During the First World War, governments were financially strained to an unprecedented degree by the costs of war. Across Europe, governments introduced new taxes, including income taxes, suspended the link between gold and paper money, and raised new loans by appealing directly to the patriotism of the public. While these drastic maneuvers in times of total war are associated with the 20th century, they were all features of public finance in 1790s Britain, when war against revolutionary France seemed to acquire an existential importance and mammoth scale unseen earlier in the 18th century or even later in the 19th century. This forced the government to raise money by means of a ‘Loyalty Loan’ in 1796.
Before the War
Britain paid for its 18th century wars largely by borrowing. During the Seven Years’ War and American War of Independence, the government deficit would run £20 million in some years. New taxes played only a small role in funding wartime spending. The potential for large scale borrowing was the benefit of a comparatively advanced financial system and a government deemed creditworthy by the citizenry. Still, interest rates rose during war years, such as the American War of Independence.
To restore confidence in the public finances after that war, a sinking fund was established in 1786 to gradually repay the debt. The next seven years’ budget surpluses were applied towards the sinking fund; however, this was interrupted by the wars of the French Revolution. These wars were initially paid for in the traditional manner, with 90% of expenses between 1793 and 1798 covered by borrowing. However, maintaining this financial position became increasingly difficult.
Conditions were bleak in 1796. There was no sign of peace as nearly 100,000 were added to the ranks of the armed forces. There was insurrection in Ireland, mutiny in the Royal Navy, and discontent in the army and elsewhere. A run on the Bank of England was near at hand. Amidst these problems, prices for British bonds reached their lowest levels in a long time, even lower than at any point in the American War of Independence. The price of 3% government bonds hit a low of 53% of face value, implying a yield of 5.7%. Expensive borrowing was a problem as the national debt now exceeded £400 million.
Further, the budget situation required the raising of yet another large loan as the year came to a close. The Bank of England’s directors advised the Prime Minister, William Pitt the Younger, that raising such a loan by the traditional means of hiring agents to place it with investors would be expensive and unlikely to succeed. So, Pitt chose instead to open the loan to the broad public and appealed to patriotism to get it sold.
An £18 million loan was introduced in December 1796 and immediately came to be known as ‘the Loyalty Loan’. Investors received a bond of £112, 10 shillings face value for each £100 invested. The loan paid 5% interest which would start to accrue, not from the date of the investment, but from October 10, 1796, two months earlier. This entailed a high cost of borrowing relative to pre-war costs but no greater than the going market yields at the time.
The government may have counted on ‘loyalty’ to raise the money to some extent but also added other favorable features to the loan in order to encourage investors. It was irredeemable by the government for three years, meaning investors could be guaranteed interest for three years, even if the government wanted to repay it early. Also, once two years had elapsed after the signing of a peace treaty, investors could demand redemption after giving six months’ notice.
Investors were able to pay for their bonds in installments made either in cash or in certain existing bonds; 10% of the subscription amount would be due in installments in January, March, April and June 1797 and 15% in installments due July, August, September, and October that same year. Discounts of 3-5% annualized were given for paying early. In the end, the effort was a success.
The contemporary caricaturist James Gillray was always intrigued by the capacity of the government of William Pitt to use the war with France to bring about stunning political successes, and in this case a financial success. In his print ‘Begging no Robbery’, Gillray depicts Pitt along with his political allies Henry Dundas, William Grenville, and Edmund Burke, pointing guns at a passerby, the personification of England, John Bull himself.
A kneeling Pitt is shown asking for “a few bits of Money into the Hat” but is carrying in his back pocket a “Forced Loan in reserve” should his appeal for “Voluntary Contribution” not succeed. Pitt supported a forced loan, if necessary, as means of raising more money. It isn’t clear to what extent the threat of a forced loan may have encouraged orders for the Liberty Loan but at the time this was considered a possible factor in its success.
Pitt’s loan was successful in raising the required sum. In a different caricature by Richard Newton, Pitt is depicted sitting atop bags of money being carried into the Treasury. The bags list the orders made for the Loyalty Loan by various investors, from semi-public institutions like the East India Company (£2 million) and the Corporation of London (£100,000) to private individuals like the Dukes of Queensbury and Bridgewater (£100,000 each). Pitt’s political adversaries, wearing red caps in the style of French revolutionaries, look on from behind in anger and dismay, though some participated in the loan as well, as the Duke of Bedford had when he invested £100,000.
The Loyalty Loan opened for orders on December 2, 1796. Some £5 million was subscribed within one day and the entire issue was sold by midday on December 5. Besides the orders shown on Richard Newton’s print, the Bank of England took £1 million of the loan for itself, and the Bank’s directors individually subscribed for another £400,000.
“At ten o’clock this morning (Monday, 5th December) the parlour doors of the Bank were opened before which time the lobby was crowded. Numbers could not get near the books at all, while others, to testify their zeal, called to the persons at the books, then signing, to put down their names for them as they were fearful of being shut out. At about twenty minutes past eleven the subscription was declared to be completely full, and hundreds in the room were reluctantly obliged to go away. By the post innumerable orders came from the country for subscriptions to be put down, scarcely one of which could be executed; and long after the subscription list was closed persons continued coming and were obliged to depart disappointed. It is a curious fact, and well worth stating, that the subscription was completely filled in fifteen hours and twenty minutes, viz ., two hours on Thursday, six on Friday, six on Saturday, and one ditto and twenty minutes on Monday.”Annual Register, 1796, Part ii, Page 44
One of the figures depicted in Gillray’s print above, the politician and political philosopher Edmund Burke, had penned his ‘Third Letter on a Regicide Peace’ in support of the loan. Burke believed it was proper statesmanship to put aside ridicule of the persistent desire of accumulation to marshal the riches of the elite for the good of the nation, even if this meant paying a high rate of interest to induce that support. He opposed the imposition of a forced loan, considered by others like the Prime Minister as a possible option.
Burke explained that he “liked the loan, not from the influence which it might have on the enemy, but on account of the temper which it indicated in our own people”. Illustrating why he believed this was in fact a ‘Loyalty Loan’, Burke noted that it evidenced the country’s ability to rally around a common cause, its courage, conviction, and readiness to assume a considerable burden, and its confidence in the government.
However, the success of the loan was not yet completely secured. Since the bonds were not owned outright until all installments had been paid, subscribers received a ‘scrip’ to represent the installments they had paid and this scrip was traded on the open market and its prices can reflect confidence in the bonds. These went from trading at a small premium to a large discount, no less than 15.5%, by March 1797.
Depressed prices could potentially encourage investors to abandon their subscriptions by defaulting on the installments remaining after the first one in January. This would have meant forfeiting the bond but also would have preserved the capital they would have paid in the remaining installments. If the prices for bonds fell far enough, this could become an appealing option. However, due to patriotic spirit or otherwise, prices never fell far enough to trigger this behavior en masse.
In any case, the loan hardly paid for the entirety of the war, indeed not even a full year’s expenses. Taxes had to be increased as well; just two days after the subscription books closed for the Loyalty Loan, £2 million in new taxes were announced on everything from tea to sales at auction. Presaging the drastic financial effects of the world wars of a later century, the long wars against France forced substantial deviations from Britain’s 18th century financial orthodoxy as the gold standard was suspended in 1797, a suspension to last over twenty years, and an income tax was introduced in 1799.
Some holders of the Loyalty Loan put forward claims for a redemption after the Peace of Amiens in 1802, as the terms of the loan would have allowed had this been a lasting peace. Unfortunately, this turned out not to be that and the war in Europe, already underway for a decade would go on for another dozen years. In the end, Britain’s borrowing power was critical to achieving victory, not just in financing its own efforts in the war but also subsidizing those of its allies who had no comparable access to capital, however loyal their populace.
The £18 million loan of December 1796 could not have been sold by patriotism alone. The government must have earned the confidence of the public first; loyalty is a two-way street, as Burke described in his ‘Third Letter on a Regicide Peace’. Public borrowing is a means of diverting current production towards the state, vital in times of war but not always as enthusiastically received by the public as it was at the end of 1796. Given how dismal the year had been, this was hardly guaranteed but whether the result of parliamentary government or professional administration, the public maintained its confidence in the state.
More from the Tontine Coffee-House
Read about the sinking fund created by William Pitt in 1786, the role of a failed French invasion of Britain in 1797 in setting off the suspension of Britain’s gold standard, and how the caricaturist James Gillray portrayed this event. Consider subscribing to this blog’s newsletter here.
1. Bordo, Michael D., and Eugene N. White. “A Tale of Two Currencies: British and French Finance during the Napoleonic Wars.” The Journal of Economic History, vol. 51, no. 2, June 1991, pp. 303–316.
2. Collins, Gregory M. “Third Letter on a Regicide Peace and the Political Economy of England.” Commerce and Manners in Edmund Burke’s Political Economy, Cambridge University Press, Cambridge, 2020, pp. 509–513.
3. Earl Stanhope. Life of The Right Honorable William Pitt. Vol. 2, John Murray, 1861.
4. Gillray, James. “Begging No Robbery;-i.e.- Voluntary Contribution;-or-John Bull Escaping a Forced Loan.” Js Gy d: Et Fect / Pubd Decr 10th 1796. by H. Humphrey New Bond Street.
5. Newmarch, William. On the Loans Raised by Mr. Pitt during the First French War, a 1793-1801; with Some Statements in Defence of the Methods of Funding Employed. Effingham Wilson, Harrison, and Nissen & Parker, 1855.
6. Newton, Richard. “William the Conqueror’s Triumphal Entry!!!” London Pubd by W. Holland, 50, Oxford St Dec. 1796.