Economic Histoty Review, XLIX, 3(1996), pp. 473-490

Gold, silver, and the Glorious Revolution: arbitrage between bills

of exchange and bullion’ By STEPHEN QUINN

etween 1688 and 1700 England’s monetary system suffered a deep crisis. B Coins were clipped and silver was exported. The price of gold coins increased by 40 per cent while the value of the pound collapsed on the international exchanges. These conditions resulted from a process of arbitrage between bills of exchange and bullion following the exogenous shock of financing England’s entry into the Nine Years War in 1689. Arbitrage between bills of exchange and bullion rather than arbitrage between gold and silver formed a mechanism whereby shocks to international exchange rates were transmitted to England’s monetary stock. This article presents market behaviour consistent with arbitrage between bills and bullion that marks a degree of international market integration during the late seventeenth century which has been statistically verified only for the eighteenth century. The micro-level financial innovations necessary for this successful arbitrage are then examined in the actions of a prominent London banker.

A result of arbitrage between bills and bullion was an international flow of one metal with no offsetting flow of the other. Although other authors have considered the interplay between bills and bullion at this time, they do not develop explicitly the interaction of the three markets in an explanatory framework.2 Hence, the period has lacked a single, consistent framework for reconciling times of gold inflows into England with times of silver outflows. Clarifying how international markets transmitted shocks explains the crisis that followed the Glorious Revolution and led to permanent changes in England’s monetary regime. England had been on a silver standard for centuries prior to the 1690s. In response to gold’s high price and silver’s massive exportation, Parliament legally set a unit of account value for gold coins which marked the beginning of a bimetallic regime that lasted for over a c e n t ~ r y . ~ The results of arbitrage were a precondition for this political a ~ t i o n . ~ Along with a bimetallic standard (both silver and gold

I wish to thank David Mitchell, Larry Neal, D. W. Jones, Warren Weber, John McCusker, Ann Carlos, Lynne Kiesling, the London School of Economics Quantitative Methods in Economic History workshop, and the Northwestern, Indiana, and Illinois Economic History workshops. This research was supported by the Social Sciences Research Council of the US.

Horsefield, British monetary experiments, p. 79; Jones, War and e c m y , pp. 69, 80-2, 122-4. Flandreau is developing a similar mode of analysis: M. Flandreau, ‘Adjusting to the gold rush: endogenous bullion points and the French balance of payments, 1848-1870’, working paper (Institut OrlCanais de Finance, Paris, 1995).

Redish, ‘The gold standard in England‘. Li, Great recoinage, p. III.

0 Ecamnu: Hulay Socicry 1996. Publuhed by BtackweN Publshm, 108 Cow@ Road, Oxford OX4 IJF, UK and 238 Main Sfreer, Combndge, MA 02142, USA.

474 STEPHEN QUINN

coins having set unit of account values), the adjustment mechanism of arbitrage between bills, gold, and silver persisted into the eighteenth century. Later shocks to exchange rates would continue either to push gold into England or to pull silver out, and either event promoted gold’s growing role in England’s money supply.

The viability of arbitrage between bills and specie depended on the ability of early modern financiers to connect international markets with the domestic monetary stock. Market integration required innovative banking, so large- scale arbitrage between bills and bullion marked the degree of sophistication acquired by England’s private intermediaries during the financial revolution. As an example, this article presents the experiences of London goldsmith- banker Stephen Evance, a conduit through whom gold entered and silver left the domestic English economy. Evance participated in the flow of bullion when arbitrage returns were available. He also engaged in activities that complemented arbitrage opportunities-remitting funds to the English troops in Flanders and investing in English government debt. These activities permitted him to repatriate bills generated by arbitrage.. The ability of bankers such as Evance to link complementary financial services explains why the integration of London into international markets shown quantitatively for the eighteenth century can be extended back into the ~eventeenth.~

I

International bills of exchange were orders to pay denominated in foreign money and payable in a foreign port. Acting much like travellers’ cheques today, bills saved merchants the expense of moving bullion. Bills of exchange were the dominant means of international payment in the seventeenth century, and their exchange rate was the effective rate of exchange for most commercial activity.‘j Treating bills of exchange as a substitute for specie introduces arbitrage between bills and bullion. Gold and silver were higher cost substitutes for bills of exchange, so the exchange rate for bills is treated as the first step in the process of market adjustment.’ Balance of payment shocks altered the exchange rate for bills. Arbitrage between the bill, gold, and silver markets then transmitted shocks to the bullion markets of early modern England.

The price of gold relative to silver is traditionally characterized as the ratio of the price of a unit of gold to that of the same unit of silver. Taking London and Amsterdam as examples, the English gold to silver ratio was 15.58 to I and the Dutch ratio was 14.93 to I in 1 6 8 8 . ~ These calculations assume arbitrage based on the heaviest traded Dutch silver coins and provide

Schubert, ‘Arbitrage’; Neal, Financiat capiialism. van der Wee, ‘Money, credit and banking systems’; Kerridge, Trade and banking. ’ For reasons of bulk, protection, and legal constraints, bullion had higher transport costs than bills.

* These figures agree with Jones, War and ecmwmy, p. 69. In the early modern period, silver coins dominated small value transactions: Supple, Financial crisis.

0 E c m r c H l r ~ Socrew rpy6

GOLD, SILVER, AND THE GLORIOUS REVOLUTION 475 conservative estimates of arbitrage returns.Y Table I rearranges gold and silver prices by metal rather than by city, thus allowing direct comparison with the exchange rate on bills of exchange. The exchange rate of a precious metal is the ratio of that metal’s prices in two countries. Continuing with the Dutch and English example, the exchange rate using gold guineas at 21s. 6d. was 36.87 S/& (Dutch schellingedEnglish pound) and the exchange rate using the mint price of English silver was 38.46 S/&.’O Silver’s stronger exchange rate, from the English perspective, tells the same story as the gold to silver ratios. English silver bought more schellingen than English gold did. In contrast, Dutch gold bought more pounds than Dutch silver did. This difference between gold and silver exchange rates produced potential arbitrage opportunities.

Table I . Coins, gold to silver ratios, and specie exchange rates between London and Amsterdam, 1688

Coin Ounces Troy Value ‘P‘ Nature of coin value pure metal

Dutch rixdollar 0.7757 silver 8.33 schellingen Mint Dutch ducat 0 . 1 ~ 1 gold 17.5 schellingen Market English shilling 0.1790 silver €0.05 Mint English guinea 0.2471 gold fI .075 Price floor

(= 21s. 6d.)

Gold to silver ratios for Amsterdam and London Schellingen per pmnd exchange rates by metal

17.5 s 0 2471 02 Gold S/f = __- * = 36.87 SJE Gold 17.5 S * 0.7757 oz.

Amsterdam ~ Silver 8.333 S 0 . 1 ~ 1 02. 14’93 - ___=

€1.075 0.1091 oz.

8.333 S o 1 7 9 0 0 ~ . Silver S/f = __ * L.-- - - 38.46 Sif Gold €1.075 o 179002 London __ - __ * -’-: - - - 15.58 Silver E0.05 0.2471 oz. f.O.05 0.7757 02.

Sources: for Dutch coins, McCusker, M a e y and erchnnge, pp. 9, XI; Posthumus, Hislory of prices; for English coins, Feavearyear, Pound srerling, pp. 435-6. Cf. Jones, War and econmny, p. 69.

The gap between these gold and silver exchange rates, however, was not likely to induce arbitrage. The gold exchange rate was 4.3 per cent below the silver exchange rate, assuming minimum gold and silver prices in London. Jones estimates the transport costs to have been around 1.5 per cent.” A round trip would then cost 3 per cent for transport. The Amsterdam Exchange Bank (Wisselbank) charged a fee of between 0.5 per cent and I per cent to change foreign coins or bullion into Dutch coins.” Fees charged by English banks for changing coins ranged up to 1.5 per

In particular, I use the rixdollar instead of the florin (guilder) in concert with Jones, War and economy, p. 69; McCusker, Money and exchange, p. 4; and Conduitt, ‘Observations’, pp. 189-90 using the Dutch silver ducatoon. Using the florin or the even more debased schellingen (Jones, War and economy, p. 1 4 ) would increase the silver mint exchange rate and bias results more in favour of arbitrage returns.

Jones, War and economy, p. 69, estimates these exchange rates as 1.5% lower. The discrepancy arises from my adjustment for the fineness of Dutch coins.

Jones, War and economy, p. 123. l 2 van Dillen, ‘Bank of Amsterdam’, p. 92.

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476 STEPHEN Q U I N N

cent.13 The total cost of exporting silver from England and then importing gold from Amsterdam was 4 per cent under the conservative assumption that money changing expenses were only 0.5 per cent in both Amsterdam and London. At best, gold-for-silver arbitrage would clear 0.3 per cent per round trip. The few surviving records of prices for silver bullion in England suggest that silver prices were sufficiently above mint to exclude these bullion arbitrage opportunities. l4

Seventeenth-century financiers, however, considered the attractiveness of gold and silver as means of payment relative to the exchange rate offered on bills of exchange. If the exchange rate for bills (9s) fell below silver’s, a merchant in London would gain more purchasing power in Amsterdam by exporting silver than by buying a bill of exchange on Amsterdam. Since a weak pound meant a strong schelling, a merchant in Amsterdam would prefer to purchase a bill on London as the bill exchange rate weakened (S/& fell). In contrast, when the pound’s exchange rate was relatively strong, merchants would prefer to send gold bullion to England rather than purchase expensive bills of exchange on London. A strong pound exchange rate on bills encouraged the importation of gold into London and a weak rate correspondingly encouraged the exportation of silver. Moreover, arbitrage between a precious metal and bills of exchange could produce flows of one metal with no offsetting flows of the other.

Following the Glorious Revolution, arbitrage opportunities resulted from the pressures of war financing. Recurrent military remittances increased the supply of pounds in London seeking bills of exchange payable in the Low Countries. This military supply of pounds, in turn, weakened the English pound on the foreign exchanges.” Because Amsterdam was the hub of northern Europe’s bullion trade and at the centre of William 111’s remittance programme to the continent, and because Evance’s book recorded transactions in London, only exchange rates between England and Holland will be examined in this articie. Dutch exchange rates were originally priced in terms of schellingen bunco (bank money) because all bills of exchange over 300 gilders (1,000 schellingen or approximately E27) had to be cleared through the Amsterdam Exchange Bank. l6 I have converted the DutcWAnglo exchange rates from banco values to current Dutch values by means of the market determined premium, called the agio, that bank money enjoyed. l7 Figure I presents available observations of the exchange rate for bills (schellingen per pound) between London and Amsterdam from 1685 to 1696. The deterioration of the pound from the mid-1680s to 1694 is evident, while its collapse in 1695 is truly extraordinary. The weakening pound exchange rate reoriented market incentives from importing gold into England to exporting silver from England.

l 3 Mitchell, ‘Mr. Fowle pray pay the washwoman’, p. 33. l4 McCusker, Monty and exchange, pp. 13-4. I s England’s war financing was an important but by no means the sole shock on exchange rates. The

I‘ Assar, ‘Bills of exchange’, p. 105. l7 McCusker, Money and exchange, pp. 46-8. For months with no ugio observations, estimates have

French called up their silver by 10% in 1689: Li, Great recoinage, p. 5 5 .

been averaged from the nearest observations. Q E C O M ~ K Htsmy S o ~ q 1996

GOLD, SILVER, AND THE GLORIOUS REVOLUTION 477

1685 1686 1687 1688 1689 1690 1691 1692 1693 1694 1695 1696

Silver Mint ~ - - - - - Gold Price - Guinea Exchange - Amsterdam on Floor Rate London

Figure I . Bill, gold, and silver exchange rates, 1685-1696 Source: see text

The deteriorating exchange rate for bills followed the shock of war finance beginning in 1689. Gold and silver prices had to adjust for the precious metal exchange rates to maintain parity with the exchange rate for bills. International markets for bullion and bills cleared and eliminated arbitrage opportunities only when financiers found all three competing exchange rates within specie points. For unfettered markets, this process would be straightforward. Traders responded to the weakened pound exchange rate with increased demand for substitutes for debt-gold and silver. The increased demand for precious metals brought higher bullion prices in London. In Amsterdam, the same shock began as an increased demand for schellingen in the bill of exchange market. The strengthened schelling encouraged the substitution of bills of exchange for gold or silver as a means of international payment. Falling precious metal prices in Amsterdam and rising gold and silver prices in London moved the exchange rates towards equilibrium.

Because we lack bullion price series for Amsterdam, I assume that the cross-price elasticity of the gold ducat from changes in the English gold guinea was relatively inelastic.** Amsterdam was the centre for northern Europe’s bullion market while London was a peripheral market, so English trade would have been a much smaller portion of Amsterdam’s market than Dutch trade was of London’s. Although Amsterdam prices could move from the 105 stivers reported for 1688 in table I, the bulk of price adjustment would occur with the English prices. England’s domestic legal environment, however, imposed limits on the prices and movements of domestic coins,

** In April and May 1688, I calculate that Evance sold ducats at 105 stivers, which agrees with prices used by McCusker, Monq, and exchange, p. 11, and Conduitt, ‘Observations’, pp. 189-90. 0 Economic Hisray Society 1996

478 STEPHEN QUINN

so the mint values of coined precious metals interrupted the equilibration of bullion markets relative to exchange rates. These constraints on prices for England’s gold and silver specie created large bullion flows.

Table 2. Total gold minted by year at the Royal Mint, London, 1684-1696

Year f Gold Year L Gold

1685 564404 1692 120,223 I 684 319,220 1691 57,222

I 686 624,2 I 8 I693 54494 1687 421,370 1694 64,780 1688 589,375 1695 7531079 1689 1349864 1696 145,548 1 6 9 5IJ59

Source: Craig, The minl, p. 416

From 1685 to 1688, the bill exchange rate exceeded the guinea exchange rate because a guinea price floor of 21s. 6d. prevented the guinea from falling further in price. Consequently, the strong pound in the bill of exchange market attracted gold from overseas to the English bullion market and thence into the mint. During those four years, the English mint processed S2.225 million worth of gold, a level that easily exceeded any other four-year period in the seventeenth century.” Figure I presents the exchange rate for gold guineas, and the guinea’s price floor is represented by the horizontal dashed line at 36.86 S/& (see table I ) . Because the vertical axis is measured in S/&, the price floor appears as a ceiling since the pound strengthens as the value of the ratio falls. The strong exchange rate and the pinning of the guinea’s price at its floor are evident throughout 1 6 8 8 . With such a strong pound exchange rate, Dutch gold prices may have risen, and the guinea exchange rate should therefore be viewed as a lower bound. The large flow of gold during these years, however, indicates that substantial returns to shipping gold did exist.20

The exchange rates before mid-1688 drew gold into domestic use in England by creating arbitrage returns. In May 1686, the importation of gold into England followed by the exportation of debt (by way of bill of exchange) produced per annum returns ranging from 10 per cent using my conservative assumptions to 30 per cent using exchange rates found in Jones.21 Table 3 provides the breakdown of my calculations. I have taken shipping time to be one week. Transport between London and Amsterdam could occur within a few days, so the term arbitrage is used within the context of seventeenth-century travel and communication times.22 The rate

l9 Craig, The mint, p. 416. zo The year 1695 also had a large spread between the exchange rares for gold and bills, and a large

influx of gold into the English mint. 21 Jones, War and economy, p. 69, places the mint gold exchange rate at 36.28 S / E based on fine gold

rather than pure gold. For the period 1686-June 1688, only May 1686 and May 1687 supply observations of the exchange rates for bills in London on Amsterdam.

zz Schubert, ‘Arbitrage’, pp. 6-7. 0 Ecaattc H r s ~ y Smug 1996

GOLD, S I L V E R , AND T H E G L O R I O U S R E V O L U T I O N 479 of return calculations assume 1.5 per cent transport The rates of exchange on bills of exchange between Amsterdam and London were quoted as due in one month (usance). Unlike the speculation involved with changing and then rechanging a bill (called dry exchange), the returns to arbitrage with bullion were locked in when the bill was written.24 In May 1687, the per annum returns to gold/bill arbitrage had fallen to 5 per cent as a lower bound and 23 per cent as an upper bound assuming 10 round trips per year.25 In contrast, the implicit annual rates of return on the re-exchange of bills over the same period ranged from plus 8 per cent to minus 3 per cent.26 Exporting gold to England in trade for bills of exchange offered much better returns than an alternative investment strategy of the dry exchange of bills.

Table 3. Gold bill arbitrage returns, May 1686

Initial investment I ducat (gold) = 17.5 schellingen Gold from Amsterdam to London I week with a gold exchange rate of 36.87 Slf (guineas at 21s. 6d.; see table I)

less transport cost of 1.5% fo.4675 * 0 . 0 1 5 = fo.0070

17.5 V(36.87 SIE) = €0.4746

E0.4746 - fo.0070 = E0.4676

Bill fiom London to Amsterdam 4 weeks with a bill exchange rate, London on Amsterdam, of 37.8 SIC

E0.4676*(37.8 S/f) = 17.6715 schellingen

36 schellingen banco and an agio of 5%, so (36 Sb/f)*(I.o5) = 37.8 S/E

Net return

Rate of return in 5 weeks

Annual rate of return

17.6715 - 17.5 = 0.1715

(17.6715 - 17.5)/17.5 = 0 . 0 ~ 9 8

(I + 0.98)’~ = 0.1024

0.1715 schellingen

0.98% in 5 weeks

10.24% per annum

Sources: see text

The exchange rate stopped attracting gold to London as the price of bills fell to between 37.4 S/& and 36.8 S/&. By August 1688, the exchange rate for bills was down to 36.45 S/& and below the specie point threshold for importation. The annual returns to goldlbills of exchange arbitrage disap- peared by conservative estimates and had fallen to 5 per cent in June 1688 under more generous assumptions. Section I1 will report a matching diminution of Evance’s importation of gold in 1688. The falling bill exchange rate explains why the flow of gold into England decreased to a trickle over the half-dozen years following I 688, despite England’s higher mint valuation

23 Jones, War and economy, pp. 123-4. 24 See de Roover, ‘What is dry exchange?’. 25 In May 1687, the gold exchange rate was 36.8 SiE (36.22 SlE for Jones) and the bill exchange rate,

in London on Amsterdam, was 37.53 S/E after adjusting for an agio of 5%. 26 A negative rate of return on credit re-exchange occurred when the pound fell during the month

between the drawing of the bill in Amsterdam and the bill’s acceptance in London: de Roover, ‘What is dry exchange?’. 0 Economic Histmy Smiety 1996

480 S T E P H E N Q U I N N

of gold to silver relative to the continent (recall figure I). The exchange rate for bills fell from a high level to within gold’s specie points.

Considering the exchange rate for bills in tandem with gold and silver also explains why so much silver began to be exported from England from 1689 and continued to leave until the great recoinage in 1696. The demand for silver bullion, as a substitute means of international payment, increased as the pound exchange rate for bills of exchange weakened. The strong schelling rewarded the export of silver from London in trade for bills of exchange from Amsterdam. As supporting micro-level evidence, section I1 will show that Evance’s bullion business responded to the changing arbitrage incentives in 1688 and 1689. Evance switched from the importation of gold to channelling silver purchases from a large number of customers into exports to a few international buyers.

The limited available evidence shows that the price of silver bullion in London increased by substantially more than the price of gold did. Only in January 1695 does the situation suddenly reverse. By November 1691 and January 1692, silver was 2.4 and 2.8 per cent above mint price while guineas were only 0.6 to 1.2 per cent over 21s. 6d. a piece.27 This suggests that the English silver was under more export pressure during the war years than gold was. Moreover, the premium on silver bullion after 1688 was persistently dampened by the flow of silver supplied from coins. England’s silver standard fixed the price of coins by setting them as numeraire.28 When the weakening pound increased the demand for silver, the price of English coins could not go up as the price of silver bullion or gold had. As a consequence, tremendous quantities of silver left the stock of circulating coins. Exporting English coins was illegal. Melting them into bullion for export was also illegal, but silver from English coins could be reshaped into the appearance of bullion of foreign origin which could be exported.29 The supply of silver out of the coinage reduced the price of silver bullion towards the fixed price of silver coins and extended the period of arbitrage returns.

We have a loose measure of how much silver left the stock of English coins of that metal because most of it was extracted without melting down the coins. Rather, England mitigated the demonetization of its money supply by lipp ping.^' This article does not attempt to explain why clipped coins circulated at full unit of account value but simply accepts that they did so

27 These calculations use silver bullion prices from McCusker, M a q r and exchange, pp. 13-4, and guinea prices from the ledgers of Sir Francis Child at the Royal Bank of Scotland, London, CHI19411.

28 Feavearyear, Pound sterling. 29 ‘For this practice of melting down our silver coin, there is another lure, which, perhaps, the most

tender conscience can hardly withstand: and it is when 7, 8 or 10% may be got in a few hours, by throwing the milled Crowns and half Crowns into the melting pot, and casting them in imitation of Spanish or foreign bars.’: Haynes, Brief m i r e s (B.L., Lansdowne MS 801).

30 Although clipping effectively raised the price of domestic silver coin under the regime of a silver standard, no new silver coins could join the ranks of the clipped. Silver coins minted after 1663 were milled with marked edges which made clipping obvious. Milled silver coins were treated as bullion by the public and stopped circulating as money after issue. In contrast, the clipped coins circulating under William III were from the Tudor and early Stuart years when coins were minted by hammering. Hammered edges were not uniform and were easily shaved. Clipped hammered coins remained in circulation. The great recoinage of 1696 ended most clipping because hammered coins were replaced with milled coins.

0 ECMK Hirw Soclew 1996

GOLD, SILVER, AND THE GLORIOUS REVOLUTION 48 1 Table 4. Extent of clipping and effective silver coin exchange rate

Year Weight of average clipped coin as YQ of Effective silver exchange rate of clipped full mint weight coins (SK)

1685 87 33.37 1686 88 34.03 1687 87 33.62 1688 85 33.52 1689 84 32.27

1691 79 30.27 1692 73 27.98 I693 67 26.63 I694 60 23.10 1695 51 19.44 1696 45 17.29

I 6 9 81 31.18

Source: Haynes (B.L., Lansdowne MS 801)

until 1695.~~ The result of reducing the silver content of a coin while keeping the unit of account value constant was to increase the effective price of silver remaining in coins. The less silver a coin retained, the higher the price of silver bullion needed to threaten demonetization. The increase in clipping from year to year has allowed Jones to conclude that between 1689 and 1695, 8,402,078 ounces of silver were exported from England while 9,174,220 ounces of silver were lost from coin over the same period.32 ‘So the amount exported is large enough to account for the bulk of loss through clipping from silver.’33

Table 4 converts the average annual bag weight and exchange rate for clipped coins based on their reduced metal content.34 The weights of the bags indicated a lightening of the coinage as early as the summer of 1689. The summer of 1690 brought an acceleration of content loss. Table 4 also plots the exchange rate for full weight silver coins of 38.46 S/& (see table I ) along with the worsening pound exchange rate for bills. The expanding gap between the exchange rate for bills and the silver mint exchange rate rewarded clipping and silver export, while the collapsing content of the coinage over the course of the war kept clipped coins in circulation. Moreover, the acceleration of clipping did not cause a falling exchange rate for bills. Rather, the silver released from the shrinking coins acted to buoy the exchange rates (S/&) for gold and bills. As the supply of silver from coins reduced the price of English silver bullion, demand for silver’s substitutes lessened. For those exporting silver to capture arbitrage returns,

31 ‘Within half a dozen years after the Revolution, there was scarce a single hammered shilling or half Crown to be met with in any sum of money, but what was extremely clipped and diminished. Yet still such pieces were received and passed as current, as when they were of full weight and value; this encouraged the clippers who increased their numbers and their diligence, and vended the money they had clipped in all places without any check or fear from the laws.’: Haynes, Brief memoires (B.L., Lansdowne MS 801).

32 Jones, War and econony, p. 231. 33 Ibid. 34 Samples of bags collected by the Excise for tax payments were weighed in July of each year from

1685 to 1696: Haynes, Brief manoires (B.L., Lansdowne MS 801). 0 Economic Hismy S&IY 1996

482 STEPHEN Q U I N N

the return of the silver’s value would have been in the form of a demand for bills payable in London in pounds. The exchange rate for bills weakened in spite of the tremendous outflow of silver.

Arbitrage transmitted the shock of war remittances on exchange rates to England’s domestic monetary stock. The relevant arbitrage opportunities were between bills of exchange and bullion rather than between gold and silver. With the entry of England into the war against France in 1689, the exchange rate fell from a position of strength that drew gold into England to one of such weakness that silver began to be exported. A price floor on gold and a fixed price for silver increased the flow of bullion. The integration of these international markets is evidence of the innovations in London’s private banking system during the Financial Revolution. The effectiveness of late seventeenth-century arbitrage implies the existence of a range of supporting financial services which are addressed in the following sections.

I1 The goldsmith-banker Stephen Evance was a key figure in bullion’s

journey in and out of England that made arbitrage possible. Under a strong pound, Evance collected gold from foreign merchants. In contrast, he and other such intermediaries collected silver expropriated from English coins with its higher valued use in foreign exchange when the pound was weak. Evance’s experiences characterize the micro-level responses of London’s bankers to the shocks occurring in the international market for bills of exchange. His activities not only illustrate how late seventeenth-century financiers moved large quantities of precious metals to secure arbitrage opportunities, but also suggest that northern Europe’s financial markets were well integrated at an earlier date than those for which data have permitted statistical confirmation. 3s

Examination of Evance’s bullion business over the critical period surround- ing England’s entry into the Nine Years War reveals that he changed his behaviour in accordance with the falling exchange rate of the pound. Bullion book 5 covered Evance’s bullion transactions from March 1688 to September 1690-the period when the pound exchange rate fell from a very strong level.36 Over the period, Evance purchased about &550,000 worth of silver and gold in roughly equal portions. Entries in which the share of each metal was not noted have been collected into a separate category called ‘gold and silver’, which remained unremarkable at about 15 per cent of either of the larger series. Figure 2 compares the net flow of each metal per month (purchases by Evance minus sales). Evance’s acquisition of gold in 1688 was very large, but the rate of collecting gold slowed after September 1688. A lesser change also occurred after September 1689. The deceleration of gold stock growth fits with the argument that the falling exchange rate for

35 Neal, Financial capitalism. 36 P.R.O., Chancery 114179. Evance was in partnership with Peter Percival at the Blackboy in

Lombard Street by 1677 and until at least 1697: Heal, London goldsmiths; Hilton-Price, Handbook of London bankers. Evance was also a large stock holder in the Hudson’s Bay Company: Carlos and Van Stone, ‘Hudson’s Bay Company’.

0 Ecaanu H u w Sociory 1996

GOLD, SILVER, A N D THE GLORIOUS REVOLUTION 483 - - - - Silver

Gold

- Gold and silver

41

Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep

Year 1688 1689 1690

Figure 2 . Evance’s monthly net purchases, March 1688September 1690 Source: P.R.O., Chancery 114179, Bullion book 5

bills choked gold imports. Evance accumulated gold because a banker had any number of domestic uses for the precious metal. Another goldsmith- banker, Sir Francis Child, kept a 50 to 60 per cent reserves to liabilities ratio during these years.37 It is not possible to measure the total size of Evance’s business, but if he kept similar reserve levels he would have held a considerable stock of bullion.

Unlike gold, Evance sold silver in levels comparable to his purchases.38 Examining the records of his customers reveals that he acted as a silver middleman for them.39 As the exchange rate for bills fell in the early 1690s~ Evance purchased silver from one set of customers and sold silver to another set. Moreover, those buying silver were often the same merchants who sold gold to him when the pound’s exchange rate was strong. For example, Evance’s largest bullion clients, as individuals and certainly as a group, were Sephardi Jews, who were major participants in the international bullion market centred in Amsterdam.40 The bullion transactions of a few Sephardi merchants, David Penso, Jacob Gabay, Gomes and Alfonso Rodriguez, and Joseph Beuno Henriques and Peter Henriques have been reconstructed, and

37 Quinn, ‘Tallies or reserves’. 38 The spike in the summer of 1689 was created by a fy,m loan of pieces of eight and an f8,7oo

loan, also in foreign coin, to the Crown in July of that year: Calendar of Treasury Books, IX, pp. 40, 4. 39 While Evance was also involved in occasional shipments, the volume of the freight entries cannot

account for the bulk of his bullion business. Israel, ‘Dutch Sephardi Jewry’, p. 530.

484

7 STEPHEN QUINN

- - - - Silver

I Gold

1 5 1 , I I I I I I I I I I I I I I I I I I I I , I I I I , I I 1

Mar M a y jul Sep Nov Jan M a r M a y Jul Sep Nov Jan M a r M a y Jul Scp

I688 I689 1690 Year

Figure 3. Net change in Evance’s stock from selected Sephardi merchants N o w Sephardi merchants are David Penso, Jacob Gabay, Comes and Alfonso Rodriguez, and Joseph Beuno Henriques and Peter Henriyues Source: P.R.O., Chancery 116179, Bullion book 5

the results are shown in figure 3.41 Individually, all these merchants’ accounts behaved very similarly. Figure 3 plots Evance’s monthly net purchases from these merchants. As a group they sold him large quantities of gold, &45,468 worth or 30 per cent of his accumulation in 1688. They sold Evance virtually no gold after 1688, and this corresponds with the timing of gold arbitrage presented in section 1. Taken together, the accounts of these merchants represent an important supply of gold that ended in 1688. Moreover, the change in the behaviour of the Sephardi merchants matched the beginning of Evance’s overall slowdown in gold acquisition. In sharp contrast, the Sephardi group began to buy silver in 1689 and continued in 1690. By September 1690, they had purchased f61,102 worth of silver from Evance. These names account for about 30 per cent of his silver sales. The silver purchases of the Sephardi merchants corresponded with the expected exportation of silver as the exchange rate for bills fell.

Various other pieces of evidence also link Evance’s customers with bullion shipments. A House of Commons committee blamed Jewish merchants for silver exports. On 7 May 1690, the committee reported that seven-eighths of the silver exported from England had been carried away by Jews.42 Some evidence also exists in London of the overseas connections of Evance’s

4 1 It should be noted that all four were leading members of the synagogue on Creechurch Lane,

42Joumal of the House of Commons, reproduced in Li, Great recotnage, p. 5 5 . London, and undoubtedly knew each other: Hyamson, Sephurdim of England, pp. 68, 422-3, 427-9.

0 EC-K Hislory S m r y 1996

GOLD, SILVER, AND THE GLORIOUS REVOLUTION

August 1690

485 Table 5 . Evance’s bullion transactions by metal and named entry, March 1688-

Sales

Silver Average f sum f No. of observations

Gold Average f Sum E No. of observations

named unnamed 808 265

142,253 721637 I 76 274

named unnamed 239 70

2,638 3,260 I 1 46

total

478 214,890

450

total

103 5,898

57

Purchases

named 463

119,097 257

unnamed tom1

I24 171 124,058 230,701

998 1,346

unnamed total 117 262

107,960 227,057 609 866

Source: P.R.O. Chancery 11dr79, Bullion book 5

Jewish and there are records in archives in the Low Countries of bullion shipment by his customers. One of them, Alexander Henderson, appears in the records of the Amsterdam Exchange Bank (Wisselbank). Between November 1689 and August 1690, Henderson purchased &I 1,500 worth of silver from Evance in harmony with possible arbitrage behaviour. Over the period February 1689 to August 1690, Henderson supplied the Wisselbank with f7,joo in specie.44 The bank’s records do not distinguish between gold and silver, nor does the &7,500 match the &11,5oo worth of silver Henderson purchased from Evance in London. However, Henderson was clearly active in both the London and Amsterdam bullion markets; he purchased silver in London and sold specie in Amsterdam.

The behaviour of most of Evance’s other customers differed greatly from that of the merchants mentioned above. The others supplied him with both gold and silver.45 Table 5 separates named and unnamed entries by the average transaction value and the number of transactions for each metal. Roughly 70 per cent of the bullion entries lack a name in the description. The transactions without names tended to be much smaller than the named ones. Certainly some bias existed towards not bothering to record the customer of a small transaction. Yet, many small transactions were named and entries worth thousands of pounds were anonymous. The smaller, unnamed transactions account for about half the pound value of Evance’s bullion purchases. Larger, named transactions represent two-thirds of his silver sales.

From table 5 and the activities of important merchants, a pattern of

43 In 1695, Peter Henriques sold Sir Francis Child two bills of exchange on Amsterdam: Child’s ledger (Royal Bank of Scotland, London), CHl194hr. Gomes Rodriguez ran a cash account with a Lombard Street banker named Edward Backwell which portrays Rodriguez as a very busy international merchant in both bills and bullion. Samples of Gomes Rodriguez’s account were taken from Alderman Edward Backwell’s ledger ‘S’, fos. 40, 303, 406, 412, 551, 583, 589: Royal Bank of Scotland archive, London, EBB.

Wisselbank ledgers (Amsterdam Municipal Archives, 5077/4): 79, 583 florins bunco exchanged at 35 Sblf.

45 Evance’s loans of f35,ooo to the Exchequer in July 1689 are omitted because they were clearly for international military payments. 0 E C ~ K History Smr@ r9y6

486 STEPHEN QUINN

Evance acting as a silver middleman is evident. He bought silver from the many and sold silver to the few. The merchants purchasing silver did so when the exchange rate for bills fell. While the pound was strong, however, Evance purchased gold in large quantities from a cadre of international merchants capable of exporting precious metal. His behaviour and that of his customers provide an example of how bankers and merchants responded to the changing incentives produced by the weakening pound. England switched from importing gold to exporting silver, and goldsmith-bankers such as Evance linked London with international bullion markets.

I11 The weak pound drove silver out of England through the shops of men

such as Evance; however, a weak pound also meant a strong schelling. Taking advantage of the strong Dutch exchange rate, financiers could purchase English silver with a bill of exchange written in the Low Countries payable on London. This seventeenth-century version of arbitrage between bills of exchange and bullion created debts owed by drawers in the Low Countries to whoever honoured the bills in London. If Evance was involved in arbitrage of silver for bill of exchange, he then had to repatriate the value of the bills. Conveniently, the resultant claim from exporting silver (debt, in London, owed by continental financiers) was the same asset required to offset the transfer of military funds on behalf of the English Treasury. Evance became a major supplier of continental credit to the Treasury, and these remittance services complemented the selling of English silver for bills on the Low Country exchanges. By connecting financial opportunities, he was able to facilitate capital flows and integrate international markets.

The export of English silver complemented the transfer of funds from London because the wartime capital flows that prompted the export of the metal were not made directly by the English government. Rather, the Treasury contracted with private financiers to secure bills of exchange with which to pay the troops. It worked through private syndicates to avoid having to ship bullion, but bills of exchange required credit in Holland. The intermediaries who supplied military transfers required a means of paying these continental creditors. In contrast, the bills of exchange that Londoners such as Evance could profitably accept in trade for silver created debts due in the Low Countries, where credit resulting from exported English silver matched the financing needs of military remittances.

During the period of war covered by Evance’s bullion book, the English relied on the Dutch army’s paymaster, William van Schuylenberg, to draw bills on London. From 1689 to 1691, Van Schuylenberg charged a commission.46 In May 1691, Evance and Joseph Herne, a successful merchant, offered to transfer the remittances, ‘without demanding anything for commission money’.47 Besides not requiring a commission, Evance’s

Calendar of Treasury Books, IX, pp. 1521-2. ” Ibid., p. 1152.

GOLD, SILVER, A N D THE GLORIOUS REVOLUTION 487 Remittances

Bills of exchange c-

L O W

Countries Evance

Bills of exchange - (Iiondon)

Bullionbill arbitrage d Silver

Figure 4. Schematic representation of bullion and bill j b w s between London and the continent during the Nine Years War, 1689-1697

syndicate agreed to accept repayment in the form of government debt.48 Rewards to him for helping to fund the war also included royal patronage such as an officership in the Excise and the jewellership to the king. The Treasury accepted the offer, and Evance’s syndicate transferred funds from May 1691 until October 1694. At a time of monetary stringency, the Treasury benefited from avoiding fees and by being able to pay Evance in debt and favours. He and his merchant partners also benefited from supplying financial transfers. Silver sales financed the bills of exchange on the Low Countries that the syndicate needed to meet its obligations to the Treasury.

Supplying transfers of funds for England’s military in Flanders also allowed arbitrage to complement another of Evance’s roles as a banker- investing in government debt. Goldsmith-bankers frequently specialized in investing customer deposits in government debt.49 Before the formation of the syndicate to remit military funds, Evance had already made substantial loans to the Exchequer,” and was innovative in that he integrated delegated lending to the Treasury with arbitrage. Figure 4 shows how the export of silver produced a flow of bills of exchange that offset the flow of these from London to pay the troops and allowed Evance to invest in government debt.

Evance had one additional advantage in connecting bill, bullion, and government debt markets because bullion clipped from silver coins from all over England was channelled into Lombard Street.51 The Goldsmiths’ Company was a national organization, and the regional goldsmiths recast the silver and ‘sent it to London as plate melted down’.52 Evance and the other goldsmith-bankers on Lombard Street were the end of this domestic chain of transactions and the gateway to the international markets. Moreover,

Ibid. 49 Roseveare, Advancement of the king‘s credit. 50 Calendar of Treasury Books, IX, pp. 1971-2008. This figure covers loans on the present aid, the

5 1 Jones, War and economy, p. 229. 52 P.R.O., Assi 45/16/1/5 (quoted in Jones, War and economy, p. 231).

12d. aid, the 2s. aid, the additional 12d. aid and the first poll.

8 E c m u H i s m y Socir@ 1996

488 STEPHEN QUINN

Evance had a gate-keeping position in the process of silver export. The Goldsmiths’ Company had a responsibility to verify that bullion to be exported had first arrived in England from abroad. 53 Goldsmith-bankers such as Evance were important members of the Goldsmiths’ Company. In fact, he served as its Prime Warden (highest officer) in 1692. Even those seeking to stop the flow of silver out of England realized that domestic English silver was ‘being melted down, and Shipped Off, . . ., under the Pretence of Foreign Bullion’.54

Both for the Treasury and for the goldsmith-banker, the Evance syndicate was an improvement over the use of the Dutch paymaster. The syndicate charged no fees and accepted debts as payment, while Evance could pocket his share of arbitrage returns from swapping silver for bills and then convert the bills into the final form he desired, government debt. Evance’s services to the Treasury complemented both the existing arbitrage behaviour of Evance and his customers and the goldsmith-banker’s role as a delegated investor in government debt. Evance exemplifies how London’s innovative goldsmith-bankers connected the international markets with England’s government finance. The adjustment of exchange and bullion markets and the repatriation of profits from arbitrage were facilitated by the sophisticated integration of services by London’s late seventeenth-century financial intermediaries.

IV The London goldsmith-banker Stephen Evance participated in both the

transfer of wartime capital to the continent and the exodus of silver that followed from it. In response to the weak pound exchange rate, Evance sold silver to international bullion merchants. To acquire English government debt with his credits due on the Low Countries, he joined a syndicate that remitted funds to support England’s forces abroad. He was at the heart of a mechanism that paid for an expensive foreign war by clipping and exporting silver from England’s circulating coins. The behaviour of Evance and his associates highlights the dynamics of the early modern international markets. Merchants switched to the lowest relatively priced means of international payment, whether gold, silver, or bill of exchange. Moreover, differences between this trio of exchange rates created arbitrage opportunities. Evance’s switch from purchasing gold from Sephardi merchants to selling silver to the same merchants corresponded with the changing arbitrage incentives that accompanied England’s entry into the Nine Years War in 1689.

The activities of intermediaries such as Evance set the stage for the monetary crisis of the 1690s and England’s bimetallic regime that followed. The goldsmith-banker facilitated both the export of English silver and the ability of the English Treasury to finance forces abroad. By 1695, years of clipping and bullion outflows had reduced the average silver content of

53 6 & 7 William 111, c. 17 Srarules, v. 9, p. 368. 54 Houghton, Alteration of the can, p. 28.

GOLD, SILVER, AND T H E GLORIOUS REVOLUTION

circulating coins to less than half the original mint weight. The public’s growing distrust of clipped silver coins drove the price of guineas up 40 per cent. Parliament responded with the great recoinage of 1696 which reminted silver coins back to full weight and stopped them from falling in weight again. A fixed price of gold was also eventually imposed. Both gold and silver coins were stripped of their ability to adjust to changes in the exchange rate except by leaving the money supply. Because England established a silver to gold ratio higher than France or Holland did, future shocks that weakened (strengthened) the pound exchange rate drew silver out of (drew gold into) Britain. Although England had shifted from a silver standard to a bimetallic one, the gold, silver, and bill of exchange markets continued to move the country inexorably towards gold. In December 1717, the price of the guinea was further reduced to 21s.; however, ‘The fact that this [21 shillings] was still too high largely accounted for the effective substitution of gold for the silver standard which was finally clinched in

489

I 8 16’?

Texas Christian University

55 Horsefield, British monetary experiments, p. 83.

Footnote references Assar, W. D. H., ‘Bills of exchange and agency in the eighteenth-century law of Holland and Zeeland’,

in V. Piergiovanni, ed., Courrs and the development of commercial law (Berlin, 1987), pp. 103-30. Carlos, A. and Van Stone, J., ‘The Hudson’s Bay Company: not a family concern, 1670-1730’, Buc.

Hist. (forthcoming). Challis, C. E., A new history of the Royal Mint (Cambridge, 1992). Craig, J., The mint (Cambridge, 1953). Conduitt, J., ‘Observations upon the present state of our gold and silver coins, 1730’, in W. A. Shaw,

ed., Select tracts and documents illustrative of English monetary history, 1626-1730 (I935), pp. 185-214. van Dillen, J. G., ‘The Bank of Amsterdam’, History of the principal public banks (The Hague, 1934),

Feavearyear, A., The pound sterling (Oxford, 1963). Heal, A., London gokfsmirhs (Cambridge, 1935). Hilton-Price, F. G., A handbook of London bankers (1890). Horsefield, J. K., British monetary experiments, 1650-1710 (Harvard, 1960). Houghton, T., The alteration of the coin with a feasible method to do it (1695). Hyamson, A., The Sephardim of England: a h i s w of the Spanish and PortugueseJewish communiy, 1492-

Israel, J., ‘The economic contribution of Dutch Sephardi Jewry to Holland’s golden age, 1595-1713’,

Jones, D. W., War and economy in the age of William III and Marlborough (Oxford, 1988). Kerridge, E., Trade and banking in earb modern England (Manchester, 1988). Li, M.-H., The great recoinage of 1696 to 1699 (1963). McCusker, J., Money and exchange in Europe and America, I600-I7500: a handbook (Chapel Hill, N.C.,

Mitchell, D. M., ‘Mr. Fowle pray pay the washwoman: the trade of a London goldsmith-banker, 1660-

Neal, L., The rise of financial capitalism (Cambridge, 1 9 ) . Posthumus, N. W., Inquiry into the history of prices in Holland, I (Leiden, 1946). Quinn, S., ‘Tallies or reserves? Sir Francis Child’s balance between capital reserves and extending credit

Redish, A., ‘The evolution of the gold standard in England’,y. Econ. Hist., L (IW), pp. 789-806. de Roover, R., ‘What is dry exchange? a contribution to the study of English mecanrilism’, Bun’ness,

Roseveare, H., ‘The advancement of the king’s credit’ (unpub. Ph.D. thesis, Univ. of Cambridge,

PP. 79-123.

1951 (1951).

TGdschrifr voor Geschiedenis, 96 (1983), pp. 505-35.

197Q PP. 13-55.

1692’, Bus. 0 Econ. Hist., 23 (1994), pp. 23-7.

to the crown, 1685-1695’, Bur. & Econ. Hist., 23 (1994), pp. 39-51.

banking and economic thought, ed. J. Kirshner (Chicago, I974), pp. 183-99.

1962).

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490 STEPHEN QUINN

Schubert, E., ‘Arbitrage in the foreign exchange markets of London and Amsterdam during the eighteenth century’, Exp . Econ. Hisr., 26 (1989), pp. 1-20.

Supple, B. E., Financial crisis and change in England, 1600-1642 (Cambridge, 1959). van der Wee, H. , ‘Money, credit and banking systems’, Cambndge ecm.ric history of Europe, v

(Cambridge, 19771, PP. 290-393.

Oi%ca/ publications Calendar of Treasury Books, IX, pts. I , 2.