Britain looks to clear debts dating back to 1700s

Low interest rates prompt Exchequer to make payments on centuries-old liabilities

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 the Second World War and that he wanted to pay off other bonds for debt incurred in the 18th and 19th centuries.

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 Co., 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 per cent or less, paying out to holders of historic debt anything between 2.5 and 4 per cent per year makes little sense.

But the manoeuvre 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.

Gary Shea, head of the school of economics and finance at the University of St. Andrews, said historic debt is “real,” even if the majority of public borrowing is fairly recent.

“The taxpayer is still financing the interest payments on it,” he said.

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 Osborne is following three centuries later.

“We are now in a period,” said Shea, “in which interest rates are even lower than they were in the 18th century.”