William Pitt, the Bank of England, and the 1797 Suspension of Specie Payments: Central Bank War Finance during the Napoleonic Wars

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Modern military engagements are made possible by a state's ability to easily acquire revenue. Central banking and the circulation of fiat currency enable the state to control the money supply and to fund any national interest the government deems worthy. By either taking the money from its citizens via taxation, borrowing funds through bonds or loans from private financiers or other governments, or inflating the currency by issuing bank notes without the backing of specie or another commodity, Western governments wield enough power over money and banking to fund any venture. British involvement in the Napoleonic Wars was no exception to the rule. By manipulating the currency and controlling the supply of money through the policies of William Pitt the Younger, Parliament, and the Bank of England, the British were able to satisfy its military ambitions. The Suspension of Payments in 1797, moreover, played a central role in wartime financial policy. Suspending payments of specie enabled the British government to fund its engagements abroad by inflating the currency and expanding the public debt, which was ultimately paid by acquiring funds through taxation. This paper examines the role of the British government, including William Pitt and Parliament, and the Bank of England in manipulating the currency, by borrowing, taxing, and issuing Bank notes to fund the war with Napoleonic France in the late eighteenth and early nineteenth centuries.

British Central Banking

Central banking in England rose out of the British government's demand for funds to continue King William's War in the 1690s, on the heels of the Glorious Revolution. Public confidence in the government reduced dramatically as a result of ongoing war and rising military expenditures. Private creditors became hesitant to loan money to the government in this time when revenue ran desperately low. In 1694, the British government accepted the proposal from William Paterson to establish the Bank of England; the government received its badly needed loans in return for granting special privileges to the Bank. Paterson further demanded that the government deem the new Bank's notes legal tender. The British government refused, but Parliament did grant the Bank the power to issue new notes to pay for government debt and the advantages of holding all government deposits. The Bank of England was thus created as a way to serve the military interests of the British Empire. (1)

Two years after its founding, the Bank experienced its first experiment with suspending payments, an act that foreshadowed the Bank's enormous influence in the future. To buy government debt, the Bank of England issued 760,000 [pounds sterling] in bank notes, which immediately caused inflationary effects on the British economy. A run on the Bank ensued, and the central bank became insolvent. In May 1696, Parliament allowed the Bank to suspend payments of specie. In other words, the Bank could refuse to pay its "contractual obligations of redeeming its notes in gold ... yet in operation, issuing notes and enforcing payments upon its own debtors." (2) Accordingly, the Bank of England suspended specie payments, effecting a severe depreciation of bank notes in circulation because of the uncertainty of the Bank in the future to resume payments in gold. Specie payments resumed two years later, but the early history of the Bank continued to be plagued with a record of periodic suspensions of payment, and Parliament continued to grant special privileges to the Bank to serve the interests of government revenue. The Bank of England, thus, wielded impressive power over the supply of money that made it easier for Britain to engage in military conflict without having to persuade private investors for loans. (3)

In 1708, the Bank of England received a generous gift from the British government. During a war with Louis XIV, Parliament restricted associations and banks of more than six individuals from engaging in banking business in England. This act essentially granted the Bank a monopoly over the issuing of bank notes; its only competitors afterward were small country banks of fewer than seven partners. Creditors were thus limited to storing their money at these small banks or with the Bank of England. The Bank regarded this monopoly over paper currency as essential to profitability, making concessions to the government as a way to protect and expand its control. The government, thus, had no problem with continuing to enforce the monopoly, because the Bank was a central figure in financing foreign wars. (4)

In return for government support, the Bank continued to show its loyalty. In 1742, just before the Bank was due for rechartering, the Bank, not by coincidence, provided the government with an interest-free loan. The government expressed its gratitude by confirming its monopoly power, which reinforced the privilege of issuing bank notes, and extended its charter until 1764. In that year, when it came time to extend the charter again, the Bank presented the government with a 110,000 [pounds sterling] gift on top of a cheap subsidized loan. The government gladly received another subsidized loan in 1781 in return for another extension of the Bank's charter until 1812. The government, as it was seen, needed the Bank's financing as much as the Bank needed the government's power of rechartering, special privileges, and authorization of the monopoly over issuing bank notes. (5)

The Bank, in essence, operated in two spheres of influence. Privately, it exercised influence over foreign and domestic trade. Not by legal tender law but by common market agreement, its notes circulated within London to the exclusion of all other banks' paper. The Bank also operated beyond the limits of ordinary banking. It "issued the coin, managed the debt, took charge of government deposits, and made advances to the Exchequer and the Treasury, on security of Exchequer Bills." (6) The Bank similarly maintained the supply of gold and bought, at a fixed rate, all gold that arrived at its counters waiting to be redeemed. It, moreover, obtained the exclusive privilege of discounting government paper, of holding public balances, and of circulating its bills through government channels. (7)

As a result of Britain's involvement in numerous wars in the eighteenth century, including Queen Anne's War, the War of Jenkin's Ear, the French and Indian War, and the American Revolutionary War, a massive public debt accrued. In 1783, the national debt consisted of 243 million [pounds sterling] in government loan stock. William Pitt attempted to reduce this debt in 1786, by means of a sinking fund. This financial instrument was fed by taxes formerly paid as …