The Sword Blade Bank

Establishing a corporation used to be a rare feat, not as simple as filing a form. Indeed, incorporation and the legal benefits it provided to financial and non-financial firms were closely guarded rights, the product of charters rarely conferred. So, if a corporation’s business model was on the way out and its value dwindling; it would still be protected from true worthlessness by its charter. Even a shell company could be worth something, especially in the days when incorporating was not straightforward, in England or anywhere else. One would rather sell or reinvent a business than dissolve it and lose that valuable intangible asset, a corporate legal identity.

In the first few years of the 18th century, this is exactly what happened with the Hollow Sword Blade Company, a sword manufacturer in England turned land speculator in Ireland. The company even entered the banking business, a long cry from its original purpose of producing armaments. The company is a curiosity but is also significant to the history of finance if for no other reason than the fact its business model was a precursor to that of the South Sea Company of bubble fame.

Swords

One of the most astounding corporate reinventions in history took place at the very start of the 18th century. It was a decade earlier though, in 1691, that the Hollow Sword Blade Company was not so tersely incorporated as “The Governor and Company for Making Hollow Sword Blades in England”. It was established by financiers Sir Stephen Evance and Sir Francis Child who paid £50,000 to secure a charter from Parliament, then an infrequently bestowed, and in this case expensive, privilege. The company’s charter gave it limited rights but these crucially included the ownership of land in its own name.

Whatever its later financial operations, the Hollow Sword Blade Company began as a manufacturer or rapiers, a sword then used by European armies. There had been growing demand for the weapon spurred by the expansion of the army and the Nine Years’ War then underway. The company was conceived to provide an alternative to French blades whose importation was banned during the war, but first, the company had to import foreign workers with knowledge of making the swords. Such was the shortage of production, and its associated know-how, in England.

“We have given and granted, And do hereby for Us our heirs and successors give and grant, unto the said Governor and Company and their successors, agents, workmen, and servants the sole power, privilege, and authority of using and exercising the said instruments, engines, and mills for making hollow sword blades within this our Kingdom of England and all our other Dominions” – Charter of the Hollow Sword Blade Company, 1691

Buyout

For whatever reason, the owners of the Hollow Sword Blade Company wanted out within a few years of the company’s formation. This may have had to do with the end of Nine Years’ War in 1697 which reduced military demand for swords. In any case, the company was acquired by new entrepreneurs sometime around 1700. The new proprietors of the Hollow Sword Blade Company included Elias Turner and George Caswall, both bankers, and John Blunt, a shoemaker’s son who became a broker and later a baronet.

This was to become an illustrious set and included future directors of the infamous South Sea Company, whose own creation was a few years out. These men were nonetheless more interested in banking than sword making. The company was reinvented; its factory was leased to new operators and the last batch of rapiers were advertised in December 1703.

Ireland

Rather than manufacture swords, the company’s attention shifted to real estate, specifically Irish real estate. The opportunities there arose from political circumstances. The Glorious Revolution of 1688 had brought William and Mary to the throne in England and Scotland; however, it initially brought war to Ireland, where the armies of William III and the ejected king James II fought for control.

Williamite victory resulted in the confiscation of estates belonging to James II’s supporters, of which there were many in Ireland. So many, that one million acres valued at £1.5 million was seized. Initial plans to dole out the property to the supports of William III was halted and replaced with a scheme to liquidate the estates to pay off the debt accumulated during the war and restore the government’s credit, which had never been good in the preceding century.

However, the estates put up for sale garnered limited demand due to distrust in the inviolability of title to the seized land and a scarcity of local buyers with sufficient capital in Ireland. Despite this, the Hollow Sword Blade Company emerged as an unlikely external buyer. Under its financially minded managers, the company purchased much of the unsold land at low prices, acquiring a quarter million acres in Irish estates for £200,000. This was land previously valued at close to £300,000 by the trustees arranging the sale for the government and the rents generated by the land were estimated to be £30,000 per year. If the rents were realized this would have amounted to an annual return of 15%.

“The next Trick they try’d, and which was indeed the Master-piece of their Knavery, was getting an Assignment of the Forfeited Estates in Ireland into their Hands: Indeed they began the World upon this Prospect, and expected to have had the whole Kingdom of Ireland mortgaged to them” – Daniel Defoe in The Anatomy of Exchange-Alley, 1719

Not even twenty years later, another financial entrepreneur attempted something similar with properties confiscated in Scotland after a revolt there against the king, George I. However, property in Scotland could not be had as cheaply as it could in Ireland and the company involved in those investments, the York Buildings Company, paid over £300,000 for estates earning cumulative rents of £15,000 annually, a 5% yield on the invested funds. Nonetheless, that firm became one of the largest landowners in Scotland as had the Hollow Sword Blade Company in Ireland.

The large purchases by the Hollow Sword Blade Company raise the question of how such purchases were financed. After all, how much money had the company made selling swords? The answer is unknown but also irrelevant because the company funded its Irish land purchases by issuing new shares.

However, this was not a typical offering of stock. Rather than raise cash exclusively, the company allowed investors to trade army pay debentures, and other state debts then trading at a discount, for shares. This gave the company a portfolio of government securities acquired for less than face value. These securities were then exchanged for the Irish estates; Parliament had encouraged the transfer of Irish land for the cancellation of debts as a solution to the country’s indebtedness. This became the preferred method of purchasing land because purchasers were able to apply the debentures at face value towards the acquisition price even though their market values were lower.

The company initially recorded the acquired land in its books for £400,000 and this proved to be a gross overvaluation. First, rents came in below expectations, just £18,600 was earned after a year as economic problems in Ireland made rent collection difficult. Further, title to land was always perilous in Ireland where disputes were common and lawsuits often held in a legal limbo between Irish and English courts with different sympathies. In the end, the company sold most of its Irish estates by 1710.

Banking and Bubbles

Issuance of its new stock made the previously obscure company the seventh largest in England. The company did not wait until it was divested of its property in Ireland to reinvent itself yet again, this time by transitioning into banking. From here, the company became even more widely known as the Sword Blade Bank. The firm began offering mortgage financing to other purchasers of confiscated Irish estates starting in 1703. It earned 6% on this Irish lending but also lent against government securities in England at 5% interest. It is crucial to note that the Bank of England, established not that long ago in 1694, still had a monopoly on banking in England. So, the Bank sued and petitioned Parliament in order to defend this monopoly.

The Bank of England was successful in stopping the Hollow Sword Blade Company from lending money after new legislation on the issue was passed in 1708. Not only was the lending business discontinued but these events may have encouraged the company to abandon its Irish business altogether in 1709-10. It sold the Irish land at a loss but considering it used debts trading at a discount to make the purchases, it likely broke even in cash terms. However, as a consolation of sorts, the company did get the right to conduct a state lottery to raise £2 million, a right previously belonging to its foe, the Bank of England.

Regardless of its constantly shuffling business interests, the company’s leadership saw their reputations rise. The founders found high positions at other firms. John Blunt became a director of the East India Company for example. They also had the ears of the politicians. George Caswall may have come up with the idea of the South Sea Company in a letter to Robert Harley, the Chancellor of the Exchequer. Caswall later became a director in the South Sea Company as did another partner at the Hollow Sword Blade Company, Jacob Sawbridge

The South Sea Company was a mirror of the Hollow Sword Blade Company in many ways. First, there was the common leaders in men like Caswell and Sawbridge. However, some elements of the concept behind the South Sea Company was a copy of what was done in Ireland. Like the Hollow Sword Blade Company’s Irish land purchases, the South Sea Company was funded by the conversion of public debt into stock in the private company.

The list of connections between the firms continue. The Hollow Sword Blade Company again tested the Bank of England’s monopoly, lending against South Sea Company shares during the boom years. In 1720, the company suspended new lending when the price of South Sea Company stock began to fall but it was too late. The former sword manufacturer failed when the South Sea Bubble continued to unravel in September 1720.

Lesson

The Hollow Sword Blade Company failed just as the South Sea Bubble crashed back to earth. It was a fitting end; the firm was just like the South Sea Company, a monument to the financial innovation, or improvisation, of the times. A company originally engaged in making swords became the seventh largest company in England, one of the largest landowners in Ireland, and a firm, along with its leaders, involved in the making of one of the first financial bubbles in history and perhaps the one with the longest lasting consequences.

More from the Tontine Coffee-House

Read about the York Buildings Company, which was originally a London water utility but turned into a land speculator in Scotland. Learn more about the South Sea Bubble, including where it took place and its literary legacy.