The Anglo-French Rivalry and the Rise of British Finance, 1688-1720

Abstract

Why did Great Britain rise as a hegemon in the 18th century Europe? What was the role of sovereign borrowing in the process? Great Britain had access to unprecedented levels of war finances via the expansion of the debt market in the early eighteenth century, and its eventual success was reflected in Britains prodigal expenditure on military and naval equipment. Effective government borrowing has hitherto become one of the predominant factors in explaining the rise of Great Britain as a global hegemon in the eighteenth century. This dissertation focused on the eighteenth century Anglo-French rivalry underpinning British financial growth to argue that the pressure to financially outperform France provided Britain the incentives to implement schemes that restructured the debt market, from public ownership of debt to modern forms of private holdings. The two grand schemes were to convert the unfunded debt to the funded debt by inducing interest rate flexibility of loans and reducing the cost of debt via the sinking fund and the South Sea Bubble. The implementation of each scheme was triggered by financial developments in France. As a result, the two schemes committed Britain to lower the cost of its national debt and institutionalize private sector control over the national debt. The thesis, in particular, focuses on the financial developments from 1700 to 1720 because when distinguishing the different types of debt, the twenty years starting from 1700 to 1720 is the transitional period where old forms of debt are restructured to modern forms of funded debt. In other words, the ownership of the national debt restructures from the public sector to the private sector, typically in forms of the bond market. This dissertation has divided the twenty years into 1700-1710 and 1710-1720 to analyze major financial developments that enabled the restructuring of the national debt. From 1700 to 1710, two political events affected Britain to compete for its fiscal-military reputation over France, in order to secure finance in the debt market. Britains military outperformance over France and internationalization of the British debt market, made Britain increasingly reluctant to forgo its future finances by reneging its commitment. To sustain the inflow of investment from foreign creditors, reputation fiscal-military mattered and especially Britain had the pressure to consistently manifest her devotion to consistent implementation of debt servicing policies despite domestic complexities. From 1710 to 1720, Britain implemented two grand schemes that restructured British national debt from unfunded debt to modern forms of funded debt. Each of the schemes was achieved in response to the financial developments in France. The first scheme to lower the interest rate of the national debt was implemented by the Tories in 1711 via the founding of the South Sea Company. This scheme was triggered by developments in 1702 France where their saving banks were re-established and their Treasury notes were circulating faster via the lowered interest rate on the Treaty notes. The second scheme to repay the debt was implemented by the Whigs in 1716 in response to the seemingly rapid fiscal recovery of France via the development of the Mississippi Company in 1716. In response, Britain actively sought to repay their public debt via the sinking fund and lower the cost of debt further by generating the South Sea Bubble that encouraged the private sector to provide speculative incentives to absorb the old forms of debt to modern forms of government bonds. The thesis, thus, provides two significant implications for international political economy. First, this thesis shows how inter-state relations influence the trajectories of financial growth for a state. I argued that the international dimension or the Anglo-French rivalry provides a better explanation in explaining the restructuring of old forms of national debt to modern forms of national debt. Recasting the international dimension to the discussion suggests that international factors can equally, and more powerfully explain government finance. More importantly, however, this thesis provides implications for hegemonic rivalry and its effect on financial growth. Anglo-French rivalry played an important role in setting the foundation for the rise of British finance, and not necessarily the endogenous factors of the British hegemon. Anglo-French rivalry and the continental war in Europe provided Britain the pressure to go beyond domestic political complexities and consistently implement policies favorable to debt servicing.