10 - A tale of two revolutions: international capital flows, 1792–1815

Summary

The key historical event for the transformation of the international financial system in the period 1789–1825 was the success of Napoleon's Continental System, which disrupted the traditional British techniques for financing wars on the European continent, as it was intended to do. After 1808, when Napoleon perfected his Continental System, the exchanges of Britain with the Continent fluctuated violently, and from then on the government funds behaved quite differently. Instead of all three major stocks declining gradually in concert, the stocks of the Bank of England and the East India Company began to rise, with sharp fluctuations, whereas the Three Per Cents remained stable. How did the Continental System cause that regime change in the British financial markets?

The British success in fighting European wars had begun with the aid of William Ill's Dutch financiers in the War of the Grand Alliance (1688–97) and continued through the Seven Years’ War (1756–63). Figure 10.1 shows how the network of trade credit created by widespread use of the foreign bill of exchange was exploited by the British government to finance its armies on the European continent during the eighteenth century. The Exchequer purchased from London merchants bills of exchange that were drawn on their correspondents abroad, then sent the bills to the British quartermaster abroad, who used them locally to hire troops and purchase supplies. Because British manufactured goods and colonial reexports were in high demand in Europe, the bills drawn in London were accepted readily by the European merchants, who used them to pay for imports from Britain.