Reader Simon Hinrichsen’s MSc thesis on the Bank of England in the Revolutionary and Napoleonic Wars is here. He argues that the UK paid for the war by borrowing as much as France, but on better terms, and by printing much more money, but it also succeeded in keeping inflation lower and more stable. Inflation in France was both very high, and also incredibly volatile.
I think what we’re getting at here is the evolution of a financial system, comprising a monetary authority and a finance ministry, that was able to manage the currency, collect taxes, and issue government debt of a quality that made it an attractive financial product (the 3% Consol) to what seems to have been a pretty big market for fixed-income securities, and one that grew substantially over time.
All this printing and issue had to go somewhere. One explanation is that the UK was running a trade surplus. Money issued for the use of the army deployed in Flanders, Portugal, and Spain, King George commands and we obey, was spent there. Somebody eventually held it because they could buy goods coming from or through Britain. This is a bit like the US in the high postwar.
Another is that there was a transition from a gold standard, before the suspension of convertibility, to a chartalist tax standard. The announcement of suspension made it very clear that paper money would be accepted in payment of taxes. With the huge expansion of public spending, you can see why this would work as a sink for the money supply.
A third, perhaps more interesting, is financial deepening and economic growth. Erik Lund has an interesting post up about Anson’s circumnavigation and the financial history of the UK just before the period covered by Simon Hinrichsen’s paper. This was a bit wild, but you can see the evolution towards the institutions that worked so well in the late 18th century, especially the standardised government bond and the central bank rediscount window. Erik also points out that economic growth picks up, which you can also see in Simon Hinrichsen’s paper – the biggest reason why the debt-to-GDP and M0-to-GDP ratios don’t go crazier than they do is that the real economy grew.
So what’s going on? I reckon that there are a lot of transactions that were nonmonetary, that now become monetised. That would explain part of the demand for all those notes. I also think that constraints on investment have been loosened by the emergence of a managed currency, a standard financial product for both wealthy savers and also local banks (which started to emerge a bit later), and a government that was determined to spend or die.
The first two are, in a really grandiose geosynchronous orbit view, either products of increased social trust, or else substitutes for it. Either people are willing to buy into the nation-state polity, or else they’re willing to delegate trust to it – perhaps it’s the same thing. And a big deal here is that the economy is getting more legible, taxable, knowable. Even if the government can inflate the money, it’s worth about the same nationally and borrowing it costs the same. Simon points out that the British government budget is a public document, it’s thrashed out in parliament, and the Bank of England’s accounts are public too. In fact, the Bank Return was published weekly, making it a much higher resolution indicator than, say, GDP.
But here’s the interesting bit. Erik points out that one of the very biggest spending line items, procurement of timber for navy shipbuilding, is restricted by absolutely ridiculous levels of corruption, even though the very survival of the state depends on it. It’s really silly – only oak from the Home Counties will do. Also, the same people who benefited from the timber cartel are also some of the biggest savers into 3% consols.
So there’s an apparent contradiction here between the nicely liberal, Whiggish notion that we beat the French with open data and financial transparency, and the ugly mess of interests on the Weald starving Jack of quality spars if they don’t get enough pork.
Perhaps, though, the crookedness was what convinced them to back the new system, to hold the notes, to put their surplus capital in consols, not to howl for gold. After all they knew the system would look after them, in a sort of Schmittian founding crime behind the launch of modern British public finance. Well, everyone thinks there’s some sort of weird bargain between southern squires, the City, and the defence industries behind everything in Britain anyway! Go read the both of ‘em.