by Judy Z Stephenson (University College London), Nathan Sussman (The Graduate Institute Geneva) and D’Maris Coffman (University College London)
This blog is based on the authors’ article which was recently published on The Economic History Review in early view: https://onlinelibrary.wiley.com/doi/10.1111/ehr.13136.
The recovery of cities is a hot topic in the post-pandemic era, especially when coupled with public debt financing of major recovery projects. In our new paper in the Economic History Review we explore the financing of the rebuilding of London after the Great Fire of 1666, and the last great epidemic that preceded it.
As the old city smouldered in late September 1666, many influential citizens and officials feared that businesses and households, newly scattered to Middlesex, Southwark, and Westminster, would never return. Writing just after the Blitz, in his classic account of the rebuilding of London, Reddaway noted how well governed in the seventeenth century was the process of rebuilding.1 Apparently, the city was fully populated again by 1673, with thoroughfares and amenities much improved, although we know that the rebuilding of many city churches was not complete until the 1680s, and spires continued under construction many years after that. Instrumental to the swift reconstruction was that the Crown and City pressed for a full survey, and Parliament passed two Fire Acts. These statutes provided building regulations to protect from further disaster; established Fire Courts to deal with disputes about costs between landlords and tenants and, crucially, secured funding from a tax on coal imported to the city.
But, receipt of coal taxes was protracted, and it imposed obligations on the city to invest in churches and St Paul’s, rather than other infrastructure. The city paid out hundreds of thousands of pounds before 1675. From where did this money originate? Our examination of archival data on rebuilding costs and interest rates from the Corporation of London, between 1666 and 1683, reveals that the city borrowed from its citizens, at incredibly low rates. The records show that funding from citizen’s loans covered costs, and most of the city’s infrastructure investments were completed in less than a decade. However, having invested in public goods without generating adequate fiscal flows, the City defaulted after a political crisis in 1683.
A long-running narrative in new institutional economics and economic and social history suggests that the institutional arrangements and financial affairs of the Stuart monarchy inhibited economic growth, and that it was not until limits imposed on government after the Glorious Revolution — which created ‘credible commitment’ — that financial markets began to support productivity growth in England.2 Such narratives rely on old literature indicating interest rates equal to, or greater than, 10 per cent throughout this period. The accounts of the Corporation of London in the seventeenth-century contradict this earlier literature.
Despite being governed by an oligarchy throughout the period before, during, and after the civil war, the City enjoyed access to plentiful cheap capital. Chamberlains’ accounts, and the London Metropolitan Archive, show London’s financial market extended the Corporation credit at an average of 4 per cent in the key period of rebuilding. Lenders, who were mostly wealthy business and property owners active in the city, were reassured by the Corporation’s reputation, (and the fact that borrowing was partly secured against future coal tax receipts). Remarkably, as the costs of rebuilding mounted, and war with the Dutch began, in addition to political upheaval, the Corporation was able to tap considerable funds for most of the cost of initial reconstruction at declining interest rates.
The well-established financial instrument of private short term interest-bearing deposits addressed the challenge of financing the rebuilding of London. Despite this cheap capital, the City’s long term finances remained insolvent and unsustainable; commercial opportunities were not converted into new rental income. Nevertheless, London’s rebuilding created the vibrant, innovative, merchant and manufacturing hub which, in the following century, became the most important financial capital, and largest city, in the world.
Our evidence on the financing of the rebuilding of London challenges many theoretical and historical ideas about how financial markets operated, and supports recent literature about the governance required for ‘credible commitment’. In London in the 1660s and 1670s, it seems that a high likelihood of repayment mattered more to investors than whether government was ‘limited’ or ‘good’, a finding we can all consider as interest rates begin to climb in the current post-COVID recovery.
1 Reddaway, T. F., The rebuilding of London after the Great Fire. London: Jonathan Cape, reprinted, 1951.
2 North, D. C. and Weingast, B. R., ‘Constitutions and commitment: the evolution of institutions governing publicchoice in seventeenth-century England’, Journal of Economic History, XLIX (1989), pp. 803–32.
To contact the authors:
Judy Z Stephenson, firstname.lastname@example.org
Nathan Sussman, email@example.com
D’Maris Coffman, firstname.lastname@example.org