The day the king defaulted : financial lessons from the stop of the Exchequer in 1672

This book studies King Charles II's decision to stop all payments from his royal exchequer, a sordid but little-known event in English history with eerie similarities to the cause of the Great Recession of 2008. As with any modern banking crisis, the financial system in 1672 almost collapsed, day-to-day commerce ground to a halt, houses were lost, and ordinary investors suffered—but there was no banking bailout, and no mercy for the goldsmith-bankers who had lent the king millions to fund his unsustainable lifestyle. The royal decision, made in the wake of plagues, fires, and war with the Dutch, left bankers unable to cover their own liabilities and, in the days before bankruptcy, they couldn’t walk away from their obligations and start fresh. Many bankers spent the end of their lives in debtors' prison, but English commoners had little sympathy for the plight of rich financiers—a sentiment echoed after the financial crisis of 2008. Ultimately, this book tells the complete story of the Merry Monarch's financial default (England's first and last) using the lens and language of modern financial products and markets. It covers the precarious history leading up to the infamous day in 1672, the intrigue surrounding the ‘stop’—including those who traded on inside information beforehand—and the attempt by distressed creditors to gain financial restitution. Dedication 5 Prologue 6 Acknowledgments 9 Contents 12 List of Figures 15 List of Tables 17 Chapter 1: Bankers Then and Now 18 Asset Liability Mismanagement in the Seventeenth Century 20 A Financial Crisis in Slow Motion 24 Outline of the Story and the Book 26 A Brief Review of Scholarly Literature 29 References 35 Chapter 2: Dramatis Personae 38 Nobility Versus Gentry 38 King Charles II 41 “The Merry Monarch” 41 Dutch and Temple 45 “Better, Faster, Richer” 45 Queen Catherine of Braganza 47 “The Portuguese Queen” 47 Thomas Clifford 48 “The Impulsive Papist” 48 Henry Bennet: Arlington 50 “The Smooth Diplomat” 50 George Villiers: Buckingham 52 “The Rake and Libertine” 52 Anthony Ashley Cooper: Shaftesbury 55 “The Two-Faced Achitophel” 55 John Maitland: Lauderdale 58 “The Zealous Scotsman” 58 George Downing 61 “The Puritanical and Efficient Administrator” 61 Thomas Osborne: Danby 64 “The Anglican Fixer-in-Chief” 64 References 67 Chapter 3: The Goldsmith-Bankers 68 From Artists to Financiers 68 Edward Backwell 72 “From Financier, to Exploited to Bankrupt” 72 Robert Viner 76 “From Goldsmith to Banker to Bankrupt” 76 John Banks 79 “The Financier That Got Away (and Paid)” 79 Banking and Interest: Was It Legal? 82 References 87 Chapter 4: Personal Finances of a King 89 Where Did the Money Go? 90 The Cost of Plagues and Fires 97 A Royal Allowance with Strings 100 Customs, Excise and Hearth 101 King’s Debts Kept Growing 105 Budget of a Modern-Day Monarch 108 References 109 Chapter 5: Paid Upon Orders from the Treasury 110 Many Ways to Skin a Cat 116 Valuing Collateralized Treasury Orders (CTOs) 120 Poisson Model for the Arrival of Taxes 124 Treat a Model Like a Gentleman 130 Fair Compensation for Financial Risk? 130 Position in the Queue Matters 132 A Hint of What Went Wrong 133 References 135 Chapter 6: Diary of a Default 136 1667: Downing Gives Orders 136 June at Chatham 142 Alliances, Duels and a Liquor Tax 146 Selling Your Religion at Dover 151 Prelude to the De(fault) 156 Matchsticks Versus Tally Sticks 157 Alternative Facts and Faults 159 Redirect the Financial Plumbing 160 Was Downing Down? 162 Whose Idea, Exactly? 163 Trading on Early and Inside Information 163 Tuesday, January 2, 1672 165 Desperate Dowry Measures 176 Order on the Sabbath 177 Clarifications and Limitations 186 Danby Makes Assignments 187 The Reopening of the Exchequer 192 Visiting Debtors’ Prison 197 1706: Internal Rate of Return and Recovery 200 References 205 Chapter 7: Concluding Thoughts for the Twenty-First Century 207 Case Study for Business Ethics? 212 Appendix A: The Fate of a 2007 Banker 214 Appendix B: Unpacking the IRR 217 Bibliography 221 Index 227 This book studies King Charles II's decision to stop all payments from his royal exchequer, a sordid but little-known event in English history with eerie similarities to the cause of the Great Recession of 2008. As with any modern banking crisis, the financial system in 1672 almost collapsed, day-to-day commerce ground to a halt, houses were lost, and ordinary investors suffered - but there was no banking bailout, and no mercy for the goldsmith-bankers who had lent the king millions to fund his unsustainable lifestyle. The royal decision, made in the wake of plagues, fires, and war with the Dutch, left bankers unable to cover their own liabilities and, in the days before bankruptcy, they couldn't walk away from their obligations and start fresh. Many bankers spent the end of their lives in debtors' prison, but English commoners had little sympathy for the plight of rich financiers - a sentiment echoed after the financial crisis of 2008. Ultimately, this book tells the complete story of the Merry Monarch's financial default (England's first and last) using the lens and language of modern financial products and markets. It covers the precarious history leading up to the infamous day in 1672, the intrigue surrounding the 'stop' - including those who traded on inside information beforehand - as well as the attempt by distressed creditors to gain financial restitution. Annotation Studies King Charles II's decision to stop all payments from his royal exchequer, a sordid but little-known event in English history with eerie similarities to the cause of the Great Recession of 2008. As with any modern banking crisis, the financial system in 1672 almost collapsed, day-to-day commerce ground to a halt, houses were lost, and ordinary investors suffered-but there was no banking bailout, and no mercy for the goldsmith-bankers who had lent the king millions to fund his unsustainable lifestyle. The royal decision, made in the wake of plagues, fires, and war with the Dutch, left bankers unable to cover their own liabilities and, in the days before bankruptcy, they couldn't walk away from their obligations and start fresh Front Matter ....Pages i-xxi Bankers Then and Now (Moshe Arye Milevsky)....Pages 1-20 Dramatis Personae (Moshe Arye Milevsky)....Pages 21-50 The Goldsmith-Bankers (Moshe Arye Milevsky)....Pages 51-71 Personal Finances of a King (Moshe Arye Milevsky)....Pages 73-93 Paid Upon Orders from the Treasury (Moshe Arye Milevsky)....Pages 95-120 Diary of a Default (Moshe Arye Milevsky)....Pages 121-191 Concluding Thoughts for the Twenty-First Century (Moshe Arye Milevsky)....Pages 193-199 Back Matter ....Pages 201-218