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Charles II was king of England from 1660 - 1685, when wooden sticks
were being used as a form of money until the system collapsed. The story has
obvious parallels to the modern world. Here it is.
While the Pilgrim Fathers were busy founding
America their English puritan brothers were also shaking off religious
oppression. By 1650 Oliver Cromwell had taken power from the king, chopped
off his head, and in a familiar pattern was lording it over a parliament
which he dissolved when it threatened to oppose him. He died passing power
directly to his feeble son, apparently untroubled by charges of hypocrisy.
With Cromwell gone England decided that if it
were going to have a king it ought to be a proper one. So Charles II was
sought out and granted a restored throne in 1660, 11 years after his father's
beheading.
The new king's powers were less than those of
his father. Much of what he needed to do now depended on the co-operation of
parliament. In particular the royal tax raising privilege had been lost,
leaving Charles forever begging taxes from his new governing
partner. Parliament met rarely, and the logistics of tax
collection caused further delays, so cash was always short and the king
struggled to pay the bills on time.
At about this time the financial development
of London was getting underway. The goldsmiths - whose traditional role was
the fabrication of jewellery and plate - were emerging from a number of
potential candidates as the trade group which would evolve into modern
bankers. Their success grew from the safekeeping role of their vaults through
the uncertain period of the civil war, and also from the strength of London's
position within growing European trade with its requirement to exchange
foreign coin.
The goldsmiths soon found themselves able to
lend, and from this they became the key middlemen in a developing market in
government debt.
It worked like this. Armed with parliamentary
permission to raise taxes Charles immediately cashed in by selling specific
future tax receipts to the goldsmiths, at a discount to their face value. The
goldsmiths needed to be able to honour their private accounts, and unable to
distribute the royal debt were rapidly unable to lend the king more. So it
was arranged that the debt redemption would in fact be paid not specifically
to the original goldsmith lender but to any bearer of the debt, thereby
enabling the original lender to sell the debt on and replenish his cash.
The problem then would be how to ensure the
new bearer of the debt - not being the original borrower - could reliably
identify the authenticity of the bearer note. And here nature offered an
ancient solution.
A piece of wood split down the middle will
only match perfectly with its other half. So wooden sticks became a key
component of English currency. The government's debt office took a nice
looking hazel stick and notched across it various symbols which denoted
monetary amounts borrowed and lent. The stick was then split down the middle,
with each side showing one end of the notches. One side - which had a wooden
handle known as a 'stock' - was held by the king's treasury, while the other
was given to the goldsmith, who also got a piece of paper describing the date
and circumstances of redemption.
The system was simple and effective. The
goldsmith-bankers proved trustworthy and traded the majority of what were by
now being called 'stocks' between themselves to provide liquidity. They had
ample reason to remain honest as they were the key middlemen in a profitable
and rapidly growing market. For their part the wooden sticks were beyond
forgery, and the king was the ultimate and trusted guarantor of all the
debts.
It was the perfection of the system which
ultimately caused its downfall because it led to a market far bigger than was
ever healthy. To begin with the supply of cash came from the goldsmith
bankers themselves. Then, with caution, they let out a little of the money
they held on private current accounts, knowing that their own personal credit
would get them sufficient cash if ever they needed it to repay their
depositors. Then they realised they could do better still by offering
interest on private accounts held at notice, because the notice period would
eliminate unanticipated cash calls. By paying interest they accumulated more
public cash, and these funds were lent on to the king at an increasing rate.
Charles soon found he no longer needed to
bother with parliamentary approval to raise taxes before issuing stocks,
because he could sell it anyway, and from about 1668 it became generally accepted
that the state's borrowings were secured by unspecified future taxes on the
nation; an assumption which remains with us today.
The parliamentary brake on the speed of issue
of this new monetary medium had now been sidestepped, and before long half of
London was booming on credit evidenced by valuable broken wooden sticks. This
was when things started to get harder.
As each tier of willing private depositors
dried up it took another notch up the interest rate scale to squeeze out more
of the public's cash. The goldsmiths could only offer to the king discounts
which they could finance by attracting deposits, and by 1670 the king was having to accept as much as 10% per annum discount on
the face of his 'stock' debts. Depositors were by now receiving 7% and the
middlemen the rest.
By 1671 the system was hardly benefiting the
king at all because redemptions were consuming all the cash subsequent issues
could raise. He had sucked in all the private money he was going to get, so
when at the year's end he demanded still more vital cash for his navy the
bankers couldn't get it - at any price.
Annoyed, Charles conveniently remembered that
the bulk of the loans which he had recently taken out had been at rates above
the 6% limit permitted by his own usury laws. He declared the debts illegal
and his own exchequer's payments stopped. This temporary action was enacted
on 2nd January 1672, was extended after one year for another two, and after
those two (subject to a few carefully chosen exceptions) it became indefinite.
The effect - often repeated since - was that
those who lent to the state turned out to have accidentally provided all
their carefully accumulated personal wealth as voluntary taxes. The
goldsmiths were blamed. They were caricatured as greedy opportunists
and damned by their once enthusiastic depositors. Eleven of the biggest 14
failed, leaving their chiefs variously (i) ruined,
(ii) bankrupted (iii) on the run (iv) jailed or (v) dead.
The humble wooden stick never regained any
credibility. It was doomed to lose out to its close cousin - paper.
Paul Sustain
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