Britain’s financial inadequacies

The Britain of the seventeenth-century and the Britain of the eighteenth-century were almost different countries, both structurally and geopolitically. Britain had undergone revolutionary internal change which allowed it to rise to the top of the geopolitical hierarchy, but the hierarchy remained the same. Britain had gone from a peripheral island to the most powerful country in the world, power being shared among the same European powers. The lessons of the internecine feuding of the seventeenth-century led to England, and therefore Britain’s, growth into a powerful state machine. Britain’s financial inadequacies had cost them dear in the preceding century, exemplified in the resounding defeat in the Second Anglo-Dutch War (1664-67). Almost a century later, however, Britain emerged victorious in the Seven Years’ War (1756-63) against the hitherto hegemonic France. What had changed to allow this shift from a relatively uninfluential country to the only nation able to defeat France? A series of revolutions within Britain facilitated a shift in political-economic structure. The Glorious Revolution of 1688, the Financial Revolution of the 1690s, and eventual founding of the Bank of England are widely regarded by historians as allowing Britain to become an international superpower. These political and economic events were symbiotic in bolstering the English state. The causes of these events, however, were not spontaneous. Although the 1690s were marred by crisis and protracted in terms of development, as Revolutions often are, the development of the Bank of England, and the reasons for its success, lie both within and without the financial realm, and within and without the decade. The Bank of England’s timing was crucial in its success, as it came at a crossroads of economic and political change, and was able to meet to financial needs of a nation at war, giving an acute advantage over Britain’s rivals. The developments in finance and political-economic thought of former decades created the economic conditions in which a bank constructed on ‘imaginary money’, or credit, with a National Debt could be founded. But also, the political climate of the 1690s specifically was crucial in ensuring that the Bank of England succeeded while to many other proposed banks did not. In this political-economic maelstrom, the Bank of England emerged at a crucial time and was able to support Britain in its political endeavours.
The period in which the Bank of England was established has reached historiographical consensus as being a ‘Financial Revolution’. This concept can be misleading. The developments which marked the 1690s as remarkable were not entirely specific to that decade. The crucial conceptual shift from material money towards credit money, for example, as the sociologist Georg Simmel noted, is not as radical as first anticipated due to the fact that coin and notes are conceptually the same and that this conceptual similarity had been developing before the 1690s. Changes in what was economically normal developed alongside changes in what was viewed as political normalcy. During the seventeenth-century, Britain had been marked by a period of political turmoil. From the Civil War, the advent of the Interregnum, and the Glorious Revolution, the constitutional settlement was shaken. These tremors led to a serious rethinking of what the English constitution entailed, culminating in the removal of hereditary succession with the accession of William III. Although historians had generally agreed that ‘in the main public relations to the Financial revolution were as hostile as they were later to the Industrial Revolution’, Steve Pincus has highlighted a new argument has emerged that there was a more modern capitalist consensus emerging in England in the 1688 period, with the Glorious Revolution creating an atmosphere for them. The desire to resolve England’s financial woes, he argues, led to a massive increase in the circulation of pamphlets which supported financial change. But these pamphlets already marked the mid- to late-seventeenth century. The endemic nature of these pamphlets and the fact that the volume increased synchronically with political change shows that the seventeenth century was a time of both political and economic reconsideration. ‘Revolution’ can be misleading. It distorts the fact that Britain was going through immense changes during the period, from Cromwell to the Bank of England, that were both evolutionary and revolutionary. Whereas financial instruments changed dramatically in the 1690s, this ignores the foundational thought on which the Bank of England were built were developing before the ‘revolutionary’ event of 1694.

These ‘evolutionary’ aspects are immediately apparent in the epochal-structural developments on which the ‘Financial Revolution’ were built, such as the legacy of the Cromwellian Interregnum. Domestically, Cromwell’s constitution enshrined limits on sovereign pay. These were a principles carried over to the Restoration. Leaders had hitherto ‘lived off their own’, but the first Restoration Parliament stated, ‘That the present King’s Majesty’s Revenue shall be made up [to] Twelve hundred thousands Pounds a Year’. This was the first time that Parliament had exercised oversight over executive revenue. Furthermore, the excise of 1643 was retained at the Restoration, and the direct taxation of the Interregnum was retained in order to secure revenue after 1660. Dickson concludes that the fiscal developments of the Interregnum and Restoration period created a ‘surer footing for government borrowing’. These financial innovations of the Cromwellian period which were carried over at the Restoration helped facilitate later financial developments that reached crescendo in the 1690s. Murphy concludes, as a result, that, ‘some of the financial innovations of the post-Restoration also laid the groundwork for the developments of the post-Glorious Revolution period’. Mid-seventeenth century developments acted as a precursor and catalyse to the more profound financial shifts in the 1690s that would see ideas of revenue raising and oversight of expenditure flourish. The developments of this era aided in the foundation of a more economically powerful Parliament and banking system.

The financial innovations of the Interregnum and post-Restoration period brought with them an increasing shift towards a system based on credit. This rise in credit systems helped further cement foundations on which the Bank of England would later be erected. Frank Melton has noted that banking as an institution had existed even before the Bank of England was created, highlighting the dynastic credit-banking system that proliferated under goldsmith-bankers such as Sir Robert Clayton from the 1660s. The main credit-based system, fractional reserve banking, of the Bank of England was first introduced by the likes of these goldsmith-bankers. The growth in this credit system is apparent too in the proliferation of pamphlets during the Restoration period about credit and a trust therein. William Killigrew’s pamphlet, written in 1663, argued that if paper money was used in the same way as gold and silver it was economically sound. Dr Lewis likewise argued from 1677 for the need for a financial system based on credit. These synchronic developments of goldsmith-banking and the rise in political economists putting a greater emphasis on trust towards in the functionality of money, facilitated a shift in the economic outlook on credit. These aided in building a surer foundation on which later banks, especially the Bank of England, could be erected as they provided the germ of thought for a much larger institutional adaptation.

Nexus shifts such as these were to become a focal point in a major financial event before the Financial Revolution. Charles II’s Stop of the Exchequer in 1672 marked the fiscal limits of the British state and displayed its relative fiscal backwardness. Despite carrying many major financial reforms from the Restoration aiming to create a more monetarily sound sovereign, Britain failed to meet the obligations to prior creditors and prepare for war in the United Provinces thus leading to Charles’s unilateral suspension of payments. War stopped the payments, but, as Carruthers has highlighted, ‘the default demonstrated both the shaky condition of public finances and the weak position of public creditors’. The crown was seen as being in a parlous financial situation: not only did it fail to meet expenditure, but the gulf in trust guaranteed by Parliament to creditors and the whim of a sovereign became apparent. The Stop cannot be directly linked to the creation of the Bank of England, but what it did achieve was to create questions surrounding the accountability of lending to the crown. For Roseveare, Charles’s ‘quixotic initiative’ was to create an accountable financial system still within the confines of absolute executive sovereignty. The Stop, therefore, precipitated a debate about whether and how the executive’s finances should be managed. The Tory party believed that these kinds of banks designed to lend to the government fostered Republics by undermining the rightful prerogatives of the Crown; while the Whigs believed they merely enacted a kind of oversight on executive expenditure and ensured that debts were repaid. The Stop influenced these party-political ideas. It also mixed with the ideologies and the legacy of the Interregnum, creating a debate over the nature of Crown finances. This debate would later be enmeshed itself with the manifold propositions for a system of banking.

The other major financial event prior to the Financial Revolution was the Recoinage crisis. Britain’s coinage, which had been clipped away to produce small pairings and traded for the same value, had been devalued in all but name. Pamphlets raged proposing numerous resolutions. The eventual decision to recall all coin, as proposed by John Locke against Isaac Newton and William Lowndes’s idea of devaluation, was a declaration that the value of silver was fixed by natural law. Although self-evidently untrue, as all value ebbs and flows, it marked a further shift towards trusting a system of credit. With silver as the basis for all value, the value of the Sterling could be adjusted. Wennerlind has highlighted that this decision meant that ‘credit and coin were now intertwined.’ This is apparent in the pamphlet literature of the Recoinage crisis. Wennerlind’s analysis is important to the Bank of England’s as later inception. Being a bank which used a fractional reserve system based on silver, it was vital that the coinage system was perfect to ensure that the Bank’s basis of financial operation was accurate. If the coinage was deficient, the Bank would be deficient at its very core.

Wennerlind highlights the increased use of the death penalty against clipping under Isaac Newton as Warden of the Mint, indicating an increase in both government involvement and interest in the upkeep of the coin’s respectability. Newton only commuted sentences when the convicted gave details of clipping, displaying the primacy of the coinage’s security. The case of Peter Cooke, for example, who was commuted by providing evidence facilitating Newton’s successful prosecution of the major clipper William Chaloner. The stay of execution for Cooke but execution of Chaloner indicates the seriousness with which the government took the information and prevention of clipping. The public nature of these executions has been highlighted by Foucault as part of a larger systematic attempt to establish a Panopticon system. Foucault argues that the use of theatrical punishment techniques fostered an internal surveillance of the individual, helping highlight its use by Newton for preventing the undermining of silver. Newton’s efforts to undermine the clipping and the effectiveness of this public punishment system are reflected in the Old Bailey records indicating a drop to single digits in the number of executions for counterfeiting in the two decades after the Great Recoinage Act of 1696. The value basis of the Bank of England – silver – was therefore strengthened by the Great Recoinage through government intervention and political economists such as John Locke writing about the importance of silver. It strengthened the base on which the Bank would be erected. The government’s cracking down on counterfeiting which undermined silver coinage under Newton fortified the material pillar on which the Bank was established; while the economists’ strengthening of silver fortified the theoretical pillar on which it was founded.

These transitionary elements, although not linked directly to the Bank’s inception, laid the foundation for why it was the Bank of England and not other proposed banks that was successfully established. They acted as a base on which the Bank’s particularities were able to flourish. The political catalyst for the Bank of England specifically, not banks generally, was the Glorious Revolution of 1688. As Steve Pincus has shown, ‘an English national bank was already the subject of hot dispute’ in the public sphere. The likes of Samuel Lambe had argued early on for the need for a bank and Hugh Chamberlen developed the idea of an Office of Credit which would act as a ‘generall Store-house, receiving all parties Goods, and delivering out their Tickets’. As such, the argument for the establishing of a bank was not a novel development of 1688. What 1688 did establish was a political system based on Whiggish principles and thus moved the Overton window to Whig political and economic ideology. Historians are in agreement that the Bank was a Whiggish institution and William Paterson, the Bank’s founder, secured the support of extremely prominent Whigs such as Michael Godfrey and Charles Montagu. The proponents of this particular style of Bank benefitted greatly from the support of the now in-power Whig party. The Tory party had supported James II’s continuation, and thus fallen fowl of William III’s favour. The Glorious Revolution and the Whig power it enshrined was intrinsically connected with the establishment of the Bank of England in particular, providing the political basis that would allow such a bank to be founded. This was not a catalyst for the development of a bank specifically, rather one that specifically enshrined Whigs principles and because of the Bank of England’s Whig connections it had a political advantage over any Tory equivalents.

With the Whigs placed in the ideological hegemonic position by 1688, it allowed a shift in political economy towards Whiggish principles. The court and party of James II had endorsed a system of Tory land-based, zero-sum political economy and finite understanding of wealth. The Whig’s claim was diametrically opposed to this, arguing that wealth was potentially infinite due to the notion that it was created by human labour. For Whigs, as long as production continued, wealth would continue to grow. The supplanting of the Tory ideology in favour of the Whig’s in the aftermath of 1688 and their ascendancy was shown in the landmark case of Nightingale v. Bridges (1689). Pincus has highlighted that this ruling ‘insisted that Parliament as the representative of the people, the people who created property through their labour, could regulate trade.’ With the Whiggish principles enshrined politically and legally, it could manifest itself economically. This meant that while under the Tory land ideology ‘during the whole Term, the Grantor is always in Possession; and is free from any fear of being Outed, or Foreclosed’, the amount of wealth a government could accrue from land was potentially finite. Paterson was concerned entirely to increase the monetary circulation, and consequent benefits to trade. The change in the political economic zeitgeist was crucial for the establishment of a bank which aimed to increase the money in circulation, as it created the ideological atmosphere and circumstances in which such ideas could gain circulation and credibility. If it was not for these paradigm shifts, the potential for the Bank’s theoretical bases would have failed to gain mainstream acceptance.

Ideological, political, and economic shifts were met with a new challenge in the aftermath of 1688. The aim of William III was to preserve the Protestant ascendancy not only in Britain but in Europe more widely. From 1689 Britain was at war with France, the most powerful nation in Europe. The new British state could not forego revenue, and after the failure of the Land Tax from December 1689 to raise sufficient revenue for the new bellicose foreign policy, money shortage was chronic. Fearing a repeat of the Stop of 1672, Goldsmith-bankers and other wealthy individuals were reluctant to lend as individual entities. However, as a consortium, as Kerridge has highlighted, it was possible. The crisis led to Parliament requesting proposals for increasing revenue. Numerous proposals were made, including the sub judice ‘Bankers’ annuities’ and many plans with little detail. It was William Paterson’s idea of a Bank of England that was eventually agreed upon in April 1694, but as a shaky compromise devised by Chancellor Montagu. It promised to raise the necessary £1.2 million with repayment backed by an Act of Parliament, promising payment with future tax revenues. If not for Parliament’s elevated financial position, this backing would have relatively valueless. Subscriptions came rapidly due to the offers or privileges such as the issuing of notes. The list of 1,268 subscribers was filled by 2 July, having opened on 21 June. It was principally designed to lend to the state to ameliorate the dearth of cash for the Nine Years’ War, disturbingly shown by the naval disaster of the Battle of Beachy Head in 1690. Paterson summarised the crisis that,

‘When this War begun, the Credit of the Nation was low, and the Wits on both sides, found no better way to supply the Necessities of the Government, than by enhauncing the Price and Interest of Money; the effect of which was, that the Government was obliged to pay from double to treble, or higher interest’.

The crisis made the government desperate, a government controlled by Whigs guided by Whig political economy. The support of the Whigs was thus crucial. But the Bank of England was not to be a perpetual institution. It was intended as fiscal ephemera, to provide cash for a war that Britain could not wage without considerable financial backing. What the Bank of England promised was immediate revenue, which it delivered, greatly aiding in the war effort and contributing the Britain’s military success in 1697. Britain’s financial capability gave it a considerable edge over France who were embroiled in financial crisis by 1696, winning the Bank support from the government at a crucial stage in an expensive war.

The ideological and circumstantial shift with William and war created a fiscal void in which the Bank of England, as a lender to the government, could place itself. Hitherto the East India Company had been the primary institution of lending, and had enjoyed considerable power and influence. The ‘number of trades in East India Company stock rose from an average of 44 per annum in the early 1660s to over 650 in the late 1680s. The increase in stock market activity with the ongoing evolution of public finance, allowed the East India Company to hold a very powerful position in James II’s finances. As James had endorsed a Tory political economy, appointing Sir Josiah Child as financial adviser rather than John Locke or Carew Reynell, the Company benefitted from James’s support for the monopoly privileges of the East India and Royal African Company, rather than a national bank. Routine cash gifts to Charles II, and later James II, alongside James becoming a shareholder in 1686 was thus initially an advantage to the Company, but after 1688, as Carruthers has highlighted, the ‘association with James made the Company politically vulnerable, and the Company’s opponents within the mercantile community exploited the situation’. The association with the Tories of the East India Company left them politically beyond the pale, creating a new need for a system of borrowing and easy cash lending. The political and ideologically economic displacement of the East India Company meant that it no longer held a monopoly on the institutional reins of England’s financial potential, and created a position in which the Bank of England could have a place.

The shortage of money in the Nine Years’ War has been highlighted consistently by historians as a catalyst for the institutionalising of the Bank. The need for money, however, offered opportunity to all financial ideas, not just to the Whiggish proposals. One such was the East India Company, which despite its loss of favour viewed the need for money as creating an opportunity to regain support. March 1694 witnessed the Commons agree, after consulting the Company, to negotiate a £600,000 loan without interest from the old East India Company in exchange for an extension of its Charter. But the ideological-economic change was such that the confirmation of the Bank of England, with the promise of a £1.2 million loan, effectively sentenced the East India Company to the political wilderness. The Tory’s failure through the Land Bank was symptomatic of this ideological shift. Competition between the Tory East India Company and the Whig rivals culminated in the formation of the New East India Company, promising £2 million to the state backed by the moneyed interest now so invested in the Bank of England. Contemporary pamphlets remarked on the political alliances between the Tory Old East India Company and the Whig Bank of England and New East India Company. The eventual conglomeration of the Old and the New was a symptom of the later ideological acceptance of the Banking system. The East India Company, then, was an abortive attempt by the Tories to compete with the Bank of England. The political-economic shift in the hegemonic economic outlook and fall from grace due to its alliance with James II ensured that the Company was supported by neither of the twin pillars of power in the period: economic thought and politics.

The reason that the Bank of England succeeded against other proposed banks is not immediately apparent after its inception. It was to be a temporary expedient. The Bank of England, however, had a much surer start than its rival. During the mid-1690s, much of the Bank’s opposition rallied behind the idea of a National Land Bank. Various Land Bank schemes were proposed in the late 1690s. Rather than invest in stock in government debt, it would invest in land or mortgages to provide government revenue. Of the three schemes backed by influential individuals, two agreed to collaborate. The scheme of John Asgill and Nicholas Barbon, supported by Hugh Chamberlen, was enacted in July 1696. The subscription was a major failure. Only £2,100 was raised from three subscribers. The Bank of England was therefore free to consolidate its position and absorbed another £1 million in government tallies. This, as Roseveare highlights, led to an extension of its charter until 1711. Reasons for the Land Bank’s failure are manifold. Chamberlen’s ideas were immensely speculative, arguing that the Land Bank would ‘Infinite[ly] increase Trade, enrich the Nation, Employ the Poor, and produce many other Benefits’. This pamphlet made clear that the Land Bank was not sure of its existence, unlike the Bank of England’s position to temporarily lend money to the government for war. Moreover, the Recoinage of 1696 soaked up clipped coins before 4 May and 24 June, the July 1696 enactment meant that there was a lack of the silver coin available that was intended to raise the initial sum.

Unlike the Land Bank and other proposed banks, the Bank of England had a surer raison d’être, which was cemented by the overall timing of its creation. With a new King following a foreign policy centred around checking French expansion, the developments of trust in a credit system, and the shift in political economy to the Whigs, the Bank of England’s utility was immediately appreciated. The post-Revolution Parliament were in agreement that they were ‘too lax with Charles and too generous with James’. William, for Roseveare, marks a transition from financial deference to the Crown towards treating the monarch as ‘a tenured executive, a public servant’. As such, North and Weingast have argued that because the Glorious Revolution allowed the government to control finance, through the Bank of England, public creditors could feel more confident in how secure their investment would be. These developments over the period combined with the desperate need for money in the Nine Years’ War combined to provide the catalysts for the Bank to come when it did. The dire need for money during wartime was the first time that Parliament had mooted the idea of a bank, so it was in these circumstances that any of the proposed banks were to be selected. The timing of the Bank was crucial for its success against other Banks. After an evolution of public finance, during a war that desperately required credit, and before the Recoinage of 1696 created the disastrous circumstances for the Land Bank that precipitated its fall, the Bank of England had surer foundations on which to develop as opposed to the other banks considered by Parliament.

The Bank of England’s timing, and the ill-timing of the Land Bank, then, ensured that the Bank survived while the latter failed. The immediate utility of the Bank in the context of war also contributed to its success against other proposed banks. By 1696, the Bank had lent some £1,240,000 to the Treasury and issued £887,000 of notes to private customers. By the time the Land Bank had been established, the Bank of England had fulfilled its initial objective by lending the desired £1.2 million. The failure of the Land Bank assisted in the acceptance of the Bank of England. Its continued use in the aftermath of other bank’s failures, and the acceptance of the Bank thereafter, led to its widespread use. The failure of the land bank allowed the Bank of England to strengthen its position; in 1707 the Bank’s charter was extended for a further 21 years. This extension was symptomatic of even the sceptical Tories endorsing the Bank. Shares in the bank were bought by many people, including King William and Queen Mary, numerous Dukes, and many other peers. But also, the Bank had a grounding in a European theatre for subsidising armies elsewhere on Britain’s behalf. Kerridge has thus concluded that the Bank became, through war, ‘the financial counterpart in the Protestant coalition of the armies raised from among European Protestants’. With the bank now so engrained in Britain’s new fiscal-military state, it became of interest for the political powers to utilise it. As Roseveare highlights, the ‘politics of finance began to take precedence over technique’, displaying the acceptance of the system of the Bank of England. The epochs of Tory Lord Treasurer Godolphin (1702-10) and Robert Harley (1710-14) via the management of the Tory-inclined Queen Anne’s finances and the waging of the War of Spanish Succession, were ‘characterised less by innovation and more by consolidation of the lessons of the 1690s’. This new use of the bank by Tory ministers is symptomatic of an acceptance on their part of the utility of the Bank and its successful establishment. Political consensus was now reached on the Bank, aided by the war-punctured eighteenth-century, cementing its position as an institution integral to the growth of British power on the world stage.

The success of the Bank of England against other proposed banks, then, was not straightforward. Rather, it was the result of decades of financial and political evolution. The foundations on which the Bank were built and the reasons for its success are not wholly to be found in the need for financial assistance at war nor to provide the Whigs with the financial clout to run a burgeoning state system. Financial and political relations were connected; there was ‘simply a political economy’. From the Interregnum to the Revolution, Britain had been changing considerably, and these changes were reflected in their economic and political outlook. The reasons for the success of the Bank were thus a result of a culmination of various circumstances. It was not the Whiggish tale of Macaulay, of financial developments resulting in the Bank; but rather a shaky compromise built upon the developments of the previous decades. The Financial and Glorious Revolutions are not mutually dependant, but likewise not mutually exclusive. Without William there would be no war nor Whig Ascendancy. Without war there would have been no Bank and no wartime recession precipitating the Land Bank. Likewise, had it not been for the development of economic thought and trust in a system of credit, the Recoinage would not have created the circumstances in which the Land Bank failed, and the Bank’s ability to lend to the government would have been impeded to the point of non-existence. The reason the Bank of England succeeded against other proposed banks were not necessarily economic arguments, but combined with its timing and its success in fulfilling its economic promises. ‘It was more than merely “financial”’. Without the developments of the past, and the circumstances of the present, the success of the Bank of England against other proposed banks would have been by no means guaranteed.

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