I intended to post the fifth and sixth instalments of Helen Schofield's history of money yesterday, but actually only did the fifth. However, having now agreed with Helen and that at least one more instalment than expected is likely I will now post the sixth part as she wrote it here, because it is both quite long and important, with another two posts to come thereafter:
The 1672 Exchequer Stop
At the Restoration when Charles II came into power he had to make a deal with Parliament. This deal was that he would receive revenue agreed by Parliament mainly through taxes and that the power to increase taxes in the future would rest with Parliament. Parliament didn't guarantee the revenue and right from the first year of Charles's reign there was a significant shortfall. Charles couldn't mint much in the way of extra money because there was insufficient bullion coming in also the knowledge that tallies could be created to top up spending appears to have been lost. We know this because interest started being paid on tallies (to Custom Farmers) as well Treasury Orders but even these tallies lost out to the Treasury Orders as a means of raising money. So Charles started borrowing heavily in order to balance the books but never caught up so much so that by the end of the year 1671 the interest on the borrowing was as much as the revenue. There were mitigating circumstances such as the Great Plague and Great Fire of London and Charles agreed two funding deals with Louis XIV one secret and one public. The public one was to help England join with the French to fight the Dutch. The secret one concerned Charles going public at some stage he was Catholic although no date was determined and converting England to a Catholic country. He sort of honoured this condition on his death bed! The secret funding went towards Charles's personal expenses.
So Charles was in serious trouble by the end of 1671 he was responsible for paying for the English army and navy out of the revenue but was in arrears on these payments. He was persuaded by Thomas Clifford to put a temporary stop on Treasury Order payments for a year. Clifford was blinded by his intense dislike for the gold-smith bankers' usury and clearly didn't care if he ruined them. Many of them were because their many creditors who'd deposited coinage and tallies with them were placed in the predicament of finding it difficult to recover these items let alone any interest payment due from the gold-smith bankers. Essentially a slow motion bank-run developed based on the fact if you couldn't honour your debts you went to a debtor's prison and many gold-smith bankers did!
So how was this all resolved? For 34 years uptil 1706 interest was paid sporadically on the Treasury Order debt but never at the original 6% interest rate. No principal was repaid! In 1706 the debt was rolled into the newly declared National Debt and the original principal revalued at 50%. Interest started to be paid on the debt on a regular basis at 3% a year. Milevsky has done compound interest calculations and figured out that after 34 years the effective investment return on the Treasury Orders was 0.01%! Now both for the gold-smith bankers and their deposit investors this outcome to say the least was outrageous not to mention the human misery this abuse of monarchical and parliamentary power caused. Basically trust in government was at an all-time low yet and the species based currency was continuing to fail in terms of meeting demand for use as a medium of exchange. Something had to give!
The Bank of England 1694
Let me start by saying that not all gold-smith bankers and not all wealthy merchants were caught out or destroyed by The 1672 Exchequer Stop some continued to have influence in Parliament and the Glorious Revolution of 1688 had strengthened Parliament's hand against monarchical powers. England was therefore faced with two problems it had to resolve shortage of medium of exchange in the economy and the need to sort out the financing of government activity with the monarchy still directing much of that activity. The latter was especially pressing since the French navy had defeated the English and Dutch navy in a naval battle off Beachy Head (near Eastbourne, Sussex) in 1690. England needed a navy to beat the French! What could be done? There were many proposals but the one that won out was a loan contract with the government that resolved various issues of trust. This was set up as a privately owned renewable charter company under act of Parliament that was to be called the Bank of England. It was a joint-stock company with limited liability. The initial capital subscribed was in the sum of £1.5 million. Not all of this needed to be subscribed at once and the capital sum could be increased to increase its money creation power. A large part of the original subscription was made in government issued tallies.
The bank was empowered to deal in bills of exchange, make loans on promissory notes, and lend on mortgages. Its borrowing privileges were not specified, however, it could take deposits on any terms as long as its liabilities did not exceed the amount of the government debt (which formed the bank's capital stock). The main promissory note the bank came to issue was the banknote. Whilst the banknote didn't have an interest rate specifically attached to each note Parliament hypothecated a stream of tax revenue to pay the bank's capital subscribers an 8% annual rate of interest return on the £1.5 million capital subscribed and an annual management fee of £4,000. The bank was not supposed to issue paper money in excess of its subscribed capital but it did particularly banknotes. Essentially the banknotes were issued to the government to augment specie money. The bank for its part had to convert its banknotes to specie money on demand it also had to provide settlement services for the private banks (Country Banks) that sprung into existence issuing their own local banknotes. It did this because as yet it didn't as yet have a monopoly on the issue of banknotes as legal tender that didn't come till early in the 20th century. The Exchequer for its part agreed to accept Bank of England issued banknotes for tax payment (I'm not sure how Country Bank issued banknotes were used to settle taxes despite trying to research it).
Important aspects of the loan contract with the government were asymmetric and, from a modern perspective, favorable to the government. For example, the loan contract was non-callable. That is, the Bank could not demand repayment early. Conversely, the government was given the option to prepay the loan and terminate the Bank's charter with one year's notice during the eleven year term of the charter. Subsequent charters held to this same general pattern, specifying the amount that the loan would be increased, the loan terms, and the length of time the loan/charter would be in effect.
Over time and particularly with the Royal Mint filling in the denominational gap below banknotes with lower valued coins this increased demand in the UK economy substantially. The unreliability of workers running up large credit tabs disappeared and the more reliable demand from improved currency circulation kicked off the Industrial Revolution in the country. Why should this be? It's really important to grasp that non-MMTer's when told more currency is being put into an economy than being retired from it through, taxation, etc. automatically assume productive capacity within an economy is static. This isn't so the extra demand created draws down inventory, increases the output of existing machinery, creates demand for more capital investment and encourages the growth of new competitive enterprises often with better productivity than the existing and importantly also creating brand-new products and services.
To bring this all round to full circle the 1694 private Bank of England loan contract agreed with the government was nationalised in 1946. What, however, changed considerably between 1694 and now was the growth of private sector banking creating currency from nowhere in very large quantity but all with the back-up, or safety net of government created currency and especially after the Bank of England had been re-nationalised (see GFC)!
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“the Glorious Revolution of 1688 had strengthened Parliament’s hand against monarchical powers.”
I am not sure that is historically correct. The 1688 GR involved Parliament inviting William of Orange to take the British throne (England and Scotland had had a union of Crowns since 1603 – an entirely different historical event from the Union of the two Parliaments in 1707). This was designed to achieve the Protestant ascendancy. The monarchy as a result had great political power and went on to consolidate power by defeating Catholic Ireland at the Battle of the Boyne in 1690 an the subjugation of the Highland clans (during which the infamous Glencoe Massacre took place in 1692). How this power balance played out in the details of British monetary and banking history I don’t know but since money is fundamentally political and is a function of both power and purpose, then these events must have shaped that history. As the Bank of England was founded it in this period it must be closely related to these political events but I doubt that it reflects dominant Parliamentary power at this juncture.
I’d suggest that in effect the BoE did contribute to some reduction in both the power of the monarchy and of Parliament as when it was created, there were three poles of power instead of just two – effectively the monarch was obliged to borrow money against the collateral of tax raising which in the end only Parliament could approve.
And then as we know the BoE was a temporary institution (its charter was renewed nine times between 1694 and 1844,) it does tend to suggest ‘Advantage Parliament’.
http://www.progressivepulse.org/economics/promissory-notes-treasury-notes-and-bank-notes
@ Peter May
In your website article Peter you write the following:-
“This indicates that whilst both state and bank were seen to be of provisional mutual benefit the state was always in the driving seat.”
http://www.progressivepulse.org/economics/promissory-notes-treasury-notes-and-bank-notes
If by “state” you mean Parliament this would be correct because the 1689 Bill of Rights Act contained this rule:-
“levying taxes without grant of Parliament is illegal”
https://en.wikipedia.org/wiki/Bill_of_Rights_1689
@ Jim Osborne
Jim I’m not claiming that the Glorious Revolution completely got rid of the “monarch-in-Parliament” problem of split government just that Parliament’s hand was strengthened. Here’s what Wikipedia says about the effect of the Glorious Revolution:-
“… the Revolution ended a century of political dispute by confirming the primacy of Parliament over the Crown, a principle established in the Bill of Rights 1689.”
If you recall prior to this revolution a monarch could dismiss Parliament.
It’s the Declaration of Right 1689 and the Bill of Rights 1689 that has to be examined carefully to see what changed in the power struggle between a monarch and Parliament. the Declaration of Right was embedded in the Bill of Rights Act:-
https://en.wikipedia.org/wiki/Declaration_of_Right,_1689
https://en.wikipedia.org/wiki/Bill_of_Rights_1689
One notable change was a monarch could no longer levy a tax without Parliament’s approval.
Whilst the powers to raise taxes rested with Parliament it must be the case that at the time the relationship between the Protestant Parliament and the monarch was a matter “if you scratch my back I’ll scratch yours”. It was William who prosecuted the campaign to establish the Protestant ascendancy and it was to the monarch that the new BoE lent the money as I understand it…..backed by taxation authorised by the Parliament.
It is an interesting part of the story of the Massacre of Glencoe that it was not directly sanctioned by the king who made efforts to distance himself from the atrocity – the instigator was the Earl of Stair (John Dalrymple) who was the Secretary of State for Scotland, an officer of the executive and therefore an agent of the Parliament. The monarch was the figurehead of the Protestant ascendancy during this period – he did a good job for them. Any association in the public mind with the Glencoe Massacre would have a detrimental effect on his standing and legitimacy. Clearly there were tensions but it was a partnership I think.
@Dungroanin
Tally sticks I suggest were issued to increase the money supply – in effect a parallel currency to specie, which was itself limited to the amount of silver that could be acquired.
Also state issued tally sticks were spent into the economy with the assumption that they would come back – just like the promise to pay on the current banknote!
GIMMS have a very detailed post on “A History Lost — The English Tally” from 2019 and I wrote an effort the year before that: http://www.progressivepulse.org/economics/burning-tallies-and-what-bankers-have-forgotten.
BoE charter was for a limited time because it was new fangled – it might not work!
I would agree with your comments about the BoE lending not being easily repaid and although taxes were levied only as a result of Parliamentary approval borrowings were not…
Fascinating. Thank you.
What an excellent and fascinating read – thank you Helen… and Richard for the ‘special guest star’ piece. Also much appreciated the link to the piece comparing the Roman crisis in 33 CE tothe GFC 2008.
Although I don’t have a detailed knowledge of the period after 1688, I think it is reasonable to surmise that since the English Parliament had invited William to take the throne in order to establish the hegemony of Protestantism in England and enforce it elsewhere in the British Isles (remember Ireland was an English colony, although contested by the indigenous Catholic population and a fair number of the descendants of earlier settlers), that the Parliament was only to willing to enact taxes in accordance with the king’s wishes – nay, not wishes – demands. I assume that is the foundation of the revenues on which the king could rely to meet his promises to the new Bank of England. So, it seems to me that the BoE was a monarch’s bank, not a Parliament’s bank at the time it was established.
@ Jim Osborne
“So, it seems to me that the BoE was a monarch’s bank, not a Parliament’s bank at the time it was established.
I see it differently that from 1678 when the Whig Party was formed this resulted in significant pressure for reform of many things in what we now know as the UK. The formation of the Bank of England in 1694 was backed by the Whigs not the Tories, the latter tending to be ardent monarchists.
http://whigs.uk/who-were-the-whigs/
Whoaa there Helen – the link is to a history of the Whigs written by who?……Whigs. This is what they say about their origins……”The Whig Party was originally founded in 1678, at the start of Britain’s modern political history. The key principles of the Whigs were to defend the people against tyranny and to advance human progress. After securing the ‘Glorious Revolution’ in 1688, which established the primacy of Parliament over the Crown, the Whigs founded the Bank of England in 1694, and then crafted the Act of Union between England and Scotland in 1707. For the next 150 years, the Whigs laid the foundations for a decent and democratic modern Britain. During this period, there were just two political parties in Britain; the Whigs, who pressed forward, and the Tories, who tried to hold things back.”
Now that can hardly be described as an objective history – it is a Whig narrative about their history. It just confirms what we know about the foundation of constitutional monarchy. It does not describe the details of the power balance which existed between Parliament, Crown and the new Bank. No doubt in the context of the time Protestantism represented progress so the Whigs can rightly claim to have been a “progressive” party at the time of its foundation. But at the same time it undoubtedly would have been pragmatic and accepted the figurehead role of William as monarch and perhaps as some sort of “Trojan Horse” for the Protestant revolution. I would wager that they voted in Parliament to approve the protestant monarch’s demands.
All this would justify more detailed research but that can’t be a priority for me just now – we have a currency campaign to win here is Scotland.
@ Jim Osborne
Hold your horse Jim! I don’t have a modern day “political horse” in trying to relay the history of what went on in the 17th century and I don’t really see myself as a Whig or a Tory. As Milevsky says on page 17 of his book “The Day The King Defaulted”:-
“Authors with republican leanings (aka Whigs) tended to “trash talk” the King. The loyal royalists (aka Tories) defended him. The battle continues in twenty-first century.”
What you need to explain to us is what political faction is most likely to have included the following rule in the 1689 Bill of Rights Act:-
“levying taxes without grant of Parliament is illegal”
https://en.wikipedia.org/wiki/Bill_of_Rights_1689
I know which horse I’d put my money on after studying the historical odds as dispassionately as possible!
The reliability of the ‘Tory’ and ‘Whig’ designation is too often suspect if it is used as an explanatory political technique. It is flawed. If I select Sir George Downing to demonstrate the problem: the breathtaking audacity he displayed in coolly changing sides, this is less because he was exceptional in just how far he travelled (albeit peculiarly successfully), but rather because it was a political commonplace to attempt the journey, if not always carry it off advantageously. It should be no surprise that this was the age of the brilliant, brittle, utterly cynical Restoration comedy; providing its own commentary on the contemprary mores. The designation of ‘Whig’ and ‘Tory’, in mainstream politics (save for the special cases of the ultra-Presbyterians or Jacobites, actually prepared to rebel) usually tells us a great deal less than the terms seductively invite us to believe.
Helen and all,
I have only had a single quick read through of the various articles so far and will return for a deeper read in a week or so.
I am not sure if it is due to a necessary concision of Desan or whether she hasn’t gone into it in greater detail but I would like to know if there is more on the Tally Stick as well as the setting up of the BoE.
From some readings I did online back in 2015 as I first ventured forth into trying to understand Money and what the curious words ‘I promise to pay the bearer…’ and why they were signed by the Governor and not the King that I came across the Tally Stick for the first time in my life! That in itself is curious.
Amongst the fact that their final elimination resulted in the burning down of the original Palace of Westminster (apocryphal perhaps?) can it be confirmed Tally Sticks became a Treasury Instrument under Henry I ?
If so why did that King do that?
Also the summary of the setting up of the BoE – who were the providers of the original shareholder capital?
Where is the list of names and how exactly did they capitalise it? I did have a long look at the BoE history site – but could not find the exact answer to that question.
Is it true that even while it’s original Charter was time limited (why?) to 4 years that at the end of that first period the Government borrowing of the original amount had increased tenfold! Which must have all ended up in circulation within the economy, giving the BoE a pretty much automatic chance of the renewal of the 4 year Charter, because it couldn’t easily be repaid. It is on that ‘debt’ that the Bank achieved its pre-eminent power and hence the original capital investors had increased their control over the economy.
I still haven’t found answers to some of these questions over the years but I realise that within its hidden history is where I seek one end of the thread that the mysterious knot of the question of Money that brought me here seems to reside.
This to fill in the chronology, which is my preferred method of Following The Money!
Thanks for the very interesting read so far.
I am in no rush to receive any reply but would like to join a few of the missing dots in my journey. All best.
[…] To continue Helen Schofield series on money, this is the last substantial part, although an epilogue will follow. Earlier parts can be linked her […]
@ Jim Osborne
Yes now I can agree with you in part. From what I understand about Whig MP’s in Parliament they tended to be wealthy and at times would align their wealth interests with those of the monarch at other times not. In other words they were interested in a “limited” form of democracy and of course this is still with us as Richard’s post on shareholding and stock exchanges conveys.
I’m still ploughing through Felix Martin’s book so not got to his argument that the Bank of England was the “King’s bank.” I think though that from what I’ve read so far it’s very much assisted me in helping me clarify my thinking what the key threads were in my saga about events in 17th century England even back to Roman times actually were.
I realise even more that key words or phrases are important to understanding so in the Addendum I’ve promised to write these at the moment for me are “bearer instruments”, “trust” and “volatility.”
The “bearer instruments” are credit instruments and span the range from Yap islanders circular stones to the mobile phones we now use to make payments “through the ether.”
So to argue that the BoE was the King’s bank is to argue I think that he benefitted the most from control over “bearer instruments” the main substance of importance appearing to be the production of banknotes which of course are “bearer instruments” and indeed tell you so on the note itself in a round-about kind of way.
The view I currently hold is that in fact the nation as a whole benefitted the most from the introduction of banknotes and Britain’s Industrial Revolution is testament to that.
“Bearing instruments” that are hard to bear!
https://www.npr.org/sections/money/2011/02/15/131934618/the-island-of-stone-money
Helen, the fact that the Whigs acted to bring taxation under the authority of the Parliament does not mean that Parliament refused the Kings taxation demands or that the Whigs then went on to oppose his demands. It did give them the means to pull the plug though when it suited them.
Coincidentally enough Peter May refers to an account of the BoE in Felix Martin’s book, in his Progressive Pulse blog a couple of days ago. I haven’t got to this point of the book yet but it seems FM takes the view that the BoE was the king’s bank.
I think Felix Martin also nails the significance of the creation of the BoE down quite well. Up till then private banks had no real powers of enforcement to ensure their debts were repaid. The creation of the BoE suddenly gave them great new powers to ensure enforcement, that is you would have been in breach of legally not repaying your debts to the BoE(a privately owned bank) . The private bankers has succeeded in getting their liabilities presented as money of the that of the crown rather than just private issued notes. That was quite a big step up.
The BoE eventually morphed into a “modern” central bank as we now see them. Becoming a banker of the banks, they stopped issuing money themselves and became a supervisor of the private banking sector and lender of last resort. Crucially the right to create crown money was passed onto these private banks who retain that very same privilege to the current day.
@ Vince Richardson
Of relevance to the argument you make is Chapter 7 of Christine Desan’s book “Making Money” on page 267 where she writes the following:-
“The 17th century opened with a case affirming sovereign authority over money and closed with one limiting sovereign authority over its own bonds.”
(Bond of course are “bearing instruments” like a specie coin, or a banknote, or a mobile phone with a contactless money transfer app.)
The court cases she refers to are “The Case of Mixed Money” 1605 which was “… a celebration of the executive prerogative over money.” to the “Case of the Bankers” 1690 to 1700 which partially limited government’s prerogative over public debt another form of “bearing instrument” since it could be traded.
@ Dungroanin
I think we can say that tally sticks were created to supplement the money supply, specie money was constrained by the supply of silver – so tally sticks were effectively a sovereign issued parallel currency.
Lots of detail in this 2019 article here https://gimms.org.uk/2019/03/08/history-english-tally/
Or less detail in one from me a year earlier
http://www.progressivepulse.org/economics/burning-tallies-and-what-bankers-have-forgotten
Like you, I’ve tried unsuccessfully to find out how exactly the BoE was capitalised and they certainly didn’t raise all the capital they anticipated so I suspect smoke and mirrors were involved….
BoE charter was time limited because it was new fangled and might not work…
And while Parliament controlled the taxes, as far as I can see it had no control on the loans sought.