of the market rate of interest has been a distorting and destabilising factor for much longer, in fact, since the invention of the central bank.
In the first part of this article I will look at the development of central banking with specific reference to the Bank of England. In part 2, I go on to suggest that the long run effect of government borrowing, at lower rates than corporate borrowers, increases pro-cyclicality, crowds out more economically productive private investment and, even as it reduces absolute interest rates for all borrowers, drives rates further below the “natural rate” leading to malinvestment.
Part 1, however, is predominantly an attempt to learn from history. You may detect the occasional “inverse déjà vu” – the unconventional monetary policies of the last few years have even more egregious precedents.
A brief history of central banking
Medieval Banking
The Bardi, Peruzzi and Acciaiuoli companies of Florence were the first true banks of the modern era.
…click on the above link to read the rest of the article…
