The Bank of England, or the twelve-day loan that never ended
The subscription books opened on 21 June 1694, and the money arrived faster than anyone expected. Within twelve days, 1,268 people had pledged £1.2 million to the English Crown — esquires, widows, cloth traders, and King William III and Queen Mary themselves, who each put in the maximum £10,000 allowed. The subscription was not charity. It was a bargain, and both sides knew exactly what they were getting.
England was three years into an expensive stalemate against Louis XIV’s France — the Nine Years’ War, which had already produced the embarrassment of Beachy Head in 1690, where the French navy drove the Anglo-Dutch fleet from the Channel. The Crown needed to rebuild the fleet and pay its troops in Flanders, but London lenders had seen enough bad royal credit to charge fourteen percent interest. Amsterdam’s merchants, working through their Wisselbank, borrowed at four or five. England was fighting a first-rate war on third-rate credit.
The fix came from a Scottish merchant named William Paterson, who had been circulating a pamphlet since 1691 proposing a national lending pool. The idea was tidy: wealthy subscribers would lend £1.2 million to the Crown at eight percent; in return, they could incorporate as a joint-stock bank and issue notes up to the value of that loan. The government got immediate cash; the investors got a guaranteed yield; the bank got a monopoly on public lending. Parliament formalized the arrangement in the Tonnage Act of April 1694, tying customs duties to the debt as collateral. The Royal Charter was sealed on 27 July 1694, and the Governor and Company of the Bank of England opened for business at Mercers’ Hall, Cheapside, with nineteen staff.
The first Deputy Governor was a merchant named Michael Godfrey, and in the summer of 1695 he made the error of following the bank’s business all the way to the front. The bank had sent a delegation to Antwerp to oversee the coining of money for troops in Flanders; Godfrey made his way to the siege of Namur, where William III was camped. The king found him in the trenches and told him, in terms, that he had no military obligation to be there. Godfrey replied that he could hardly show more concern for his own safety than the king showed for his. “Yes,” said William; “I am in my duty, and therefore have a more reasonable claim to preservation.” A cannonball from the besieged fortress struck Godfrey moments later. He remains the only director of the Bank of England killed on active service — a distinction that has required no particular effort to maintain.
The deeper significance of 1694 is not the bank but what backed it. Parliament, not a monarch’s word, had guaranteed the loan. That institutional commitment — codified in statute, enforced by elected representatives with a direct interest in English solvency — meant lenders could trust English government paper in a way they could never quite trust a French royal promise. England went on to fight seven major wars against France between 1688 and 1815, each funded at progressively lower interest rates. France cycled through fiscal crises that compounded on one another until one of them became a revolution.
The bank was, at bottom, not a financial institution so much as an argument: that a government constrained by law is cheaper to lend to than one that is not. Three hundred years and roughly two hundred central banks later, no one has found a better one.
Sources
- Bank of England — Wikipedia — founding date, the 1,268 subscribers, Paterson’s role, the Tonnage Act, subscriber demographics including William and Mary.
- Michael Godfrey — Wikipedia — Godfrey’s role as first deputy governor, the Namur exchange with William III, his death July 1695.
- The Bank of England Founding — Market Histories — England vs France credit costs, the parliamentary guarantee’s role in English fiscal advantage, France’s compounding fiscal crises.