New, exotic financial instruments, such as credit default swaps, are being cast as one of the principal villains in the credit crisis. But most financial innovations, properly used, enhance our standard of living by helping create and deploy capital more efficiently. Every instrument can be abused In the early 18th century both Britain and France experienced a mania for stocks, which led to the South Sea and Mississippi bubbles. Equities collapsed spectacularly. Paris clamped down, making it nearly impossible for independent stock companies to form, while London was far less restrictive. In fact, Britain's creation of innovative financial institutions and instruments enabled it to best France in the chronic wars the countries waged against each other during the 18th century, even though France was a much wealthier and larger nation. The Bank of England and the development of government bonds enabled the British government to borrow prodigious sums of money at low interest rates, in contrast with the usurious rates the French monarchy had to pay.
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