I

By April 1696 the English government was close to total financial exhaustion. Eight years of war had drained the nation's coffers, and the combined effects of a prolonged trade slump, the remittance of vast amounts of money overseas for the army, and the recall and recoinage of the nation's money in 1695 and 1696, made it nearly impossible to borrow money to keep the navy at sea and the army in the field (Dickson Reference Dickson1967, pp. 46–57; Jones Reference Jones1988, pp. 23–6, 95–161; Waddell Reference Waddell2015, pp. 318–51; Kleer Reference Kleer2017, pp. 186–92). The temporary boost provided by the foundation of the Bank of England in 1694 had subsided and the stumbling start of its putative successor, the National Land Bank, seemed to presage disaster (Horsefield Reference Horsefield1960; Dickson Reference Dickson1967, pp. 56–7; Kleer Reference Kleer, Mcgrath and Fauske2008, pp. 70–103). Charles Montagu, Whig politician and Chancellor of the Exchequer, wrote to William Blathwayt, the Secretary at War at the king's side in Flanders, that ‘faction and party … has broken all proper credit, … so that whereas formerly the paper money in London was more than all the cash in England, at present no bill or note will pass in payment’.Footnote ¹ Blathwayt also had letters from his friend the Earl of Ranelagh, Paymaster-General of the army, who told him that ‘we are, at least, in as miserable a condition as to want of money … [and] what can be done to relieve us in this fatal extremity I cannot see’.Footnote ² The solution suggested by Montagu was that the government circulate its own paper money, called Exchequer bills, which would overcome the shortage of coin and provide a breathing space until the war ended and enough tax was gathered to redeem the bills. ‘We are now come to the experiment of our Exchequer bills … and we must set our shoulders to it to make them pass’, he told Blathwayt on 23 June 1696, ‘[but] ’tis a terrible prospect and I have yet no comfort nor hopes of being successful, for all credit is so utterly destroyed by the fatal project of a new [Land] Bank coming at the same time with the deficiency of specie that we know not how to turn ourselves’.Footnote ³ Drastic steps were necessary in order for this experiment to succeed.

To make the bills successful and overcome the weakness of the credit market it was necessary to create proper formal structures that would turn the bills into rational and profitable investments for monied interests. The first tranche of Exchequer bills were not and therefore failed to work. Montagu intended that they would be issued by the Exchequer as the main cash-keeper of the English state, backed by its general credit, and would then circulate throughout the country until taxes came in to redeem them. They would be accepted in payment of taxes and carry a moderate rate of interest, about 4 per cent, both intended to promote circulation. The bills were therefore to be both a currency and a credit instrument, which Montagu hoped would replace the Land Bank and make good its promise to raise £2.564 million for the use of the nation. The same Act that created the Land Bank in April 1696 gave permission for the Treasury to issue £1.5 million in bills if the bank proved unsuccessful, which it did (Dickson Reference Dickson1967, pp. 364–8; Clapham Reference Clapham1945, vol. i, pp. 38–9, 54; Horwitz Reference Horwitz1977, pp. 167, 175–82; Kleer Reference Kleer2017, pp. 96–114, 150–203). Yet, even though they were backed by a guarantee of parliamentary taxation they met with no success since they lacked the incentive structure to attract investors, like many others in the same era. As Richard Kleer, Georges Gallais-Hamonno, Christian Rietsch, Anne Murphy and others have shown, the 1690s were a period of experimentation as public and private parties searched – as much by trial and error as rational calculation – for the best incentives for these new financial instruments. The Malt Lottery Loan of 1697, for instance, did not sell more than 1,763 of its 140,000 tickets because it was so poorly designed that it only offered half the return of other investments (Murphy Reference Murphy2005, pp. 227–46; Kleer Reference Kleer, Mcgrath and Fauske2008, pp. 70–103; 2015, pp. 179–203; Gallais-Hamonno and Rietsch Reference Gallais-Hamonno and Rietsch2013, pp. 259–77).

In what remains the only detailed study of the first issue of Exchequer bills, Peter Dickson argued in 1967 that this early tranche in 1696 were similarly ‘not very skilfully designed’, as they offered holders only 5 per cent interest whereas other investments paid 7 per cent or more, and lacked adequate funds for repayment: one of the Treasury Lords told Blathwayt in July 1696 that they were now wholly reliant on the credit of the bills, ‘and that we cannot propose to establish any further at present than we have the money to support it’ (Dickson Reference Dickson1967, pp. 368; Sundstrom Reference Sundstrom1992, p. 76; Desan Reference Desan2014, pp. 337–41; Jones Reference Jones1988, p. 24). Because people made a rational calculation and refused to take the bills in payment from the government, except at extortionate rates of discount, only £160,000 of the £1.5 million granted could be issued, and within 12 months most of them were no longer in circulation. This suggested to Dickson and others that subsequent tranches of Exchequer bills emitted after 1697 succeeded because they gave much better returns and more security than their predecessors, and were more successfully calibrated to the financial markets they encountered. In fact, this was only partially true. They were now accepted in lieu of taxes but were otherwise based on the same parliamentary funds, occupied the same legal status, offered exactly the same rate of interest, and were in most respects, Dickson conceded, ‘not conspicuously better than those of 1696’ (Dickson Reference Dickson1967, p. 369). The only other benefit they now offered was a supplementary arrangement with a group of private financiers to ‘circulate’ the bills or repay them in coin to any investor who was unwilling to keep them in hand until they matured, ‘an important step towards improving the bills’. The nature of this arrangement is the focus of this article.

The Act authorising a new tranche of £1.5 million Exchequer bills in April 1697 permitted the Treasury to raise a fund by subscription to circulate them, in return for a generous rate of interest which this time recognised the competition for funds at a moment when the money markets were in freefall (Dickson Reference Dickson1967, pp. 369–73; Clapham Reference Clapham1945, vol. i, p. 55). This fund could be smaller than the tranche itself because the intention was to persuade holders to keep the bills in their hands, so the fund would only need to answer the bills that they chose to present; it would therefore operate on the principles of a fractional-reserve bank. In this period the Bank of England tried to maintain a cash reserve of 10 to 20 per cent to back the notes in circulation, and the Treasury proposed that this First Subscription be set at the same level of £400,000 or 27 per cent of the £1.5 million Exchequer bills that could be issued, though because only £100,000 of this subscription would be paid up at the start, the actual ratio was closer to 6 per cent (Clapham Reference Clapham1945, vol. i, pp. 41–2; Kleer Reference Kleer2017, pp. 33–54; Desan Reference Desan2014, pp. 304–8, 322).Footnote ⁴ Generous incentives were offered to people to put their cash into the fund. Dickson gave the rate of interest as 5d per £100 per day or 7.6 per cent per annum, but in fact the contract signed on 26 October 1697 promised ‘ten pounds per cent per annum for the whole sum so by every contractor written up … for so long as he or they shall be liable to answer any part of the same’, even if the whole of their subscription was not called up.Footnote ⁵ Subscribers thus had unlimited personal liability for all sums subscribed but in return they enjoyed at least a 10 per cent return, and even more if their subscriptions were not all paid in at once. To protect the interests of all those involved, the circulation would be handled at arm's length by twelve trustees, half of them appointed by the Treasury and half by the subscribers. By agreeing to accept the bills in payment of taxes, the Treasury not only encouraged people to hold them but also cut down the number of bills that could be presented directly to the Trustees for immediate redemption (Dickson Reference Dickson1967, pp. 370–3; Jones Reference Jones1988, p. 67). ‘Otherwise the subscription money would not last one day’, wrote Sir James Bateman, an important Whig financier, to Richard Hill, the deputy-paymaster in Flanders, ‘for all men that were possessed of Exchequer bills would immediately come for their money’ (de Krey Reference De Krey1985, pp.151–2; Cruickshanks et al. Reference Cruickshanks, Handley and Hayton2002, vol. iii, pp. 147–9).Footnote ⁶

Careful attention was therefore paid in 1697 to institutional design and the creation of a small but lucrative mechanism for circulation, which would in turn underwrite the credit of the new Exchequer bills and supplement or compensate for the demonstrably inadequately credible commitment underlying the bills themselves. Yet Montagu had recognised even in 1696 that a variety of informal mechanisms would also be needed to build confidence. Rather than simply leaving things to the market in June 1696, he had tried to make arrangements with merchants in major commercial towns such as Norwich, Newcastle, Bristol and Exeter to circulate the new bills by accepting them and paying them out, as a ‘little Bank’, which he considered ‘the most difficult thing that was ever brought about’.Footnote ⁷ By September 1696 there was an ‘Exchequer Bank’ in Exeter which had agreed to circulate the bills for 1 per cent commission, by offering them to local merchants for cash or bills of exchange and exchanging the Exchequer bills back on demand.Footnote ⁸ Montagu also asked Blathwayt to persuade the king, William III, as the Stadtholder of the United Provinces, to order merchants in the Netherlands to accept the bills; ‘it would do the whole thing’, he begged, ‘and give them such a reputation as would enable us to turn all to money’.Footnote ⁹

Yet popular confidence in this first tranche of Exchequer bills, as noted above, was always low. Ranelagh told Blathwayt on 6 June that they lacked credit and credibility because they had no real security and could not be turned into money at will. People were therefore unwilling to accept them, even at very high rates of discount, since there was no guarantee that they would be able to sell them again or exchange them with the government for cash. ‘If there be not a fund of three or four hundred thousand pounds in the Exchequer to answer them, who shall [?agree] to turn those bills into money’, Ranelagh wrote , ‘and where to find that fund is the difficulty’, since the money market was in ‘a tottering condition’.Footnote ¹⁰ One of the Lords of the Treasury made the same point directly to the king (Horsefield Reference Horsefield1960, p. 124). The idea of a fund that would give the bills currency by circulating some of them, which was adopted in 1697, had also occurred to Montagu as well, who wrote to Blathwayt on 17 July 1696 with his proposal (Horsefield Reference Horsefield1960, pp. 122–4; Kleer Reference Kleer2017, pp. 207–8).Footnote ¹¹ A memorandum he drew up around this time shows the expedients that he already had in mind, which included the formal mechanisms seen later in 1697 but also relied upon a series of informal incentives and sanctions intended to play on investors’ patriotism and obligations to the government. It recognised that the collaboration of major players in the London money markets was vital and that it would best to appeal to their private interests, but also that some might not be willing to participate and might therefore have to be forced to join in with his measures, a conclusion which naturally focuses attention on the measures then employed in 1697.

‘Everybody being now convinced of the mischiefs that the public service and all commerce suffer for want of paper credit, and of the necessity there is of re-establishing it in some manner or other’, the proposal opened, ‘’tis probable there will be a great concurrence among most people to advance the currency of Exchequer Bills … by all means that are not prejudicial to their own private interest.’ This could best be done by ensuring that they were accepted in payment, ‘by a general consent and agreement’ among all people to accept and receive them, but this could only work if the agreement were comprehensive and reliable. Public officials might be ordered to receive the bills for taxes, but private parties also needed some way of knowing that other merchants would accept the bills, ‘whereby they might know one another's mind and mutually join in the understanding and so be secure of having those bills accepted on one hand which they receive on the other’. Montagu suggested that this guarantee, so necessary for creating confidence in the bills, be provided by parties signing a public indenture pledging to accept a certain number of Exchequer bills, which would also ‘give those who are willing to assist the Government in this exigency an opportunity to express those intentions’. All the subscribers would also pay in one-tenth of their subscription, creating a fund of £250,000 ‘which will be sufficient capital to answer all demands at the Exchequer if the subscribers circulate them as is proposed’, and they would receive interest in return. Montagu therefore proposed an institutional arrangement which would create confidence in the bills and anchor their value, by offering investors not only a return on the money subscribed but also the wider public benefits that might be expected from a stabilisation of the circulating medium.

However, the crucial point would be to secure the participation of key figures in the money market as subscribers, especially those who nevertheless felt that these terms were not sufficient compensation for the risks they were undertaking. Montagu thus proposed to put heavy pressure on the political and monied elite, including the Lords Justices of the kingdom, the Privy Council, and the Lord Mayor and the Court of Aldermen of the City of London, as well as the livery companies, Jewish financiers, and the goldsmiths in Exchange Alley, ‘that they may either come in and assist, or show their unwillingness to help the Government’.Footnote ¹² Though recognising that some form of institutional fund was necessary to set public fears at ease and to create confidence that the Exchequer bills could be answered in cash if necessary, Montagu therefore also saw that public confidence and credit rested on a far broader basis and that this might be supported by forcing political and financial figures to invest and to agree to accept the bills, even if they did not want to assist (Horsefield Reference Horsefield1960, p. 124). He recognised that credit in the British financial revolution of the 1690s was not merely a case of finding an institutional design which offered more transparency and profitability to rational investors, and which could be addressed by developing a new institution for circulating the bills. Instead, that institution would build confidence by gaming the system and forcing all the leading financial, commercial and political groups in the City to participate, which would then serve to encourage other groups to follow their cue and to participate as well.

This was typical of the broader financial revolution. As Carl Wennerlind, Christiane Desan and many others have recently emphasised, developments from the 1690s were strongly shaped by sentiment and cultural constructs that sometimes had little to do with the actual profitability of ventures (Wennerlind Reference Wennerlind2011, pp. 83–122, 161–234; Desan Reference Desan2014, esp. pp. 295–304, 322–38). Stocks and shares were traded rationally through networks of brokers and investors who nevertheless possessed limited information, despite the rise of a public sphere which offered the investors the tools to keep themselves informed and sometimes even to demand creditable conduct from the state (Murphy Reference Murphy2009, pp. 89–136, 161–219; Reference Murphy2013, pp. 178–97; see also Dickson Reference Dickson1967, pp. 486–97). As a result, it was still possible for important actors such as the government strategically to manipulate information flows, particularly through major figures in the financial markets who gave a lead to other investors, in order to influence what was then perceived to be a rational and profitable investment. The South Sea Bubble of 1720 has been reassessed as an example of just such manipulation, embarked upon by its directors and the government for the purpose of persuading government bond-holders to make the rational choice and exchange their annuities for South Sea stock (Shea Reference Shea2007, pp. 73–104; Wennerlind Reference Wennerlind2011, pp. 197–234; Paul Reference Paul2011, pp. 12–23, 75–87; Deringer Reference Deringer2015; pp. 651–5; for an alternative perspective which stresses irrationality, see Dale Reference Dale2004). Montagu therefore recognised that better institutional design would have to be matched by informal measures which managed public perceptions and information among potential investors, and this shaped his actions in 1697 when the second tranche of Exchequer bills were issued and steps were taken to find subscribers for the fund that would, successfully, circulate them.

II

By the time that the necessary Act was passed in April 1697 and the subscriptions for the circulation could begin, the entire English fiscal-military system had advanced from its state of exhaustion 12 months before to one of seeming paralysis and imminent collapse (Dickson Reference Dickson1967, p. 57; Clapham Reference Clapham1945, vol. i, pp. 54–6; Horwitz Reference Horwitz1977, pp. 184–91). Bateman reported to Hill on 2 April that the Treasury could not pay any of its debts. ‘I do believe their minds and wills are good, but they want the means to effect it’, he said, ‘and such necessities I find they are under that those who have ready money may have anything they please to ask for it’.Footnote ¹³ The discount on government paper was higher than it had ever been, and the catastrophic collapse of public credit seemed imminent. One week later he noted ‘all their dependence is on the Exchequer notes’, but that only a mere £50,000 of the £400,000 necessary for the circulation had been subscribed.Footnote ¹⁴ Despite the attractive terms offered, few were willing to act as subscribers. Bateman informed Hill the next week that Exchequer bills still lacked credibility. ‘I fear the same evil and ill conveniency of buying, selling and discount will attend them as does at present our Bank notes’, he said, ‘and I fear they'll not answer their design or expectation, for the subscriptions goes on very slowly and few people have writ but those in places and dependent on the court.’Footnote ¹⁵ On 20 April he reported that subscriptions had been received for only half the fund, ‘yet all people agree ’tis the common interest to promote making them up to £400,000 for a fund to circulate those bills’.Footnote ¹⁶ The methods used to fill the First and Second subscriptions of April and July 1697, when the danger to public credit was at its height, suggest that even the increased rewards offered by the Treasury were not enough to persuade investors to come forward, and the dangerous consequences for public credit and the conduct of the war forced Montagu and the Treasury to try some of the other, more informal, methods which had first been suggested in 1696.

Thus, even before trouble appeared on the horizon the Treasury made informal contact in mid March with the Court of Directors of the East India Company, the largest trading company in England and one of the biggest single players in the money market in London. So important was the company as a lender in the 1690s that the ministry was forced to make substantial commercial concessions in return for loans, and the chartering of another company (the ‘New’ East India Company) in 1698 was made conditional on payment of a £2,000,000 loan to the government (Dickson Reference Dickson1967, pp. 49–50, 57). If the company subscribed to this fund for the circulation of the Exchequer bills it would send an important signal to other investors contemplating whether or not to take the plunge, not least because the company's seemingly bottomless financial resources would be directly liable for any deficits. In response to the government's informal approach, the directors debated ‘a paper of a proposal for reviving the credit of this nation by giving a currency to the Exchequer Bills’, and received permission from the shareholders to open negotiations.Footnote ¹⁷ After four weeks of bargaining with the Duke of Shrewsbury and Earl of Portland, two of the leading figures in the ministry, ‘who recommended it to them with some earnestness to use their interest with the Generality [i.e. the shareholders] to promote the subscriptions now afoot’, it was eventually agreed that the company would subscribe for £40,000 or one-tenth of the entire fund for circulating the Exchequer bills if the Treasury allowed them to use the bills rather than cash to pay customs duties.Footnote ¹⁸ This decision may have been strongly influenced by growing demands for the ‘New’ East India Company and a recognition that official support for the ‘Old’ one might depend on their willingness to loan money to the public, as was occasionally the case with the Bank of England (Horwitz Reference Horwitz1977, pp. 178, 190–1, 232–4; Chaudhuri Reference Chaudhuri1978, pp. 432–6; Broz and Grossman Reference Broz and Grossman2004, pp. 48–72), and by the commercial and financial concessions that it was able to extract. However, it seems clear that informal pressure from the ministry as well as the rational calculation of corporate advantage was also a key factor in this decision.

The Lord Mayor of London was likewise told by the secretary of state on 20 April that ‘the king regards the subscriptions to the Exchequer bills as a matter of exceeding moment to his service and to the advancement of the public credit and interest at this time, and therefore desires you will earnestly promote the same with the Common Council’.Footnote ¹⁹ Echoing Montagu's plan to complement the carrot with the stick, the secretary of state added that ‘you and the City have here as seasonable an opportunity as could be wished to give a very signal proof of your affection and zeal to His Majesty and the public by your hearty and ready performance herein’. The Earl of Wharton, another member of the Whig Junto ministry, attended the City directly ‘to dispose people's minds right’ (Horwitz Reference Horwitz1977, pp. 191, 216). The Lord Mayor and the Chamberlain or treasurer duly subscribed £5,000 between them, either privately or on behalf of the Corporation, even though the city was in the midst of a comprehensive financial bailout which had nearly seen it sink beneath debts of £800,000 to its own orphans’ or trust funds (Doolittle Reference Doolittle1983). The Bank of England was also asked by the ministry to contribute, and they agreed with the Treasury on 19 April that if they could have the management of the fund they would recommend to their shareholders to subscribe £50,000, ‘and further several of the Directors will subscribe over and above in their particular persons, and also will promote the subscriptions of the several members of the General Court’ (Clapham Reference Clapham1945, vol. i, pp. 54–5).Footnote ²⁰ Bateman told Hill of the pressure which had also been put on him and the other directors by the king himself to subscribe in their personal capacities. ‘Several of us have writ £2,000 each as particular men’, he noted, ‘for he told us he could not go out of the kingdom until it was done; for until it is things are at a stand, but, this over, all things will revive.’Footnote ²¹ The leading financiers in the country were thus induced to subscribe not just out of rational calculation or institutional design, but also because the king had told them that the war, the public good and the national interest would be at risk if they did not.

The list of subscribers to the First Subscription likewise demonstrates that Montagu made extensive use of informal influence to find other investors. Out of the £430,450 or so underwritten by 449 individuals, more than £90,000 came from leading figures in the ministry and the upper reaches of the fiscal-military state, including the Lords of the Treasury, revenue commissioners, departmental treasurers and receivers, and senior Exchequer officials; ‘those in places and dependent on the court’, as Bateman had noted.Footnote ²² The financier and Treasury commissioner Sir Stephen Fox subscribed £8,000, ‘undertaken at least in part in order to inspire confidence in the rest of the investing community’ (Clay Reference Clay1978, pp. 232–3, 241–4). ‘The Lords of the Treasury and all the officers of the revenue were subscribers’, one anonymous commentator later noted, ‘(and those officers who would not subscribe … must lose their places)’, such as the financier Sir Robert Clayton, who was dismissed as a commissioner of customs in May, ‘great notice being taken of his discouraging the subscriptions which are to be the foundation for issuing Exchequer Bills’ (Melton Reference Melton1986).Footnote ²³ As noted above, some £40,000 was subscribed by the East India Company. The application of the Bank of England for management of the money was rejected, and the shareholders refused to vote the £50,000 conditional on that, but the individual directors privately offered over £30,000 in total, and it was agreed that the Bank could name three of the six private trustees. Nearly £50,000 was also invested by the remittance contractors who sent money to the army in Flanders, such as Sir Solomon Medina, as one of a number of loans he made in the 1690s to support English public credit (Rabinowicz et al. Reference Rabinowicz1974, pp. 28–31).Footnote ²⁴ A closer study would undoubtedly identify many more who subscribed to the fund either directly or on behalf of others. For instance, the third-largest single subscription of £10,000 came from John Germaine, a Dutch favourite of William III (and suspected of being his illegitimate son), who was possibly acting as the king's agent (Cruickshanks et al. Reference Cruickshanks, Handley and Hayton2002, vol. iv, pp.13–14). Well over half of the First Subscription therefore came from leading public figures susceptible to political and commercial pressure, helping to generate confidence in the fund and undoubtedly encouraging many others to put their own names to the subscription.

Desan and Kleer have proved that similar structures were used to build confidence in other new instruments, such as the Bank of England bills in 1694: ‘public officials and individual holders cooperated to institutionalise them’, Desan notes, ‘[and] it [they] gained stability from the reciprocity of their obligation’ (Desan Reference Desan2014, pp. 308–20). They were also no temporary expedient but an integral aspect of building credibility at this stage in the financial revolution, since the second subscription of July 1697 to circulate a further tranche of £1.2 million Exchequer bills was set up on a similar basis. Bateman told Hill on 2 July that the bills would not circulate until they could secure another subscription, ‘[and], if it takes effect, they will be more acceptable. But this will require time, and uncertain if we succeed or no[t].’Footnote ²⁵ Ranelagh's deputy Mordecai Abbott told Hill on 9 July that £90,000 had already been subscribed ‘and I doubt not we shall have a large subscription’, but this was because Montagu and the Treasury were already at work behind the scenes.Footnote ²⁶ Letters were sent on 8 July to the Bank of England and East India Company asking them again to subscribe directly and to recommend it to their shareholders, ‘looking upon it as a matter highly serviceable to the government … [and] Their Lordships being sensible of what good effect the Company's example hath formerly been on the like occasion’.Footnote ²⁷ The court of directors of the Company managed to extort further concessions before they would subscribe another £40,000, but other investors were slower to subscribe, and Montagu confessed to Blathwayt that ‘the old artifices are playing over again and endeavouring to confound all’.Footnote ²⁸ Due to some ‘some unlucky accidents … [and] malicious contrivances’ it took until 30 July to assemble £360,000 and enable Montagu to write ‘that now we are again afloat’.Footnote ²⁹ Once again, informal efforts were needed to secure enough subscribers to make the subscription, and the bills, credible.

III

Experience additionally showed that it was not enough simply to assemble the subscription. The Exchequer Bills also had to be fed gradually into the financial markets in order not to create a glut that would push down their price and make people disinclined to accept them. Bateman and his remittance consortium were owed £200,000 for funds they had sent to the army in Flanders, for example, but the Treasury had delayed issuing them the first tranche, and so, he informed Hill on 7 May, ‘we must wait and hold the candle to see others first dispose of theirs, great parcels being already issued out for several purposes, and the greediness people have of turning them into money makes them run already at an 8 per cent discount’.Footnote ³⁰ An anonymous commentator later noted that this ‘brought discredit upon the bills’, and Bateman wrote to Hill that the rate of discount might soon double to 15 or 16 per cent. Matters did not improve over the next week. ‘Many of them are already issued out and there is really abroad too great a glut of them’, Bateman wrote ‘ … [and] whether ’tis too many coming abroad or the scarcity of money or the value those who have put on't, but these bills I am told are run to 6, 7 and 8 per cent discount … and I fear the £400,000 subscription will not be a sufficient fund to answer the quantity of these bills as they come in.’Footnote ³¹ A letter from Ranelagh to Blathwayt written around the same time made a similar point. ‘Exchequer notes have been offered to the parties … but not one of them will accept them, so that now we are forced to try all manner of ways to turn those bills of the Exchequer into money, which we shall not be able to do without a considerable loss’, he said, ‘and it is to be feared that the allowing of this loss will bring a disrepute upon our Exchequer Bills, which is the thing in the world we ought to avoid, especially at their first setting out.’Footnote ³² If the discount continued to rise the demand for encashment might bankrupt the trustees, destroy the credit of the bills, and thus undermine English public credit. Unfortunately, due to absence of data it is not possible to construct a price series for the bills in this period to allow more detailed study of the ebb and flow of supply and demand, but the letters of key individuals involved in the circulation of the bills tell their own story of this challenge and how it was overcome.

Troubling signs began to appear in May 1697. ‘There is a very pressing occasion for money at this time to be applied for payment of wages to seamen’, the Treasury wrote to the Bank of England on 3 May, for example, and noted that lending £50,000 on the bills would be ‘a very acceptable service, and we doubt not will tend as well to the interest of the Bank as to the good of the public’, but the directors refused to make the loan.Footnote ³³ Bateman wrote to Hill on 25 May that the Treasury would not make good ‘the common discount’ on the bills he was offered in payment, about 10 per cent, and he had therefore refused to accept them.Footnote ³⁴ ‘I am heartily sorry for it’, he told Hill, ‘… [but it] would have been greatly to my loss, and I believe you would not have me suffer for my readiness in serving you.’Footnote ³⁵ The Bank was similarly reluctant to accept them (Clapham Reference Clapham1945, vol. i, pp. 56, 58–9). When even loyal contractors like Bateman and the Bank of England were not willing to accept the bills, despite having invested large sums of their own money in the fund for circulating them, the collapse of the bills and public credit must have seemed imminent, although Montagu asserted otherwise in his letter to Portland on 18 May, writing that ‘your Lordship has a very wrong account of the Exchequer bills, for they are in great credit and pass current in most payments at par with money’.Footnote ³⁶ Some persons had indeed been forced to dispose of them at a discount, ‘but that went not far and has hurt them much less than could be imagined, considering the great quantities we have been forced to issue at once’. He also sent a hopeful note to Blathwayt on 25 May that the bills ‘do as well as could be expected from so new a thing, under a great opposition’, though he admitted that the Treasury had been required to issue so many that the fund for circulating them was almost exhausted, putting their credit at risk.Footnote ³⁷

In fact the state of affairs was very bad indeed and the Treasury was therefore forced to adopt a deeply hazardous expedient. Bateman had noted to Hill on 11 May that Francis Eyles, a major Whig merchant in London and the agent to Messrs Clifford of Amsterdam, the leading remittance contractors for the army, had presented two bills for £20,000 to the Treasury for payment.Footnote ³⁸ These had been drawn by Hill as part of his desperate attempts to find money for the allied army in Flanders (Graham Reference Graham, Felix and Dubet2018b). ‘They told us plainly to talk of money was impossible, but in part of payment they would give three or four thousand [pounds] in Exchequer Bills’, Bateman wrote, adding on 25 May that Clifford and Eyles were refusing, like him, to accept the bills in payment at such huge discounts, ‘for no man will take paper for money without allowing the difference or discount they give it at’.Footnote ³⁹ The largest single remitter seemed about to abandon his support for the British troops abroad, and desperate measures therefore called for the most desperate remedies. Ranelagh wrote to Blathwayt on 1 June that he had been given private instructions by the Treasury to make good the losses that Clifford might suffer from taking the Exchequer bills in payment for Hill's notes.Footnote ⁴⁰ ‘But this must be kept a great secret’, he warned Blathwayt, ‘for should it take air, we must prepare to allow a discount for all Exchequer Notes [sic] … than which nothing can be more fatal, especially at a time when we are labouring all we can to make our bills equal to money, which certainly in real value they are.’ So secret were these instructions that they were not even entered into the Treasury's minutes or the letter that William Lowndes, their secretary, wrote to Blathwayt that night.Footnote ⁴¹ Eyles had subscribed £3,000 towards the First Subscription in May 1697 and was one of the twelve Trustees for Circulating the Exchequer Bills, which no doubt gave him additional leverage in his demands for a special exception to be made that would keep the support of a key commercial ally.

This combination of ad hoc and informal expediencies in support of the Trustees for Circulating Exchequer Bills was enough to maintain the credibility of the bills and to prevent a run on the trustees in June, which would have undermined the English state even as the war was drawing to a close and credit was being restored. Montagu was able to report on 6 July that the public credit was more ‘enervated’ than usual, ‘[but] I am more and more in hopes that we shall set up paper credit as high as ever’.Footnote ⁴² By August it was becoming clear that negotiations at Rijswick would produce a peace, and he told Portland that ‘the news from your side is so good that all credit mends every day, and after ages will not believe how great an alteration has been made in one year’.Footnote ⁴³ Ranelagh commented to Blathwayt that the second subscription had doubled to £670,000 in a few days and might soon reach its target of £800,000, ‘which is an undeniable evidence that our credit recovers to a miracle’.Footnote ⁴⁴ When news arrived that the Peace of Rijswick had been signed on 20 September, confidence in English public credit was restored almost at once, and Bateman told Hill that it would be easy enough for the Treasury to raise their loan of £200,000 to meet the costs of disbanding the army, ‘[as] they will now readily find people enough to supply them withal, all things being exceedingly mended and will yet daily grow better’, though Montagu confided to Blathwayt that this loan had still required a trip to the City to encourage investors (Horwitz Reference Horwitz1977, pp. 194, 199).Footnote ⁴⁵ By October, Bateman was able to report to Hill in triumph that ‘all things mend, and money seems as plenty [sic] as ever’.Footnote ⁴⁶ The English state had therefore successfully made it across the financial rapids that it had encountered in 1696 and 1697, but, as will have become clear, only with the assistance of a raft of informal measures that were intended to maintain public confidence and bolster the formal institutional structures created to encourage circulation of the Exchequer bills.

This is not of course to dismiss the importance of good institutional design in encouraging subscribers to come forward to invest in the circulation, by providing a competitive rate of interest and appropriating reliance revenues for repayment. Public confidence was also undoubtedly strengthened by vesting the management of the fund for circulating the Exchequer bills in independent trustees who legally represented the subscribers to the Treasury and the money markets, and were not formally obliged to either. Yet in practice, the trustees were men of considerable political and financial weight drawn from the upper reaches of government, such as Mordechai Abbot, and the monied interest, such as Francis Eyles and Sir James Bateman. This meant that they not only had a vested interest in the wider English state but also had a range of informal connections with other key groups and drew on them in similar ways to Montagu in order to make the fund for circulating the bills a success. It is probably also significant that the Trustees staffed their office with veteran officials from the Treasury and Exchequer, including the secretary Lionel Herne, the cashier Samuel Edwards, and the assistant cashier Richard Taylor (Dickson Reference Dickson1967, p. 370n). One writer later noted that there had been a continual communication between the Trustees and the officials of the Exchequer, where the bills were initially presented for payment, ‘so they, knowing beforehand, would provide money according … [or] stop the Tallies and Orders of Loan for a week or more, until the subscriptions were called in to furnish money’.Footnote ⁴⁷ This practice of frantically robbing one fund to pay another was contrary to the strict appropriation or hypothecation of taxes which supported the credit of paper instruments by providing a reliable and secure fund for them, but was clearly deemed necessary to prevent even the slightest check in credit that might undermine confidence, and points to a further nexus of informal measures which cannot now be recovered but also served to support the bills.

IV

The measures adopted to circulate Exchequer Bills between 1696 and 1698 therefore helped the English state out of a deep crisis that might potentially have stopped the financial revolution dead, and the new English fiscal-military state with it. Like the Louisquatorzian state, which Guy Rowlands has shown faced a similar crisis between 1710 and 1712, the emergency was resolved by the desperate application of both formal and informal measures intended to solve the problem at any costs, rather than the more measured and rational solutions that could be employed after 1698 as the English economy revived and taxation and public credit with it (Rowlands Reference Rowlands2012). Bateman wrote to Hill in March 1698 that the Exchequer bills were now ‘much more esteemed than they were’, to the point where the Treasury was paying them out at par, ‘so I doubt [not] they'll be difficult to come by, for that they serve their turn as well as money’, as Montagu had hoped.Footnote ⁴⁸ By the end of 1699 more than half the bills had already been cancelled, rising to 60 per cent by 1700 and 70 per cent by 1701, though annual contracts for circulating this tranche of bills continued until all the bills were cancelled in 1709 (Dickson Reference Dickson1967, p. 371).Footnote ⁴⁹ The number of trustees fell to three, one of them Sir James Bateman, and his letters to Hill made no further mention of Exchequer bills except as profitable investments.Footnote ⁵⁰ The bills had become routine, even mundane, and could therefore be resurrected with relatively little fuss between 1707 and 1711 when the Treasury once again tried to introduce a government paper money and credit instrument into circulation to address the real shortage of specie. This time the Bank of England took over the business of circulation, forming a reciprocal nexus of mutual advantage that persisted into the nineteenth century (Clapham Reference Clapham1945, vol. i, pp. 64–72, 78, 79; Binney Reference Binney1958, pp. 127–31; Dickson Reference Dickson1967, pp. 373–92; Kleer Reference Kleer2015, pp. 179–203). Although they never became the substitute for Bank notes that Montagu had hoped they would be, the Exchequer bills were nevertheless one of the most important and successful experiments in public finance in the 1690s, which inspired imitation in Britain and elsewhere, and a fuller understanding of how they actually became credible investments is therefore vital if the English financial revolution of the 1690s is to continue to serve as the leading case study of early modern financial development and the birth of ‘credible commitment’.

Confidence was clearly crucial in keeping the Exchequer bills in circulation despite the near-collapse of English public and private credit in 1696 and 1697, but the letters and private correspondence of key figures show that it did not arise simply because the bills were backed by parliamentary taxation, or even thanks to improving institutional designs which struck a better balance between security, profit and risk. The Treasury also employed a number of informal measures. Some bore little resemblance to the open and transparent methods to be expected of a democratic state, and instead more closely resembled practices used by absolutist monarchies such as France to maintain the credit of their unreliable financial instruments (Rowlands Reference Rowlands2012, Reference Rowlands2014; Felix Reference Felix2018, pp. 43–70). As noted above, Christine Desan has argued that ‘there was no invisible hand at work in the dawn of capitalism, … [and] the fingerprints of public authority, along with those of its business allies and the larger community, were all over the new medium’ (Desan Reference Desan2014, p. 328). The ministry took a similarly direct hand in helping the Habsburg emperor float two major loans in the City in 1706 and 1710, using a web of personal influence to persuade people to invest, so that ‘the actual process of flotation was assisted by political and financial elites who invested for reasons for public service rather than private profit alone’ (Graham Reference Graham, Pohlig and Schaich2018a, p. 320). Had the English Treasury held back from meddling so closely in financial markets in 1697 in order to circulate the Exchequer bills, and left the matter entirely to the markets and the rational incentives created by better institutional design, it is probable that the bills would have failed entirely, or required the state to offer even more generous terms at a time when it was teetering on the brink of bankruptcy. Either one would probably have brought down the English state, public credit and the financial revolution as a whole. The key institutional developments of the period, such as the shift from royal to parliamentary taxation and the rise of the fiscal state, were therefore cushioned, protected and made practical by the informal and hitherto unacknowledged measures adopted by the Treasury at the same time.