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In October 1720, John Hanger, governor of the Bank of England (BoE), and his fellow directors confronted the imminent collapse of the South Sea Company (SSC). The SSC directors urgently appealed to the BoE for funds to prevent collapse. Should the bank rescue the SSC? The answer to this question hinges upon an assessment of the origins of the market bubble, Britain's strategy of creating trading monopolies, the development and role of the new BoE, and Britain's jockeying to be a major power. The B case presents an epilogue.
1. Explore the role of development of the financial sector in public finance and national economic growth. In particular, these cases consider the transformation of a financial system from one comprising small and widely dispersed private banks and "goldsmith banks" to one dominated by one institution with a monopoly charter—the proto-central bank. 2. Review the influence of mercantilism on strategies of national finance. 3. Assess the early interactions between the state and the financial sector, giving particular attention to financial repression by the state. 4. Exercise simple analysis of financing for a distressed debtor. 5. Induce some principles by which governments and decision-makers might assess proposals to provide distress financing (i.e., bailouts) to banks and corporations.