Wednesday, 8 June 2016

Money: The Sinews of Power

   At the end of the 17th century, an amateur statistician called Gregory King attempted to count the population of England, based on tax returns. This was the first serious attempt at such a project in any country. He calculated the population of England and Wales at about 5 ½ million, and although he did not extend his researches to Scotland and Ireland, it is guessed that the Irish population was about 2 ½ million, and the Scottish, 1 million. Britain at the time was therefore a small and rather insignificant country, next door to a much bigger one, namely France, which had a population of about 19 million, as well as a very large army and an aggressive, militantly Catholic monarch, Louis XIV. Britain’s position thus looked distinctly insecure, and under Charles II (1660-85) Britain’s foreign policy consisted of following the French lead in return for financial subsidies.
   In 1688 Charles’s brother, James II, was overthrown in the “Glorious Revolution” and replaced by his cousin and son-in-law, the Dutchman William of Orange. The next three decades saw a constitutional transformation of Britain into a system of government based on Parliament, with two distinct political parties, and, closely linked with this, a revolution in foreign policy.
   It is worth remembering that, apart from some skirmishes under Henry VIII, England had not fought wars against France since the Middle Ages. But Louis XIV launched his armies into the Rhineland and present-day Belgium (then part of the Spanish Empire), and Britain now joined coalitions to stop him. William III was not a great general, but in the Nine Years’ War (1689-97) he fought the French to a standstill and an eventual peace settlement that restored the status quo. More significantly for the future, the British Navy gained a significant advantage over the French which it never subsequently lost.
   William died childless in 1702 and was succeeded by his sister-in-law, Anne, James’s younger daughter. Anne’s reign was to be entirely dominated by war, because at the same time the old ruling dynasty of Spain came to an end, and the succession was disputed between two claimants: Louis XIV’s grandson, Philip, and Charles, the son of the Habsburg (Austrian) Emperor. This was of great concern to Britain, for the Spanish Empire included Belgium, much of Italy, and the vast Spanish colonial possessions in the Americas and elsewhere. A compromise partition between the claimants could have been possible, but Louis XIV tried to seize the lot, thus precipitating the War of the Spanish Succession, which was only ended with a compromise treaty in 1713, a year before Anne’s death.

The war was marked by the Duke of Marlborough’s four great victories, but Britain’s other lasting contribution was in its financial structure, for in these wars there came about a financial revolution. A permanent direct tax, the Land Tax, was imposed for the first time. The Bank of England was created in 1694, enabling the wars to be financed by borrowing: the beginning of the National Debt. It was accepted that henceforth no taxes would be imposed save by vote of Parliament, and that the Debt was guaranteed by stable government. Henceforth Parliament would keep control of the national finances, voting on them every year. Within a few decades this annual financial statement was to be nicknamed “the Budget”. Furthermore, there were to be regular General Elections: every three years, under a Triennial Act. From this point, although the monarch’s wishes remained paramount, it became increasingly clear that no government could survive for long without a reliable majority in the House of Commons.
   The Nine Years’ War left England with a debt of £19 million, and by the end of the War of the Spanish Succession this had risen to £52 million. The sheer size National Debt alarmed many people, and still does. The Debt was thirteen times to government’s annual income from taxation, and the interest to be paid on servicing it made up over 30% of all government expenditure. How could it ever be paid off? It never was; and wars in the future were to be fought with borrowed money. What is more, servicing the Debt and providing for defence were to make up almost the whole of an 18th century budget: all other government costs put together totalled well under £2 million.
    Where did all this money come from? There must have been plenty of money kicking around in Britain, but before this time there were no reliable and secure banks to invest it in. Foreign money must have been involved, especially from Holland and the Spanish Netherlands. These countries were always open to invasion, especially from France, when any wealth would be threatened by plunder; but Britain was an island, defended by a strong navy, and with a government that looked dependable and unlikely to default on its debts, and was therefore a safe place to invest. Around the great institution of the Bank there grew up the financial centre that soon became the “city”, where all matters of loans, investment and insurance would be handled. Britain had a much more sophisticated financial structure than France, which had neither a national bank nor a national debt. Governmental bankruptcy was to be one of the principal causes of the French Revolution.

Money has been called “the sinews of power”. How was it used? The most obvious use was to finance the armed forces. Shipbuilding yards for the Royal navy were by far the biggest industrial works of the time, and supplying munitions, weapons or uniforms or food for the troops, swallowed vast sums, to the great benefit of the contractors. A new professional army had to be created, such as had not existed since the days of Oliver Cromwell, and which led some to fear the establishment of a military dictatorship. But there was more than this. The British army, even at the height of Marlborough’s campaigns, was tiny compared with that of the French, and it was rapidly reduced as soon as peace returned. Instead, British money was used to pay others to fight on our behalf, either by subsidising allies like the Habsburgs, the Dutch and the small German states, or by directly hiring foreign mercenaries. This practice continued throughout the 18th century and beyond: Britain paid vast sums to the Austrians and Russians to enable them to fight Napoleon, and much of Wellington’s army at Waterloo consisted of Dutch or German soldiers.

The great questions of war and peace and finance helped define and separate the political parties. The Whigs and Tories had their origins back in the 1670s, and originally been divided over questions of religion. Now, as the wars continued and the debt increased, the Whigs became increasingly identified with the land war and with the City financiers, whereas the Tories favoured a “blue-water” (that is, naval and colonial) strategy, or even outright isolationism: they were suspicious of the money-men of the City and resented paying the high taxes which paid for the war, and looked like continuing indefinitely afterwards, in order to pay the interest on the National Debt. William III attempted to form all-party ministries, which only caused political instability, and in the latter part of Anne’s reign single-party governments became the norm: Whigs from 1708-10, then Tories from 1710-14. At Anne’s death the Whigs again took power, and did not relinquish it until the late 1750s, by which time the old party labels had become more or less meaningless.   

In peacetime, efforts were always made to reduce the Debt, notably under Sir Robert Walpole (1721-42) and the younger William Pitt (1783-1801), but when the next war came, once again it was financed by borrowing. By the 1760s the War of the Austrian Succession, followed by the Seven Years’ War, had pushed the Debt up to £130 million, and the War of American Independence raised it further to £244 million by the 1780s; but all this was nothing compared with the expense of the Napoleonic Wars, which led to a Debt of some £844 million, incurring interest payments that formed a staggering 58% of all government expenditure. And yet, probably thanks to the start of the Industrial Revolution, the country never did go bust!

Victorian statesmen managed to keep Britain out of expensive continental wars, and in consequence had reduced the National Debt to under £600 million by the 1890s; and this, combined with enormous expansion of the economy, meant that interest payments made up only 10% of government expenditure. But then came the First World War, which as before was financed by borrowing. When the war was over, Britain was encumbered with a National Debt of around £800 billion, the servicing of which made up over 30% of annual expenditure. Some would maintain that the British economy has never recovered from this.   

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