Newton and the Counterfeiter (17 page)

To some—to Chaloner, certainly—the sudden appearance of what came to be called bank notes must have seemed like a gift from heaven: here at last was the road to wealth, paved not with gold but with sheets of England's first paper money.

T
O MOST PEOPLE
in the 1690s, paper money was an oxymoron, as ridiculous and self-contradictory as a wise fool or a cowardly lion. Paper could not be real money. But faced with the cost of the war and the fact of a debased coinage, the demand for something—anything—that could pass between buyers and sellers, debtors and creditors, forced the issue.

The idea behind the Bank of England was hardly new. Prototype national banks had been tried in London in 1682 and 1683, and the key founder of the Bank of England, William Paterson, had offered his first proposal for a loan-making company to the government in 1691. But the idea of a central lending bank remained suspect, viewed as a way for investors to enrich themselves at the country's expense. Paterson's proposed bank would have charged the government six percent on loan capital of a million pounds, a rate of interest that was rejected out of hand by the House of Commons.

But by 1694, King William was desperate. The Treasury had tried to raise its own loan in 1692, and was forced to offer first ten percent, and then a ruinous fourteen percent, to attract less than 900,000 pounds—well under half the total needed to support the army in the Low Countries, never mind the government's other expenditures. When Paterson renewed his offer in 1694, this time for a bank with a capitalization of 1.2 million pounds, the Chancellor of the Exchequer rammed it through a still hostile Parliament during an almost unpopulated session of the House of Commons—reports indicate that only forty-two members showed up to vote.

In its final form, the Bank was supposed to provide a very simple service. Wealthy men would subscribe money to supply the Bank's capital, and the Bank would then lend that money—and only that money—to the government. Depositors could get access to their funds in three ways. They could hold a "book or paper" in which their transactions were entered—the passbook in embryo. They could write their own promises of funds to be paid, which the Bank would accept up to the amount of their deposits—the prototype of the check. Or, crucially, they could hold their money as "running cash notes," which the Bank promised to accept on demand, redeeming the note, either in full or in part, in hard coin. (Clerks would list partial payments on the note itself.)

That's how it began: money, captured on a sheet of paper. It rapidly became something more. By lending the full sum of its deposits (and soon enough, even more) to the government, and by issuing notes against that same capitalization that depositors could spend, the Bank of England performed the essential economic miracle: it created capital out of thin air. This was the birth of what is known as fractional reserve banking, the foundation of the modern financial system. In a fractional reserve bank, working on the assumption that only a small percentage of depositors will demand their share back at any given time, the institution lends more than the sum total of its capital. How much more is the question. Banks that lend too great a multiple of their deposits risk running out of cash if too many depositors demand payment. If the banking system as a whole lends too little, credit tightens, loans become more costly, and economic life suffers. (Bank regulators can use the reserve requirement—how much cash as a percentage of loans a bank is required to keep on hand—as a tool to tighten or loosen credit,
and thus, in theory, keep an economy from becoming either too sullen or too exuberant. The gap between that theory and actual practice is not, perhaps, as small as economists would wish.)

At the start, the Bank had no vision of global capitalism. It was just trying to get negotiable credit into the hands of William and his army in Flanders—all while making a profit for itself. The unintended but critical consequence of creating modern bank notes, however, was that for the first time, a nation in Europe had transformed its government obligations into a new, uniform—and most important, tradable—commodity. Previous attempts to raise cash for the war had relied on any expedient available—loans, annuities, exotic proto-bonds—but none of these had an agreed value that enabled holders of an annuity, for example, to trade that asset on a market for cash. Bank notes
were
a form of cash.

The uniform character of the notes also meant that, useful as bank notes might be, they carried a potentially ruinous risk: what one man could inscribe on paper, another could copy. The raw materials for paper money were easy to find, and with so many printers and engravers in London, surely some would sacrifice their honesty for a price. After all, William Chaloner had persuaded a few of them to risk the noose by printing Jacobite propaganda.

The Bank's owners understood the danger, and they did what they could to protect themselves. The first bank notes were never intended to be ready cash, replacements for the silver and gold coins that ordinary people used to do their business. The new currency was supposed to remain in the hands of financiers who needed to move major sums of money around. Although the Bank offered notes in amounts as little as five pounds, one hundred pounds—or roughly double a middle-class income—was the most common denomination. Such large sums made it harder to pass poorly copied bills. Few would or could accept them, and those who did were mostly sophisticated enough to protect themselves from amateur criminals. But greater sums of money also increased the temptation. So, two weeks after the Bank received its charter, the directors formally decided that "the Notes for Running Cash being considered liable to be counterfeited, for preventing thereof it was ordered that they be done on marbled paper Indented."

Thus decorated, Bank of England notes—in practical terms, the first bank-issued paper money in the world—entered circulation in June 1695. They were immediately popular. As early as 1697, almost 700,000 pounds circulated as running notes—and this pile of what passed as cash quickly took on a life of its own. The five pounds that Mr. Smith deposited on Tuesday became ten by Wednesday: the five lent to support the army in Flanders and the five Smith could hold as a running cash note. This simple trick was the first in the sequence of novel gyrations of money that was about to turn London into the financial center of Europe and, within a century or a little more, of the entire world.

For Chaloner, marbled paper did not present much of an obstacle. He knew at least one artisan capable of simulating it, and he or a confederate was skilled enough to forge the handwritten entries on each note. His fakes circulated for at least two months before the first was detected, on August 14, 1695. If that was not enough time to match the haul of his early coining triumphs, with the house in Knightsbridge and his service of plate, it was still long enough to pass a serious amount of money.

But then, of course, he had a serious problem. The Bank's men traced that first detected dud note back to the printer who had copied the marbling. The printer informed on Chaloner, who then performed a magnificent two-step. Of course, he had to surrender his as yet uncirculated stock of false bank notes, but he forestalled prosecution with his usual expedient of trading information for freedom. He told the Bank's investigators of another scheme, one he had almost certainly also masterminded. The Bank had been fooled into accepting stolen checks from the City of London's Orphans' Fund, a fraud that had cost it at least a thousand pounds. Chaloner named names, and the infamous John Gibbons, porter at Whitehall, arrested those unfortunate enough to have been of use in this Chaloner enterprise.

It was a vintage performance. Chaloner played the boundaries between official London and its criminal shadow city better than anyone else in his day. For his services to the Bank—a double robbery, admitted and betrayed only after the profits had been booked—Chaloner received grateful thanks and, unbelievably, a reward of a further two hundred pounds. Encouraged—and why not?—Chaloner kept playing what must have seemed like an exceptionally gullible and rich mark, extending "his old Trick of Trumping up his Services." In November 1695, he sent the Bank a list of suggestions for dealing with the threat of counterfeit bank paper. His ideas impressed his readers. Sir John Houblon, the governor of the Bank, became an active supporter, to the point of seeking Chaloner's release from Newgate on his next brush with the turnkeys.

It was that same November that King William finally commanded Parliament to act in the face of the ever deeper crisis of England's coinage. To Chaloner, the decisions made in response to the King's demands only widened the field of opportunities. His experience in stealing from and then "funning" the Bank had confirmed for him that any turmoil in the money system created opportunities for him to get rich. Sixteen ninety-five had turned out to be a highly profitable year. It looked as if 1696 would be even better.

F
OUR A.M., LATE FALL
1696.

The gate at the southwest corner of the Tower of London opens. Men appear from the darkness, some lagging, struggling against weariness and the aftereffects of the gin and ale consumed several hours before. A few of the bolder or more belligerent laborers chaff the sentries as they pass beneath the heavy stone of the gateway and through the Byward Tower. Scuffles break out between the soldiers and some of the workmen, and both sides wait for fighting words, or for the elbow in the gut or the flick of a leg that sends a man sprawling.

Past the tunnel that pierces the outer wall of the Tower, the stream of workers turns left. Another gate opens. Men enter the workshops that snake around the perimeter of the Tower—long, narrow rooms, airless and dark, propped up here and there by huge wooden posts, filled with rows of machines. As the hours pass, the air thickens—coal fumes and the stink of horse droppings merging with the funk of too many bodies working too hard in the rising warmth of the day. The noise is steady, relentless, rhythmic; the top note strikes fifty, sometimes fifty-five times a minute. Men push on through the clamor, the sweat, and the stink until early afternoon, when the next shift shows up. The Royal Mint, in full spate of what became known as the Great Recoinage—an enterprise unprecedented in the history of money—falls silent only at midnight. Four hours later, every day but Sunday, it lurches into action again.

***

This was how the recoinage ultimately proceeded—quickly, efficiently, relentlessly. But at the point when Isaac Newton took up his post as Warden, the effort—and at least potentially, the nation too—was on the verge of collapse.

The looming disaster derived from the fact that the man who was supposed to be in charge of the recoinage was thoroughly incompetent. In 1696 the Royal Mint was still an essentially feudal institution, headed not by one man but by three separate officers, the Warden, the Controller, and the Master and Worker. Each incumbent held his post by warrant of the Crown. There was no clear hierarchy of authority among them, and each had clearly fenced-off powers and duties. The Warden was nominally responsible for the Mint facilities alone. The production of new coins was supposed to be under the control of the Master and Worker.

Unfortunately for England, that meant that the fate of the nation's money supply in the spring of 1696 rested with Thomas Neale. Neale was a gambler's gambler, having served three kings—Charles II, James II, and William III—as groom porter, whose duty it was to furnish the royal residences with tables, cards, and dice, and to settle disputes among players. Neale himself played, on a grand scale. He asked for and received the first concession to create a North American postal service, a privilege for which he paid eighty cents a year. He hired a local deputy and lost heavily—three thousand dollars in the first five years of the service. He bet and lost another fortune on an expedition to recover a cargo of silver rumored to be worth more than one million pounds from the Spanish galleon
Nuestra Señora de la Concepción,
which had sunk north of Hispaniola. He wangled the Master's job in the usual way, through personal connections. But even with the benefit of patronage, his fame as a wastrel was such that he had to post a bond of fifteen thousand pounds of his own money, instead of the usual two thousand. Reckless, possibly corrupt, and certainly indolent, Neale was thoroughly overmatched by the job. When he died, it took his successor as Master—Newton himself—four years to untangle his official accounts.

In the meantime, Neale proved to be a true Mint traditionalist. His post had long been a patronage plum, and nothing could make him perform beyond what he believed were purely nominal duties. By 1696, he had long since turned over the bulk of his responsibilities to a hired assistant, with whom he shared a cut of the Master's profits from the coining operation. Such sloth did not matter during the slow years of the early 1690s. But with the recoinage, Neale was suddenly in charge of an operation that aimed, in three years or less, to melt and restrike almost seven million pounds sterling—more than the Mint had produced in the preceding three decades. No one in authority over the Master would have had any great confidence in his performance. But given that he held the royal warrant for his post, there was no obvious solution to his presence but to hope that the assistants he had already hired would be able to make up for their chief's deficiencies.

They could not. Under Neale's management, the first months of the recoinage swerved hard toward farce. The first significant milestone came in May 1696, when the Treasury ceased to accept the old, hammered money as legal payment for taxes. Neale's men were supposed to have produced enough new silver coins in the preceding five months to keep at least a reasonable fraction of usable silver in common circulation. But in the event, from May through July, there was almost no cash to be had anywhere in England, and the situation improved only slightly into autumn. Official revenues disappeared—tax payments abruptly dried up and government debt traded at a discount of thirty percent of its face value, a further drop from the already disastrous level of the year before.