Working Papers No. 156/11 Merchantilist institutions for a first but precocious industrial revolution The Bank of England, the Treasury and the money supply, 1694-1797 Patrick O’Brien Professor of Global Economic History London School of Economics and Political Science © Patrick O’Brien November 2010 Department of Economic History London School of Economics Houghton Street London, WC2A 2AE Tel: +44 (0) 20 7955 7860 Fax: +44 (0) 20 7955 7730 2 Merchantilist institutions for a first but precocious industrial revolution The Bank of England, the Treasury and the money supply, 1694-1797 I One topical implication of the ongoing programme of attending more closely to the state's role in the construction and development of institutions behind the First Industrial Revolution has been that historians are re-engaging with a theme in financial history that virtually disappeared from view while cliometricians focussed on proximate determinants of long run growth.1 Thus the wider purpose of this paper is to recall the well documented interactions of England's financial institutions with internal trade and external commerce and to bring into relief the related support they accorded over the long eighteenth century to the operations of an exceptionally powerful fiscal state and its mercantilist strategies of promoting British economic interests at home and overseas.2 The restoration and widening of this discussion in political economy is predicated, however, upon elaborating upon knowledge out there in secondary and primary sources upon the sustained and systematic connections between the Treasury, the Bank of England and the accumulation of Government debt which (by way of unintended consequences) strongly influenced one all important macro variable behind the growth of the economy - namely the money supply.3 My analysis of these connections will be heavily concentrated upon evidence for the late eighteenth century because the circumstances of a major war against Revolutionary France 1793-1802; leading to the suspension of cash payments in 1797 exposed their nature and ramifications more clearly than at any time since the foundation of the Bank of England during another costly bout of warfare in 1694.4 Furthermore and after a century of financial intermediation under the auspices of the Bank by the late eighteenth century the scale, density and spread of provincial (country) banks had reached a level where the British economy 1 P. K. O'Brien, 'State Formation and the Construction of Institutions for the First Industrial Nation', in H. J. Chang (ed.), Institutional Change and Economic Development (New York, 2007) 2 P. K. O'Brien, 'The Nature and Historical Evolution of an Exceptional Fiscal State and its Possible Significance for the Precocious Industrialisation of the British Economy from Cromwell to Nelson', (forthcoming as a Survey and Speculations in Economic History Review, 2010. Hereafter, An Exceptionai Fiscal Slate . 3 E. Coppieters., English Banknote Circulation (Louvain, 1955). 4 D. W. Jones, War and Economy in the Age of William III and Marlborough (Oxford, 1988), 5 R. Levine, 'Financial Development and Economic Growth: Views and Agenda', in Journal of Economic Literature, 35 (1997), pp. 688-726. 3 conducted a very high (alas unmeasurable) share of its transactions with bank notes and deposits and with paper credit (negotiable bills of exchange) - convertible with greater ease that anywhere outside the Netherlands into the liabilities of specialised institutions for the funding of trade, agriculture and industries as well as the state. On theoretical and empirical grounds modern economics posits 'a positive first order relationship between financial development and economic growth'. An efficient network of financial institutions reduces transaction and informational costs, mitigates risks, monitors firms, mobilises saving and facilitates trade.5 Although technical and organisational innovations have undoubtedly promoted development in the financial services industry, other functions including a country's legal and political systems have also promoted its expansion, integration and efficiency at critical stages in the growth process. Thus it remains important to understand the evolution of the kingdom’s financial system through time and to comprehend how the fiscal and financial activities of the State operating in cooperation with a chartered private corporation (the Bank of England) generated benign as well as malign outcomes for the growth of the economy. Major connections are most easily exposed and referenced for a period of intense and costly warfare for which sources happen to be abundant Nevertheless they operated over the entire century between the Foundation of the Bank of England and the suspension of specie payments in February 1797 to provide an elastic supply of revenues which were created to fund the foreign, imperial and strategic policies of England's successful mercantilist state and which were based upon a highly effective fiscal constitution. Without the fiscal and financial operations of the state (which intensified during six interludes of warfare between 1689 and 1793) it is difficult to conceive of a comparable pace and pattern in the long run development of the financial services industry for the economy as a whole. II By the late eighteenth century national supplies of money and credit consisted of gold, silver and copper coins, tokens, bills of exchange and liabilities of banks, including notes of the Bank of England, notes of private banks of issue and bankers deposits. To plot trends for any kind of statistical breakdown of the total money supply is impossible because data on such important components as bills of exchange in circulation and bank deposits does not exist. Only 5 R. Levine, ‘Financial Development and Economic Growth: Views and Agenda’, in Journal of Economic Literature 35 (1997), pp. 688-726. 4 conjectures are available on the amount of gold, silver and copper coin and bank notes in circulation. These gaps in information are serious because according to Ashton bills of exchange in the hands of the businessmen may well have been a very important component of the nation's money supply6. Furthermore and although bank deposits were not generally employed as a means of payment in the provinces, within the capital cheques and drafts upon bankers may have exceeded the value of Bank of England notes in circulation. Forms of money which attracted contemporary attention included gold, silver and copper coins, and notes issued by the Bank and by bankers located outside the metropolis. For long stretches of the eighteenth century the supplies of coins failed to meet growing demands for a means for fractional payments particularly during the wars with France (1793-1815) when the market price of specie rose and they all be disappeared from circulation.7 Within the metropolitan area notes issued by the Bank filled the gap left by the negligence of the Government to mint adequate supplies of coins, but its notes seldom circulated beyond a thirty mile radius from central London. Elsewhere, as Pressnell's classic study demonstrated, the problem had been alleviated by the note issues of country bankers. At the beginning of the Revolutionary War the amount of their notes outstanding throughout Great Britain probably equalled issues by the Bank and by the battle of Waterloo may have exceeded it8 Country bank notes circulated within fairly well defined geographical areas and were employed for such payments as wages and purchases of local produce. Payments for goods and services traded between different parts of Britain generally took the form of bills of exchange drawn upon banks located in the capital.9 Between the end of the Seven Years Wars and 1793 the liabilities of the banking system probably achieved a new position of dominance in the country's money supply. Bankers issued notes and created deposits in exchange for assets offered by those who wished to obtain acceptable purchasing power. Their ability to acquire assets and create liabilities is today regulated by the central bank, but until well into the nineteenth century it seems incorrect to use a term as strong as 'control' to refer to the status of the Bank of England with respect to the economy's supply of money. The Bank's Directors never claimed to exercise "control" and 6 T. Ashton, 'Bill of Exchange', in R Sayers (ed.), Paper.\· in Monetary History, (Oxford, 1953) pp. 37-38; Coppieters, pp. 21, 144-5, 150 and 154. Bank Note Circulation, 7 A. Feavearyear, Pound Sterling, (Oxford, 1931) pp. 169, 183 and 187; L. Pressnell, Country Banking in the Industrial Revolution, (Oxford,. 1956), p. 159; thereafter: Pressnell, Country Banking. ; CC on Suspension, 1797. Three Reports from the Committee of Secrecy on the Outstanding Demand on the Bank of England and on the Restriction of the Payments in Cash, 1797, in Parliamentary Papers 1826 (3), [henceforth P,P. 1826 (3)]; H. Thornton, Paper Credit, (London, 1802), p. 97 and Statesmen's Papers deposited at British Library Additional Manuscripts, [henceforth BLAM Papers, with volume numbers]; p. Mathias, "Official and Unofficial Money in the Eighteenth Century'. in The British Numismatic Journal, 74 (2004), pp. 68-83. 8 Coppieters, Bank Note Circulation, p. 1; Pressnell, Country Banking. pp. 15, 16, 136, 142 and 159. 5 confusion has been created about the extent of their powers by a conflict of views among contemporary and more modem writers on the nature and degree of central direction over the eighteenth