Stop of the Exchequer facts for kids
The Great Stop of the Exchequer was a big event in England in 1672. It happened when King Charles II of England decided to stop paying back money he owed to people and banks. Imagine if someone borrowed money from you and then suddenly said, "I'm not paying you back right now!" That's kind of what happened, but on a much bigger scale for the whole country.
Contents
Why the King Stopped Payments
In the 1660s, King Charles II's government was in serious financial trouble. They were spending much more money than they were collecting in taxes. To cover the difference, the government borrowed a lot of money from wealthy bankers in London, especially "goldsmith bankers." These bankers were like the banks of today.
The government promised to pay back these loans using the taxes they expected to collect in the next year or two. This was a good deal for the bankers because they could earn a lot of interest, sometimes 8% to 10% or more. This was higher than the usual 6% interest allowed by law at the time. The loans were also easy to trade, so bankers could sell them to other investors.
However, more and more of the government's future income was already promised to these bankers. This meant the king had less and less money available for new needs.
When the Stop Happened
The stop happened very suddenly on January 2, 1672. The king announced that he would stop all payments on most of his debts for one year, until December 31, 1672. He said he would still pay interest on the outstanding loans, but only at a rate of 6%.
A letter from Richard Langhorne in January 1672 helps us understand why this happened:
- England needed to prepare 82 ships for a war against the Dutch Republic, known as the Third Anglo-Dutch War.
- The king asked the bankers for a new loan to pay for this fleet, but they refused.
- Because the king desperately needed money for the war, he and his advisors decided to use the money that was supposed to pay back old loans for the fleet instead. They would only pay the interest on the old loans, not the main amount borrowed.
- This decision caused huge problems in the financial world. Many people believed that the business of bankers was "totally destroyed" by this event.
The total amount of money the king owed was about £1.2 million. This was almost as much as the king's entire regular income for a whole year!
What Happened Next
The king originally planned for the stop to last only one year. However, he asked Parliament for new money to pay off the debts, but Parliament did not agree. So, the stop was extended, first to May 1673, and then to January 1674. By then, all the money that was supposed to be used to pay back the debts had already been spent by the government. This meant the stop became indefinite, with no clear end date.
Later, a new Lord Treasurer named Thomas Osborne (who became Earl of Danby) took charge of the king's finances. He wanted to bring order to the royal money. In March 1675, three years after the stop, the promised 6% interest payments finally began. After a careful check, the payments were adjusted in 1677 to include all the unpaid interest. These payments continued regularly while Danby was in charge.
However, after 1680, the payments became very unreliable. Between 1680 and 1685, only about half of the expected interest was paid. During the reign of King James II (1685-1688), even less was paid. Finally, when William and Mary became rulers, Parliament decided to use the money that was supposed to pay these old debts for new wars against France. So, the payments stopped completely.
The Bankers' Fight for Justice
The bankers who were owed money sued the government. This led to a very long court case called The Goldsmith Bankers case. It raised important questions about whether courts could force the king to pay his debts.
In 1692, the Court of Exchequer ruled in favor of the bankers. But the government immediately appealed. In 1696, a judge named Lord Somers overturned the decision, saying there were technical reasons. Many people felt this was unfair. The case then went to the House of Lords, which is the highest court. In 1700, the House of Lords ruled in favor of the bankers.
However, the order to pay the bankers said the money could only come from certain royal revenues that were "not otherwise disposed of or applied by Act of Parliament." The House of Commons then decided to use all of those revenues for current government spending.
Finally, in 1701, Parliament passed a law to settle the issue once and for all. The bankers would receive 3% interest each year, but only starting from December 1705. This interest would be paid only on the original amount of the loans from 1676, which was about £1.3 million. All the interest payments that were missed from 1680 onwards, including the interest from 1701 to 1704, would not be paid. The interest rate was later cut even further to 2.5% in 1716, and this debt became part of the larger British national debt.
What Were the Effects?
The Great Stop of the Exchequer had very bad short-term effects. Many bankers, like Edward Backwell and Robert Viner, went bankrupt. Lots of people who had trusted their money with these bankers lost everything.
One very important result of the Great Stop of the Exchequer was the creation of the Bank of England in 1694. The main reason for starting this bank was to help the government borrow money in a more reliable way. The bank lent the government £1.2 million. In return, the people who invested in the bank became "The Governor and Company of the Bank of England." They received special banking rights, including the ability to print money. The official permission for the bank was granted on July 27, 1694.
At the time, the government's finances were in such bad shape that they had to pay 8% interest on this new loan from the Bank of England, plus an extra £4,000 each year for managing the loan.
The creation of the Bank of England helped prevent future events like the Great Stop of the Exchequer. From then on, the British government became known for always paying back its creditors.
Historians say that the stop was a failure because it was something new for England. Other countries like France and Spain sometimes refused to pay their debts without too much trouble. But since the time of Queen Elizabeth I, the English Crown had a good reputation for paying its debts. Even though King Charles II was known for spending a lot and being careless with money, the bankers in London were completely shocked by the stop.
The king himself later said that stopping the payments was a "false step," meaning it was a big mistake.
Images for kids
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The sealing of the Bank of England Charter (1694)
