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That Debt From 1720? Britain’s Payment Is Coming
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LONDON — Share prices went through the roof, speculation ran wild and money poured into ill-fated ventures before the boom turned, inevitably and catastrophically, to bust.
Following that financial crash in 1720, called the South Sea Bubble, the British government was forced to undertake a bailout that eventually left several million pounds of debt on its books. Almost three centuries later Britons are still paying interest on a small part of that obligation.
Now, prompted by record low interest rates, the British government is planning to pay off some of the debts it racked up over hundreds of years, dating as far back as the South Sea Bubble.
George Osborne, the chancellor of the Exchequer, said this month that in 2015 Britain would repay part of the country’s debt from World War I, and that he wanted to pay off other bonds for debt incurred in the 18th and 19th centuries.
George Osborne, the chancellor of the Exchequer, wants to pay off bonds for debt from the 18th and 19th centuries. Credit Oli Scarff/Agence France-Presse — Getty Images
That includes borrowing that may have been used to compensate slave owners when slavery was abolished, to relieve the famine in 19th century Ireland and to bail out the infamous South Sea Company, which caused the bubble in 1720.
Economically, the move is no different from a homeowner’s decision to refinance a mortgage at a lower rate. In an era when the government can borrow at 1.5 percent or less, paying out to holders of historic debt anything between 2.5 and 4 percent per year, as they are now, makes little sense.
But the maneuver is also a reminder of how debts incurred by governments are passed down through generations.
In many cases, the underlying debt has already been refinanced, sometimes multiple times, since being incurred. The bonds paying interest on the debt have been bought and sold and passed down through generations, still paying interest indefinitely, until the government decides to pay them off. So old are some of the bonds that closing the books on them may require an act of Parliament in some cases.
Gary Shea, head of the school of economics and finance at the University of St. Andrews, said historic debt is “real,” even if the vast majority of public borrowing is fairly recent. “The taxpayer is still financing the interest payments on it,” he said.
One of the bonds Mr. Osborne plans to pay back next year is a 3.5 percent war loan issued in 1932 in exchange for earlier bonds. It still has more than 120,000 holders, including 38,000 who own bonds with a face value of less than £100, or about $155. In March, those who still own the bonds will get the original stake back at a cost to the government of £1.9 billion.
Also for repayment are “4 percent consols,” or securities, issued in 1927 by Winston Churchill, then chancellor of the Exchequer, partly to refinance National War Bonds originating from World War I. Now worth £218 million, they will be repaid in February.
Reissuing bonds was a big administrative endeavor in earlier eras. In 1932, the conversion of an earlier war loan to one paying lower interest required so many temporary clerks that 700 lambs were prepared to feed them one evening, according to a history of Britain’s debt by Jeremy Wormell. Now, in the computer age, the task is relatively straightforward, officials say.
Within a total debt of around £1.4 trillion, the historic liability accounts for a small portion — about £2.5 billion, or less than two-tenths of one percent of the total outstanding.
But over the centuries Britain’s borrowing has at times been huge and has come in different forms, sometimes including loans from other governments.
It was not until 2006, for example, that Britain fully repaid its lend-lease debts to the United States from World War II.
Some international loans from the aftermath of World War I were never fully paid and were effectively put aside in 1934, though Britain also failed to recoup debts it was owed by other nations.
The recent eurozone debt crisis is creating a similar legacy in countries that took bailout loans. Ireland is not scheduled to make its final repayment to international creditors until 2042. Greece is scheduled to do the same in 2054.
Britain’s current stock of open-ended historic debts does not include international loans but is made up of a variety of bonds known as gilts, a name that comes from the original British government certificates that had gilded edges.
Of course, much of the original debt has been eroded by inflation. According to research for the British Parliament, prices rose by around 118 times between 1750 and 1998.
The debt originating in part from the South Sea Bubble, the oldest still on the books, was consolidated into bonds issued in 1853, and those who now own them receive an annual payout of 2.5 percent.
According to the Bank of England, that original debt of around £4 million was probably incurred around 1722, though other sources suggested it might date from a few years later.
Experts say that some of the government bonds issued in the years after 1720 were created to replace earlier ones that had paid higher interest — a principle that Mr. Osborne is following three centuries later.
“We are now in a period,” said Mr. Shea of the University of St. Andrews, “in which interest rates are even lower than they were in the 18th century.”