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L. Neil Smith's
Number 508, March 1, 2009

"The one hope we have is to aggressively reassert
the libertarian principles that propelled the American
Revolution and turned the world upside down."

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The Lessons of 1722
by Jim Davidson

Special to The Libertarian Enterprise

"King Charles [II] took from your father the plate, specie, and bullion that had been entrusted to the House of Ham by its depositors. The House was ruined. Your father died of shame. Others in the goldsmith trade had suffered likewise—though not as much—and understood that your father had been given no choice. The King had taken the gold by invoking his divine right to it. That's why you've never wanted for a position in the banking trade—because the story is proverbial among money-goldsmiths and you are a living link to it.... He saw that banks would never work right if the King could sack their vaults whenever he ran low on revenue. This was a revolutionary thought."
—Neal Stephenson, The System of the World
"The Baroque Cycle" trilogy, p. 800, 2004.

It was a long time ago in a Europe which survives mostly in dusty history books, a few novels of the era, and the occasional historical novel about that period. So, what could we possibly learn from AD 1722 that would be applicable today?

In many ways, it was a time much like our own. The size of the world had greatly expanded a few hundred years earlier with the discovery of what proved to be two new large continents in the Western Hemisphere. Technologies like the steam engine were being developed to advance rapidly the industrial revolution. Political thought had been advanced by minds like John Locke and science by minds like Isaac Newton. Mercantilism was still a favorite economic policy, and wars were a big enterprise for making money. Politics was easily as corrupt as it is today.

Most of the things we think of as contemporary in the field of economics, such as double entry bookkeeping, finance, insurance, syndication, banking, fiat money, joint stock companies, and political intrigue had been thoroughly advanced. So, the comparison to 1722 is not like a comparison to AD 1453 and the sack of Constantinople or AD 476 and the fall of the Western Roman Empire.

Those earlier cases are fascinating, to be sure. Rome's coinage, though badly debased by numerous emperors, was widely used in trade and commerce across the world. The same is true of the Islamic dinar and the Byzantine solidus, both of which were no longer issued after the Mongols and Turks swept through. The collapse of a global reserve currency is potentially in the cards, so these other events are of interest. I'll examine them in a future essay.

Presently, though, let's look at 1722. Americans talk about "The Great Depression" and refer to the events from 1929 to 1938. But this period was a relatively brief contraction which, had it met with government inaction, would likely have been even shorter. A truly great depression followed the collapse of the South Sea Bubble in 1722. By some estimates, about 90% of the value of all stocks listed in London, Paris, and Amsterdam in 1720 had been wiped out by the end of 1722. Around 95% of the companies that had existed in 1720 had been wiped out by 1730. (Mackay, Charles, Memoirs of Extraordinary Popular Delusions, 1852).

Not only was the global depression deep, it was long. Stocks did not recover to their previous price levels until 1782. Many events we regard as significant, such as the American Revolutionary War, took place in the context of this global depression. If prosperous people do not typically rebel or revolt, it is interesting that some of the most dramatic revolutions took place amidst the poverty of one of the worst depressions in world history.

Where shall we begin this story? We know that by 1649 the English civil war had been won by the parliamentarian forces. Charles I had been executed. Cromwell took control and led England on a series of expeditions to ransack places like Ireland.

The story continues with a thoroughly corrupt king named Charles II who was brought to England to take up where Cromwell's son left off. The restoration of the monarchy was accompanied with considerable fanfare, but much of the power of government had already been absorbed by Parliament. Charles II was quite capable of spending all the money in the kingdom. He held lavish feasts, he had numerous mistresses— many of whom he created duchesses—and he was an enthusiastic alchemist, among his other vices.

Then, we're told by a knight: "The King having borrowed the greatest part of the ready coin of the nation [from] the goldsmiths, shut up the Exchequer, which caused the most considerable of them to break, and an infinite of people whose money those [goldsmiths] had borrowed at interest to be undone." Memoirs of Sir John Reresby for 1672.

The closing of the Exchequer was originally for one year, but was extended to several years, and then indefinitely. The "infinite of people" by some estimates (Fekete, Antal E., 2002, "Gold Eagle University") was as many as 10,000 depositors.

A typical case would be Alderman Edward Blackwell who is frequently mentioned by Samuel Pepys in his Diary. Blackwell was a goldsmith and "banker" or money goldsmith. He was ruined by the closing of the Exchequer by Charles II in 1672. The crown then owed him £295,994, sixteen shilling, sixpence. In lieu of paying such a debt, the King granted him an annuity of £17,759, thirteen shilling, eight pence. Blackwell retired to Holland and died there in 1679. The annuity had paid little more than a third of the debt by the time of his death. Some of the bankruptcies were immediate, others were to suffer well into the 1680s, trying to get their claims paid.

And in what peculiar form those claims were found! Not papers, as you might imagine, sealed with great wax hunks and the imprint of the king's seal. No, rather bundles of twigs or sticks represented the debts. These were the all-important tally sticks.

The basic idea was nothing new. Some of the oldest artifacts known are lengths of bone on which marks have been made. Some archaeologists suggest that the bone was chosen from a specific animal and the marks represented the herd of that animal being tracked or accounted for. These early artifacts would then seem to indicate a natural or genetic predisposition to counting, property ownership, and the accumulation of capital.

Aurignacian period artifacts show tally marks on bones from about 30,000 years ago. Roughly at the time Cro-Magnon man appears in Europe, he is marking bones with notches. A Czech discovery of 1937 was a bone from 20,000 or more years ago with fifty-five notches in groups of five, using the tally system as we are familiar with it: four vertical notches connected by one diagonal. Also of interest is a bone from about 25,000 years ago which bears notches representing prime numbers 11, 13, 17, and 19. This last item suggests the existence of a significant civilization presumably now lost as melting ice raised the sea level and inundated the old coast line. (Even today most of mankind lives within a few tens of miles from the sea.)

The tally stick itself is a simple device. It makes use of the fact that when a stick is split lengthwise, the grain of the wood creates a unique pattern. The two pieces of wood can only be matched to each other. So, information which is inscribed across the place where the break will be made should be carried on both halves.

The use of tally sticks derives from an earlier tradition of making contracts. The Vikings seem to have been first on the scene with this idea. The contract would be written down in Nordic runes on a stick. The stick would be split lengthwise. The fulfillment of the contract would be accompanied by matching the two pieces of wood to review the terms. Neither party could change the terms, since the markings wouldn't match up. Nor could one party create wholly new terms on another piece of wood, because the corresponding half would not be in the possession of the other party.

This tradition from the Vikings was brought to England with the Norman invasion. William the Conqueror probably didn't have time for it, but his son Henry seems to have done. England was divided into shires and each shire was the responsibility of a sheriff. Taxes were assessed for each shire. The accounting of the tax assessment was cut into a stick in a series of notches. The stick was then split, so both sheriff and king would have a record. The sheriff would then go and pummel the locals until he had farmed up as much taxes as he wanted, killing any peasants who resisted and generally seizing anything of value. When it was time to pay the king his share, the sheriff would appear with the loot and his tally stick. The sticks would be compared, the tally known, and the loot would change hands.

The system evolved, as systems do. Taxes were collected twice a year, at Easter and at Michaelmas. The amount of taxes to be paid at Michaelmas would be recorded on the tally stick system. By the time of Henry II, a further evolution was widespread. Since tally sticks were representations of taxes due to the king, the king would sell his half of the sticks at a small discount. The buyer would then receive the tax payments when they came due.

The system was vaguely reminiscent of government bonds. Since the tally stick represented value due to the king, or to the buyer of the king's half of the tally stick, it was possible to transfer value by moving the king's half of the stick rather than commodities or specie. According to some sources (Davies, Glyn, 1995, A History of Money; 1911 Encyclopedia Brittanica) the Exchequer facilitated the smooth operation of this market. In fact, the officers of the Exchequer included a tallier or "teller" whose role was to count up the tallies or tally up the funds. Bank tellers perform a comparable function today. [see link]

Since the tally sticks came to represent taxes due, the king could borrow funds and pay out in tally sticks. Later, the tally sticks were acceptable for taxes. Some of these tally sticks represented considerable value owed by the king.

Naturally, the rapacious tendencies of the kings would shine through. They would borrow as much as they could. Then they would borrow more.

It was this borrowing that eventually brought down Charles II and the Stuart dynasty. Stephenson portrays the events as though a confiscation took place. More likely, what happened was the goldsmiths accepted tally sticks as representations of the king's obligations, then presented them for payment and were rebuked with the closing of the Exchequer. So, rather than finding an empty vault, as portrayed in Quicksilver, the auditors of the Ham goldsmith vault probably would have found a bunch of hazel twigs split lengthwise and marked with tallies. Whether Neal wrote such a scene and it was edited for length, we don't know.

Owing to the excessive borrowing of the monarchy, the market for tally stick money—the demand for money in this form if you would—was severely reduced. Adam Smith in his Wealth of Nations book ii, chapter xi says, "in 1696 tallies had been at forty, and fifty and sixty per cent. discount and bank notes at twenty per cent." Of course, by that time, the Glorious Revolution had overthrown James II, placing William and Mary on the throne. Also by then, the Bank of England had been founded in 1694. One tally stick worth £25,000 was paid in by an original stockholder. In other words, these shares were bought in one of the most powerful business enterprises in the history of the world with a split piece of wood.

The discounting of the value of the tallies was not the last of the assaults. Though tallies were used until 1826, they were out of favor very quickly. The mint began to produce sound coinage, the Bank of England preferred its own bank notes, and tally sticks were outmoded. Parliament eventually ordered that the tallies of official government transactions be stored away, not daring to expose these records of events nor wishing to pay out claims against them. So in 1826, the tallies went into storage.

The tally men had their revenge, though. On the night of 16 October 1834 the tallies were finally committed to the flames. By some accounts in furnaces whose flues overheated. By other accounts in an enormous courtyard bonfire. In any event, the old Houses of Parliament were consumed in the flames when the fire got out of control. The horrid Gothic revival pile we see today is the replacement for the old Houses of Parliament, burnt to the ground along with the tally system.

By 1720, the money of England was on a gold standard. That development was due to Sir Isaac Newton, who served as master of the mint. He also invested in the South Sea company, getting out before the collapse only to have misgivings and get back in for a thorough pummeling when the bubble burst. So, his cleverness in things financial was hit or miss. Yet, that gold standard was to last two hundred years, and served Britain in good stead during that time.

Tally sticks proved to be another worthless fiat money scheme. They were only valuable so long as they represented tax payments or value owed by the crown. Ultimately, they were repudiated and consigned to the flames, like ever so many other fiat money samples. They were inflated or discounted depending on the arbitrary spending habits of capricious monarchs.

Tally sticks show that anything may be used as a money substitute. Woe betide those who accept money substitutes and lend out the real thing in exchange. When the substitute goes sour, who would be left holding the true article? Better to have gold and silver coins in your possession than rely upon any substitute.

The BBC informs us of the consequences of the fiat money scheme. "Aiming, like many previous monarchs, to regularise the monarchy's finances, in 1694 William III licensed the founding of the Bank of England. Its chief debtor was the government, which it made an indefinite loan of £14,000,000. Successive governments were preoccupied with servicing and ultimately reducing the National Debt, which nevertheless grew progressively; by 1763 it stood at £130,000,000."

The BBC continues, "The South Sea Company was set up in 1711 to manage English trade with South America, the Spanish slave trade included; its Tory backers saw it as a counterweight to the Whig Bank of England. In 1719 the company proposed to manage part of the National Debt, offering investors and the government better terms than the Bank of England. While the scheme might ultimately have worked, its launch—using exaggerated claims, cut-price stock offers and outright bribery—made a rapid payback imperative; funds were raised through further stock issues, supported by ever more inflated expectations. The company collapsed in 1720, ruining many investors. The Bubble Act of 1721 forbade the founding of joint-stock companies without a royal charter—a provision which slowed the development of British industry." [see this link]

The lessons are many and varied and worthy of consideration today. First, the bubble was not just a British event, nor merely the fiat money excesses of the Bank of England alone. France had a part in it with the fiat money of the Banque Royale. Many companies were bid up in the bubble, which proved to be founded on nothing but a house of cards.

The government response very likely worsened and deepened the resulting depression, so that things were worse for longer. Innovations to overcome the difficulties were often thwarted, deliberately, in an effort to restore a status quo of the vested interests.

The peak values for stocks in 1720 were the end of a long series of bubbles. Newton had sold out prior to the end, but bought back in to lose nearly everything. Once the collapse came, there was no way to restore things to their former heights.

What would the stock market look like in October 2009 if the peak in October 2007 was met by the same kind of 90% haircut we saw between 1720 and 1722?

The high price of the Dow Jones Industrials was 14,279.96 during the day of 11 October 2007. So, if things were now as bad as they were in 1722, we would expect to see the Dow at 1,428. We would have to go back to November 1985 to find the Dow at that level—meaning that we could conclude that the last 24 years were just an enormous bubble. (We've already seen prices wiped back to 1997, so the last 12 years has definitely been a bubble.)

The peak for the NASDAQ was 2,835.63 on 1 November 2007. Again, given a 90% haircut, we would expect to see, two years later, 284 on the NASDAQ. That would take us back to October 1985.

For the S&P 500, a broader market indicator than the Dow, the peak was 1,576.09 on 11 October 2007. So if the economic calamity is a 1722 type event, one would anticipate a value of 158 on the S&P 500. Such a collapse would take us back to August 1984.

While there are certain similarities in economics, science, politics, and ethics, between today and 1722, there are also many differences. The world has been without any gold standard currency since earlier this decade when Switzerland's currency finally divorced itself from gold. The world reserve currency, the dollar, has been unrelated to gold since 1971. Whereas the English currency in 1722 and most other world currencies were convertible to gold or silver, or largely coined therein.

So, while an historical antecedent worse than the 1722 collapse is not known, there's really no reason to believe that the current economic calamity is only as bad as 1722. It could be much worse.

Jim Davidson blogs about space at and about finance at


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