By the mid-17th century, the goldsmith bankers had a virtual monopoly on banking and had made extensive loans to King Charles II. The king was able to do this and circumvent parliament completely via the use of ‘tally sticks’ but there was a natural limit to this debt expansion, i.e. the amount of gold held by the London Goldsmiths Company.
- Once all the money attracted from depositors had been transferred to the king, additional deposits could only be acquired by means of offering higher interest rates than previously.
- By 1671 the annual discount on the King’s debt had reached 10%.
- As redemption demands nearly overwhelmed the funds raised by new debt issues, the king’s cunning plan had clearly ceased to work.
The Great Stop of 1672
In 1672 however, Charles II had become so heavily indebted that he could not pay, and announcement that he would suspend repayments of loans to his bankers for a year. The event that brought this situation to a head was the Third Anglo-Dutch War.
- A total 82 ships were to be prepared for sail “in the cause of national defense”, i.e. to attack the Dutch Republic in the Third Anglo-Dutch War.
- The bankers of Lombard Street were asked for an ‘advance’ (loan) to the king to finance the fleet, they refused to make the loan.
- Due to the pressing need for money the king and his council resolved to find the money for the fleet by cutting other parts of the treasury’s budget – money that had been allocated for the repayment of bonds and securities were to be spent on the fleet and only interest paid with no repayment of principal that year.
However, Charles suddenly and quite conveniently remembered that there was a law against usury on the statute books, and lo and behold, interest rates in excess of 6% were actually not permissible by law.
- Since all his recently issued debt carried a far bigger discount, he simply declared the debt illegal, and stopped making payments on it (with a few judiciously selected exceptions
- As such, it was a ‘selective default’
- Overnight, the king’s tally sticks reverted back to what they had really always been – worthless pieces of wood.
The king’s creditors, namely the London Goldsmiths and their customers, had quite literally “drawn the short end of the stick” (which is where this expression comes from).
- The period of the stop was to be one year, ending on 31 December 1673.
- This resulted in five of the leading goldsmith banks going bust.
- Nine other Goldsmith banks were seriously undermined (but managed to survive)
- Over 10,000 (previously) wealthy families were ‘financially embarrassed’ as they lost their deposits
- This reduction of capital stunted the early development of commercial banking in the city of London
- It also resulted in a court case, which the bankers won, but the verdict was overturned by the Lord Chancellor – a decision that Charles II would later regret
- There was obviously unease about the situation, with more talk of Civil War, unless some form of guarantee was put into play for Royal, or rather governmental loans
This was when George Downing – who was managing the separation of the Treasury from the Exchequer – introduced the idea of raising money by selling marketable Treasury orders with a guaranteed repayment date.
- Today, these are known as government bonds and eased the pressure a little on the Royal office for funding the Third Anglo-Dutch war.
- If the English had won this war, the financial rewards would have been substantial
- Sadly, for Charles II and the Royal Navy, this war was a military and financial disaster
- England’s Royal Navy joined France in its attack on the Republic, but was frustrated in its attempts to blockade the Dutch coast by four strategic victories of Lt-Admiral de Ruyter.
- An attempt to make the province of Holland an English protectorate rump state likewise failed.
- The English Parliament, fearful that the alliance with France was part of a plot to make England Roman Catholic, forced the king to abandon the costly and fruitless war.
Coincidentally, there are two Anglo-Dutch War links to the future issue of regal halfpennies for Ireland.
- See, the mini-biographies for Lt-Col. Sir Thomas Armstrong and Admiral George Legge
- O’Brien Coin Guide: Armstrong & Legge’s ‘Patent’ Irish Halfpennies for Charles II
The Great Stop effectively ended the ‘cosy relationship’ between the king and a small clique of private bankers that thrived on the Crown’s inability to generate enough cash to cover its short-term expenditure.