John Locke and the Bank of England

Claude Roche, Carl Pitchford

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000386349
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

John Locke was one of the first shareholders of the Bank of England and participated in parliamentary debates surrounding its creation. He had a key role in the monetary reform of 1696. This book examines Locke's thought in relation to credit, banking regulation, the monetary and financial system, the gold standard and the principles of Natural Right. It also establishes a link between Locke's economic and financial ideas and his political philosophy.

John Locke and the Bank of England will be of interest to advanced students and researchers of central banking, financial history, the history of economic thought and political economy.

1The problem of thought posed by the creation of the Bank of England

The purpose of this chapter is to understand the theoretical issues, but which are in reality problems of thought, that arose when the Bank of England, the first true financial institution of our modern times, was created. They will be seen especially in the credit function, but also in the functions and nature of money.

In doing so, the aim is not to rewrite the history of the Bank of England, in a way that is commonly understood, in other words, retracing the action of protagonists responsible for setting it up. For even if this bank was indeed born out of such actions, even if they are easily identifiable, the independent nature of their rationality must really be relativised. It was not independent of a specifically intellectual context in Skinner’s sense [1988], that is to say, of data, concepts and even theories on which such actions could be founded. As is already known, however, this context was problematic as it was not adapted to the facts and the subjects that were being discussed. And it is this difficulty that needs to be addressed here.

Therefore, it is easy to imagine that such decisions were part of a factual diagnosis of the country’s economic situation, and it is important to reconstruct that.

1.1 Background to the creation of the Bank of England

This will not be difficult, however, because at the time England’s economic perspective was easily identifiable and its situation is also widely documented. Therefore, this can be presented succinctly and described in three points.

• England at that time could be seen as a country transforming itself into a market economy; however, its core activity was still based on agriculture, with a high level of tenant farming. Its social structure bore the mark of this, with the emergence of groups linked to markets – such as the trading community – but inserted into a society still structured by orders. We refer here to Macpherson’s work on King’s data.¹ Above all, it was a country that was growing economically, albeit very moderately since the Restoration, but clearly driven by commercial activity, especially foreign trade. This point was accepted by the ruling classes.

However, the problem with such situations, as we have learnt over time, is often financial. It is that they are accompanied by significant financial needs, which affect the banking system by calling into question its ability to meet them. It is from these very needs that the Bank of England was born. In this particular case, they were coupled with a very high level of State debt, estimated at 30% of the domestic product (1697)² – as opposed to 2.5% in 1688 – due partly to the war situation. From this point of view, the situation was really very delicate.

• For there was indeed a banking system, quite developed even, it was the characteristic of the trading nations in the 17th century. There was even significant growth in private savings, as noted by Child. But fundamentally, this system was disorganised and incapable of covering these needs, with three particular characteristics. (1) It consisted mainly of deposit banks and money-changers – the famous ‘goldsmiths’ – which were internationally open and led often complex activities, but frequently quite small, and with a rather exclusive approach to their clients as their debts were not easily transferable within other banks. This was also the case with State floating debt – the well-known tallies – which were not really discounted. (2) It was also extremely speculative and so poorly regulated that it hampered the development of the economy. The forms it took will be outlined in detail throughout this book. But more than just a long speech, this statement by Pepys – a senior Navy official – summed up perfectly their image in the eyes of the main decision-makers:

I did despair…so long as we and the world must be subject to these bankers.³

(3) Finally, it gave priority to State financing, but at higher rates – 12% or even 14% (North⁴) – because of the negative image of the Treasury. ‘The credit of the Nation is low’, Paterson would say.⁵ This contributed to the feeling of financial scarcity that almost all the protagonists, including Locke, would echo. These points form the backdrop for the coming debates.

• There was, in the end, a major monetary crisis which weighed negatively on the guarantees offered to creditors. Locke would talk about the ‘disastrous state’ of money, but given its importance, it will be seen in detail in Chapter 4.

It should therefore come as no surprise that the period being discussed here was marked by major debates on these financial issues. That is what will occupy this work. However, two points that will help in positioning the very beginning of the Bank of England should be mentioned.

Firstly, the trigger effect of the parliamentary debate held on interest in early 1692 should be noted. By abandoning traditional policy which was to lower interest by law, but without another solution - it opened up the door to alternative financial policies. And it is no coincidence that it was soon followed by numerous projects for a National Bank. It can even be considered as raising the curtain on the Financial Revolution. Secondly, among these projects, the Land Bank of Barbon and Asgill should be mentioned, which followed the attempts of Chamberlen and Briscoe and would be the main competitor of the Bank of England.⁶ In spite of its failure, it represented an alternative form of bank, advocating the issue of private monies – in this case monies based on physical capital (a private money at the time was a bearer note). In this respect, it can be called a genuine model – the ‘model of money creation’ – even if it would remain essentially theoretical as indicated hereafter.⁷ On the contrary, it sheds light on the Bank of England’s choices.

It is undoubtedly in this excitement, more than in a bad economic climate, that the immediate origins of the Bank of England should be explored. However, what makes it original is both the specific nature of the project and the complexity of its implementation. These points now need to be examined.

1.1.1 A politico-economic logic of creation

The Bank of England was set up in 1694, two years after the parliamentary debate, by an act granting it a privilege to carry out banking activities. There is little doubt among historians about the specific interests that led to this. They all describe this project as the combination of two different viewpoints: that of the trading community, who were very consistent on this point, and that of a fraction of the ‘whig’ political power, who was extremely concerned about State funding. This link of interest between the Bank and the State will remain predominant.

But even if the bank was born in 1694, it can only be considered as an institution, even at an early stage, from 1697 onwards. For it was at that moment that it would receive, contractually, dual exclusive rights to large banking activities and issuing money. But it would then be the outcome of a long decision-making process, which lasted more than 5 years and which included, beyond that Parliamentary debate, the whole Monetary Reform of 1695/1696 which played a pivotal role in its development. Thus, this complexity, which is outlined in the box below, has a twofold consequence on the discussion here.

• First of all, it puts a stop from thinking about this creation process in purely political terms, as has recently been the case.

Several works are alluded to here which have defended the importance of state financing in these events by relativising the economic determinants for the creation of the Bank of England. First of all, Dickson can be quoted who remained satisfied with explaining it through the emergence of a stable and efficient government,⁸ or North who established new institutions, and namely parliamentary control as the main explanatory factor for its success. But Carruthers [1999] could also be quoted, even others who will see it in competition between the political parties.

There is, of course, some truth in these explanations – namely, in that of North – because the Bank of England has been the main operator of sovereign debt and its success has been necessarily linked to the State’s mastery of its own indebtedness. On the other hand, it should be counter-argued that the management of the monetary reform by favouring the economic principle of confidence in money has overturned the exclusively political nature of these analyses. This will be discussed further below.

• This suggests, however, that there was a coherence inherent in these measures, which could be qualified as politico-economic.

For even if they were each time partial decisions, they all contributed to giving the Bank of England the same economic function, which can be seen in its ability to direct savings towards business and/or the State. They should, therefore, have an objective meaning, which had to be at least partially mastered by the decision-makers. This is the key point, the fact that this had to be thought through, but the important part is certainly to know how.

The Bank of England’s institutionalisation process

• The beginning of the Financial Revolution started with the House of Lords rejecting a law lowering the interest rate (1692).
• The project of the Bank appeared in 1693, following a quasi-call for projects managed by Montague, and including several informal discussions with England’s leaders. Everything was due to Paterson.
• The Bank was finally created in 1694, through a law without specific considerations, and due to start in the summer once the capital was rais...