financial revolution. This term refers to the extensive changes brought about in the British financial system between the Glorious Revolution of 1688 and the 1720s by the creation of a system whereby a national debt could be accumulated to provide government with spending power beyond the scope of taxation. This became necessary as a result of the extensive military commitments undertaken between 1688 and 1815. War expenditure grew from £49 million in 1688–97 to £1,658 million in 1793–1815 and the national debt soared from £44 million in 1739 to £820 million by 1815. At the same time business, in order to expand, required a secure and reliable means for making payments, as well as a stable system of credit. There were three main elements to this revolution, all of which relied on financial techniques developed in the Netherlands: the use of the bill of exchange for financial transactions, trade in shares of the capital stock of corporations, and perpetual annuities issued by the government and thus free from the risk of default.

In foreign trade, the bill of exchange acted both as a means of payment and as an instrument of credit. Its flexibility was increased by the introduction of serial endorsements in Antwerp in the 16th cent., and was institutionalized in the foundation of the Amsterdam Wisselbank in 1609. This allowed merchant bankers to transfer payments denominated in bank money between them quickly and without great risk. The bill of exchange became the main source of credit for merchants engaged in trade with the American colonies in the 18th cent. By the early years of that century facilities for short-term lending and clearing international payments had been established throughout much of western Europe. In the course of the century London became increasingly integrated with the Amsterdam market and attracted some investment from Holland, principally in government and bank stock.

The bill of exchange was used as follows: a purchaser in country A wishing to pay a debt to his supplier in country B obtained a bill from a merchant banker in the currency of country B which he dispatched to his supplier. This would be accepted by a merchant banker in B and paid in that country's currency, usually at a specific date, often three months after acceptance. Finally the bill was returned to the original drawer to show that payment had been made. A merchant could obtain a bill of exchange as a loan. Legislation at the beginning of the 18th cent. gave the inland bill of exchange the same status as its foreign equivalent, and it acted as a major form of money throughout the century. In 1726 the Bank of England created a 3 per cent annuity, paying out each year £3 for every £100 purchased, copying the scheme introduced three years earlier by the South Sea Company.

Another means by which the state raised capital was by the award of monopoly powers to corporations to raise funds on the understanding that they, in turn, would lend to the government. The Bank of England, founded in 1694, sold the £1.2 million of stock in twelve days. Subsequent flotations of the East India Company and the South Sea Company, together with a further round of subscriptions to the Bank, brought the total capital of the three institutions to £20 million by 1717. Similar monopoly status awarded to the London Assurance Company and Royal Exchange Assurance Company in 1720 was conditional on a government loan of £300,000, which was eventually written off as a bad debt.

The combined effects of these developments had profound economic results. They provided an institutional framework within which economic activity expanded, not only by creating a means by which provincial business could be transacted and linked to the main financial centre in London, but, perhaps more critically, by integrating London with the main European financial centre, Amsterdam, which by the end of the 18th cent. it had superseded. Secondly they provided a conduit through which investment on a hitherto unprecedented scale could be mobilized. Throughout the 18th cent. the principal customer remained the government. The state thus played a major role in stimulating and shaping the development of the financial system.

Clive H. Lee