The Stop of the Payments: Charles II and the 1672 Financial Crisis
In the late 17th century, the English Crown faced a systemic financial collapse that would reshape the relationship between the monarchy, the banking sector, and the state. Under the reign of Charles II, state expenditures consistently outpaced the revenue authorized by Parliament, leading to a precarious reliance on private credit to maintain the functions of government.
To bridge this fiscal gap throughout the 1660s, Crown departments sold debt to prominent London goldsmith bankers. These loans were secured against the first call on the following two years of state revenues. For the bankers, this was a lucrative arrangement; by purchasing debt at a discount, they could achieve annualized returns of 8% to 10%, significantly higher than the legal interest cap of 6%. Furthermore, because this debt was readily assignable—meaning it could be transferred to other parties—it remained a liquid asset that could be traded among bankers or sold to private investors.
However, this system created a dangerous cycle. As more of the state's future revenue became pre-committed to these creditors, the Crown's ability to maneuver independently vanished.
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The Sudden Halt of 1672
The crisis reached a breaking point on Tuesday, January 2, 1672, when the Crown abruptly announced the Stop of the Payments. This decree suspended payments on all warrants, securities, and orders due within that period. The only exceptions were payments related to the subsidy (per the Act of Parliament) and fee farm rents.
While the stop was initially intended to last only one year, ending on December 31, 1672, the King promised that interest would still be paid on outstanding bonds at a rate of 6%.
The Catalyst: The Third Anglo-Dutch War
The immediate cause of the stop was military necessity. England was preparing 82 ships for national defense to attack the Dutch Republic in the Third Anglo-Dutch War. When the bankers of Lombard Street refused to provide the necessary advance loans to finance the fleet, the King and his council decided to divert funds from the treasury's budget. Specifically, money earmarked for the repayment of bonds and securities was redirected to the navy, leaving creditors with only interest payments and no repayment of the principal for that year.
The impact was catastrophic for the financial markets. Contemporary accounts, including a letter from Richard Langhorne to Lord Hatton, suggested that the banking trade was "totally destroyed" by the event. The total outstanding obligations were estimated at £1,211,065—a sum nearly equal to the King's entire ordinary revenue for 1671–2 (which included customs, excise, and hearth tax).
Key Facts
- Date of Event: January 2, 1672.
- Primary Cause: Funding requirements for 82 ships for the Third Anglo-Dutch War.
- Total Debt: Estimated at £1,211,065.
- Initial Terms: A one-year suspension of principal payments with 6% interest.
- Outcome: The stop became effectively indefinite as Parliament refused to grant new funds for repayment.
- Final Resolution: The debt was eventually absorbed into the general British national debt via the National Debt Act 1716.
Long-term Consequences and Legal Battles
The intended one-year stop was extended to May 1673 and then to January 1674 after Parliament rejected requests for new funds. By this point, the revenues that had served as security for the debts had already flowed into and out of the Treasury, making the stop indefinite.
Under the management of Thomas Osborne, Earl of Danby, the promised 6% interest payments finally began in March 1675, though they were three years in arrears. While payments remained regular during Danby's tenure as Lord Treasurer, they became erratic after 1680. Between 1680 and 1685, only 56% of expected payments were made; under James II (1685–1688), this dropped to 21%. Following the accession of William and Mary, payments ceased entirely as Parliament reallocated the revenue to the Nine Years' War against France.
The Goldsmith Bankers Case
The cessation of payments led to The Goldsmith Bankers case, a protracted legal battle over the Crown's obligations. The legal journey was complex:
- 1692: The Court of Exchequer ruled in favor of the bankers.
- 1696: The Court of Exchequer Chamber reversed the judgment on a technicality, ruling that a "petition of right" was the only valid remedy.
- 1700: The House of Lords finally found in favor of the bankers.
Despite the House of Lords' ruling, the government limited payments to revenues from the hereditary excise that were not already allocated by Parliament. Since the Commons allocated all such revenue to current spending, the bankers remained unpaid.
The Final Settlement
To resolve the "avalanche" of demands, Parliament passed the Appropriation of Revenue Act 1700. This act established a definitive settlement: interest would be paid annually at 3% starting in December 1705, but only on the principal sums calculated at the end of 1676 (£1,328,526). No compensation was provided for missed interest from 1680 onwards. Eventually, the National Debt Act 1716 reduced the rate to 2.5% and absorbed the obligations into the general national debt.
| Period/Act | Payment Status | Interest Rate | Notes |
|---|---|---|---|
| 1672 (Initial Stop) | Principal suspended | 6% (promised) | Triggered by Third Anglo-Dutch War |
| 1675–1680 | Interest paid | 6% | Managed by Earl of Danby |
| 1680–1688 | Erratic payments | Variable | Dropped to 21% under James II |
| 1701 (Appropriation Act) | Settlement reached | 3% | Payments began Dec 1705 |
| 1716 (National Debt Act) | Absorbed into Nat. Debt | 2.5% | Final consolidation of debt |
Frequently Asked Questions
Why did Charles II stop the payments in 1672?
The stop was triggered by the need to finance the Third Anglo-Dutch War. After goldsmith bankers refused to provide further loans for the preparation of 82 ships, the Crown diverted funds originally intended for debt repayment to the naval budget.
Who were the goldsmith bankers?
They were leading London financiers who acted as early bankers. They bought state debt at a discount to earn returns of 8% to 10%, securing these investments against future state revenues.
What was the result of The Goldsmith Bankers case?
Although the House of Lords eventually ruled in favor of the bankers in 1700, the government avoided payment by allocating the necessary revenues to other spending, leading to a legislative settlement in 1701.
How was the debt finally resolved?
The debt was settled through the Appropriation of Revenue Act 1700, which lowered the interest rate to 3% and ignored arrears from 1680. It was later fully absorbed into the general British national debt by the National Debt Act 1716 at a rate of 2.5%.
How much money was involved in the 1672 stop?
The outstanding obligations were estimated at £1,211,065, which was roughly equivalent to the Crown's entire ordinary revenue for the 1671–2 fiscal year.