Magna Carta and the Bank of Eng­land

The Pak Banker - - COMPANIES/BOSS -

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.

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