As everybody knows, the attempt to substitute the Duke of Monmouth for James, as Charles's heir, failed, but the later plan for supplanting James by William of Orange succeeded. Thus for the next sixty years or so England had a disputed succession; the King on the throne did not dare to pursue a strong policy through the fear that, if he did so, powerful interests would transfer their allegiance to the King over the water. It was not until fifteen years after the final defeat of the Jacobites in 1745 that it was possible for George III even to attempt to strengthen the monarchy.
Now, once more, it was a complexity of interests which was responsible for the Revolution of 1688. It is not the business of such a book as this to attempt to disentangle them. Contemporaries thought of the revolution as a revolution of the large land-owners the Grandees against the monarchy. It established, Lord Acton has said, "the divine right of freeholders." It was well understood that the bankers were also of the opposition to James and that their influence in the State was not to be despised. But none at the time thought of them for a moment as of an equal standing with the large landowners. The social relationship between the two classes was that of a master and his agent. Readers of Macaulay(23) will remember how Sir Dudley North found to his disgust that he "could not go on Change without being followed round the Piazza by goldsmiths, who, with low bows, begged to have the honour of serving him."
Yet, as Napoleon was to tell the world a century later, "the hand that gives is above the hand that takes," whatever social appearances may seem to say. Just as, forty years before, Cromwell had discovered that he had deposed Charles only to inherit his financial problems in an aggravated form, so now with William III. The Parliament which had been unwilling to vote a sufficient income to Charles II was just as unwilling to vote one to his nephew. Yet William almost from the first moment of his accession was at war with Louis XIV a war of desperate importance to his own country, Holland, but of little real concern to England and acquiesced in by the moneyed classes principally that they might use it as an opportunity for establishing their power over the State. How was William to get his money?
After a number of tricks in the way of tontines and lotteries had been tried with little success, the following plan was adopted. It was suggested by a curious financial adventurer called Paterson and piloted through Parliament by Montague, then a Lord of the Treasury. The bill was called "A Bill for Granting to Their Majesties Several Rates and Duties upon Tunnages of Ships and Vessels and upon Beer, Ale and other Liquors; for Securing Certain Recompenses and Advantages, in the said Act mentioned, to such Persons as shall voluntarily advance the Sum of Fifteen Hundred Thousand Pounds towards carrying on the War with France." The bill was vigorously opposed, especially in the House of Lords, but Camarthen, who was in charge of it there, was able to silence all objectors with the unanswerable answer that, if the bill was rejected, the country would be left without a fleet in the Channel as indeed it would have been, unless the rich were to consent to tax themselves more heavily, of which of course there was no question.
The plan was that, instead of borrowing from the goldsmiths, the Government should instead borrow £1,200,000, of which it was in need, from a newly formed Corporation called the Bank of England. This corporation promised to collect the required money from the public and to lend it on to the King at 8 per cent plus £4,000 per annum for expenses a rate considerably lower than that which he would have had to pay to the goldsmiths. In return for lending at this low rate the Bank received a number of privileges of which the most important was that it had the right to issue notes up to the extent of its loan to the Government "under their common seal" on the security of the Government. That is to say, it had the right to issue a £1 note; the holder of that £1 note had the right to demand that the Bank give him cash for his note, but, if he made that demand, the Bank had the right to demand that the Government raise that £1 by taxation and repay £1 worth of debt to the Bank so that the Bank might repay its £1 to the note-holder. As Disraeli put it, "the principle of that system was to mortgage industry in order to protect property,"(24) or, as Paterson, the originator of the Bank, himself explained with charming simplicity, "The bank hath benefit of the interest on all moneys which it creates out of nothing."
The required £1,200,000 was easily subscribed. The Bank, however, did not hand over the whole sum to William in cash. They handed over £720,000 in cash and the remaining £480,000 in notes "under their common seal." The Government was thus compelled to use the Bank's notes to pay its bills, which gave them prestige. The Bank on its part was left the possessor of £720,000 in notes "under their common seal" and £480,000 in cash.(25) Now William, in the difficulties of the previous years, had been reduced, as Charles had been reduced before him, to issuing tallies in lieu of payment of his debts. The Bank now determined to use its spare notes and cash to buy up these tallies at a considerable discount, usually of 7 per cent, just as the goldsmiths had done in Charles's day.
Before long they had thus issued notes to the full extent of £1,200,000 which the Act of Parliament entitled them to issue "under their common seal." No one but a special-pleading lawyer doubted that the intention of the Act had been to prevent them from issuing notes beyond that amount at all, but they knew very well that William was now so dependent upon their notes for the carrying on of his business that he would not dare to break with them. He was caught by what was perhaps the cleverest trick of blackmail in history. If he tried to repudiate his debt, his creditors would certainly go over to James and he would lose his throne. On the other hand he could only pay it if Parliament should vote him the money in extra taxation. The sum required would have been an inconvenient, but not an impossible, burden, but the Bank had seen to it that their influence in Parliament was sufficient to prevent it being voted. The monarchy was caught in a trap from which it was never to escape.
Therefore they issued the further notes beyond the £1,200,000, guarding themselves against prosecution by issuing them signed by the cashier and without their "common seal." Now, so far is it from it being true that a purely metallic currency is necessary for stable prices that the price-level had been kept exceptionally stable throughout all Charles II's reign. "The great revolution caused by the rise in prices seems to have run its course in England by or somewhat before the middle of the century," writes Professor Clark,(26) "and until the last quarter of the eighteenth century there seems to have been no very great change." It is true that he adds, "though what change there was ran in an upward direction," but, as we shall see, the slight rise which made the price-level of 1789 a little higher than that of 1660 took place not in Charles II's reign, but in that of William III. That was because both Charles and the goldsmiths, divergent as their other interests were, were at least united in their desire that the whole experiment of paper money should not be discredited by a rise in prices. They therefore kept the quantity of it issued strictly proportionate to the increase in productivity. The Bank of England, however, confident that the King was impotent against them and that at the same time it was the King who would be blamed by public opinion for a rise in prices, saw now no necessity for restraint. They lent freely a proceeding which did not cost them a halfpenny issuing their notes well beyond the country's productive capacity. As the figures given in the contemporary Houghton's Collection for the Improvement of Husbandry and Trade show, prices rose as a result from 100 to 137 between June, 1694, and August, 1695.
The Government, quite mistaking the disease, thought that the rise in prices was due to the clipped money, although English money had been clipped since the beginning of time and prices had remained perfectly stable since Cromwell's death. They therefore determined to call in all the old money and reissue it instead in milled money, and fixed a date after which unmilled money would no longer be legal tender. This was wise and fair enough, but with incredible folly they made no provision for seeing that the nation had an adequate temporary monetary supply during the time that silver was in the Mint for recoining. The consequence was a most drastic deflation, threatening far greater suffering than had been caused by the inflation. Through the folly of the Government the Bank of England notes were alone available to prevent that disastrous fall in prices. Sir John Houblon, its Governor, was able to explain to the people that he would indeed, if they demanded it, pay them a proportion of their notes' value in cash but that nothing could be less in their interest than that he should pay the full value, as such a demand would compel a drastic calling in of the Bank notes at the very time of the severe restriction of cash. The people agreed; so did the Government, which had quite lost control of the situation and was only too grateful for any suggestion which might save the country from chaos. It was not until three months later that it occurred to them to issue their own paper money as an expedient.
Therefore as a result the Bank was allowed to make its notes partly inconvertible. They issued these partly inconvertible notes and with them bought up the Government's tallies. So, when in November, 1696, a return of the position of the Bank of England was given to a Parliamentary committee, it was discovered that only £1,500,000 of cash had ever passed out of the hands of the Bank into those of the King or of anybody else £1,200,000 of its own capital and £300,000 which it had borrowed in Holland. Yet nevertheless by this puerile conjuring trick the King was in debt to the Bank £3,034,576 16s. 5d.
The effect of the creation of paper money by the Bank of England was totally different from that of its creation by either Charles II or the Caroline goldsmiths. The King, if he issues money, spends it and it becomes merely a part of the general money circulating in the country. The goldsmiths were but individuals, who, if luck favoured them, perhaps made fortunes, but, having made them, retired and spent them on consumable goods. Their paper had no guarantee; they were always liable to the demands of their depositors and, taking one goldsmith with another, the profit from the interest of one was not perhaps more than sufficient to balance the loss of another. But the paper money of the Bank introduced an entirely new element. In the first place, the Bank was a continuing joint-stock corporation. There was no moment when it died and divided up its fortune among its relatives, no moment when it retired from business and settled down to spend that which it had amassed. It existed to lend and it proposed to go on lending until the end of time. In the second place, so long as it lent only to the Government or against adequate collateral security, it was lending virtually without risk. Its only risk lay in a risk of the general collapse of the régime.
Now, if a corporation lends money at interest and without risk, then re-lends the repaid loan and so on, never distributing more than a trifle of its profits either as wages or dividends, then, however small its original capital, however moderate its rate of interest, it is but a simple proposition in mathematics that in course of time it must necessarily become the possessor of the entire wealth of the country. The only remedy is, it may be said, for the people to refuse to borrow from it. But, if the corporation has itself the privilege of issuing money, then the public has no choice but to borrow from it, for, as we have seen, the consequence of a deflation is a violent fall in the price-level, causing most widespread suffering. And, if the money issued by the corporation as a loan has once established itself as an important part of the country's monetary supply, then it is clear that the public, if they suddenly started to refuse that corporation's loans, would throw the whole of their productive machinery into chaos.
It is then obvious why it was that the Bank inflated in 1695. As a general rule the bias of a bank is towards deflation, for the bank prefers prices low. But in 1695 the incidental consequence of inflation was a rise in prices, its essential consequence was so to increase the proportion of the Bank's money in circulation to King's money as to make the Bank's money an essential part of the nation's economy.
It is perfectly true, of course, as an abstract proposition in financial theory, that the King might have cancelled the privileges of the Bank and have filled the gap by paper money of his own. But by the bargain by which he held his throne, by the Bill of Rights of 1689, he was prevented from doing this without the consent of Parliament which meant in practice without the consent of the Bank of England. This bill was passed to protect the liberties of Englishmen against such tyrants as James II. As if the maddest of believers in the divine right of kings had ever fashioned in imagination a tyranny one-hundredth part as strong as that which was clamped upon us by the Revolution of 1688 !
It is sometimes said that the foundation of the Bank of England was followed by a great increase in productivity and rapid improvement in credit. But, as Mr. Feavearyear(27) has shown, credit had already been improving and productivity increasing ever since Charles II's time, and especially during James II's reign there had been "a remarkable improvement of credit." The Bank was no more responsible for the increased productivity of the seventeenth century than were the acceptance houses responsible for the increased productivity of the nineteenth century. Both the one and the other merely took advantage of it.
23. History, iv, 491.
24. Sybil, Bk. i, chap. 3.
25. Short Account of the Bank of England, Michael Godfrey, p. 8.
26. The Later Stuarts, Clark, p. 38.
27. Pound Sterling, Feavearyear, p. 107.