Stop of the Exchequer

Under Charles II the state finances were in such a grievous condition that the Crown found itself no longer able to honour its debts.[1]

Throughout the 1660s state expenditure had been running ahead of the taxation and revenue that Parliament was prepared to authorise. To bridge the gap, the Crown departments increasingly sold more and more debt to the leading London goldsmith bankers, secured against first call on the following year's revenue. This was an attractive investment for a gilded circle of preferred bankers, who could make annualised returns of 8 to 10% or more by buying the debt at a discount, at a time when interest payments were capped by law at 6%. The debt was also readily assignable, making it relatively liquid, so bankers could trade it between themselves, or sell it on to private investors. But as a larger and larger proportion of the state's anticipated revenue became pre-committed in this way, its room for independent manoeuvre became narrower and narrower.

The Stop came suddenly and unexpectedly on Tuesday 2 January 1672. Payments were suspended upon:

any warrant, securities or orders, whether registered or not registered therein, and payable within that time, excepting only such payments as shall grow due upon orders on the subsidy, according to the Act of Parliament, and orders and securities upon the fee farm rents, both which are to be proceeded upon as if such a stop had never been made.[2]

The period of the stop was to be one year, ending on 31 December 1672. In the interim the King intended that interest would be paid to all those who were owed payment of outstanding bonds that had become due "at the rate of six pounds per cent".[3]

A letter from Richard Langhorne to Lord Hatton on January 6 gives additional background on the causes and effects of the Stop:[4]

• 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.
• There was great disruption and damage to the financial markets: "I believe it certain that the trade of bankers is totally destroyed by this accident".[3]

Despite the original intention that the Stop should only last one year, two requests from Charles II to Parliament for new money to pay off the debts gained no support, and so the Stop was extended, first to May 1673, and then to January 1674. Eventually, three years in arrears, the first payments started to be made in March 1675 of the promised 6% interest, revised in 1677 to take account of the total gross amount by then outstanding, thenceforward to be paid annually.

The short-term consequences of the Stop were disastrous. Gilbert Burnet wrote that "the bankers were broken, and multitudes who had put their money in their hands were ruined by this dishonourable and perfidious action".[3] This seems to have been only a slight exaggeration: the goldsmith bankers were heavily hit, and some of the most prominent, including Edward Backwell and Robert Viner, went bankrupt. Danby, the Lord Treasurer, promised them compensation, but this was never forthcoming, leading to a lawsuit, The Goldsmith Bankers case, of almost unheard-of length.[5] Eventually the Court of Exchequer Chamber gave judgment in favour of the bankers, but in 1696 Lord Somers, the Lord Chancellor, reversed the judgment on technical grounds which left a general feeling that an injustice had been done.[6] The King himself came to regret it as a "false step".

The sealing of the Bank of England Charter (1694)

One important legacy of the Great Stop of Exchequer was the founding of the Bank of England in 1694. The primary purpose of the Bank was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. A loan of £1.2m was made to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. The Royal Charter was granted on 27 July through the passage of the Tonnage Act 1694.[7]

Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4000 per annum for the management of the loan.

The founding of the Bank of England put an end to defaults such as the Great Stop of the Exchequer. From now on, the British Government would never fail to repay its creditors.[1]

Kenyon argues that the Stop was a failure simply because it had never been tried in England before. The French and Spanish Governments periodically repudiated their debts without undue difficulty; but from the time of Elizabeth I the English Crown had earned a reputation for paying its debts, and in spite of Charles II's notorious extravagance and carelessness about money, the City of London was quite unprepared for the Stop.[8]

• William A. Shaw (1908), Calendar of Treasury Books, Volume 3, 1669-1672 : Introduction (part 1, part 2) (via British History Online)
• Andrew Browning (1930), "The Stop of the Exchequer", History, 14(56), 333-337 JSTOR 24400948
• Richard David Richards (1929), The Early History of Banking in England, London: P.S. King & Son. Chapter III: "The Stop of the Exchequer" OCLC 802047567
• Richard David Richards (1930), "The 'Stop of the Exchequer'", Economic History: Supplement to The Economic Journal,II 45–62 doi:10.1093/ej/40.Supplement_1.45
• J. Keith Horsfield (1982), "The Stop of the Exchequer Revisited", The Economic History Review, 35(4), 511-528 JSTOR 2595405
• Moshe Milevsky (2017), The Day The King Defaulted. London: Palgrave Macmillan. ISBN 3319599879