Sunday, April 17, 2016

The Second Hundred Years War and the Power of the Bond Market

In a few recent blog posts, I put forward my ideas as to which battles deserve a place on a list of the fifteen most decisive battles in world history. If any one of these battles had gone differently, the entire course of history would have been changed. However, it's important to remember that while history can sometimes be changed in a day, or even an hour, by the seemingly insignificant actions of a single individual, there are also very long arcs in history that have even more power. This is especially true when we try to comprehend the historically misunderstood subject of money. To illustrate this, consider the following story.

Between the ascension of King William III in 1688 until the final defeat of Napoleon at the Battle of Waterloo in 1815, Britain and France went to war with one another with grim regularity. They fought against one another in the War of the Grand Alliance from 1689 until 1697, in the War of the Spanish Succession from 1701 until 1714, the War of Austrian Succession from 1742 until 1748, the Seven Years War from 1756 until 1763, the American Revolutionary War from 1778 until 1783, the French Revolutionary Wars from 1792 until 1802, and the Napoleonic Wars from 1803 until 1815. The wars were waged not only in Europe, but on the high seas, in the Americas, in India, and among assorted islands and colonies across the globe. War between Britain and France during this time period was so common that some historians have taken to calling it the "Second Hundred Years War" and have compared the Franco-British rivalry to that of Rome and Carthage in ancient times.

The Second Hundred Years War began as a conflict over religion, with Catholic France pitted against Protestant Britain, and a struggle to contain the personal ambitions of King Louis XIV, the Sun King. Before too long, however, the struggle had morphed into a larger conflict over trade, empire, and which nation was to emerge as the global superpower. Britain and France fought each other during this time period basically because they were the two toughest kids on the block. Only one could be left standing in the end.

At the beginning of the struggle, intelligent observers probably would have given the more favorable odds to France. It had a larger population, superior resources, and a much more stable government. The mighty French army had been feared across Europe for centuries and it seemed posed to ensure French hegemony over the whole continent. The power of the French king was unchallenged when the Second Hundred Years War began. In the conflict's latter stages, in the person of Napoleon Bonaparte, the French army and state would be led by one of history's most brilliant generals and most effective rulers. Britain, by contrast, was emerging in 1688 from a period of social, religious, and political chaos and a bitter civil war between King and Parliament. It was only in 1707 that England and Scotland united, under dubious circumstances, into the United Kingdom of Great Britain. Subversion by Scottish Jacobites opposed to the Union would continue to be a problem for years, until finally crushed at the Battle of Culloden in 1746.

Nevertheless, when the end came in 1815, it was Britain that had emerged victorious from the Second Hundred Years War and France that lay prostrate in defeat. Britain became the undisputed global superpower for the next century, with an empire on which the sun never set. Today, English rather than French is the global language of business and diplomacy, and innumerable countries use political, economic, and legal systems derived from British rather than French models.

How did Britain do it? How did the weak and divided English, Scots, Welsh, and Irish triumph over the united power of France?

The valor of Britain's soldiers and sailors, as demonstrated in battles such as Blenheim, Quebec, Trafalgar, and Waterloo, certainly had something to do with it. So did the brilliance of statesmen like William Pitt and military leaders like the Duke of Marlborough, Lord Nelson, and the Duke of Wellington. But if you really want to know the answer, the place to look is the London establishment known as Jonathan's Coffee House. It had opened in 1680 and, very soon and without any planning, became England's de facto stock market.

When William III became King of England in 1688, he maintained his other position as Stadtholder of the Dutch Republic, simultaneously ruling both nations. The close relationship between Britain and the Netherlands during the early years of the Second Hundred Years War exposed the British to the revolutionary economic concepts and new financial institutions then emerging among the Dutch. In the 17th Century, the Netherlands had become the first nation to establish a central bank, the first nation to establish a stock market, and one of the first nations to establish a national lottery. The money raised, borrowed, and loaned out by these institutions helped propel tiny little Holland into the ranks of the great powers of Europe.

Britain followed the Dutch example. The Bank of England was established in 1694. By then, scores of companies were trading stock issues at Jonathan's Coffee House and, soon enough, other establishments. Chartered companies enabled an enormous boom in trade with the colonies in North America and the Caribbean, as well as with India and the Far East. Economic development throughout Britain and Ireland became possible on a scale never before imagined and such inventions as James Watt's steam engine and James Hargreaves's spinning wheel came into being due to an extensive system of financing.

This unprecedented economic boom, made possible by the financial institutions the British adapted from the Dutch model, allowed the British government to raise enormous amounts of money through the issuance of government bonds. The Royal Navy grew from a pathetically small force in the late 17th Century into a vast fleet of warships that dominated the globe by the early 19th Century, shattering French naval power at the Battle of Trafalgar in 1805. The British were not only able to field armies on the plains of Germany, in the mountains of Spain, and throughout the overseas colonies, but to subsidize continental allies like Prussia, Austria, and Russia to do their fighting for them. Without the revolutionary financial system that took hold during the 18th Century, none of this would have been possible.

The British did not so much outfight the French as out-finance them.

The French might have matched their British adversaries in financial innovation. The brilliant if roughish Scottish economic John Law immigrated to Paris in the early 18th Century and found himself appointed Controller General of Finances by the French government. He began to implement many of the financial practices which had been developed by the Dutch and were even then being put into practice by the British. But like a figure in a Greek tragedy, Law became arrogant and eventually went too far. In 1720, a Ponzi scheme he had set up surrounding the largely fictitious Mississippi Company came crashing down, instantly ruining the lives of thousands of Frenchmen. Law fled France and died in exile, while the French turned their backs on newfangled financial schemes for nearly a century. One wonders how different history might have been had Law been able to keep his head and bring about the creation of a sound financial infrastructure in France to match that of Britain.

The lesson of the British victory over the French in the Second Hundred Years War is that wars are won on the floors of the bond market no less than they are won on the battlefield. The power of a nation is to be measured not merely by the number of aircraft carriers or nuclear weapons they possess, but by the flexibility and reliability of their financial institutions. In an increasingly globalized and interdependent world, this lesson is one we forget at our peril.

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