Deflation Made Simple (Part II)

A falsely vilified phenomenon (Entry 141)

The Bank of England was not formed overnight. The discussion leading up to the bank’s formation had already begun as early as 1683 during the prolonged aftermath of Charles II’s Stop of the Exchequer (Entry 128).

Charles II was an impulsive spendthrift who led a colorful social life largely enjoyed by the English aristocracy. It was a lifestyle, however, that the English Parliament was reluctant to fund. As a result, Charles II relied heavily on expensive credit from those whom he entertained — credit whose interest was paid, in part, by Louis XIV (Image 89).

When Charles II turned to the English Parliament in 1672 to fund the Third Ango-Dutch War, Parliament refused to support the war. Convinced that he would receive funding, but gruffly rebuked, Charles II placed a stop on all further withdrawals from the English treasury and effectively confiscated the deposits of many a guildsman-banker who had been funding the King’s extravagant lifestyle.

Although Charles II of England did continue to meet his interest payments, he devastated several prominent guildsmen-bankers who could no longer meet their obligations to their depositors. Rather than storing their depositors’ gold in their own vault, they had stored it in the king’s. After all, the king was their chief borrower, and their own depositors appeared content with deposit receipts (Entries 129, 131-132).

Now, recall that not all guildsmen-bankers were thieves (Entry 132). As a result, those, who neither issued more deposit receipts than they had deposits, nor scalped the king with exorbitant borrowing fees while supporting his outlandish lifestyle, performed well when fearful depositors presented their receipts and demanded their gold. War is a scary event for merchants with overseas obligations, and the demand for liquidity (money on hand) always increases in such difficult times (Entry 115).

In any case, it was the honest English guildsmen-bankers who rose to the top in England in the wake of the Dutch rampjaar. Unfortunately, this phenomenon would be short lived. War is an invitation to corruption. Surely you have not forgotten Charles V and the banks of Seville.

One of the strongest supporters of the Bank of England was none other than William III — a different kind of spendthrift. Whereas Charles II reveled in parties among the English aristocracy, William III reveled in military glory and heroic pride. This said, things had changed somewhat since James II had fled London in 1688. Not only would William III find it difficult to raise taxes without Parliament’s permission, but he would be declared an enemy of the state were he even to try (Entry 135). What had not changed, however, was the king’s ability to borrow — simply, he would have to find his own way to pay back what was lent, if Parliament did not approve.

None of this changed the fact that James II was now in Ireland drumming up support for his invasion of England and hia wishful overthrow of William III. Money was needed quickly to pay for a counter offense, and it would take time for Parliament to discuss the matter. Initially William III turned to the city of London, but was rejected. This said, William III was not asking for a lot of money — a mere 100,000 pounds, about 189,000 Guilders. Three wealthy Dutch merchants who were not over-extended could have come up with such a sum in relatively short order. Still the king was rejected.

When the Commissioner of the Royal Treasury, Charles Montague, proposed an innovative tontine loan, the king was elated.

Subscribers to the loan were divided into various age groups. The size and age of the group determined the portion of a fixed annual dividend based on a predetermined rate-of-return and the total amount of all money lent. With each new death in a particular group, the assigned portioned of the total dividend was divided among fewer and fewer subscribers. When all members of all groups had perished, the lent principal would revert to the state and the loan was extinguished.

Some 881,492 English Pounds were raised via the tontine-subscription. By 1694, the year in which the Bank of England was founded, Charles Montague had also introduced a lottery that would raise an additional one million Pounds. The Bank of England pulled in still another 1.2 million — not including the 4,000 pounds set aside to manage the bank — for the king.

In summary, between 1688 when James II set foot on Irish soil until the founding of the Bank of England in 1694 the English had managed to raise 3,081,492 million Pounds for the war effort. This comes to about 5.82 million Guilders.

Now, compare the above amount with the increase in The Estates budget during this same period. In 1688 The Estates’ outstanding balance was 159,229,000 Guilders. By 1694 it had risen to 173,925,000 Guilders for a net increase of approximately 14.7 million Guilders. In effect, the Dutch were paying 2.5 times more for the joint Anglo-Dutch defense than were the English. And, Louis XIV had never attacked the Provinces!

During this same period the total volume in English Pounds traded on the newly formed London Stock Exchange rose from 630,000 to 1,312,049 Pounds. In other words, while the Dutch were paying for the war effort the English were becoming rich.

No, we are not jumping ahead; the Bank of England will still get its due. Simply a little international perspective was needed.

In liberty, or not at all,
Roddy A. Stegemann