The worst trades in history… lending to the king

Charles II was born in 1630 to King Charles I and his wife Henrietta Maria, and he went on to fight in the Civil War before spending several years in exile. He was crowned king in 1660 when Oliver Cromwell’s commonwealth collapsed, leading to the restoration of the monarchy. Charles’s reign, which lasted until 1685, was characterised by his involvement in various wars against the Spanish, French and Dutch, and his poor relations with Parliament, which he prorogued several times. He was also a spendthrift, lavishing large sums on his court.

What was the trade?

The cost of the wars and the king’s lifestyle, as well as difficulties raising taxes and the large debts inherited from his father, left the Exchequer in financial dire straits. Not even the sale of Dunkirk to the French solved the problem and Charles was forced to borrow. His loans were initially secured against specific revenue sources, such as taxes. Later, however, he took on unsecured debt from goldsmith bankers, who took in deposits, then lent them to the king, making their money from the difference between the 8%-10% paid by the government and the 6% paid to depositors.

What happened?

As long as the king continued to make regular payments, this strategy worked well for the bankers, but the cost of the wars began to mount and in October 1671 Charles demanded a further loan from his bankers in order to finance the expansion of the Royal Navy. Stung by their refusal, and facing payments equal to his government’s revenue, Charles announced on 2 January that he would simply stop repaying either the interest or principal on any unsecured loans and ordered that the bankers still had to repay their depositors.

Lessons for investors

A few private individuals were able to swap the defaulted bonds for secured bonds, but the 25 bankers who appeared on the list of creditors, accounting for 85% of the £1.3m owed (£ 225m in today’s money), received only sporadic payments over the next three decades. When they did get a final lump sum in 1706, it involved a haircut. Most such creditors were forced to declare bankruptcy, with several spending time in debtors’ prison – a lesson that sovereign debt is not necessarily risk-free (although British debt has not defaulted since).