The golden bloody era of central banking

Between the years of 1714 and 1815 the Royal Navy went to battle every three weeks on average.

A battle every three weeks… for 101 years.

That’s a lot of fighting.  

It’s a lot of gunpowder. A lot of sailcloth. A lot of iron, brass, and lead.

It’s a lot of blood.

And it cost a lot of money.

I say three weeks – it averages out to every 22.6 days. Royal Navy forces went to battle on 1,630 separate occasions during that bloody century. There were a few years of “peace” sprinkled in there of course. But the fighting times outweighed the peaceful ones by an extraordinary measure.

I asked you last week what you thought that average battle schedule was. Nobody thought it was as often as three weeks, but several of you were quick to point out just how often we were at war during the 18th century – pretty much half the time.

I bring this up this fine Monday, for just as “The Great Frost” of 1709 and the return of privateering which we explored last week evoke the 1700s… I think there’s an even bigger comparison we can make between now and that century. A similarity with major implications – and not just for investors if I’m right.

How on earth could we afford to fight a war for a century?

Conducting war has never been a cheap exercise.

Revolutions in technology can certainly make elements of it cheaper: superior smithing techniques leading to the cheaper production of edged weapons. More efficient saltpetre mining leads to abundant supplies of gunpowder. In the modern age, the mass production of kalashnikovs and even more recently the mass production of drones have made arming proxies and causing chaos much cheaper.

But building a navy, a fully-fledged fighting fleet, and waging a conventional war with it has never been cheap, let alone doing it for 100 years. So how did we pay for it all? It’s worth bearing in mind that going into the 1700s, the Exchequer was broke and exhausted from fighting previous wars. The Royal Navy was also in very poor shape having just been broken by France.

But then along came a talented Scotsman, who came up with a solution for both problems: printing money. It was William Paterson, a trader (rumoured to engage in a spot of piracy on the side) born in Dumfriesshire who cut his teeth operating in the Bahamas.

It was Paterson’s idea to IPO what he called the “Bank of England” which would give the government all the money it needed. It was a revolutionary idea upon which almost all central banks since have been modelled upon.

The BoE would lend the government all the money it needed to get fighting fit again. In short, it did this by printing banknotes to lend directly to the government. The twist was that the BoE’s banknotes was henceforth the only type of banknote anybody was allowed to use in the country. The BoE could now finance all of the government’s spending needs, and then, using government debt as a “reserve” asset, could print even more banknotes to lend to the private sector.

With money no longer a problem, King William could start splurging on military spending. The very first loan of £1.2 million the BoE printed, went straight to building up the Navy.

After the BoE was chartered in 1694, we were off to the races. Here are all the wars we could afford to take part in that followed, thanks to the wonders of 18th century “quantitative easing”:

1688-1697: The War of the Grand Alliance
1702-1713: The War of Spanish Succession
1739-1742: The War of Jenkin’s Ear
1744-48: The War of Austrian Succession
1754-1763: The French and Indian War
1793-1801: The War against Revolutionary France
1803-1815: The Napoleonic Wars

The bankers of the BoE were like the “powder monkeys” of the Navy, but in the financial system instead. Not running gunpowder from the ship’s magazine to the gundeck with more when they ran short in battle, but running banknotes to the men at the Exchequer whenever they’d finished spending them.

Once we’d finished off Napoleon, we were top of the heap. Pax Britannica arrived, and the naval battles were no longer every three weeks on average.

The point I’m trying to make here is that while the 18th century is remembered as a period of great conflict, beneath the bonnet it was a golden age of central banking.

Of course, I’m not saying it was just money printing that won the day. If that was how it worked, Venezuela and Zimbabwe would be superpowers by now. The reason that the Royal Navy and all the military expenses surrounding it could be built was because there was enough capital in England and its colonies to do so.

However, it was the BoE’s monopoly over the currency supply that pushed the control of that capital into the hands of the government, which everybody else paid for through inflation. The newly printed banknotes added to circulation to purchase naval supplies diluted the purchasing power of everybody else who had to use the BoE’s banknotes. The 1700s were fittingly a century of high inflation for Britain.

Now, flash forward to today, where everybody has forgotten that the very creation of the BoE was to finance a war. Look at the vast amounts of money being printed by central banks all over the world – trillions in the States, hundreds of billions over here.

So far in the political discourse, those who want to print money rather than borrow it, are aiming to implement a welfare programme – like Universal Basic Income, or fund a green energy revolution. We’ve yet to see politicos clamour around the idea that the printing press at Threadneedle Street (or at any other central bank) be used for its original purpose: buying guns and building warships.

But I reckon we’re gonna see that soon enough. The longer and more extreme the money printing becomes, the more it draws the eye of the ambitious politico who thinks…

“Why can’t we use some of that?”

More to come tomorrow,

Boaz Shoshan
Editor, Capital & Conflict

PS Following his success founding the BoE, William Paterson went on to bankrupt Scotland with a gigantic crowd-funding attempt to create a Scottish Imperial outpost in Panama, which failed catastrophically and led to a bailout by England. That bailout fund became RBS, which of course ironically was key in our more recent financial crisis. The English bailout was instrumental to the Act of Union in 1707, which Paterson was also a cheerleader for. Our nation’s history would look hugely different without him…

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