Making the Modern Financial Centre: Financing the global power

Despite decades of chaotic civil war within the three kingdoms, England was also facing wars against European powers. England was at war for 29/66 years between 1688 and 1756. Especially between 1688-1697, England was fighting the Nine Year’s War as a part of the coalition against France. It would be fair to argue that William III’s ambition to build a strong navy was the catalyst for the financial revolution. Namely the Battle of Beachy Head, where France defeated both English and Dutch navies, fuelled the pace of military expansions. As a consequence, a series of changes took place in the English financial institutions.

To build fleets for the navy, enormous amount of money were needed. Yet, the English government back at that time, lacked available public funds at their disposal and had relatively low credibility as a legacy from the previous decades. In 1694, the Bank of England was established as a private bank that would act as a banker to the government. It possessed all governmental balances and was the only joint-stock limited-liability to issue bank notes. This largely increased the borrowing capacity and funds for fleets were raised around 10 days. Arguably, this is the bedrock for England to grow as a global power. Primarily, fleets were able to be built. Furthermore, the action of building fleets further pushed the macro economy. Industrialisation and improvement in agriculture were both needed to achieve general success.

However, changes in collecting tax were equally important to help England stand out from her continental rivals. To finance war, money was needed, and tax was one major contribution for raising government’s revenue. It used to be that the government heavily taxed the landed class via land tax. For most European powers, printing more money which may cause inflation was also a common short-term solution. What England adopted during the Financial Revolution was the rise of excise tax . In the context, it meant tariffs or tax on consumer goods such as alcohol. Thus, the audience of taxation was broader than that on land tax. Both the increase in borrowing capacity and the ability to raise tax revenues were equally important for the rise of England as a superpower and they are co-developed side by side.

Nevertheless, historians have argued that having monopolistic institutions such as the Bank of England was not always a good thing. For England (or Britain, unified in the early 18th century) during external wars it was useful to help with funding the war. Yet, from the mid 1700, the Industrial Revolution took place and trade increased sharply when moving into the 19th century. If the Bank of England was the only bank allowed to issue notes, it would be rather inconvenient for merchants to trade as other banks did not have this ability. Furthermore, its monopoly was also visible in banking structures. Up until 1825, other banks were struggling to grow as they were limited only to be able to have 6 partners. This largely restricted their sizes and the scale of their assets.

The advantage of being a superpower made Britain reach other parts of the world. Trade increased and there were urgent needs for a more flexible banking system. Eventually, from the 1820s onwards, reforms began to take place in the British banking system, which ended the commercial monopoly of the Bank of England.