The Day the Universe Changed - James Burke [81]
North demonstrated the relationship between trade and the availability of money. Whether surplus wealth came from land or from business profit, he said, the money is lent. Land is lent for rent, money for interest. And the more trade there is, the more profit there is to be lent and the lower the interest rate will be, because everything is determined by the law of supply and demand. These were extraordinary, novel thoughts at the time, but they rapidly caught on. As the seventeenth century drew to a close, there were calls for ways to ease the development of trade. There should be insurance to make investment in shipping less of a risk. Fire insurance would bring money more readily into towns. Money could be found from those who wanted to insure their lives and keep their heirs from ruin. Above all, it should be made easier to borrow.
The fire engines of London at work. Each engine came from the street or area in which it was stationed and was funded by an insurance company. The symbol of one of the earliest fire insurance companies (above), the Hand-in-Hand, set up in 1696. The metal sign would be attached to the outside of a building insured by the company as identification for the fire engines.
In 1694, in answer to these demands, the first major English financial institution was to come into existence, thanks to the profligate behaviour of Charles II. In 1672, when he had failed to persuade Parliament to vote him the wages needed for his army, the King raided the Royal Mint and took the £200,000 worth of gold left there for safe-keeping by the London merchants.
After that, merchants found places to put their gold in safer keeping, in the strong-rooms that every major goldsmith possessed. After a while, temporary payments by the depositors began to be made with pieces of paper from the goldsmith certifying that the sum involved was covered by the gold in the strong-room. Then the goldsmiths realised that while the gold was there they might as well make money from it, so they began to lend it, on paper, in return for interest, some of which was paid to the depositor of the gold.
With the great increase in trade towards the end of the seventeenth century, demand for this kind of credit grew rapidly. Frequent serious financial abuses occurred. A trustworthy institution was needed which could operate on a national scale. Not surprisingly, when King William III, recently arrived on the English throne from Holland, needed a vast loan to finance his war against Louis XIV of France, the English found a Dutch way of providing the money.
Custom House Quay, London, c.1750. London was the busiest port in the world at the time. Here a clerk checks a cargo, while coopers prepare barrels for shipment. On the left, an English man-o’-war flies a commodore’s pennant.
A successful English merchant. Through the window can be seen his docks and warehouses. A clerk explains the state of the profits, while the merchant’s expensively and fashionably dressed family are served by a black servant in front of a painting of their country house.
Holland had had an extensive credit and banking system since the foundation of the Bank of Amsterdam in 1609. The Bank was authorised to accept and transfer deposits, exchange coin, buy metal and non-current coin for use in the mint and act as a clearing house for notes of exchange. Above all, it gave credit to certain major institutions such as the City of Amsterdam and the Dutch East India Company.
A Scotsman called William Paterson suggested the establishment of a similar institution for England. On his third attempt, he succeeded in persuading Parliament to approve his scheme. Paterson was a merchant from Dumfries who had been involved in the disastrous Scottish attempt to found a colony on the isthmus of Panama. His ideas for financial reform were put into practice on 21 June 1694, when subscriptions were invited, at an interest of 8 per cent, towards a total of £1,200,000 to be lent to the King. If half the money were subscribed by 1 August