Magna Carta and the Bank of England
Aburst of inflation. A crisis in the public finances. Public sector bailouts. Infighting in Europe. Not eight years ago, but eight hundred. That was the economic context for the striking of Magna Carta. Magna Carta has played a central role in British political development over the centuries, not least as a banner under which those seeking liberty from oppression have rallied. But many modern scholars argue that its significance, in and of itself, has been overstated. They characterise Magna Carta as a pragmatic political document that was a product of its time, including the difficult economic circumstances that then prevailed. The enduring legacy of Magna Carta is how its strictures on unconstrained power are reflected in our systems of political and economic governance.
I will conclude that both the constitutional and pragmatic perspectives are relevant to modern central banking and the current conduct of monetary policy. The costs of inflation were among the key economic catalysts of Magna Carta, and its core constitutional legacy - namely the importance of delegated authority, with clear lines of public accountability - is at the heart of the Bank of England's institutional arrangements. In the spirit of Magna Carta, the Bank of England has been given a great responsibility: to deliver monetary stability for the good of the people of the United Kingdom.
Where did Magna Carta come from? The England of the 1200s was far from a unitary state. Most matters were administered by local barons, with the King acting as an arbiter in the event of a dispute. The relationship between local and central authority was much less deferential, and much more arms-length, than it is today.
What lay behind such unsustainable public finances? First, and most obviously, the need to pay for constant military protection for the Normandy estates created what modern-day macroeconomists would think of as an enormous structural deficit.
Second, the monarchic finances had taken a colossal hit in 1193 because of the need to fund a gigantic public sector bailout. Richard I had managed to get himself caught in Germany on his way back from the Holy Land and was held to ransom for £66,000 in silver. Third, the need to raise additional cash for the public finances was made much more problematic by the strain of inflation, which accelerated in the early years of the 13th century.
Forget royal infighting, wars or the whiff of revolution, it is inflation that really sets the pulses of central bankers racing. And for good reason because closer inspection suggests that inflation may have been a significant catalyst to Magna Carta.
Historians estimate that prices were rising sharply in the early 1200s. The prices of agricultural goods, including wheat and oxen, probably doubled in that period. Wages were rising as well. With pay growth approaching 20% a year, wages really were fizzing!
The underlying causes of this inflation are debated among historians, but the most convincing argument is that the inflation was a monetary one, albeit with a twist. Not surprisingly, the quantitative information on the thirteenth century money supply is of very poor quality, imputed, as it has been, from archaeological finds of cash hoards.
Magna Carta was a desperate attempt at a peace treaty that failed almost immediately. Brokered by the Church, and issued by King John in June 1215, the Charter sought to placate the disgruntled barons. It is doubtful that John ever intended to uphold his side of the bargain, with all the constraints on his authority that this implied. Indeed, within a few months of its agreement, by the end of August 1215, John had convinced Pope Innocent III to annul the Charter on the grounds that it had been issued under duress. The 1215 Magna Carta was never enacted, and England slipped into the First Barons' War.
Charters of this type were not uncommon at that time. It had been fairly routine, in fact, for English kings to attempt to curry favour with the nobles upon whom the stability of their realm depended by rubbishing the reputations of their predecessors and issuing ' coronation charters' that demonstrated how virtuous and peace-loving they were by comparison. If Magna Carta was such a product of its time, how did it become to be so venerated? And once we cut through the legend, what is its significance for economic governance today?
The revisionist interpretation of Magna Carta as a timeless statement of natural rights and liberties became imprinted onto the minds of the Englishspeaking world only in the 17th century. In large part, this was due to the work of Edward Coke. As well as being an enormously influential jurist, Coke was also the author of popular English legal textbooks that exported his views around the world. Despite the efforts of Coke and others, Charles I's rejection of all enterprise to constrain his authority led to the English Civil War and to the king's beheading in 1649.
We have seen how the economic forces and political developments of the time played a crucial part in the mounting hostilities between King John and the barons that led to Magna Carta and First Barons' War. Given that background, it is not as shocking as it first seems that Magna Carta is very largely taken up with the parochial interests of the rich. It is dominated by three basic themes: taxes; abuses of the ' judicial system' with the aim of raising revenue; and the protection of the barons' mercantile interests.
Given how irrelevant those specific concerns now seem, it is hardly surprising that almost all of the Charter's clauses that survived the 1225 re-issue have since been repealed. In fact, only four clauses of the original 66 remain. These stand out as different in character from the others. They are much more general, universal and timeless. They are: Clause 1: Freedom for the Church. Clause 13: Protection for the ' ancient liberties' of the City of London. Clause 39: No wrongful imprisonment. Perhaps the most famous clause. "No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any way, nor will we proceed with force against him, or send others to do so, except by the lawful judgment of his equals or by the law of the land." Clause 40: Justice is not for sale. Added to that, the spirit of Clause 12 of the 1215 Magna Carta (dropped from all later reissues), that "no 'scutage' or 'aid' may be levied in our kingdom without its general consent…", is clearly what would later become ' no taxation without representation': to establish a council (the embryonic embodiment of what would later become Parliament) to agree whatever new taxes the King might demand.
Whatever their purpose at the time, the more universal clauses that remain on the statute book certainly resonate today. They in effect encompass the idea of the rule of law and of due process as a means to ensure justice. It is tempting, therefore, to think of these clauses as being the enduring legacy of Magna Carta, while at the same time allowing ourselves to patronise the juxtaposition of these apparently fundamental principles alongside so much antiquated gibberish about fish-weirs, the obligation to construct bridges, and the theft of wood for building castles. Magna Carta was nowhere near the first attempt to encapsulate ideas of justice and good government, nor was it the last. Indeed, it was a spectacularly unsuccessful attempt - and it was anyway concerned only with the interests of a very small segment of society. But, largely because King John's heirs were forced into a tight corner and therefore obliged to reissue the charter again and again after 1215 (in 1216, 1217, 1225, 1234, 1253, 1265, 1297 and 1300, to cite only the more famous reissues), it is Magna Carta that has become the icon of the principle that the exercise of authority requires permission from those subject to that authority - and that, once granted, this permission can just as easily be withdrawn.