One of the greatest concerns of European rulers during the 17th century was their inability to finance the increasing size of organized war. Prior to this period in time, many monarchs around the world simply commanded what was needed from the peasantry and merchants, but by the close of the century this was becoming increasingly difficult. The size and duration of war in Europe was making the repayment and securing of loans nearly impossible for governments. This was certainly the case for William and Mary of England. As war between England and France showed no signs of abating, and eventually bankrupted both kingdoms, King William II decided the English needed a better financial system to fund his campaign against the French. The growing pressure that was being applied to the government’s revenue by interest payments and repayment of the loans was hurting British chances of victory. Similar interest payments were crippling many countries of Europe and in the case of France it was consuming as much as forty percent of the crown’s income. This necessitated a drastic change in the relationship between the government and private companies. It is important to briefly analyze the ‘9 Year’s War’ and its effects on the economic interactions between William II and English merchant bankers. It must also be shown how the creation of the Bank of England benefited both the English government and the persons who funded the initial loan that gave birth to it. Lastly, the interrelationship of the bank and Parliament must be looked at to understand how this revolutionary idea of lending to governments, with the loans being backed by future taxes, led to governments being better able to manage their debt and in turn help their economies take off.
Prior to the creation of the Bank of England, European banking consisted largely of groups of merchants who were generally all members of the same guild. Unlike banks of today, the banks of the fourteenth and fifteenth century didn’t make their profits off of interest, with usury being outlawed by the Pope, but rather from the conversion of currency and procuring rare goods from far away countries. This fairly unorganized system of finance was a problem for many monarchs in Europe as their thirst for conquest on the great continent began to grow.
William of Orange was no exception to this trend as he constantly sought victory over his nemesis Louis XIV of France. The 9 Year’s War (1688-1697) was a conflict that William was willing to fight to the end, and by the end of the seventeenth century the strain on the English government’s finances became apparent. Short-term loans were becoming increasingly difficult to pay back and securing new loans by force from wealthy merchants became equally as challenging. Unable to command financial support from the wealthy merchants because the merchants were obsessed by a fear of complete financial breakdown. William II was forced to seek out other options to finance his war.
William collaborated with brilliant Whig financiers such as Charles Montagu and Scottish banker William Patterson to create the Bank of England. In order to get this institution up and running the initial charter loaned 1,200,000 pounds to the government at 8%. The difference between this loan, and loans that had been made in the past, was the duration. King and merchants alike decided the best way to manage this contract would be over longer periods of time. In fact, the contract stipulated that the loan was never required to be paid in full, and thus, the interest payments would be made perpetually unless the King decided to pay the principal balance. The initial investors were also able to sell their ‘stock’ to anyone willing to buy. This would therefore transfer the interest payments to the new holder of the note. This primitive version of the stock market allowed governments and people in general to borrow against future earnings which helped stimulate economic growth by increasing the money supply circulating in the economy.
The initial charter also stated that the contract was to be renewed every 12 years, at which time either the crown or the stockholders could terminate or renegotiate their position. This was a key factor in attempting to establish a balance of power between the two parties, which would help prevent the crown from dominating the Bank and also from the Bank forcing the Crown’s hand in matters that may benefit the investors.
Mercantile and Governmental benefits of this way of financing were astounding and far surpassed those of the French. The duration of the contract allowed the King to take out larger loans due to the lack of necessity to pay the principal sum in the near future. The only thing the King need be concerned with was the interest payments that were owed, which were paid by taxes collected from the citizenry. Interest payments such as these, when made timely, greatly increased a governments credit rating. The ability to raise a large army and navy in turn meant the need for larger and more factories to equip his troops. With a greater private manufacturing base England escaped many of the financial problems that plagued the French monarchy.
This economic model also had other important implications. For one, it allowed the King to pay his troops on a more regular basis, and thus individuals in the military had more money to spend. England’s credit and easy access to long-term loans made the maintenance of these troops less expensive when considering the savings in interest expenses and potential military plunder. Also, the increase in monetary circulation that payments to troops created, and the Bank’s printing of a form of paper money, helped real and disposable incomes to rise. This increase in non-essential income created demand for a wider range of products. Thus, wealthy merchants began to invest capital into new industries, which in turn created more jobs. This form of an expanding economy is still being felt by the societies of today.
Problems arising from trying to raise an army for war and maintaining a stable or growing economy has plagued leaders since Sun Tzu. These economic issues began to further hamper governments when the size and scale of war began to increase. Countries tried many different methods to confront the situations they found themselves in, but only England, following Dutch practice, found a solution that helped that small country become one of the greatest nations on Earth. The brilliant combination of public and private institutions that created the Bank of England has changed the way countries deal with the political economic realm. The private funding of governmental loans, which were guaranteed by the King in lieu of future taxes, greatly increased the ease with which the British government raised money for its war efforts. War time loans became simpler to manage, because parliaments only concern was to maintain the interest payments that were owed. This situation was also advantageous to the private holders of the notes because they were guaranteed perpetual interest payments. Britain’s credit rating thus began to rise and loans rates began to drop. This helped increase its ability to pay its troops, which increased circulation of money, and thus helped England’s economy to grow. ‘King Williams War’, and the need for money that it created, helped form one of the most important financial systems that affect our world today.
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