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complaint.” He borrowed from a man who married his cousin; he shorted his mother on the money due under his father’s will so frequently that she finally threatened to take Walpole to court.
THERE WAS ONE sure way out of Walpole’s predicament. A mere seat in Parliament did not yield major political spoils, but some offices that were in the gift of the crown—which is to say, of the king’s ministers—could reward their occupants handsomely.
The perks of that office served him well, placing an Admiralty boat at his disposal, which he used to land a useful quantity of un-dutied claret, burgundy, and champagne, smuggled in from Holland.
That helped earn him his first taste of actual power with his appointment in 1708 as secretary of war. Despite the title, that office had nothing to do with strategy, or with the direction of Britain’s ongoing campaigns; rather, it involved managing organizational matters for the army.
Throughout these early years, Walpole demonstrated the capacity that would serve him through four decades in Parliament: an aptitude for public business that few, if any, of his rivals mustered, married to an enthusiastic appetite for factional warfare.
There is no doubt that Walpole grew much richer in office than he had been as a mere landowner and member of Parliament. But the Tories were unable to prove that he had personally gained from any of the transactions they brought up at trial. No matter. Eliminating Walpole’s opportunity to torment the government from the floor of the House was all that mattered, so the Tory majority voted to convict him of “a high breach of trust and notorious corruption.”
The Tory overreach became a public embarrassment a few weeks into his imprisonment—a replay of the Whigs’ self-inflicted wound in the Sacheverell trial—when Walpole won the by-election to fill the seat from which his enemies had just ejected him. Ultimately, Walpole was released from the Tower, but the damage had been done: it had long since become clear to the more acute Tories—like Jonathan Swift—that his return to power only waited on the fall of Harley’s government.
From his desk he oversaw a river of cash—and between 1714 and 1717 he managed to accumulate over £60,000 from investments of government funds under his direct control—on the order of £10 million in twenty-first-century terms.
THERE HAD BEEN some progress on the debt in the year before Walpole took over, but mostly a series of minor fixes. Even with Harley’s moves, Britain still owed huge sums at high rates on the guaranteed national debt.
It took Walpole nearly a year to assess the full extent of the damage, but when he emerged he was ready to present a comprehensive plan to fix the problems once and for all.
The total owed, he conceded, “was become large and burthensome,” but given that private borrowers were paying just 5 percent on their loans, compared to the rates the Treasury faced—6 percent, 7 percent, or more—now, he said, was the moment to act:
If anything, Walpole underplayed the agonizing, ponderous pace of those meetings. There’s no record of what was said, or of how many times the politicians and the monied men gathered to go over every offer, clause by clause. It took more than a year to construct the mere outline of a deal that addressed all the faults in the nation’s finances.
Most important, those who held the irredeemable obligations, with their guaranteed, decade-after-decade stream of payments, faced one crucial restriction: the kind of debt that is known technically as illiquid. It couldn’t be transferred to another person, and it couldn’t be sold or bought in Exchange Alley’s secondary market. That meant if owners of an irredeemable needed the capital tied up in their investment in government debt, and not just their yearly interest payments, they couldn’t get it.
The same mathematics used to price a pasture could be applied to finding the present value of a bond based on its future yields.
The key to Walpole’s plan was that by the second decade of the eighteenth century the basic mathematics of investment, of returns over time, was well enough understood to make the whole negotiation possible.
Over the summer of 1717, Parliament got to work on the bills to implement Walpole’s plans. One handled the lottery loans, converting more than £9 million into lower-interest-rate instruments managed by the Bank of England. Others reworked various long-term obligations held by the Bank and the South Sea Company, achieving Walpole’s aim of dropping the interest charges the Treasury faced. Some of the short-term obligations were retired, and more became cheaper, thanks to another rate cut. Taken together, this was, by any standard, an impressive achievement.
The nation’s debt had just become cheaper, and, for a subtle benefit, the accounting had been simplified to the point where it no longer took months of work just to discover what was owed to whom.
These were the people the government would need to turn to the next time Britain needed to borrow, so for the moment the ministry chose not to attack their interests. That might even have been the right choice politically, given how intimately connected the Whigs were to Britain’s monied men. But fiscally, such timidity had its cost. More than £15 million of the most expensive obligations, or over one-third of the nation’s total debt, remained a running drain on the Treasury.
Labels like “Whig” and “Tory” evoke an image of more or less coherent political parties. That’s not how it worked in the early days of the party system. To identify as either Whig or Tory was in part a matter of family ties; Walpole himself had inherited his estate, his seat in Parliament, and his party from his father.
Class and faith mattered too: the Tories were generally linked to landed wealth and High Church orthodoxy, while to be a Whig implied a more tolerant religious sensibility, an affinity for a web of smaller landholders, and an alliance with town and city men of a certain amount of property.
Political labels conformed to malleable coalitions—often with no more than “the enemy of my enemy is my friend” allegiances. Such alliances were always vulnerable to personal animus, pure competi...
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Walpole voted for the financial measures he’d done so much to craft, but after those passed he became, in effect, a member of the opposition, using all his skill in parliamentary maneuver to discomfit his rivals. Over the next few years, he regularly allied with the Tories and in 1719 even worked to block the long-held Whig priority of tolerance for Protestant religious dissent.
Behind all the skirmishing between the two Whig factions, the irredeemables continued to loom over every attempt to bring the national budget into some kind of stable state. On that question, though, the one on which he had more knowledge than any other leading member of the House of Commons, Walpole was pushed to the sidelines, denied any influence at the precise moment the South Sea Company presented itself to the ruling ministry, proposing an experiment that would, if it worked, solve Britain’s money worries for good.
Other powers rallied against an overambitious Spain, which threatened the balance of European power. Austria, the Netherlands, France, and Britain, in a rare concord with their traditional rivals in Paris, created the Quadruple Alliance. Shards of war struck several fronts (including Florida, where French forces destroyed the Spanish outpost of Pensacola and thus prevented the invasion of South Carolina).
THE SOUTH SEA Company had never stopped being a company in love with financial tricks. For example, by 1715 the government had failed to make almost a million pounds of the interest payments due to the company and its shareholders on the debts that had been converted into stock at the Company’s founding. There was a simple solution to the problem: more financial alchemy, transmuting the interest arrears into South Sea capital—which in theory could have funded more trading adventures.
the Company received more paper obligations from the government, a higher regular payment due, and the right to treat the missed interest payments as a store of capital that increased the total value of the company—and hence the number of shares it could issue.
It’s rarely a good idea for a person or a family to run their finances this way, of course, but—to step ahead of the story for a moment—nations are different, for several reasons. As early-eighteenth-century treasury officials knew to their sorrow, realms and individuals alike may make lousy deals when trying to borrow in an emergency.
it was and remains true that states have ways you and I don’t that allow them to lay their hands on more money.
For all the various examples of hiccups in interest payments on the new national debt, this wasn’t the idle boast of a pamphleteer in the ministry’s pocket. The first phase of the financial revolution in the 1690s had demonstrated that Parliament could indeed raise loans at almost any moment and use its powers to persuade investors that such debt would in fact be covered by one new stream of income—a fee on malt!—or another.
The second advantage that the British government possessed was the inexorable passage of time. The funds it borrowed at any moment became bets on the nation’s economic life year over year. The wager was that the ongoing work of every new enterprise, each voyage, everything that Britons did to get and spend in the future, would create enough wealth to support the debts being incurred.
Whole nations, as London’s monetary thinkers had discovered, need not perform the virtue embodied in the very good advice to pay off a credit card balance in full every month.
From this realization—that time matters—flows perhaps the most significant advantage states have over families: what a government does, how much it chooses to spend and on what, can directly affect the way a nation’s economy will perform going forward.
The recognition that debt is not simply an encumbrance on a more or less fixed trove (a way of thinking that resonated with the older notion of the nation’s budget as a royal family’s revenue) was in some sense the central realization of Britain’s financial revolution.
Defoe’s theory wasn’t as precise as Newton’s. He wrote that it was “the Honor, the Probity, the exact punctual Management” of Britain’s finances—the commitment to deliver each succeeding year what was promised to those who supplied it with credit—that drove both “the Great Wheel in the Nation’s Clockwork” and “the Great Spring that turn’d about that Wheel.”
Defoe was at best an amateur financial theorist. But the broad idea he conveyed was correct. Neither the specific deals Defoe defended nor the broader idea of manipulating Britain’s debt seemed to either the author or his audience to be particularly dangerous, and certainly not inherently corrupt.
while hindsight makes Defoe’s happy confidence seem almost unbelievably naïve, it’s important to remember that he and his contemporaries did not see the South Sea Company’s new plans for Britain’s finances as anything radical, unfamiliar, or dangerous.
its proposal turned on precisely the kinds of deals that had worked in the past—which themselves mapped onto the same kinds of reasoning that had so recently brought order to the entire universe.
The most obvious change was that the full value of the lottery obligation swapped for its shares was added to its capital—just over £1.5 million. The £168,750 in overdue interest payments on its preexisting debt holdings was converted into capital as well, as was a new loan of £778,750 that the Company agreed to provide the government.
this time, lurking within the seemingly innocuous machinery of the deal, there was indeed real money to be made. The new loan to the government promised a sum the Company did not actually have. Accordingly, the agreement allowed the company to raise that money by issuing new shares to be sold to the public.
the Company was allowed to value this new stock at a par value of £100 per share. Every £1,000 to be loaned would thus add ten shares to the Company’s accounts. But the money that would actually fund that loan would come from selling shares at whatever the market would bear. So if Exchange Alley quoted prices over par, the Company would pocket the difference—in essence, enjoying the same windfall offered to those being enticed to swap their lottery annuities for shares.
To emphasize: nothing in this arrangement was seen as either dangerous or venal. Quite the reverse. In principle, at least, this was nothing more than sound management, a clever and equitable approach to a long-standing problem.
The point for Defoe, abandoning his poor fish to the sharpers, was not that credit and finance were in themselves terrible ideas. He remained a booster of both private projects and public ones, all funded with borrowed money. But he was unable to make the connection between Exchange Alley and the government’s ability to borrow at the levels the secondary market in credit made possible.
He never offered a real alternative to the Alley when the Treasury needed to raise money on the scale required to pay for Britain’s wars. Such demands, and the role of an exchange in making enough private capital available to the public purse, were still recent enough that even a dedicated observer like Defoe found it hard to distinguish what was needed from what was simply dangerous.
Then and now, a critical function of secondary markets in securities—stocks and bonds, debt and equity—is to allow investors an easy way in and out of their investments.
Before the Alley provided a way for buyers and sellers to exchange government obligations at broadly consistent prices, the king’s creditors were mostly out of luck: whatever they had lent to the crown would come back to them at the agreed term—or worse, at the monarch’s pleasure.
The same money-creation power can in principle be used to pay back any official obligation expressed in that nation’s currency; the risk of paying off the entire US debt in this way would be inflation and a rapid depreciation of the value of the US dollar against any other currency.
This was both a literary triumph and a very worldly one. The project had earned Pope an almost unheard-of amount for a man in the scribbling trade, and by the fifth installment his fortune had grown to the point where he was genuinely well-to-do—and beginning to act accordingly. He
Unstated, but certainly part of the calculation, was the thought that Aislabie was no more honest than he needed to be. As Arthur Onslow, later speaker of the House of Commons, put what was apparently common knowledge: the chancellor was clever, with a knack for business, “but dark, and of a cunning that rendered him suspected and low in all men’s opinion.”
Over the next several years, that number rose to £250, still a risible number for someone overseeing £10 million in capital. More curiously, that sum could hardly have paid for the landed estate he bought and the mansion he began to build in 1716. Knight did have some family money, but it’s almost impossible to come up with an honest explanation for Knight’s swift rise to fortune.
Knight was a man who loved money and, on the circumstantial evidence that survives, was not too particular about how he got it.
