Learning by doing: the failure of the 1697 Malt Lottery Loan

The failure in 1697 of the ‘Malt Lottery’, the second lottery loan, presents a fruitful case study. From a practical point of view, it tells us three things. First, the technical features of the English state lottery loans were established for more than a century after only three experiments. Second, its two components (‘lottery’ and ‘loan’) led to an abnormally poor return for investors since its expected return was 3.91 per cent whereas its effective return was 5.84 per cent – two figures in contradiction with the 6.3 per cent advanced by Dickson (1967). Third, a most strange solution was devised to counteract the failure: delivering the unsold tickets to the Exchequer to be used as cash. From a more theoretical point of view, the condition North and Weingast (1989) advanced for a successful financial issue proves necessary but not sufficient. The Malt Lottery failed (1,763 tickets sold out of 140,000) because it did not meet the three requirements for success: its return was too low and was lower than the return on competitive assets; its reimbursement dates were uncertain; and the economic and political environment was gloomy.