The Financial Revolution in England

A Study in the Development of Public Credit, 1688-1756

P.G.M. Dickson

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9780751200102
• eBook ISBN:
  9781351889728
• Topic: History
• Subtopic: World History
• Index: History

Peter Dickson's important study of the origins and development of the system of public borrowing which enabled Great Britain to emerge as a world power in the eighteenth century has long been out of print. The present print-on-demand volume reprints the book in the 1993 version published by Gregg Revivals, which made significant alterations to the 1967 original. These included a new introduction reviewing recent work, and, in particular, 33 pages of detailed annotations and corrections, which, taken together, justified its status as a second edition.

PART TWO

Government Long-term Borrowing

3

The Earliest Phase of the National Debt 1688–1714

WHEN William of Orange landed at Torbay in November 1688 bringing with him — as contemporaries alleged — the secret of running the state over head and ears in debt, English government borrowing of different kinds already had a long and tangled history dating back to the Plantagenets. For most of this period its reputation had been unsavoury. To start with, the very idea of lending money was suspect. As late as the seventeenth century borrowing tended to be regarded as an index of necessity, and lenders as those who took advantage of necessity. This was the line of thought behind the prohibition of usury until the sixteenth century, and the subsequent establishment of maximum rates of interest for loans between private persons.¹ These statutes did not bind the Crown, which was free to offer whatever interest its creditors demanded. But this in turn seemed shocking to contemporaries, who thought that the state was being drained by leeches. There were also more specific reasons for the uncertain reputation of public borrowing. Although its form changed considerably between the war loans of Edward III and those of the Commonwealth, it had certain common characteristics. First, the Crown seems always to have been acting in haste and therefore at a disadvantage. Money had to be found, and found quickly. This explains why, secondly, interest was always stiff and frequently exorbitant. Third, and following from this, the Crown always had great difficulty in paying the interest, which had often to be funded in the principal, thus creating a growing snowball of debt. Lastly, no clear distinction was drawn between short-term debts and long-term ones. Public loans were shadowed by the lenders’ expectation of early repayment. This was the natural result of the absence of an effective market in which lenders could sell their claim on the state for a capital sum. It was therefore impossible to divide borrowing into anticipation pure and simple, regularly paid back from incoming revenue, and long-term borrowing in which the state would undertake to repay the principal with interest over a number of years. Failing this basic distinction, it was no wonder that subtler gradations, like ranking short-term debts in order for repayment, could not be introduced. Thus English government borrowing down to the seventeenth century tended to be a hotchpotch, with creditors either pressing for payment or running up claims against the state at compound interest. The only way out of the quagmire was the sale of royal land or, as in the 1650s, satisfying public creditors by giving them forfeited estates in Ireland or elsewhere.

These characteristics of public borrowing were not confined to England. They probably obtained everywhere in Europe for much of the period. Nor were they confined to public loans. Many a sixteenth- or seventeenth-century nobleman, paying 10% on his debts, and paying off old debts with new ones until the accumulated principal swallowed up his estate, would have recognized his case as that of the government in miniature. Merchants, too, though usually more prudent both in the scale of their needs and in keeping accounts than kings and nobles, also borrowed and repaid on an essentially short-term basis. This general picture in both the public and private sectors is presumably explained by a relative scarcity of funds available for long-term as distinct from short-term loans, and by the fact that commercial activity was geared to the short run, and placed a high value on liquidity of assets so that capital could be switched readily from one occupation to another.

By the middle of the seventeenth century there are signs that this picture was changing, both for the state and for individuals. English private finance began to shift to a longer-term basis with the development of the joint-stock company and the strictly-settled landed estate. The crucial factor in joint-stock companies was the right (and possibility) of selling shares, for this enabled the company to continue, without constantly repaying its capital, while its shareholders had both income (dividends) and capital liquidity. These advantages were not at first recognized, and several of the early joint-stock ventures were wound up after each voyage. Gradually, however, they became apparent and accepted. The strictly settled estate, which was important from the 1650s, was more difficult to alienate and therefore encouraged the growth of charges on its revenue. For it was now primarily by mortgage, rather than by sale of part of the land, that capital sums for children’s portions or for investment could most easily be obtained. At the same time, strict settlement must have encouraged the formulation of longer-term plans for agricultural improvement, and hence have increased the revenue against which mortgage loans could be charged.

Besides these two developments there was a growing interest in insurance to lessen the hazards of shipwreck, fire, and premature death. Marine and fire insurance developed empirically. The theoretical work needed to lay the foundations of modern actuarial science (and hence life assurance) was begun by Pascal, Fermat, and Huyghens in the 1650s, and continued over the next hundred years by de Wit (1671), Halley (1693), van der Burch (1702), de Moivre (1725), and Simpson (1742). Small-scale facilities for all three kinds of cover were available in London by the 1690s.¹ At the same time in the United Provinces private investors were using tontine loans as a speculative form of life cover. A group would subscribe a capital sum, which was then invested in East India shares or other securities. The income would be paid pro rata to each beneficiary as long as a named person (his nominee) lived. As each nominee died the surviving beneficiaries drew a larger income, until one drew the whole. Since the beneficiaries would normally also be the nominees, it was possible in this way to give a child a certain annuity with a chance of its increasing. The basic idea is usually attributed to Lorenzo Tonti (1630–95), an Italian financial adviser to Cardinal Mazarin. Tonti intended his scheme to be for state loans, and drafted a plan for one in 1653, but it made no provision for dividing nominees into classes according to age and never got off paper. The Dutch adapted his plan not only to private insurance but to municipal finance. In 1670 Kampen and Groningen in the United Provinces both floated tontine loans. Middelburg and Delft followed suit in 1671 and 1673.² A proposal to raise a loan for the City of London on a similar basis, with the nominees classified according to age, was drafted in 1674, no doubt owing to the Dutch examples, and printed by order of the Corporation.³ By the time that these developments were taking place in private and municipal finance, the governments of both France and the United Provinces had already developed reasonably viable systems of long-term borrowing, which enabled the state to tap the capital resources that existing taxation could not reach. Loans were of various kinds, but were mostly annuities for lives or for terms of years.¹ In 1689 the French government belatedly took up Tonti’s suggestions by successfully floating a survivorship loan of 14m. livres, with the nominees divided into 14 classes, the interest ranging from 5% to 12% according to age.

The English government at this stage had no system of long-term borrowing to match those of its neighbours, and still had to rely on sales of Crown lands and rents to cover revenue deficits. Its financial position (and hence its credit rating) had nevertheless improved in many ways since the earlier seventeenth century. The introduction from Dutch precedents of an effective tax on internal consumption, the excise of 1643, which was retained at the Restoration, and the experience of direct taxation during the Commonwealth, helped to put the revenue on a sounder basis after 1660 and thus provide a surer fund for government borrowing. It was in this period (1660–88) that a system of short-term anticipation of direct taxes was evolved which was carried over virtua...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Illustrations
• List of Tables
• Dates, spelling, citations
• Abbreviations
• Introduction to the Gregg Revivals edition
• Preface and Acknowledgements
• I. The Scope of the Problem
• II. Government Long-term Borrowing
• III. The Public Creditors
• IV. Government Short-term Borrowing
• V. The Market in Securities
• Appendixes
• Bibliography
• Index