MONEY FOR NOTHING

The story of government debt finance, which sounds boring but definitely isn’t.

Science writer and MIT professor Levenson reminds readers that rulers throughout history have taxed citizens to pay bills. During wars, this proved insufficient, so they borrowed from rich people and often didn’t pay it back. As a result, governments paid higher interest than private borrowers and sometimes found no lenders. Alternatives such as seizing church money created other difficulties, but unpaid soldiers wreaked havoc. Britain solved this problem around 1700 when clever men invented the joint-stock company, which would exchange government bonds for stock in their business. The bonds were collateral for loans that the company would invest, make a profit, and pay dividends. What could go wrong? Succeeding in business takes time and expertise, but joint-stock shares had value immediately. One could profit trading them, and savvy company owners, with insider knowledge (not then illegal) and a printing press, went to town. Levenson’s fascinating subject, the South-Sea Company, was not the first but the most memorable. In 1711, Parliament approved a plan to trade its bonds for South-Sea stock, which they believed would skyrocket because the company possessed exclusive trade rights in South America. This trade never amounted to much, but few paid attention. The company absorbed a great deal of government debt and satisfied both owners and shareholders until 1720, when—for reasons no one, including the author, can explain—stock prices shot upward during a buying frenzy and then collapsed. While historians often portray this as a scam, Levenson points out that it worked. Despite recriminations following the crash, British leaders understood that issuing bonds that buyers could trade or use as collateral was a superb way to borrow. Other nations did not catch on for another century, during which time Britain’s ability to raise immense quantities of money allowed it to “punch above its weight class” in wars against far more populous and wealthy nations.

An enthralling account of an economic revolution that emerged from a scandal.