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Interest Reductions in the Politico-Financial Nexus of Eighteenth-Century England

Published online by Cambridge University Press:  13 September 2011

Christophe Chamley
Christophe Chamley*
Affiliation:
Professor, Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215; and Directeur d'Etudes (EHESS), Paris School of Economics, Ecole Normale Supérieure, 48 bd Jourdan, 75014 Paris, France. E-mail: chamley@bu.edu.
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Abstract

In the 1730s and 1750s the English government proposed to refinance the redeemable debt by “lowering the interest rate.” In the ensuing coordination game among creditors, large investors like the Bank of England could block the policy change by demanding cash. Using 4 percent and 3 percent annuities prices to analyze market expectations, this article studies two refinancing episodes with very different fates. Lord Barnard failed in 1737 because his terms were too strict and financial agents induced a temporary market crash. Lord Pelham succeeded in 1750 because his better terms fit market prices, and interest rates had fallen much faster than expected.

Type
ARTICLES
Information
The Journal of Economic History , Volume 71 , Issue 3 , 13 September 2011 , pp. 555 - 589
Copyright
Copyright © The Economic History Association 2011

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