The Bank of the Crown: The Profound Importance of the Bank of England in 1694
Politics and banking have been closely linked since the beginning of history. The economic power granted to politicians far exceeds the power derived from any other source in political institutions. This power can win elections, marginalize unfavorable political groups, and alter the course of human history. Acts such as injecting liquidity into the markets shortly before an election to prop up the economy to attract votes greatly endanger the long-term safety of the global economy. For this reason, the creation of a central bank is not only needed but, arguably, necessary for a nation to survive.
The creation of the Bank of England in 1694, chartered by King William III and Queen Mary II, was one of the first examples of a nation separating its monetary policy and politics. The Bank was created to pay for expenses arising from British military conflicts. England had roughly 1.2 million pounds outstanding in military payments to rebuild their navy during their involvement in the War of the Grand Alliance (1689-97) against Louis XIV’s French army. The balance of power between the Habsburg (Spain and Austria-Hungary) and Bourbon (France) dynasties was paramount to the stability of Europe, so while it was a costly conflict for the British to enter, as made evident by their need for financing through a national bank, it was also a necessary conflict to provide support to their allies.
While the creation of the Bank formally separated monetary policy and politics, it also gave the crown financial leverage over many other countries. In addition, the creation of the Bank had a direct cause on the rapid rise of the British economy and military in the early-18th century. Although many point towards British colonialism and the abundance of natural resources as the reasons for why England was the first nation to industrialize, it was actually Britain’s complex and institutionalized public capital system that launched the British economy to the forefront of industrialization.
The technical components of the Bank of England were created by Charles Montagu, a member of Parliament elected in 1689. England found itself in a global monetary crisis in the early-1680’s. There was a massive decline in the supply of gold and silver which squeezed the liquidity of the global economy. The Crown was unable to pay for their aforementioned military expenses from government revenues which left them in a difficult situation. King William III initially searched for a solution in the private markets, but after determining that there was not enough available capital, they had to refinance the debt through the Bank of England. Montagu and other financial leaders in Parliament proposed the idea of banknotes backed by the bank’s credit, becoming the first country to do so. This innovative idea allowed England to quickly find the capital needed to rebuild its naval fleet, as private investors swiftly picked up all of the banknotes on the open market.
The Bank ultimately provided long-term wealth and stability to the British economy, but also fundamentally changed the relationship between financial institutions and commoners. The founding mission of the Bank was to “promote the public Good and Benefit of our People.” It was not the “state” market anymore but rather the “public” market, an interesting development that could be extrapolated as an early example of Enlightenment thought. The creation of the Bank signified a shift of power from the ruling class to the people: an important theme of the succeeding political and social movements in 18th century Europe.
While many argue that British colonialism and their abundance of natural resources were the primary drivers of European industrialization, it should be noted that these two elements go hand in hand. As Great Britain expanded its empire across the world into territories such as India, the Americas, and Africa, acquiring natural resources, specifically precious metals, was a key motivator in their imperialistic efforts. The British economy was one of the most, if not the most, powerful economies in the 17th century due to their stock pile of gold, silver, and other valuable commodities. This supply gave them the leverage in international trade to receive favorable deals that allowed them to further expand. For example, while the Dutch and other notable European economies had to rely on promissory notes, or wisselbrief, when trading, Great Britain’s money supply was large enough to trade in real money. British reliance on gold and silver, however, made them overly exposed in the supply shortages of the late-1600’s. The Bank of England mitigated the downside of a potential global economic disaster, though, due to their banknotes and management of the money supply. In turn, this means that the Bank controlled the so-called drivers of industrialization from causing a massive global economic crisis. From this, it seems apparent that the Bank of England was actually the determining catalyst in the system of British industrialization--while the supply of natural resources and colonialism were mere long-term developing inputs into the system.
Most importantly, the Bank of England cultivated British innovative spirit. Before 1694, there were no public capital markets for entrepreneurs in England. This left many Britons beholden to high rates and constricting terms-of-trade from private market financiers. Also, private capital was traditionally reserved for upper-class nobles that had connections within the British financial system. Because of the Bank, those lower on Britain’s social hierarchy were now integrated into the production and innovation economy of the 18th century. Entrepreneurs across social classes now had access to capital.
The Bank of England institutionalized entrepreneurship in the British economy by funding entrepreneurs and their factories, product development, and research projects. This system of institutionalization was a major driver in British industrialization because people were now able to acquire capital to build factories across England and increase the means of production. If it were not for this availability of public capital, it is very unlikely that the British would have been the first to industrialize.
Beyond the economic implications of the Bank, it was also a source of power and pride for the British. Many countries including China and Japan quickly copied the British national bank model to provide capital to entrepreneurs to fund business pursuits. The British felt a sense of financial ingenuity and superiority as they watched these other countries borrow their model.
The timing between the creation of the Bank of England and the Industrial Revolution was not mere chance like some may suggest. There is a profound and noticeable causal relationship between the two. The Bank of England is what the Industrial Revolution was built upon. The institutionalized availability of capital for British entrepreneurs profoundly altered the vector of British and global economic development. -
Edited by Belicia Rodriguez and Urvi Agrawal
