Money, Politics and Power

Banking and Public Finance in Wartime England, 1694–96

Richard A. Kleer

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351713351
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The Nine Years' War with France was a period of great institutional innovation in public finance and of severe monetary turmoil for England. It saw the creation of the Bank of England; a sudden sharp fall in the external value of the pound; a massive undertaking to melt down and recoin most of the nation's silver currency; a failed attempt to create a National Land Bank as a competitor to the Bank of England; and the ensuing outbreak of a sharp monetary and financial crisis.

Histories of this period usually divide these events into two main topics, treated in isolation from one another: the recoinage debate and ensuing monetary crisis and a 'battle of the banks'. The first is often interpreted as the pyrrhic victory of a creditor-dominated parliament over the nation's debtors, one that led very predictably to the ensuing monetary crisis. The second has been construed as a contest between whig-merchant and tory-gentry visions of the proper place of banking in England's future. This book binds the two strands into a single narrative, resulting in a very different interpretation of both. Parliamentary debate over the recoinage was superficial and misleading; beneath the surface, it was just another front for the battle of the banks. And the latter had little to do with competing philosophies of economic development; it was rather a pragmatic struggle for profit and power, involving interlocking contests between two groups of financiers and two sets of politicians within the royal administration. The monetary crisis of summer 1696 was not the result of poor planning by the Treasury; rather it was a continuation of the battle of the banks, fought on new ground but with the same ultimate intent – to establish dominance in the lucrative business of private lending to the crown.

Introduction

Overview

Recently I had the pleasure of reading Timothy Howard’s book, The Mortgage Wars: Inside Fannie Mae, Big-Money Politics and the Collapse of the American Dream. His account overturned almost everything I had previously believed about the role of Fannie Mae in the financial crisis of 2007–8. A common storyline in the post-crisis literature was that Fannie Mae, a quasi-government agency, lay near the root of all that evil. For it had built its massive empire on the strength of a dangerous new financial product: the subprime mortgage. Few surprises then that in 2008 the US government had to put that agency into conservatorship in an effort to save the financial sector from imminent disaster. But on Howard’s telling a very different story emerges. Until a wholesale change of management was forced upon Fannie Mae in 2004, the company had in fact been operating responsibly and safely. It was private mortgage lenders who were pushing the envelope, subjecting the new financial technology to pressures it was never meant to bear. But through an intense lobbying campaign those private lenders managed nevertheless to persuade regulators that Fannie Mae was the problem. By this means they weakened the corporation’s grip on the industry and were able to assume a much larger role in a very profitable a line of business. In short, the financial crisis resulted from an industry turf war. Previous accounts, Howard noted, ‘have almost completely missed this fact – ironically because they have had to rely on materials produced to gain political advantage in that battle, which are deliberately inaccurate and almost impossible for outsiders to decipher or entangle’.¹

In this book I similarly attempt to reverse the received view about another, much older big-money power struggle. Since the 1930s the story of England’s so-called ‘Great Recoinage’ of 1696–99 has been told as one of intellectual dogmatism triumphing over sound, practical reasoning. In the midst of a long and expensive war, the nation’s silver coin having dwindled to half its normal size, parliament chose to have it all melted down and restored to full weight. Parliament also had to decide whether at the same time to devalue the pound. Treasury Secretary William Lowndes, approaching the matter pragmatically, laid out a convincing case for devaluation. But the government, foolishly, chose to follow the advice of philosopher John Locke, who was driven by little more than intellectual dogmatism, to hold fast to the pre-war value. Consequently, in mid-1696 the nation was plunged into a depression as severe as it was unnecessary. But in constructing this narrative, historians built principally from the large outpouring of pamphlets and broadsides published at the time. These documents, though great fun to read and chockfull of factual claims, turn out to be terribly unreliable guides. Crafted for partisan political purposes, they were the mere outcroppings of underlying, intersecting power struggles between two political camps and two groups of financiers. In the study now before you, I’ve worked to put those struggles front and centre. In particular, I emphasize a key decision faced by parliament that year: where to find the money for a large, new war loan. If the money were borrowed, as many were hoping, from a proposed new bank, the political consequences would have been enormous. The Bank of England would probably have become a minor player, destined to disappear once its charter expired in 1706. The Commons would have gained a great deal of influence and decision-making power. And control over the administration would have shifted back toward the tory camp. The recoinage debate, I will show, was only a concealed means of fighting this much larger battle. I demonstrate too that the received view has things almost exactly backwards: that for several months it was the administration itself that pressed to devalue the pound.

Howard, having been Fannie Mae’s Chief Financial Officer for many years, knew the inside story of his industry from personal, workaday experience. I’ve had to assemble my alternative account by means far more indirect. Little has survived from the correspondence of the period. Fortunately we have a very extensive collection of Locke’s letters, published less than forty years ago and still being mined. But besides that and a smattering of official correspondence pertaining to army finances, we have only the odd assortment of letters, mostly from minor figures, printed in various reports of the Royal Commission on Historical Manuscripts. Nor do we have the benefit of diaries or published memoirs from any of the leading politicians, or even records of parliamentary debates. The best available source of this kind is a history compiled many years later by Gilbert Burnet, an Anglican bishop with close ties to the court. But it wasn’t terribly helpful for my purposes since the good bishop had little interest in public finance and was to boot strongly biased to the whig cause. Fortunately we do have two sets of diplomatic reports, both of which offer detailed, day-by-day summaries of parliamentary debates and court politics. They were written, in French (the lingua franca of the day), for the Dutch States General and the court of Brandenburg (both allies in the war against France) by N. l’Hermitage and Frederic Bonnet respectively. Since matters of public finance were always central to the politics of the day, these reports are often a rich, though not always entirely reliable, source of information. One MP, Narcissus Luttrell, did keep a personal record of daily news highlights; unfortunately he wasn’t close to the court or very well-informed about financial matters. For the rest I have had to guess at what might have been going on behind the scenes. For this kind of reconstructive work, the most helpful sources were: contemporary pamphlets (subject to the limitations just described) and London newspapers (unfortunately, complete runs have survived for only two or three and they seldom wrote of economic issues); the printed journals of the House of Commons and House of Lords; the rather sparse manuscript minutes of the Cabinet, Treasury (alas missing for the period 1692–95), Bank of England and National Land Bank; the accounting records of the Treasury, Bank of England and of a deputy paymaster for the English army in Flanders; a complete set of Treasury payment orders; and a couple of small manuscript collections of public-finance proposals submitted to Commons committees or to the treasury lords. The biographies of Commons MPs collected in the four History of Parliament volumes for this period were also indispensable tools.²

It is never easy to catch sight of power. When at its highest pitch, it is often completely invisible. In our period it became a little more evident than usual because, the war having put economic and political systems alike under considerable strain, some groups were struggling to retain, or even to regain lost, power. Even so, the role of power in the Great Recoinage remains hard to discern. To aid with this problem, I paid close attention to contemporary economic institutions and practices. For I have found that they offer far more reliable and revealing testimony than written documents. Pamphlet authors often succeeded in concealing their objectives, using rhetoric to whip up sentiment for ends not announced. But it is almost impossible to hide the purposes of economic institutions, since their very design speaks volumes. And accounting records are also very reliable guides, since they were never expected to be seen by anyone other than insiders.

This is the main reason why the first half of the book is almost all economic history, though of an old-fashioned kind: institutional rather than theory-driven. In my estimation we can only properly understand the politics of money and public finance during our period if we first become thoroughly familiar with the underlying economic institutions and their stress points. You will therefore be introduced to England’s systems of public revenues, expenditure and borrowing; to the design and operations of the Bank of England; to foreign bills of exchange (the primary mechanism by which England funded an army fighting on the continent); and to the three most important ‘projects’ (a contemporary term that translates roughly as ‘proposals for joint private-public business undertakings’) for land banks (which proposed to lend to the state using new paper currencies secured by title to agricultural rents). I’ve written these chapters to be accessible to non-specialists. I believe they are worth reading for their own sake; there is considerable pleasure to be had in understanding how such institutions worked. But I also tried to restrain myself, providing only as much detail as you will need later in the book to follow my arguments on subjects more political.

A short history of histories of the recoinage

I embarked upon this study in reaction to the histories I had read of the Great Recoinage. So to explain my aims in writing the book, I first need to introduce you, ever so briefly, to the broad outline of those histories.

The Recoinage Act of 21 January 1696 has received a lot of scholarly attention over the centuries. This is mainly because it has been viewed as the opening instalment of a long-running debate over whether the value of the British pound should periodically be adjusted to reflect changing economic circumstances. In 1696 parliament opted to leave the value of the pound unchanged. For two or so centuries, this was lauded as a wise decision – setting an example long followed by British policy-makers facing a similar choice.³ The classic statement of this view is Thomas Macaulay’s long and detailed narrative of the recoinage in his grandiloquent History of England from the Accession of James II (first published in 1849). For him the decision not to devalue was yet another instance of the marked improvement in England’s political fortunes after the Glorious Revolution of 1688. A recoinage plan that would retain the integrity of the pound was jointly conceived and executed by England’s two most eminent intellectuals (Locke and Isaac Newton) and two leading politicians, Charles Montagu (Chancellor of the Exchequer) and John Somers (Lord Keeper of the Great Seal, the highest legal office in the country). The latter two, bold and far-seeing, carried through parliament the statutes needed to reform the currency, against demands from timorous opposition politicians to delay action until the end of the war or at least to soften the blow by simultaneously devaluing – an expedient that would have cost England its monetary honour.

But in the twentieth century there was a shift in attitude on the part of economists, if not of policy-makers. After the first and second world wars, the administrations of the day decided to try to restore the British pound to its pre-war value, or something near it. This meant having to unwind the effects of substantial wartime price inflations and so put the country through long and painful depressions. On both occasions officials eventually relented, choosing five or six years later to devalue the pound by substantial amounts. Interpretations of the recoinage of 1696 changed very markedly after the first such episode. Beginning in the 1930s, most economic historians now maintained that, at least on the level of economic theory, Lowndes had had the better of Locke by far. Locke allowed the logic of his argument to seduce him into thinking that a metallic currency’s value was some kind of natural constant. He failed to grasp Lowndes’ essential insight that in fact the value of money was inherently variable and that this might necessitate periodic, offsetting changes in the official standard. Nor did Locke foresee that keeping to the old standard would cause a sharp deflation and an economic depression.⁴ On this interpretation, the severe monetary troubles of summer 1696 were the very predictable consequence of Locke’s intellectual rigidity. Twentieth-century commentators differ about whether Locke was also wrong in practice. By and large, those writing prior to the second world war maintained that despite his theoretical failings, he had made a telling practical point: meddling with the currency might destroy public faith in its stability and would open the door to endless further manipulations. Among more recent writers, by contrast, the consensus seems to be that Locke was altogether wrong and that it would have been better had Lowndes’ advice been taken instead; England would have experienced less deflation.

These earlier analyses troubled me on several counts. First, they all viewed the recoinage controversy through the lens of later developments in British monetary policy. I wondered what I might find by approaching the episode through the eyes of contemporaries. Second, I found the accounts of twentieth-century economic historians unsatisfying because they: a) treated the question of the appropriate Mint standard as a simple technical problem (for which there were right and wrong solutions) and largely ignored the distributive issues involved – vices common among economists;⁵ b) seemed uninterested in, and certainly could not account for, why parliament had taken what was in their estimation the wrong approach (while Locke may have been dogmatic, the Commons didn’t need to follow his advice); and c) rested upon some key factual errors. The last point needs some explaining. Ever since Macaulay, historians had believed that the recoinage design eventually decided upon had been recommended by Locke and Newton and implemented jointly by Montagu and Somers. But some 25 years ago Kelly discovered, after a careful reading of Locke’s correspondence, that this view was entirely mistaken. He established that in fact the administration had been internally divided on the issue and opted in the end for a course of action to which Locke himself was opposed and that only Newton supported.⁶

So in setting out to study the Great Recoinage I aimed to approach it as much as possible on the terms in which contemporaries would have understood it, leave ample room for issues of politics and distribution and develop an interpretation consistent with Kelly’s important new findings.⁷ That quest eventually resulted in a book in which the recoinage has been pushed from the centre of attention. I slowly learned that the debate over devaluation could not be understood in isolation – that its final outcome was determined by two concurrent struggles for power, one in the banking industry and the other within the administration. In the end the book became more about those contests than anything else.

Over the last half century or so the recoinage debate and its attendant pamphlet literature have been carefully examined by a small army of historians. I offer the following short overview for those interested in learning more on their own. In British Monetary Experiments, 1650–1710, Horsefield offered a short narrative of the recoinage and assessed the quality of theoretical reasoning in a representative cross-section of contemporary publications on the subject. The book’s greatest merit for scholars of the recoinage is its extensive, meticulous bibliography of primary sources. Li’s analysis in The Great Recoinage of 1696–9 is similar to Horsefield’s, though his book concentrates more on the sequence of events and less on the pamphlet literature. In their short study, Political Parties in the Reigns of William III and Anne, Burton, Riley and Rowlands report upon and analyze several previously unpublished House of Commons ‘division lists’ (records of how MPs voted, or were expected to vote, on a given issue), two of which are very closely related to the recoinage. This shed some much needed light on the inner workings of the Commons during a period that is notoriously poorly documented. In Parliament, Policy and Politics in the Reign of William III, Horwitz provided an updated narrative of the recoinage, refined on the basis of several important manuscript discoveries and his very extensive knowledge of parliamentary politics during this period. In War and Economy in the Age of William III and Marlborough, Jones offered a penetrating interpretation of the specific economic pressures contributing to clipping and the need for a recoinage. The book is still more valuable for historians of the recoinage in its expert and detailed descriptions of the actual institutions and mechanisms by which English military funds were transferred to Europe. Finally, in his Introduction to Locke on Money, Kelly provided a detailed narrative of the recoinage, updated in light of his very careful re-reading of the textual and manuscript evidence. To all these authors I am very grateful; without their work this study simply would not have been possible.

A short sketch of English parliamentary politics

In the second half of the book, the chapters covering the slow progress of monetary and financial statutes through the Houses of Commons and Lords, I assume a basic familiarity with contemporary English parliamentary processes. In this section I pro...