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Financial History Review 7 (2000), pp. 117–140. Printed in the United Kingdom © 2000 Cambridge University Press.
How it all began: the monetary and financial
architecture of Europe during the first global
capital markets, 1648–1815
LARRY NEAL
Department of Economics, University of Illinois at Urbana-Champaign, Urbana, IL 61801, USA
The Treaty of Westphalia (1648) created the modern nation-state system that has
subsequently characterised the European political scene. It broke up the Holy
Roman Empire into 300 sovereign political entities, recognised both Switzerland
and the Netherlands as sovereign states and confirmed France and Sweden as the
dominant political powers within northern Europe. The resulting political environment set the stage for the long-term success of financial capitalism. The governments of the numerous political units that emerged within Europe after the Münster
treaty experimented with a variety of monetary regimes as they attempted to
establish, respectively, their legitimacy and consolidate their territory. During wars
over the next century and two-thirds, they extended and perfected the financial
innovations that had emerged with the pressures of the Thirty Years War. When
the Treaty of Vienna was signed in 1815, a new system of public finance was firmly
set as the government of each country tried, as best it could within its political
framework, to imitate the success of the British in establishing a funded national
debt. However, the monetary regime of Great Britain, then based on the fiat
currency of the paper pound, was not imitated. Even the new monetary regime
installed in Britain between 1819 and 1821 – the gold coin standard – was not
adopted within continental Europe until much later in the nineteenth century.
Why did European governments eventually attempt to imitate the British in
terms of their financial regime and not their monetary regime? For that matter, why
did they not imitate the British sooner rather than wait until the final defeat of
Napoleon at Waterloo? And earlier, why did the British adopt only the stockmarket practices of the Dutch and not their payments system centred on the Bank
of Amsterdam? Why did John Law’s attempts between 1717 and 1720 to equip
France with a superior combination of the Dutch and English financial systems
come to such a disastrous end? These questions, familiar to historians of eighteenth-century Europe, should demonstrate to others the potential relevance to
developments in the current global capital markets of the historical experience in
Europe over the period from Münster to Vienna. The issues that governments of
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eighteenth-century Europe dealt with are similar in nature and importance to those
that concern governments at the start of the twenty-first century. The European
Monetary Union enlarges the scope of fixed exchange rates as did the Dutch
reforms after 1648; Japan tries to maintain some degree of independent monetary
policy much like the French after 1715; and the United States insists upon the
importance of international mobility of capital like the British after 1694.
The British innovations that constituted their ‘financial revolution’ at the beginning of the eighteenth century emphasised reliance upon financial markets rather
than upon financial institutions, despite the obvious importance of the Bank of
England, established in 1694. In other countries, reliance upon financiers and credit
institutions stunted the development of financial markets, especially in France.
Underdeveloped capital markets led to excessive volatility in pricing available assets.
Paternalistic governments then protected financiers and financial institutions from
market fluctuations in ways that stymied markets’ further development. In particular, the role of fixed exchange rates proved to be ambiguous. They certainly helped
the Netherlands develop a flourishing capital market at the start of the period being
considered, whereas France’s two experiments with floating rates (1719–26 and
1790–97) proved disastrous for its capital markets. In contrast, Britain’s ‘paper
pound’ between 1797 and 1821 coincided with a period when its capital markets
flourished. The different outcomes from these three experiments, I argue, arose
from the different uses of the market and the payments system made by the respective governments. Both aspects, the respective roles played by the capital markets
and the payments system in each European country, reflected the government’s
legal regulations of market operations and their choices of monetary regime.
I
Legal regulations comprised mainly usury restrictions and the loopholes that could
be found to evade interest-rate ceilings on personal debts. One technique, available
within all of Europe by 1648, was for lenders to sell borrowers a foreign bill of
exchange at the market exchange rate but require them to re-exchange this bill, on
its maturity, for a bill of exchange drawn abroad. Typically, domestic currency was
worth more locally than abroad, so the difference in exchange rates between any
two cities in early modern Europe would nearly always give the original lender an
attractive rate of return.1 However, this lending depended on the volume and
intensity of commerce between any two cities. So it was limited to merchant
bankers dealing in foreign trade, and to cities in close geographical proximity that
were politically friendly.
For domestic credit instruments, opportunities for varying interest rates were
1 This process is described in detail in R. de Roover ( J. Kirshner (ed.)), Business, Banking, and Economic
Thought (Chicago, 1976), ch. 4; and, with different emphases, in L. Neal, The Rise of Financial
Capitalism (New York, 1990), ch. 1.
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more limited. Within Protestant Europe, markets for debt instruments issued by
nobles, cities or guilds could determine the prices at which they were bought, even
if the rate of interest on the par values of these securities was limited by a usury law.
Within Catholic Europe, a distinction was made between short-term obligations
and long-term rentes. Interest was fixed on both by the usury law. But lenders could
require borrowers to redeem short-term notes at their discretion, usually fixed when
the loan was granted, while borrowers could decide when they would redeem longterm bonds.2 Interest could be varied then to reflect the risk borne by the lender,
but only within the limits set by the usury laws. The problem with both these
instruments was the difficulty that lenders had in liquidating them before their term
of expiry on a secondary market. The potential risk borne by the lender was
therefore idiosyncratic to each borrower – the amounts lent as well as the wider
conditions imposed had to be personalised. All these considerations limited the
liquidity of both obligations and rentes for lenders. The larger and better known the
borrower, the less binding were the liquidity constraints for lenders, so city corporations, noble houses and ruling princes were able to borrow larger amounts and on
more favourable terms.
Monetary regimes were determined by weight and fineness standard for coins
minted from precious metals, although occasional experiments with paper and fiat
currencies were attempted. When compared with surrounding mint standards, a
particular country’s mint standard determined its median foreign exchange rate with
its trading partners. When a country’s mint standard for coins was compared with
the legal weight of its domestic unit of account (used for calculating taxes and
internal contractual obligations), it determined changes in both the tax burden of
the economy and domestic creditor-debtor relations. A government’s choice of
mint standard, then, depended upon the relative importance it attached to waging
foreign wars versus maintaining domestic tranquillity. If war finance caused it to be
heavily indebted, a European government would be tempted to devalue its coinage
by ‘crying up’ the face value of existing coins or replacing coins of a given face
value with new coins with less metal content. If domestic tranquillity depended
upon increasing the purchasing value of taxes assessed in terms of a given money of
account, a government would want to ‘cry down’ the face value of existing coins.
Or, the government could replace coins of a given face value with new, heavier
coins, thereby raising the real value of the taxes collected in fixed, nominal terms.3
The diverse legal and monetary regimes within Europe that emerged after 1648
were struck by a series of financial shocks as governments repeatedly waged war,
both on the continent and overseas. Especially interesting are the contrasting monetary regimes and financial systems that developed within the three leading mercantile
powers – the Netherlands, Britain and France – over the period to 1726. Each
2 See P. Hoffman, J.-L. Rosenthal and G. Postel-Vinay, Priceless Markets: Political Economy of Credit in
Paris, 1660–1870 (Chicago, 2000), Introduction, section on ‘Regulation of Credit’.
3 John H. A. Munro, Bullion Flows and Monetary Policies in England and the Low Countries, 1350–1500
(Aldershot/Brookfield, VT, 1992).
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power then maintained a stable financial system with only minor modifications over
subsequent decades that experienced the War of the Austrian Succession (1739–48),
the Seven Years War (1756–63), and the War of American Independence (1776–84).
The accumulated fiscal pressures on the French government finally led to a catastrophic breakdown of each country’s regime and its replacement by a new system
of war finance from 1789 to 1815. The governments of, first, revolutionary France,
then a conquered Netherlands and, ultimately, an isolated Britain had to devise new
systems under threat of military defeat during the French revolutionary and the
Napoleonic Wars. The Treaty of Vienna in 1815 eased the political uncertainties of
this period for a generation or so. But the economic uncertainties of the aftermath
continued until the almost universal adoption of the gold standard by 1880. Only
then can it be said that a stable set of financial and monetary regimes re-emerged.
II
The Dutch province of Holland, led by the international merchants of Amsterdam,
emerged from the travails of the Thirty Years War unrivalled in wealth and the
potential for increasing its commercial supremacy in the long-distance trade of
Europe. Having taken advantage of the lapse in military support of Portugal’s overseas
emporia during the period when Portugal was united with Spain (1580–1640), Dutch
merchants expanded their trade throughout Asia and Africa, and into the Caribbean
and northern Brazil.4 Financing the logistical operations of Gustavus Adolphus in
northern Germany, Dutch merchants dominated the Baltic trade including the
Russian trade from Archangel. At Münster, the military leader of the United
Provinces, the Stadholder from the House of Orange, was able to obtain recognition
from the powers of Europe of his domain as a sovereign state. He was then able also
to impose a uniform mint standard upon the United Netherlands.
From the Dutch viewpoint, the Thirty Years War was simply an intensification of
its ongoing 80 years war with Spain that had broken out in 1568, but with a wider
range of allies and enemies. At the mid-point of this lengthy struggle, the desperate
finances of individual provinces led each of the 14 mints in the Netherlands (eight
provincial and six municipal) to follow its own policy in the timing and extent of
successive debasements. Mints in the adjacent areas of the Spanish Netherlands and
Westphalia took advantage of the resulting confusion in circulating coins to produce
their own variants. Foreign coins were introduced in profusion as well by merchants
from abroad. By 1610, it has been estimated that money changers in Amsterdam had
to keep track of nearly 1,000 different gold and silver coins.5 As would be the pattern
throughout the period until 1795, the province of Holland took the initiative in
4 J. Israel, Dutch Primacy in World Trade, 1585–1740 (Oxford, 1989).
5 P. Dehing and M. t’ Hart, ‘Linking the fortunes: currency and banking, 1550–1800’, in M. ‘t Hart,
J. Jonker and J. Luiten van Zanden, A Financial History of the Netherlands (New York, 1997), p. 40.
They cite H. E. van Gelder, ‘De Nederlandse manualen 1586–1630’, Jaarboek voor Munt- en
Penningkunde, 65/66: 39–79 (1978/79), p. 62.
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clarifying the situation. In 1638 the city of Amsterdam determined that its silver
currency should have slightly less than ten grams of pure silver – a standard to remain
unchanged until the 1930s. This measure also set the relative value of the current coin
to the guilder of account used to value deposits in the Amsterdamse Wisselbank
(commonly called the Bank of Amsterdam), a guilder still based on the silver guilder
established by Charles V in 1544. In 1659 the States General of the Netherlands
followed the Amsterdam example.
As much as ‘hard money’ enthusiasts might like to attribute the Netherlands’
ensuing financial success to the stabilisation of the currency in 1659, contemporaries
interpreted the Dutch experience otherwise. More important than the stability in
the intrinsic value of the newly minted coins was the ease of payment that merchants
and citizens found in the always reliable bank guilder. This was the unit of account
established for deposits in the Wisselbank, founded in 1609 at the initiative of
foreign, non-Catholic merchants who had come to Amsterdam after being expelled
from Antwerp by the Spanish. The central role of the Wisselbank was established
by outlawing all existing money changers and cashiers, as well as their notes issued
as receipts for coins placed with them for safekeeping. The kassiers were allowed to
resume business in 1621, but only as licensed officials and under the restriction that
they could not hold specie for longer than 24 hours before depositing in their
account at the Bank of Amsterdam.6 In this way, the Bank of Amsterdam maintained a unified system of payments denominated in a single currency – the bank
guilder – and centralised in a single institution. Its receipts then became the preferred medium of exchange for the market-place. A merchant dealing with scores
of customers on the Amsterdam markets could more quickly credit his account at
the Bank of Amsterdam by depositing their bank receipts rather than their coins,
whatever their provenance. Coins would have to be assayed for their precious metal
content and evaluated at bank guilder rates before being credited. Bank receipts, by
contrast, could be credited to a merchant’s account immediately.
The centralisation of the payments system at the Bank of Amsterdam had two
great benefits for the financial future of the Netherlands. First, it allowed an efficient
giro system of net clearing to function that minimised the need for cash by merchants. This was more efficient, the greater the number of accounts. These rose to
nearly 3,000 in the frenetic year of 1720, but had already numbered 1,350 in 1625,
far more than in any other exchange bank in northern Europe.7 Merchants from all
over Europe were then content to leave their specie and precious metals in the
vaults of the Bank. (Even John Law, the great financier for France from 1715 to
1720, kept his personal account open, if inactive, and with a minimum deposit, after
he left Amsterdam.) This mass of silver and gold was then available for the outbound
ships of the Dutch East India Company as well as for the English, French, Austrian
and Danish East India companies. It was also available for the defence of Amsterdam
6 Dehing and t’Hart, ‘Linking the fortunes’, pp. 40–4.
7 ibid., pp. 46–7.
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should the city be threatened by enemy occupation, an event that only happened
once a century during this period. The availability of actual trade coins in the vaults
of the Bank of Amsterdam also meant that bills of exchange drawn on Amsterdam
were both reliable and prompt in payment. The city became the entrepôt for
commercial credit throughout Europe – credit extended on the basis of the bill of
exchange payable in Amsterdam at the Bank of Amsterdam.
The second benefit of the Bank of Amsterdam as a financial institution for the
Netherlands was the flexible exchange rate its management could maintain between
the bank guilder and the coin guilder. The agio fluctuated according to the demand
for bank money relative to domestic coins, rising when coins were being deposited
more rapidly than they were being withdrawn, and falling when the reverse situation arose (becoming negative when a French invasion threatened, as during the
mid-1690s and again in 1794). Initially, the agio arose as a fixed commission fee
taken by the bank for the acceptance of deposits of coin and the issue of receipts.
Later, it fluctuated, acting as a barometer of market conditions, informing everyone
about the relative abundance, or scarcity, of the circulating medium of exchange
within Holland.
The agio also acted as a sluice gate because, as it rose, further specie inflows into
the Wisselbank’s coffers were discouraged since bank money became more expensive. Conversely, when it fell, specie inflows were more likely as bank money
became cheaper. The movements of the agio as a sluice gate, therefore, allowed the
Bank of Amsterdam to keep domestic coins in circulation for internal transactions
just at times when foreigners might be demanding more of their foreign coins for
export. Thus the Dutch were able to reap the advantages of a fixed exchange rate
for their international trade and finance, encouraging their own merchants as well
as foreign merchants to use their financing facilities for long-distance trade and
long-term finance. At the same time, they were able to maintain the shock absorber
benefits of a flexible exchange rate for their domestic economic activity.
The advantages of centralisation for the efficiency of the Dutch payments system
were not allowed, however, to extend into the financial realm. The political jealousies of the separate provinces and the individual trading cities over Amsterdam’s
eminence resulted in shares in the United East India Company (VOC, for
Vereenigde Oost-Indische Compagnie) being divided up among the seven participating cities. The authorities of Amsterdam, by far the dominant city, had to agree to
keep its portion of the company’s capital stock just below half. The balance, divided
among the other six cities, never provided a sufficiently large enough body of
tradable securities allowing an active stock market to emerge outside of Amsterdam.
Even there, the capital stock of the Amsterdam chamber of the VOC only provided
enough volume of trading activity to sustain the livelihood of a small group of
stockbrokers. Public debt instruments were issued in prolific quantities, but they
were all backed by specific taxes dedicated to a specific debt issued by a particular
province or, most typically, the general taxes of an individual municipality.8
8 See J. P. de Korte, De Financiele Verantwoording in de Verenigde Oostindische Compagnie (The Hague,
1983).
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In short, the Netherlands, due to the fragmented character of its political structure, never issued during this period a truly national debt backed by a national
taxing authority. This was despite the constant pressures placed upon Dutch financial resources by the repeated assaults of the French or the English. Consequently,
the Netherlands missed out on the financial revolution that arose later in England,
even though its constituent cities and provinces had developed the basic elements
of funded, fungible and assignable debt backed by perpetual taxing authority that
comprised the financial revolution of England.9 What Dutch citizens and bankers
lacked was a liquid, transparent, secondary market for the securities issued by their
various public authorities. Their financial system failed to match the effectiveness of
their monetary system. However, after 1694, they were able to take advantage of
the market in financial assets created in England by their countryman, William III,
and his advisers.
III
William III, Stadholder of the Netherlands and military commander of the
Protestant forces of northern Europe seeking to limit the expansion of France under
Louis XIV, became king of England and Wales in the course of the Glorious
Revolution of 1688. When the expenses of his military efforts during subsequent
years in Ireland, Scotland and northern Europe overwhelmed the tax resources
allowed him by the English Parliament, he was forced to try out on his English
subjects some of the financial innovations that had been found successful on the
continent.
In 1694, the English Parliament issued three types of securities. All were intended
to ‘fund’ the various forms of short-term debt, arising from the expenses of the War
of the League of Augsburg. The latter were intended to be transformed into longterm funded debt, on which only interest would be paid for the duration of the
war. They comprised: lottery tickets, tontine annuities and special bonds.10 The first
two types, both sold to the general public, failed to find a suitable market. Lottery
tickets were too easily and too profitably imitated by the private sector for the
government to wish to rely upon them for additional finance. While the full £1m.
worth of tickets were sold, their implicit interest rate was 14 per cent and the lottery
was expensive to operate. Tontine annuities, actually authorised in 1693, appeared
too complicated and too foreign for the English public to respond enthusiastically.
Barely one-tenth of the intended £1m. were bought, even with an implicit interest
rate of 10 per cent. The balance had to be raised through later issues of simpler life
or long-term annuities bearing an interest of 14 per cent. In the third attempt at
creating funded debt, £1.2m. bonds, carrying a guaranteed eight per cent rate of
9 See J. Tracy, A Financial Revolution in the Habsburg Netherlands (Berkeley/Los Angeles, 1985).
10 See Table 2, ‘Government long-term borrowing, 1693–8’, in P. G. M. Dickson, The Financial
Revolution in England: A Study in the Development of Public Credit, 1688–1756 (London, 1967),
pp. 48–9.
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interest and funded from specific taxes assigned to that purpose by Parliament, were
sold only to subscribers in the proposed new Bank of England. If they bought a half
of this issue by 1 August 1694, they were to be incorporated as the Bank of England.
The Bank, in turn, issued easily transferable shares in its joint stock. The Bank also
promised purchasers at least a pass through of the interest it was being paid by the
government, and a potential capital gain if it succeeded in turning a profit on its
monopoly of the banking business of the government. The full £1.2m. was taken
up immediately, and the success established the basis for a remarkable rise in further
issues of debt.
However, the new public bank of the government was not given the monopoly
of the payments system, so it was no mere imitation of the successful Bank of
Amsterdam. Unlike the Wisselbank in Holland, the Bank of England was not the
creation of the merchant guild of the capital city. Rather, it was chartered by the
national parliament of England at the urging of the king. Even so, parliamentary
approval required acknowledging the vested interests of the goldsmiths’ guild and
their most important members – the goldsmith bankers. Earlier, they had been
given their own set of annuities as compensation for losses sustained during the
reign of Charles II. When the Bank of England was chartered in 1694, their interests
were protected through allowing them to continue issuing their individual banknotes as the favoured medium of exchange within the City of London. Later, when
the Bank of England was given the monopoly of note issue in 1706, goldsmith
bankers retained their privileges of acting as trustees for absentee debt holders who
possessed claims on the government in the form of illiquid, personal annuities. The
most fruitful reaction of the goldsmith bankers to the new public bank, however,
was to move into new forms of activity. Their portfolios contained not only
government annuities but also shares in the new government chartered corporations. This enabled them to manage portfolios for wealthy clients and, increasingly,
to deal themselves in the emerging capital market of London, whether as brokers or
dealers.11
After the South Sea Bubble (1720) was mopped up, further issues of government
debt were made, all on the same principles as those first issues to the Bank of
England. The debt was always redeemable by the government, but the government
would not wish to do that unless the debt’s market value had risen above par and,
even then, it would be better off by continuing to pay interest than to redeem the
full amount. Of course, it could issue new debt at lower interest rates to cover these
costs, but, then, the original holders would benefit from realising substantial capital
gains. In other words, the government would have either to induce holders to turn
in their bonds or to induce new buyers to purchase the new issue of debt – it would
have to play by the rules of the capital market. In the meantime, original purchasers
11 This is described in S. Quinn, Banking before the Bank: London’s unregulated goldsmith-bankers,
1660–1694, unpublished Ph.D. (University of Illinois at Urbana-Champaign), 1994.
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of government debt could freely sell part, or all, of their holdings on the secondary
market for securities.
Readily accessible transfer facilities, low transfer fees and transparent pricing on
the spot market for these securities facilitated the growth of active trading. At first,
this kind of trading in government debt solely involved the shares of the Bank of
England. Other forms of government debt were available to investors, but were not
actively traded. Lottery tickets were mainly subdivided and resold once, whereas
annuities were held by long-term investors. The shares of other joint-stock corporations were traded, but none had the certainty of a fixed annual income from
interest on government debt backing them. However, thereafter, shares of the New
East India Company (1698), the United East India Company (1708) and the South
Sea Company (1710) continued the process. This culminated in creating the three
per cent perpetual annuities of the South Sea Company (1723). These, in turn, led
ineluctably to the creation of the Consols of 1758, now known as the ‘gilts’. Their
inherent marketability was enhanced by the regular purchases on the market by the
Commissioners for the Reduction of the National Debt.12
Despite alarms raised by economists throughout the eighteenth and nineteenth
centuries over the burden created by raising, and then increasing, the national debt,
the British economy prospered and expanded. This vibrant growth occurred even
as the ratio of the stock of national debt to the annual flow of gross domestic
product rose sharply with each successive war. The evidence is clear that the
periodic increases in the size of the British national debt did not ‘crowd out’ private
investment, but were, indeed, associated with increases in the ratio of investment to
GNP. (The one major exception was not to occur until the Second World War,
which should be treated as a special case rather than the prime example.) On
the other hand, when the ratio of national debt to British GNP was reduced,
private investment also seemed to rise. In short, ‘crowding out’ did not occur, but
‘crowding in’ did.
Figure 1 shows clearly how the national debt of Great Britain was enlarged
dramatically with each successive war waged during the eighteenth century. Two
measures of the debt are given – its nominal value and its market value. The first
reproduces data given in official sources and replicated in countless books and
articles, including Mitchell’s authoritative British Historical Statistics. The other shows
the market value of that debt, estimated by taking the percentage of par at which
either Bank of England stock until 1723, or the dominant three per cent annuities
thereafter, were traded on the London stock exchange. Both measures of debt rose
sharply with each war, but the market value did not rise nearly as much, especially
during the Seven Years War and the War of American Independence. Wartime
shocks produced the anticipated effect of a price reduction, given that a large
addition was made suddenly to the stock of outstanding debt. The persistence of the
12 Neal, Rise of Financial Capitalism, ch. 3.
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Figure 1. National debt of the United Kingdom: nominal and market values
70%
60%
60%
40%
30%
20%
Debt service/Revenue
10%
1691 1701 1711 1721 1731 1741 1751 1761 1771 1781 1791 1801 1811
Eighteenth century
Figure 2. British debt service/revenue ratio in the eighteenth century
reduced price after mid-century can be explained in various ways, which will be
considered later.
The British government very quickly ceased issuing ‘unfunded’ debt, turning to
straight issues of ‘funded’ debt after the trauma of the South Sea Bubble in 1720.
Special taxes were committed by Parliament to the service and redemption of each
new issue. As Parliament was a permanent legislative body with exclusive taxing
authority, it could make a commitment to the creditors of the state that was both
credible and perpetual. Figure 2 is instructive in terms of current issues confronting
transition governments. It shows the incredible weight of debt service within the
annual budgets of the British government after the joys of debt financing had been
discovered. Only once did debt charges dip as low as one-third of tax revenues after
the creation of the South Sea Company in 1710. At the end of the American War
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of Independence, it briefly touched two-thirds of the gross revenues available to the
central government.
John Brewer has argued that it was the development of improved tax collection
bureaucracies in Britain that enabled government to find a ready market for its huge
increases in the outstanding funded debt which occurred with each war of the
eighteenth century.13 But the pressure of debt service occurring after each war must
have been a more powerful force impelling government to develop a larger tax base
and to extract taxes more efficiently. The two processes obviously reinforced each
other over the eighteenth century, but the direction of causation appears to be from
war finance to increased debt to higher debt service/total revenue ratios to higher
taxes.14
Most important, the truly extraordinary increase in the ratio of the stock of
national debt to domestic product over the course of the eighteenth century does
not seem to have had any retarding effect on the gradual rise in the share of
investment expenditures in output that occurred during the century’s last quarter.15
The collapse of the South Sea Bubble in 1720, which ended the volatile period of
initial experimentation with the various forms of the national debt, had only a
minor effect on the course of industrial output. Even that effect was negative rather
than positive. What can explain this remarkable course of events?
The answer lies in the opportunities for risk-sharing that arose within the English
financial system. Unlike their continental counterparts, English firms were bound
together in a secondary market for financial assets, rather than through a clearing
house or an information network. Small partnerships of specialised intermediaries
characterised banking, foreign exchange and stock broking. Specialised brokers had
appeared on the London stock exchange by the end of the War of the Spanish
Succession. By 1713, ample shares in not only the Bank of England but also the
United East India Company and the South Sea Company were available, and had
been subscribed for, initially, by quite distinct groups of investors. The consequent
reduction of transaction costs for purchasers of the government funds obviously
increased the value of government debt as a form of insurance against the risks
incurred when dealing in the less liquid markets for real or private financial assets.
A large part of the theoretical advantages obtained from creation of national debt
depends upon it having sufficient volume, and spread among enough asset holders
with different tastes, that transaction costs in its secondary market can be reduced.
These advantages could be captured by holders of English government debt at least
by the end of the War of Spanish Succession and, most likely, before it began
in 1702.
Following the collapse of the value of South Sea Company stock during autumn
1720, various alternatives were considered for reform of the British financial system.
13 J. Brewer, The Sinews of Power: War, Money and the English State, 1688–1783 ( New York, 1989).
14 P. K. O’Brien, ‘The political economy of British taxation, 1660–1815’, Economic History Review,
41 (1988).
15 A large literature has dealt with this issue, starting with J. G. Williamson.
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Many holders of government debt had suffered serious losses, especially amongst
those who had held short-term (nine to 20 year) redeemable annuities. All these
securities had been converted into South Sea stock at terms very favourable to this
Company, but also to the longer-term advantage of the government, whose interest
charges were thereby substantially reduced. The shock of widespread failures among
London goldsmith bankers at the centre of the web of credit that constituted the
national and international payments network of Great Britain brought a temporary
halt to trade as well. The new government, headed by Robert Walpole, had to
consider alternative proposals for absorbing the failed South Sea Company into the
Bank of England, or the East India Company, or a new public bank or into a
government department. The outcome was a mixed strategy, comprising elements
of each particular proposal. The capital stock of the South Sea Company was
absorbed partly by an expanded Bank of England and East India Company, with
each taking part of the government debt previously acquired by the South Sea
Company. Most, however, including all that had been added during 1720, were
converted into perpetual annuities bearing a nominal interest of three per cent,
starting in 1723. This allowed many of the suspended goldsmith bankers to resume
business as the new shares of the Bank of England, the East India Company and the
new annuities of the South Sea Company could be easily transferred and so
liquidated.
Most important for the future success of the capital markets within Britain, the
huge mass of illiquid irredeemable 99-year annuities, that had constituted the major
part of British national debt in 1719, had been largely converted into liquid, easily
tradable and transparently priced South Sea annuities. This greatly enlarged the mass
of tradable financial assets on the secondary market for securities in London, so
preserving an active stock market in London by more than offsetting the effects of
the Bubble Act of 1720. This statute eliminated dealing in a welter of bubble
companies that had sprung up during the previous speculative boom, but does not
seem to have eliminated continued use of the joint-stock company for financing
the continued expansion of British infrastructure – turnpikes, canals, docks and
waterworks.16 The basic outlines of the Anglo-American structure of finance were
set by 1723 – complementary sets of private commercial and merchant banks, with
all enjoying continuous access to an active, liquid secondary market for financial
assets, especially for government debt. The South Sea Bubble proved to be the ‘big
bang’ for financial capitalism in England. Unfortunately, the Mississippi Bubble
proved to be the end of secondary markets for financial assets in France.
IV
The years following the Treaty of Westphalia saw the rise to power of the fabled
Sun King, Louis XIV (1638–1715). Louis first defeated the rebellions of the tra16 R. Harris, Industrializing English Law: Entrepreneurship and Business Organization, 1720–1844 (New
York, 2000).
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ditional nobility (the Fronde of the Parlement and the Fronde of the Princes),
caused in large part by the continued fiscal demands placed upon them by the
expenses of the Thirty Years War. He then created a new aristocracy under the
leadership of his Comptroller of Finances, Colbert. Finally, in his old age he
dissipated the economic and financial resources of his kingdom after Colbert’s death
in a series of increasingly expensive and indecisive wars until his death in 1715.
Financial power rested in the hands of a diverse group of financiers, capable of
mobilising the large sums needed for renewed military campaigns but expecting
control over major parts of the government’s sources of revenue in return.17 By the
end of the War of Spanish Succession (1702–13), that had come upon the heels of
the War of the League of Augsburg (1689–97), the French government was bankrupt. The last years of war required repeated borrowing and the creation of new
offices, sold to wealthy citizens. Sales of new bonds raised less and less money as
they had to be sold at increasing rates of discount, amounting to 50 per cent by the
war’s end.18
None of the traditional means that Louis had used to deal with the aftermath of
war finance seemed to work following his death in 1715. These included simply
repudiating all of the debt, or repudiating it in part by means of a Visa that would
acknowledge some debts and disavow others or using a Chambre de Justice to
impose a capital levy on the financiers who had profited most. All required a strong,
powerful monarch to be effective. In the circumstances within France after the
death of Louis XIV, with the legitimate successor a sickly, five-year-old greatgrandson of the Sun King and the Regent under a cloud of suspicion, new expedients had to be proposed and attempted. The first series of innovations consisted of a
series of devaluations and revaluations of the coin of the realm, and the introduction
of new means of payment – a paper currency bearing interest, known as billets
d’état. The repeated alterations of the currency disrupted drastically the French
payments mechanism, while the introduction of a new form of government debt
only depreciated further the value of the existing debt. Into this dire situation
stepped the financial wizard of the eighteenth century, John Law.
Law proposed to combine the best features of the Dutch and English financial
systems into an entirely new ‘system’ for French money and finance. This would
combine secondary markets for government securities with a central clearing house
for payments. He was already the successful operator of a new joint-stock bank in
Paris possessing extensive international connections, Banque Générale. This was
modelled upon the Dutch example but also served itself as a model for Royal Bank
of Scotland, founded in 1732 with Law’s friend and fellow Scotsman, Lord Ilay, as
Governor. Law was also director of a reorganised and revitalised Compagnie
d’Occident, which had a monopoly of French trade to the Caribbean and the
exploitation of the Mississippi River drainage. This was a direct imitation of the
17 J. F. Bosher, French Finances 1770–1795: From Business to Bureaucracy (Cambridge, 1970).
18 A. E. Murphy, John Law: Economic Theorist and Policy-Maker (Oxford, 1997), p. 128.
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English practice of converting public debt into the private share capital of a monopoly company. The essence of Law’s schemes was to displace with paper money
the use of gold and silver as the means of payment and store of value within the
domestic economy. The attraction to the government was that this would allow it
to amass in its treasury the gold and silver needed to mobilise and maintain the large
armies and navies required for success in the period’s warfare.
The first step taken by Law was to enlarge the capital stock and issuing authority
of the Banque Générale through re-chartering it as the Banque Royale in 1718.
The Regent of France gave Law this authority in order to raise the money required
to mobilise French troops against Spain. Banque Royale stock was exchanged at
face value for existing government debt – part in the form of billets d’état and part
in shares of Compagnie d’Occident – both trading then at substantial discounts from
their par values. The government agreed to pay a lower interest of four per cent
annually on the debt held by both Banque Royale and Compagnie d’Occident.
This reduced its outlays on both current interest payments and the redemption of
short-term debt.
Banque Royale clearly mimicked the form and functions of the Bank of England,
but with three very important differences. First, its issue of banknotes was not
limited by any reserve requirement, but rather by the King’s Council, the senior
governing body of France under the Regency of Duc d’Orléans. Second, its banknotes were convertible at the holder’s discretion into either coins or credits of livre
tournois, the domestic money of account. Third, one-fourth of its capital comprised
shares in Compagnie d’Occident, Law’s other company. This was an imitation of
the English East India Company, although with two major differences. Its holdings
of government debt were not differentiated from other forms of government debt
other than the lower interest on its debt holdings, and its court of directors overlapped considerably with that of Banque Royale.
To meet the Regent’s desires for additional finance to consolidate his political
situation both at home and abroad, Law put to use Banque Royale’s new powers to
begin the machinations in the stock of Compagnie d’Occident that were to create
the Mississippi Bubble in Paris. First, he formed Compagnie des Indes during May
1719 by merging his Compagnie d’Occident, which had the monopoly of trade
with the West Indies, with both Compagnie des Indes orientales and Compagnie de
Chine. To give this new Compagnie sufficient capital to outfit 24 ships of 500 tons
each, Law proposed to issued 50,000 new shares with a nominal value of 500 livres
tournois each, for a total additional capital of 25m. livres. To market these, he
formed a group of associates who each promised to subscribe 1m. livres and, on
their behalf, contracted to purchase the entire new capital stock for them and
himself. Moreover, Law promised that his group would subscribe for the new shares
at 110 per cent of par, and he paid out 2.5 million livres (the ten per cent premium)
as a guarantee, which he stood to lose if he did not make the subsequent payments.
On the basis of this wager, which was well publicised, the Regent issued the decree
authorising the formation of the new company. Shares in the Occident had already
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131
Figure 3. The Mississippi bubble, Compagnie des Indes, 1719–20
risen to 98 per cent of par and, on the day following the publication of the decree,
rose to 120 per cent of par. By this audacious bet, Law had gained a ten per cent
return for his small group of wealthy supporters.19 Of course, it helped enormously
that Banque Royale, which he controlled as well, had issued another 270.7m. livres
in banknotes the preceding week.20 These extra funds were obviously used to bid
up the price of Compagnie shares available for sale on the Paris bourse.
Over 1719, Law continued to use these techniques to expand the capital stock of
Compagnie des Indes to absorb other French enterprises useful for ensuring the
success of his Mississippi venture. The Compagnie de Sénégal had already been
absorbed to supply slaves needed to develop the agricultural possibilities of
Louisiana. The tobacco monopoly was bought up to guarantee a profitable market
for the eventual produce of Louisiana and, in the meantime, provide the finance
needed to develop this colony. At the end of the summer of 1719, Law proceeded
to buy out the one other major French joint-stock company – United General
Farms. This had been founded to collect royal taxes for a term of five years, a
privilege acquired through a large loan to the Crown. The loan, in turn, was to be
repaid out of the tax revenues collected during the period of the farm. To finance
this buy-out, Law needed to expand again the capital stock of his Compagnie des
Indes. This is the origin of the famous Mississippi bubble, depicted in Figure 3.
At the top of the spectacular rise in the price of Indes shares, near the end of
November 1719, Law began to consolidate his gains by creating a new financial
system for France. First, he took official office as Comptroller General in addition
to being the chief executive officer of both Banque Royale and Compagnie des
Indes. Then, he merged the two companies into one, absorbing the Banque into
the Compagnie. This effectively froze out from controlling the operation of the
new system the financiers who had helped finance Louis XIV’s wars. To maintain
convertibility at a fixed rate between the inflated shares of the Compagnie and
banknotes issued by the Banque, however, Law had to enforce a reduction in the
19 E. Faure, Le Banqueroute de Law (Paris, 1977), pp. 198–9.
20 Murphy, John Law, p. 77.
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rate of interest on all alternative financial assets. His one-two punch of inflation in
the money of account – the livre tournois – and an interest cap on new loans,
effectively demolished the existing credit structure in France.21
John Law’s experiment in consolidating and then monetising France’s national
debt ended by a protracted Visa, which started in 1721 and lasted until 1723. The
Visa was a classic French financial innovation, essentially a ‘segmented default’. It
divided holders of the French national debt into six categories, with each successive
category getting less credit for their holdings, depending how they had acquired
them. Distinctions were made among payments by exchanging previous debts of
the Crown: specie, city of Paris debt, private debt, foreign bill of exchange, billets
de banque, etc. Creating the documentation required for various debt holders to
claim as much as possible from the authorities gave an enormous boost to the
information base at the disposal of Paris notaires. These were the 113 officials
appointed by the city of Paris to draw up and attest to the validity of legal instruments. Moreover, private French debts were always legally enforceable only in
nominal terms of the official unit of account – the livre tournois. When this
depreciated rapidly during the brief inflation set off by Law’s issuance of paper
money, debtors forced their creditors to receive devalued livres for repayment,
again through notaires. The shock of inflation, arbitrary default by the Crown and
protracted scrutiny of citizens’ affairs by Visa officials combined to ruin the official
credit market in France for at least a century.22
Not so, claim the revisionist studies of private credit activities undertaken by the
notaires that emerged from the ruins of public credit in 1723.23 The closely-knit
corporation of notaires was empowered to pass on their accumulated legal records,
known as études, to designated successors. They used these to match up private
lenders with private borrowers, sharing information with one another to make the
matches as mutually congenial as possible in terms of amount and duration. Hoffman
et al. claim that the concentration of notaires in brokering long-term lending among
private individuals thereafter was an effective ‘third way’ for financial intermediation. The French, under duress, had spontaneously discovered an alternative to
banks and capital markets as means of financial intermediation – an information
network managed by information brokers entrusted with the responsibility of
placing either funds or loans among their clients.
V
The bubble years of 1719 and 1720 created an international capital market, one that
subsequently flourished until it was disrupted and, then, demolished by the pressures
of political revolutions and war finance from 1789. But the response to the systemic
21 P. Hoffman and J.-L. Rosenthal, ‘Redistribution and long-term private debt in Paris, 1660–1726’,
Journal of Economic History, 55 (1995).
22 C. P. Kindleberger, A Financial History of Western Europe (2nd ed., New York, 1993), ch. 6.
23 Hoffman et al., Priceless Markets.
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133
shock of the bubbles’ collapse was quite different within each of the three major
mercantile economies of Europe. They developed three distinct financial structures
ranging from banks to markets to networks. Each managed in some way to separate
and partially insulate the domestic monetary and credit systems from a flourishing
international capital market. The Dutch continued to focus on a centralised payments system, a diffuse set of financial assets available for long-term investors and an
active set of merchant bankers who could facilitate foreign payments and credits.24
The English gradually developed a network of country banks, tied by partnerships
into private banks in London, which could help finance domestic investments and
foreign trade, with frequent recourse at times of financial shocks to the market for
government debt.25 The French developed a market for government debt in the
form of life annuities that were very attractive to foreign investors by virtue of
paying a very high rate of return. Private investors then concentrated on lending,
through the network of notaires, to private borrowers whose security was attested
by notaires.26
Thanks to the information network created by notaires, the Paris credit market
thrived from 1726 to 1789. The quantity of private loans brokered by notaires grew
sharply up to the eve of the French Revolution, equalling the size of the French
national debt. These were private loans, usually secured by some form of property,
whether real or personal. French national debt, largely in the form of life annuities,
was not a major part of the placement services provided by notaires. The large part
of French rentes held by foreigners appear to have been bought by them through
their foreign bankers and their agents in Paris. The French government apparently
could not tap into the active private market for loans, save with very specific
securities at much higher rates of interest than ruled in the private market. The only
way the government exploited the information network of the notaires, apparently,
was to use it to verify the continued life of the nominee named by each annuitant.
By 1750, some notaires had become bankers as well as brokers, evidently trying to
take advantage of latent profit opportunities in the segmented credit markets. They
made short-term loans to preferred customers and paid illegal interest rates to
preferred depositors.
This development was cut short during a series of bankruptcies that hit several of
the largest, most reputable notaires during the 1750s and early 1760s. It could not
be mere coincidence that this was also a period of financial stringency for the
French government as it attempted to finance a world-wide war effort against the
British in the Seven Years War.27 The bankruptcies of notaires-banquiers led to
24 J. C. Riley, International Government Finance and the Amsterdam Capital Market (Cambridge, 1980).
25 L. S. Pressnell, Country Banking in the Industrial Revolution (Oxford, 1956); and L. Neal, ‘The finance
of British business’, in R. Floud and D. N. McCloskey (eds), The Economic History of Britain since
1700, 1 (Cambridge, 1994).
26 See Hoffman et al., Priceless Markets.
27 J. C. Riley, The Seven Years War and the Old Regime in France: The Economic and Financial Toll
(Princeton, 1986).
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self-imposed restrictions by the company of notaires on banking activity.
Thereafter, they restricted themselves to acting simply as brokers, refusing to make
advances on their customers’ deposits or taking a counterparty position with respect
to any of their clients. The private credit market continued to flourish, despite the
French government’s credit standing steadily worsening, especially after the
expenses incurred while supporting the Americans in their War of Independence
against the British. Hoffman et al. argue that the growth in volume of the private
credit market brokered by the notaires demonstrates the efficacy of information
networks as an alternative form of financial intermediation. Alternatively, its growth
may have been a manifestation of a ‘flight to quality’ by French domestic savers
alarmed at the increasingly tenuous nature of French public finances.
There is no comparable study of the activities of Dutch notaries, possibly because
the quantity of material available there is utterly overwhelming. But it is clear that
they provided as much, if not more, private credit facilities for their more commercially inclined clientele in the Netherlands than did notaires in Paris and the French
provinces. Moreover, their clientele were active investors in foreign long-term
securities, especially the various forms of English national debt after 1720, as documented many years ago by Charles Wilson.28 Much of the risk-averting activity of
the wealthy Dutch was focused on British Consols as well as the original South Sea
annuities issued in 1723. As yields on these forms of British debt fell, Dutch
speculators showed more interest in English East India Company stock.
During the same Seven Years War that caused bankruptcies among notaires in
Paris, the most spectacular military victories won by the British were in India. The
territorial gains there, and rewards by grateful Indian princes, yielded the promise of
greatly increased profits for the East India Company. Speculation could be financed
by drawing bills of exchange on the basis of credits expected from the Bank of
England as it remitted bills payable in Amsterdam to support mercenaries employed
by the British government on the continent, as well as the troops of Frederick the
Great. This led to wisselruiterij, a Dutch version of cheque-kiting, that came to a
sudden and widely embarrassing halt in 1763. A chain of bankruptcies then occurred
in Amsterdam and Hamburg, to where British subsidies had been directed.
According to Wilson,29 the crisis was short-lived and focused on the least reputable
bankers. London bankers, who had not been involved in wisselsruiterij, perhaps due
to a lack of opportunity or in sophistication in the use of the Wisselbank’s facilities,
sent large shipments of specie to their most reliable correspondents. London bankers
and the Bank of England also suspended temporarily requests for payment of their
bills in Amsterdam. The connections between the sources of public credit for the
British government and the instruments of private credit for foreign trade between
London and Amsterdam were thereby sustained and even strengthened.
The increased financial ties between London, Edinburgh and Amsterdam led
28 C. Wilson, Anglo-Dutch Finance in the Eighteenth Century (Cambridge, 1941, repr. 1966).
29 ibid., pp. 168–9.
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directly to the crisis of 1772–73. Again, this was caused by the failures of speculators
gambling on changes in the price of East India stock, then the most volatile form of
British national debt. First, the Scottish banker, Alexander Fordyce, wagered that
the price of stock would fall by the beginning of 1772. In fact, it continued at high
levels, only falling to 226 by end of May 1772 from its peak of 231 at the end of
February 1771.30 Fordyce absconded in January 1772, leaving his partners without
funds to cover over £0.5m. in debts. Next, the Anglo-Dutch firm of Cliffords,
merchant bankers long responsible for purchasing in Amsterdam the silver exported
by East India Company ships on their outward voyages to Asia, tried to support the
price of East India stock as it began to fall in mid-1772. This effort failed as the stock
kept falling, down to 150 by mid-1773. The crisis broke out in December 1772 as
private creditors to Cliffords and their associates refused to roll over their short-term
loans except on condition of more collateral. Unable to meet creditors’ cumulated
demands, Cliffords finally had to stop payments and go out of business. Again,
London bankers and the Bank of England came to the rescue, but in a selective
fashion that meant the ruin of Cliffords and a number of Jewish houses. To resume
the chain of credit necessary for financing entrepôt trade through Amsterdam,
remaining merchant bankers formed a loan bank to recapitalise solvent, but
temporarily illiquid, banking houses.
Although Cliffords, one of the most important houses in Amsterdam that emerged
from the South Sea Bubble affair, had now failed, other merchant bankers arose to
keep Amsterdam at the centre of the international capital markets.31 Most important
was Hope & Co., which underwrote a series of large public loans to governments
throughout Europe, especially Russia.32 The historian of this redoubtable banking
house, however, has concluded in each case that the basis for transferring the proceeds
of a loan and, then, its return payments of interest and amortisation depended upon
Hope & Co.’s knowledge of trading opportunities. The firm had to find goods that
would flow profitably to the same destination as the funds. There, local merchants
would gladly buy the bills of exchange used to remit the payments so they could use
them in turn to finance imports from the centre making the payments. Like Parisian
notaires, then, Dutch merchants relied upon their network of information to make
profitable financial deals. The information centred in Amsterdam was world-wide,
replenished daily by letters and reports arriving in the busiest port of the world over
the century from 1648 to 1756. Packet boats distributed the gazettes of Amsterdam
twice a week throughout Europe so that the most important information on political
events and shipping movements became transparent to a much wider and more distant
clientele than available to financiers anywhere else in the world.33
30 Neal, Rise of Financial Capitalism, p. 246.
31 Riley, International Government Finance.
32 M. J. Buist, At Spes Non Fractra, Hope & Co., 1770–1815, Merchant Bankers and Diplomats at Work
(The Hague, 1974), chs 5–8.
33 W. Smith, ‘The function of commercial centers in the modernization of European capitalism:
Amsterdam as an information exchange in the seventeenth century’, Journal of Economic History,
44 (1984).
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The English response to the shocks of the bubble years contrasted with those of
both Amsterdam and Paris. The Bank of England was learning, reluctantly, to be a
lender of last resort and, in the process, helping to strengthen the ties of the London
private bankers with Amsterdam. Since 1717, Isaac Newton’s overvaluation of gold
had effectively put England on a gold standard while the Netherlands and France
were on a silver standard. Even though all three countries were nominally on a
bimetallic standard – defining their units of account in terms of both silver and gold
– the differing mint ratios amongst the three put the Netherlands typically on a
silver standard, England on a gold standard and France moving between the two
metals. The resulting scarcity of silver within England and, consequently, of small
coins led to a variety of private innovations in developing alternative means of
payment. During the Seven Years War, the spread of the so-called country banks
began, a development that gradually led to a dense network of local banks centred
upon their correspondent banks in London. The financial links of the agricultural
and industrial districts of England to the commercial and political centre of London
provided Great Britain with the most varied and complex financial system in
Europe. Subjected to the same shocks as the other mercantile powers in the wars of
the eighteenth century, moreover, it proved flexible enough not only to survive but
also to emerge from each stronger relative to both France and the Netherlands.
The result of the failure of Law’s system was that France, under the succeeding
reigns of Louis XV and Louis XVI, did not experience the adoption of the best
features of either the English or the Dutch financial systems. Rather, the French
had to rely for finance upon an information system that allocated private funds upon
personal mortgages through the network of notaries existing in Paris and the provinces. Necessarily, these were localised so that a national market for private finance
never emerged. Worse, no secondary market for these financial assets could arise, so
the salutary features of the British system of marketable bills of exchange and easily
transferable government debt were lost in the case of France. Acting strictly as
brokers, notaries were confined to a role of agents and never able, legally, to
become principals. Merchant bankers and financiers who could purchase the financial liabilities issued by others were reluctant to take risky positions in these, given
the absence of a resale market for them. Nevertheless, the private information
system flourished until it was finally dispersed by the French Revolution. The
private system endured, no doubt, because it afforded private individuals protection
from arbitrary seizures of assets and repudiations of outstanding government debts
by French monarchs when under duress.
VI
The accumulated strains upon French public finances following the conclusion of
the American War of Independence caused the country’s entire monetary and
financial structure to collapse as the revolution of 1789 unfolded. In sequence over
the four years from 1789, first, free banking was allowed to emerge as the feudal
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system of privileges and tax exemptions was abolished. Then price controls and
restrictions on banking practices were imposed as the revolutionary governments
attempted to legitimise their regimes in place of the deposed monarchy. Finally, the
issue of assignats ran well beyond either the value of the church and emigré lands
put up for sale as backing for them, or the value of the stock of circulating specie in
France that they had displaced. The hyperinflation that followed destroyed once
again the private credit structure of France just as during the Law episode in 1720.
It also ruined the credit of the state, with no legitimate government in sight to
re-establish political credibility à la Louis XV in 1723. Consequently, the Directory
tried to implant in France the financial and monetary practices that had proved
successful in England and the Netherlands.34
First, state debt was defaulted to the extent of two-thirds, to assure creditors that
interest could be paid on the continuing one-third at least. Then a major currency
reform was undertaken, replacing the now thoroughly discredited livre tournois
with a new unit of account, the franc germinal, defined like the Dutch guilder in
terms of both gold and silver with a fixed mint ratio. The gold value, at least,
remained stable until 1914. Finally, a public bank was established, the Banque de
France. While required to maintain the value of the franc germinal, the Banque was
also expected to help the government avoid fresh deficits by improving the
efficiency of its payments system. In the event, French public finances maintained
their solidity by virtue of Napoleon’s military victories. The satellite kingdoms,
subjected to the new tax regime of the French revolutionaries and required to
accept the franc germinal at fixed prices for military supplies, were able to support
the continued war effort of France in a throwback to Roman-style war finance.
Chief among the satellite kingdoms was Holland.
The political fragmentation of the Netherlands and the already high tax burdens
imposed on the most commercialised provinces made it impossible to organise
effective resistance against the French revolutionary armies. Indeed, the goals of
national unification and elimination of feudal institutions espoused by the revolution appealed to the Patriots, who welcomed the chance to put the Orangists and
their claims to hereditary privilege out of power once and for all.35 The collapse of
the French government debt had certainly harmed Dutch financiers, who had been
withdrawing from British ‘Funds’ since 1784. French troops had to win decisive
victories in the Austrian Netherlands, before annexing them, over the resistance
displayed by the largely Catholic populations in 1794. By contrast, they only had to
appear at the outskirts of Utrecht and Amsterdam to encourage the Patriot revolutionaries to seize power and welcome them.
The gratitude of the Dutch Patriots, however, had to be expressed financially to be
meaningful to the French government. The specie reserves of the Wisselbank had been
34 E. White, ‘The French Revolution and the politics of government finance, 1770–1815’, Journal of
Economic History, 55 (1995); and T. Sargent and F. Velde, ‘Macroeconomic features of the French
Revolution’, Journal of Political Economy, 103 (1995).
35 Israel, Dutch Primacy, ch. 43.
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completely withdrawn by the time that French troops entered Amsterdam, despite the
plunge of the agio into negative depths never seen before. Subsequent repeated payments to support French forces forced the Batavian Republic, and then the Kingdom
of Holland, to create more and more annuities, now issued by the national government.
In 1814, the restored Kingdom of the Netherlands consolidated them into 2.5 per cent
perpetual annuities, modelled on the successful British example. Amounting to over
four times the national income of the kingdom, however, only a small part of the
annuities, the activated portion, could actually be paid by the government.
At the start of French occupation of Holland, William V had fled to Britain and
the senior partners of Hope & Co. – Henry Hope and John Williams Hope – moved
from Amsterdam to London. William V signed over all Dutch colonial ports and
fleets to Britain, whose naval forces quickly took possession of most, finally occupying Java in 1811. Although France controlled the home ports and cities of the
Netherlands, Britain acquired the global commercial and intelligence network of
the seaborne Dutch empire. The course of subsequent events proves they exploited
it fully, both militarily and, especially, financially.
First, the British government increased greatly to £10m. the annual tribute
(reimbursement) levied upon the East India Company annually. Second, as the
French monetary reforms threatened to encourage a speculative return of funds to
France at the end of 1796, the Bank of England was allowed to suspend convertibility of its banknotes into specie. The resulting ‘paper pound’ lasted from
February 1797 to May 1821, when the gold standard was formally resumed. Third,
the government of William Pitt moved to competitive bidding among underwriting
syndicates for the placement of new issues of three per cent Consols, with interest
payments guaranteed against the increased revenues of the income tax. Income tax
allowed the government to tap into the profits of European merchants now
directing all their affairs from London rather than dividing them among London,
Paris, Amsterdam and Hamburg. The existing liquid market for British national
debt allowed huge sums to be raised on the capital markets. As most of the money
raised for war finance was used after 1803 for paying and supplying British forces
directly, rather than laying out subsidies to continental allies or hiring mercenary
armies from Germany, domestic expenditures rose greatly. Entrepreneurs from all
over Europe flocked to Britain to take advantage, either with direct or portfolio
investment, of the profit opportunities that emerged in textiles, iron and steel,
dockyards, waterworks, gas works and agriculture.36 The flight to quality by the
mercantile classes of French-occupied Europe, certain to be taxed heavily and
dispossessed of privilege by Napoleon’s forces, alit in large part in Great Britain.
The cosmopolitan bourgeoisie of Europe, indeed from much of the world, stayed
and prospered, in large part due to the financial markets existing in London. These
provided transparent information, security of title and ease of entry and exit as
36 Neal, Rise of Financial Capitalism, ch. 9 and idem, ‘A tale of two revolutions: international capital
flows 1789–1819’, Bulletin of Economic Research (1991).
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alternative opportunities appeared. The only capital controls that could be enforced
were on foreign holdings of national debt as recorded, variously, in the ledgers of
the Bank of England, East India Company and the South Sea Company.37 But with
the floating pound, capital controls were not really needed. If foreign capital was
withdrawn suddenly in sufficient quantity to cause concern to the authorities, the
pound would fall and the remaining assets would be locked-in more securely
the further the pound fell. In 1810, the pound did fall relative to the specie-backed
currencies of continental Europe. This elicited the famous Bullion Report of 1810
that anticipated much economic theory on exchange rates. It also elicited a dramatic
expansion in the range of securities offered to investors on the London Stock
Exchange. The official price list, the Course of the Exchange, expanded its format in
1811, more than doubling in size to include prices of American securities, canals,
docks, insurance companies and waterworks. In sum, the flexible shock absorbers
of Britain’s various financial markets – government securities, private debt, jointstock company shares and bills of exchange – enabled investors from all over the
world to deal effectively with the sundry shocks of war finance until 1815.
On the monetary front, the expansion of Bank of England notes to include
‘small’ notes of £1 and £2 proved insufficient to replace the disappeared silver and
gold coins for the increased volume of monetary transactions. But they did prove
their worth as backing for notes issued in greater and greater quantities by country
banks, which proliferated in numbers throughout England as branches increased in
Scotland. The much thicker network of banking relationships created in this way
laid the basis for important later developments in creating a national market for
inland bills of exchange. They also created a speculative environment susceptible to
recurrent financial crises, but that is a story of the global capital market that
re-emerged over the course of the nineteenth century.
The three financial and monetary systems described above comprise the main
alternative structures that are available to countries even today. In close contact and
frequent competition with each other, the Dutch, British and French developed
alternative structures for money and finance – merchant banks, money markets and
information networks for private credit, along with federated, parliamentary and monarchical authorities for public finance. Each was agreeable to the creation of large-scale
enterprises engaged in long-distance trade as well as to the needs of a powerful nationstate obsessed with the military demands placed upon it by frequent wars. Each system
managed, under quite different legal and political regimes, to provide the intermediation between savers and investors necessary to keep each country in the forefront
of economic progress from 1648 to 1815. International capital flows occurred
frequently and occasionally on a large scale among the three nations. When subjected to shocks, however, the three systems reacted differently. Regardless of the
37 Neal, Rise of Financial Capitalism, ch. 10.
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source or severity of the shock, the British system, with its rich mixture of varied
financial institutions and its complex of interrelated financial markets, managed to
absorb the shock most easily and rebound most strongly. This is a lesson worth
pondering even today.