Charles II was king of England from 1660 - 1685, when wooden sticks were being used as a form of money until the system collapsed. The story has obvious parallels to the modern world. Here it is.
While the Pilgrim Fathers were busy founding America their English puritan brothers were also shaking off religious oppression. By 1650 Oliver Cromwell had taken power for the people, chopped off the king's head, and in a familiar pattern was lording it over a parliament which he dissolved when it threatened to oppose him. He died passing power directly to his feeble son, apparently untroubled by charges of hypocrisy.
With Cromwell gone England decided that if it were going to have a king it ought to be a proper one. So Charles II was sought out and granted a restored throne in 1660, 11 years after his father's beheading.
The new king's powers were diminished. Much of what he needed to do now depended on the co-operation of parliament, so an uneasy truce prevailed. In particular the royal tax raising privilege had been lost, leaving Charles forever begging taxes from his new governing partners.
Legislating a tax was one thing; collecting it quite another. There were few useful records, there was no internal revenue service, and it was a job which would certainly require both local knowledge and the occasional use of force, now under the control of parliament too. So tax collection was enabled by a combination of privatisation and delegation. Parliamentarian intermediaries were allocated a region, and then would gather the money in that locality through their own initiatives. For their efforts they received a healthy cut, which helped to motivate them to keep authorising new taxes.
But there remained a problem of Charles' cash resources. Parliament met rarely, and the logistics of tax collection caused long delays. He was still struggling to pay the bills.
At about this time the financial development of London was getting underway. The goldsmiths - whose traditional role was the fabrication of jewellery and plate - were emerging from a number of potential candidates as the trade group which would evolve into modern bankers. Their success grew from the safekeeping role of their vaults through the uncertain period of the civil war, and also from the strength of London's position within growing European trade, with its frequent requirement to exchange foreign coin.
They soon found themselves able to lend as well, and from this they became the middlemen in a developing market in government debt.
It worked like this. Armed with parliamentary permission to raise taxes Charles immediately cashed in by selling specific future tax receipts to the goldsmiths, at a discount to the face value. The goldsmiths needed to be able to honour their private accounts, and unable to distribute the royal debt were rapidly insufficiently liquid to lend the king more. So it was arranged that the debt redemption would in fact be paid not specifically to the original goldsmith lender but to any bearer of the debt, thereby enabling the original lender to sell the debt on and replenish his cash, ready for the next royal loan.
The next problem was how to ensure the new bearer of the debt - not being the original borrower - could reliably identify the authenticity of the bearer debt. And here nature offered an ancient solution.
A piece of wood split down the middle will only match perfectly with its other half. So wooden sticks became a key component of English currency. The government's debt office took a nice looking hazel stick and notched across it various symbols which denoted monetary amounts borrowed and lent. The stick was then split down the middle, with each side showing one end of the notches. One side - which had a wooden handle known as a 'stock' - was held by the king's treasury, while the other was given to the goldsmith, who also got a piece of paper describing the date and circumstances of redemption.
The system was simple and effective. The goldsmith-bankers proved trustworthy. They generated liquidity by trading what were by now being called 'stocks' between themselves, and they solemnly placed all the wooden sticks in their own vaults, next to the gold and silver. They had good reason to remain honest as they were well placed in a profitable and rapidly growing market. For their part the wooden sticks thoroughly outwitted the forgers, and the king was the ultimate and trusted guarantor of all the debts.
It was the perfection of the system which ultimately caused its downfall, because it led to a market far bigger than was ever healthy. To begin with the supply of cash came from the goldsmith bankers themselves. Then, with caution, they let out a little of the money they held on private current accounts, knowing that their own personal credit would get them sufficient cash if ever they needed it to repay their depositors. Then they realised they could do better still by offering interest on private accounts held at notice, because the notice period would eliminate unanticipated cash calls. By paying interest they accumulated more public cash, and these funds were lent on to the king at an increasing rate.
Charles soon found he no longer needed to bother with parliamentary approval to raise taxes before issuing stocks, because he could sell it anyway, and from about 1668 it became generally accepted that the state's borrowings were secured by unspecified future taxes on the nation; an assumption which remains with us today.
The parliamentary brake on the speed of issue of this new monetary medium had now been sidestepped, and before long half of London was booming on credit evidenced by valuable broken wooden sticks. This was when things started to get harder.
As each tier of willing private depositors dried up it took another notch up the interest rate scale to squeeze out more of the public's cash. The goldsmiths could only offer to the king discounts which they could finance by attracting deposits, and by 1670 the king was having to accept as much as 10% per annum discount on the face of his 'stock' debts. Depositors were by now receiving 7% and the middlemen the rest.
By 1671 the system was hardly benefiting the king at all because redemptions were consuming all the cash subsequent issues could raise. He had sucked in all the private money he was going to get, so when at the year's end he demanded still more vital cash for his navy the bankers couldn't get it - at any price.
Annoyed, Charles conveniently remembered that the bulk of the loans which he had recently taken out had been at rates above the 6% limit permitted by his own usury laws. He declared the debts illegal and his own exchequer's payments stopped. This temporary action was enacted on 2nd January 1672, was extended after one year for another two, and after those two (subject to a few carefully chosen exceptions) it became indefinite.
The effect - often repeated since - was that those who lent to the state turned out to have accidentally provided all their carefully accumulated personal wealth as voluntary taxes. The goldsmiths were blamed. They were caricatured as greedy opportunists and damned by their once enthusiastic depositors. Eleven of the biggest 14 failed, leaving their chiefs variously (i) ruined, (ii) bankrupted (iii) on the run (iv) jailed or (v) dead.
The humble wooden stick never regained any credibility. It was doomed to lose out to its close cousin - paper.
Other articles in the Disastrous History of Money series include :-
