Before you ask whether I have had one too many beers in the lead up to the Australia Day long weekend there is some history behind this statement.
Once it became known that the British were establishing a colony on the east coast of Australia, both the French and Spanish sent expeditions to investigate. La Perouse famously landed just weeks after Governor Phillip arrived, only to disappear on the return trip home.
The Spanish sent two ships, the Descubierta and Atrevida, landing in Sydney Cove on 12 March 1793.
The commander of the expedition, Captain Alexandro Malaspina, had secret instructions to report back to the Spanish Government not only on what was happening at Port Jackson, but also on what the Russians were doing at Nootka Sound.
In his report, A Political Examination of the English Colonies in the Pacific, which was apparently prepared by Malaspino for submission to the Spanish Government, he explains why he thinks the British were settling in Port Jackson.
He states “ the first is to sustain the public credit with new speculations, which feed the hope of being able to one day to extinguish the public debt; hopes without which it would be impossible to contract new national debts, necessary on the other hand just at the moment when a Rupture is so feared”.
Was Malaspino right? Were the British settling Australia to keep their creditors happy?
There have been endless debates on why Australia was settled. When Lord Sydney announced on 18 August 1786 that a settlement would be established the argument was to house Britain’s growing convict population. But as Geoffrey Blainey says in The Tyranny of Distance “the settling of Eastern Australia was a startlingly costly solution to the crowded British prisons. It was also a very slow solution to what is often said to have been an urgent problem”.
So what was the issue with banks and credit?
At the time the decision was made to settle in Australia William Pitt (the younger) had just become Prime Minister. He had inherited debts from Britain’s war in America.
As William Hague (ex British foreign minister) says in his excellent biography of William Pitt “the financial position he inherited was dire. A country with annual tax revenues of about £13 million was paying £8 million a year interest on a national debt which now amounted to £234 million. The last four years of the American War had added some £80 million to that debt, and it had been further inflated by the habits of Pitt’s predecessors, who sold government stock at a nominally low interest rate but at a large discount. This kept the interest rates low, but eventually gave the lenders a very healthy return by hugely inflating the capital which would one day have to be repaid”.
Pitt raised a £6 million loan through the Bank of England and set out to address the debt through a range of taxes on hats, ribbons, paper, hackney coaches, bricks, candles, linens, calicoes, coal, gold and silver plate, imported silk, exported lead, postage rates, and shooting certificates. All except the tax on coal were accepted by the public, but the necessity of coal for heating led to its quick withdrawal.
As Hague says “It is hard to imagine in a later age the extent of the preoccupation of late-eighteenth-century politicians and commentators with the national debt. We are accustomed to the debt inflating in bad times and being reduced in good ones, and have often seen it greatly diminished as a problem by either inflation or economic growth. But the policy-makers of the 1780s did not know that they were on the brink of an Industrial Revolution which would multiply the size of their economy many times over; their experience of recent decades was of the inexorable growth of the nation’s debt until it was now some sixteen times greater than the annual income of the state. Pitt was therefore responding to what was seen as a national problem of immense importance, and he and his proposals were acclaimed because he not only announced a policy, but also the method and resources by which it could be put into effect”.
In Yuval Noah Harrari’s book Sapiens he outlines the importance of credit to development at that time. “Western Europe witnessed the development of a sophisticated financial system that could raise large amounts of credit on short notice and put it at the disposal of private entrepreneurs and governments. This system could finance explorations and conquests far more efficiently than any kingdom or empire”.
The problem, as Harrari identified, is that for banks to provide credit they needed trust. As the Dutch empire experienced turmoil lenders shifted to France and England. France’s crisis over the Mississippi Company in 1719 cost it dearly with Britain emerging to win the trust of the financial system with Louis XV subsequently finding it more difficult to obtain credit whilst the British could borrow money easily at low rates.
The mercantilist system of the day was fed by constant growth. For Britain whilst it had the trust of bankers, it has lost the American colonies. Where was this growth to come from?
Did Lord Sydney and William Pitt talk about the need to keep bankers happy as one of the reasons to settle? Who knows? But it certainly was a conversation that was on the governments mind at the time.
The First Fleet cost £84,000. In the scheme of the British government borrowing £6 million this was a drop in the bucket. The actual long term government outlay was small. Out of the 11 ships sent to Botany Bay, 9 were contracted from the private sector. Having finished their duties ships like the Charlotte went off to China to pick up cargo from the British East India Company. The First Fleet sounds a little like a Private Public Partnership. But that is a story for another day…
William Hague, William Pitt the Younger: A Biography, HarperCollins, 2004
Yuval Noah Harrari, Sapiens, Vintage, 2011
Robert J. King, The Secret History of the Convict Colony, Allen & Unwin, 1990
Originally published LinkedIn on January 24, 2018