Novels online

Chapter 1321: Financial Warfare, Part Four

Outside London.

In the garden of a château-style estate, Wilberforce listened quietly to Pitt the Younger's complaints, then nodded. "The French clearly intend to cripple our finances, complementing their war of attrition at Gibraltar."

Although he was no longer in the cabinet, Pitt the Younger still frequently sought his friend's advice on national policy, especially regarding financial matters.

The Prime Minister sighed. "Baring Bank and the stockbrokers have already purchased over 700,000 pounds sterling in national bonds, but still can't stem the selling trend."

Wilberforce stated, "You'll have to exert influence over the German states through diplomatic channels."

"I've already sent Lord Hawkesbury to Bavaria and other nations, but it will take some time for that to take effect."

Wilberforce pondered, then said, "In fact, you only need to raise the interest rate on national bonds to solve all these difficulties."

If the new national bonds offered 12% interest, while the old bonds offered 9%, sellers of old bonds would have to lower their prices to compensate for that 3% difference; otherwise, buyers would undoubtedly choose the new national bonds. After all, the old bonds only matured a year earlier.

Pitt the Younger frowned. "But that would significantly increase the financial burden."

The base amount of national bonds was enormous, and the interest rate would affect repayment expenditures for many years to come. He would rather invest millions of pounds sterling in one go to repel the short sellers than let the treasury be saddled with the burden of interest.

"There will indeed be some adverse effects." Wilberforce nodded, then smiled. "But given the current situation, the benefits it brings outweigh the drawbacks."

"Aside from guaranteeing the sale of national bonds, I'm not sure what other benefits there are."

Wilberforce looked at him and asked, "You still remember the discussions in 'Political Discourses,' don't you?"

"Of course." Pitt the Younger nodded. It was a work by David Hume they had studied at Cambridge, and while its title was political, most of its content dealt with economics.

Wilberforce continued, "Once the interest rate on national bonds rises, the Bank of England will undoubtedly raise its deposit and lending rates accordingly."

Pitt the Younger nodded again.

Although the concept of a central bank's "benchmark interest rate" didn't exist in this era, under the influence of the financial market, deposit and lending rates would inevitably follow national bond rates. And vice versa.

If the national bond rate significantly increased while deposit rates remained unchanged, depositors would naturally choose to invest all their money in national bonds, leading to a depletion of banks' liquid funds.

Therefore, for their survival, banks would inevitably choose to follow the national bond rate by raising their deposit rates. Once deposit rates increased, lending rates would also rise.

This is why central banks in later eras would set benchmark interest rates to serve as the standard for deposit and lending rates, bonds, and financial products.

Wilberforce said, "To my knowledge, the Bank of England has issued a 'small' amount of additional paper money over the years, which will lead to inflation. In fact, it's already happening."

"And according to Mr. Hume's theory, raising deposit rates can effectively solve this problem."

A major cause of inflation is an oversupply of currency, and raising deposit rates would encourage people to save more money in banks, thereby reducing the amount of currency in circulation, achieving the effect of curbing inflation.

This was almost common knowledge in the twenty-first century, but in the late eighteenth century, it was still cutting-edge financial theory.

"Currently, food, cloth, sugar, and salt are all constantly rising in price, with street protests erupting periodically. We can use this opportunity to stabilize prices."

"At the same time, lower domestic commodity prices will boost exports. The additional national bond interest paid out by the treasury can be offset by increased trade."

Pitt the Younger's eyes began to light up. He had always subconsciously tried to avoid high-interest national bonds, but by thinking a layer deeper, he realized this wasn't unacceptable.

Wilberforce, however, didn't stop. "Furthermore, you can reach a loan agreement with the Bank of England in advance to secure a substantial amount of funds. You could even issue more banknotes after inflation has subsided."

"All the major projects you're advancing will receive ample financial support, and the Navy Board won't have to pester you for appropriations daily."

Previously, the Boulton-Watt Company had been on the verge of collapse due to breach of contract and a stock market crash, forcing the British government to inject substantial funds and acquire a controlling stake in the company.

Subsequently, to develop steam engine technology—the French introduction of trains had greatly agitated London politicians—Britain successively invested over 100,000 pounds sterling in research and development.

The Fuel Committee had also received 150,000 pounds sterling in appropriations and was currently devouring funds at a rate of 30,000 pounds sterling per quarter.

The biggest "budget killer" was still the Navy.

According to Lord Melville's plan, the Navy would construct as many as 30 new "Prince-class" third-rate battleships within three years.

These warships represented the Royal Navy's hope of returning to the Mediterranean Sea, and thus, their construction had to be executed without a single compromise.

This single project alone would require an annual investment of 630,000 pounds sterling.

At the same time, three to five ordinary third-rate battleships were still to be built annually. As for why older models were still being built despite the new designs, that depended on the Navy Board's political landscape and distribution of interests; a detailed explanation would probably require an entire book.

Of course, the ostensible reason was that older models were cheaper to build, saving funds.

On the other hand, the repair work for steam warships also cost tens of thousands of pounds sterling annually.

All these expenditures combined would require over 800,000 pounds sterling annually.

Previously, the Empire had expended enormous military funds in the war against France, and was still continuously bleeding money in Gibraltar and Porto, its treasury already stretched thin.

Pitt the Younger was exhausted trying to raise these 800,000-plus pounds sterling, and had already planned to cut some projects. But if raising interest rates attracted large deposits, not only would he not need to cut anything, but he could even allocate additional funds to accelerate construction and research.

He nodded at Wilberforce and said, "It's a good thing I didn't refuse this banquet today. You've helped me solve a major problem."

"The pleasure is mine." The latter smiled and bowed slightly, then asked, "It seems the recent financial situation is not optimistic."

"Indeed." Pitt the Younger forced a smile. "The war has created a financial hole. Trade volume in North Germany is also shrinking."

"But we are also finding solutions."

"The opium trade in the Far East is growing rapidly, and we plan to increase exports to over 4,000 chests within two years."

"Furthermore, the Australian colonies are starting to turn a profit. With the completion of the Van Diemen's Land settlement, the amount of sealskins and whale oil brought back next year will more than double. Oh, and the sheep flocks in Sydney have expanded significantly..."

Wilberforce patted his old friend's shoulder and remarked, "The Empire truly couldn't manage without you."