Financing War

I just caught up with the comments, and as I was trying to make sense of patronage and war finance in a long reply to Erik, I had somewhat of an epiphany, or more accurately, making a connection between two different parts of the whole. I probably should have made this connection far earlier, and undoubtedly others already have, and I’ve probably already read this somewhere else, but academic research often consists of making connections between various bits of once-read information in different contexts. And it usually comes at its own pace.

The question deals with the upper echelons of war finance, i.e. where the governments get all that money to fight. Ultimately it’s based on taxes and other revenue streams, but to get those resources in the short term requires some kind of government debt. Patronage has often been used in this context, with rulers and wealthy financiers using each other to get upfront cash in exchange for longer-term interest payments, and possibly the purchase of social capital. But since even bankrupt rulers always seemed able to secure additional lines of credit (and not just from extending the terms of existing creditors), I wonder what exactly patronage means as far an increased willingness of creditor clients to loan money to their ruler patrons.

While I don’t have a pat answer to that question, what I did realize, however, is that the whole point of creating hybrid private-public institutions like the Bank of Amsterdam (1609) and the Bank of England (1694) is to make it easier for governments to avoid relying solely on patronage networks to borrow money. With a public debt, ministers no longer had to rely only on the big fish creditors (which they continued to do, no doubt). Now they could mobilize the wealth of their subjects further down the socio-economic ladder, as individual investors could easily purchase stock in these private-public partnerships from the Bank, as well as purchasing government debt in the form of annuities and lotteries. This means less work was needed creating, maintaining, and expanding networks among the wealthy, or, more likely, that even more money could be raised by the government by supplementing the normal financial patronage sources with this new public credit.

France lacked such a mechanism to easily mobilize its entire society’s capital. As a result, Louis XIV had to keep working his financiers and tax farmers for more credit every year, his new finance minister Desmaretz had to use ridiculous expedients to shore up France’s finances in 1708 (see McCollim’s forthcoming book), and Louis had to issue a personal appeal to his nobles and subjects in 1709 to melt down their silver plate and otherwise contribute to the war effort. In fact, France would not establish its own public bank until Napoleon, putting itself at a significant fiscal disadvantage in its many wars with 18C Britain. On the other hand, the English had already made patriotic investment in the war effort as simple and as impersonal as purchasing shares in a company like the East Indies or South Sea company (government debt was frequently converted into such shares), or stock in the Bank of England, or buying a lottery ticket. An example from the Post Boy newspaper indicates how widely the government wanted its message spread: Anyone is welcome to invest in the government!

Get your lottery ticket here!

Lottery explained

£10 buys you a piece of victory! These lotteries were usually fully subscribed because of their favorable terms, which is an indication of an increasing desperation on the part of the government issuing them. But it wasn’t nearly as desperate as Louis appealing to his nobles to turn in their silver.

Nothing revolutionary, just another piece of the puzzle falling into place for me.

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3 responses to “Financing War”

  1. learnearnandreturn says :

    The next question then – why DIDN’T France have a similar national bank until Napoleon? The usual argument is that William III brought in Dutch financial ideas in 1688/9, and the Bank of England is set up by his Whig associates soon afterwards – but if this was such a superior way of raising money compared with tax farming, then why didn’t France (or Spain or wherever) quickly follow suit? Is it a Catholic aversion to usury? Or a lack of trust in paper money? Or a lack of middle class investors?

    I think Trust is an important, and underrated, issue here – and the failure of the South Sea bubble (or, for Scotland, the Darien scheme) are relevant. Lotteries were understood as gambles, and may well have been fully subscribed on this basis – but buying government bonds to pay an annuity to your widow is another matter.

    I’m sure you are right about these financial instruments allowing governments to tap a wider cross section of society – but in The Sinews of War, John Brewer puts more emphasis on England’s more efficient taxing power (because as an island, it could tax imports more effectively).

    • jostwald says :

      Good question. One I don’t have the breadth to answer, but only to speculate (I still haven’t read through the most recent work on the fiscal-military state).

      The fact that the Netherlands and England managed to raise the most money the most easily, and had the best system to do so, suggests the importance of a ‘middle class’ of investors – the point I was making in my response to Erik: patronage isn’t as necessary if people have an investing mindset and when ‘trust’ can be monetized (see below). I think there’s been some revision to the idea that well-off Frenchmen refused to invest in commercial ventures (vs. buying property and venal offices), but I think it was probably still less significant than in the mercantile countries.

      Re: taxes vs. debt. I haven’t read Brewer in a while (it’s on my list to look at this month), so my thoughts are speculative. It’s possible the system changed somewhat later on in the 18C, as British international trade really took off. According to Dickson and Dickinson, taxes were increased 75% over the course of Anne’s reign, which is nowhere near enough to make up for the increase in expenses from peacetime (with an army of only 7,000) to wartime. The Land tax (established 1692) raised a third of Anne’s revenues (£21m), the excise another third (£20m), customs another £15m. D.W. Jones does point out that an uptick in trade (woolens and East Indies) resolved England’s balance of payment problem. But all this revenue left a gap of £29m, almost a third of its expenditures, which had to be borrowed. I think generally, even if you do have the tax revenues to cover expenses, you still probably need to ‘borrow’ money (even if only on paper for a short time) until those taxes get collected, since expenditures and revenue collection aren’t always in sync. And of course this is somewhat separate from the issue of how you collect gold in England and spend it in the Low Countries or Spain (a point Jones spends a lot of time on).

      Re: why England and not France. Not sure, but it seems like both France and England were already doing similar things, borrowing based off of future tax revenues. France, however, was forced to take the more inefficient route of paying tax farmers to collect its taxes plus their cut, not to mention the exemptions enjoyed by the two riches Estates, whereas the English had a centralized bureaucracy able to collect theirs and a more equitable tax base. It’s conceivable that for France to switch to a different system would have required ‘start-up’ funds (at the least, the money to pay off its current debts) that it just didn’t have since it was already so far in debt. Earlier in Louis XIV’s reign, Colbert could come up with all sorts of economic reforms, but they usually got shelved whenever Louis went to war: “It’s my money, and I want it now!” Every time Louis got into a long war, he ended up selling more venal offices and further alienating future revenues (the capitation and dixième don’t seem to have been that significant, especially with all the exemptions, yet another short-term sale of long-term revenues).

      Re: Trust, I’d argue that it is most important in a patronage-style system, e.g. Louis XIV getting rid of Chamillart and bringing in the well-connected Desmaretz. Or maybe there are different types of trust – perhaps trust can be monetized, e.g. “I don’t trust you very much” equals a +2% interest rate? The fact that even the most hard-up ruler could get loans must mean there was a lot of capital looking for an investment, however risky. And then the benefits of patronage would make up for whatever financial advantage is lacking. The English system had much more trust and transparency built into it since it was institutionalized and responsive – some investors in government debt (native ones at least) could elect MPs, and all could rely on the institution of Parliament to check the profligate tendencies of whichever monarch (the Commons originating all spending bills), adding another layer of ‘trust’ in this system. For the Bank of England/East India/South Sea system, you have to have trust in the government (backing the company you’re investing in) – is it trust in the current monarch, the current Lord Treasurer, the current Parliament, the merchant class, or the English nation? But despite Whig warnings that only Sidney Godolphin could manage the Treasury, Harley managed to find £9m in 1711 by creating his own company from scratch (though maybe this was possible because much of it was used to refinance older debt?). Investors apparently trusted both political parties to keep the government afloat, so I’d think that trust was as much a general feeling rather than always tied to a specific minister/individual. Even with the 1720 South Sea bubble collapse, the British government came in and rescued investors (though admittedly at a heavy discount rate, maybe half). I’m sure many of the pamphlets from the period (in the Goldsmith-Kress collection) talk about all this, but I haven’t had a chance to look through them.

      It’s also interesting to note that there were lots of other ‘Bank of X’ ideas floating out there (e.g. a land bank), and I don’t think renewing the Bank of England was much of a problem in 1708 (esp. with the Whigs in power). In other words, the English public (and international investors, as Dickson discusses) was thirsting for investment opportunities, and the government was able to take advantage of this. “Taxation (and borrowing) with representation” explains it pretty well I’d guess. I think Wheeler also made this point in Making of a World Power.

    • Gene Hughson says :

      I wonder if the difference between France and Britain resides in the maintenance of feudal privilege in France. France had a middle class, but it lacked a tradition of all being subordinate to the law (not that all were equal before the law in Britain, but no one was above it).

      When the aristocrat can trump the bourgeois, regardless of the facts, then the trust needed for more modern financial institutions will not exist.

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