I'm the Dauphin in France

Chapter 1321 Financial Warfare, Part Four
Suburbs of London.

In the garden of a castle-like manor, Wilberforce listened quietly to Pete's complaints and nodded, saying, "The French clearly want to cripple our finances to support the war of attrition in Gibraltar."

Although he was no longer in the cabinet, Pitt Jr. still frequently sought his friend's opinion on national policy, especially on fiscal matters.

The British Prime Minister sighed: "Barings Bank and securities brokers have bought more than £70 worth of government bonds, but still cannot stop the selling trend."

Wilberforce said, "You have to exert influence on the German states through diplomatic channels."

“I have sent Lord Hawkesburg to Bavaria and other countries, but it will take quite some time for this to be effective.”

Wilberforce thought for a moment and said, "Actually, you only need to raise the interest rate on government bonds to solve all the problems."

If the new government bond has an interest rate of 12% while the old bond has an interest rate of 9%, then the seller of the old bond will have to lower the price to make up for the 3% difference; otherwise, the buyer will definitely choose the new government bond. After all, the old bond's maturity date is only one year shorter.

Pete Jr. frowned: "But this would significantly increase the financial burden."

The base of government bonds is very large, and the interest rate will affect repayments for many years to come. He would rather invest millions of pounds at once to fend off the short sellers than let the treasury bear the burden of interest payments.

“There will certainly be some negative effects,” Wilberforce nodded, then smiled. “But in the current situation, the benefits outweigh the drawbacks.”

"I don't know what benefits it offers besides guaranteeing the sale of government bonds?"

Wilberforce looked at him and said, "Do you remember the arguments in 'Political Essays'?"

“Of course,” Little Pitt nodded. This was a book by David Hume that they had taken as an elective when they were studying at Cambridge. Although the title was related to politics, most of the content was about economics.

Wilberforce continued, "Once government bond rates rise, the Bank of England will certainly follow suit by raising deposit and lending rates."

Pete Jr. nodded again.

Although the concept of a central bank "benchmark interest rate" does not yet exist in this era, under the influence of the financial market, deposit and loan interest rates will inevitably follow the interest rate of government bonds, and vice versa.

If government bond interest rates rise sharply while deposit rates remain unchanged, depositors will inevitably choose to invest all their money in government bonds, leading to a depletion of banks' liquidity.

Therefore, in order to survive, banks will inevitably choose to raise deposit rates in line with government bond issuance. When deposit rates rise, loan rates will also rise accordingly.

Therefore, central banks in later generations set benchmark interest rates as the standard for interest rates on deposits, loans, bonds, and financial products.

Wilberforce stated, "As far as I know, the Bank of England has issued a 'small amount' of paper money over the years, which has led to inflation. In fact, this has already happened."

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

One major cause of inflation is excessive money supply. Higher deposit interest rates will encourage people to deposit more money in banks, thereby reducing the amount of money circulating in the market and thus curbing inflation.

This is common knowledge in the 21st century, but it was still cutting-edge financial theory at the end of the 18th century.

"The prices of food, fabric, sugar, and salt are constantly rising, and street protests break out from time to time. We can take advantage of this opportunity to stabilize prices."

“At the same time, lower domestic commodity prices will also boost exports. The extra interest payments on government bonds can be offset by increased trade.” Little Pete’s eyes began to light up. He had always subconsciously tried to avoid high-interest government bonds, but upon deeper reflection, he realized that it wasn’t entirely unacceptable.

Wilberforce didn't stop there: "Furthermore, you can get a lot of money by making a loan agreement with the Bank of England in advance. You can even print more banknotes after inflation has decreased."

“The major projects you are pushing forward will all receive ample funding, and the Naval Commission will no longer need to urge you for funds every day.”

Previously, Bolton-Watt was on the verge of bankruptcy due to defaults and a stock crash, and the British government had to invest a large sum of money to take control of the company.

Subsequently, in order to develop steam engine technology—the commissioning of French trains greatly stimulated the nerves of London politicians—Britain invested more than £100,000 in research and development.

The Fuel Committee has also received £15 in funding and is currently consuming funds at a rate of £3 per quarter.

The biggest "budget killer" is still the navy.

According to Lord Melville, the Minister of Naval Affairs, the Navy will build up to 30 new Prince-class battleships within three years.

These warships represent the Royal Navy's hope for returning to the Mediterranean, so the mission must be carried out without any compromise.

This alone requires an annual investment of £63.

At the same time, three to five ordinary third-class battleships were to be built each year. As for why the old model was being built even when a new model was available, that depends on the political landscape and distribution of interests within the Naval Commission; it would probably take a whole book to explain in detail.

Of course, the ostensible reason is that the older models are cheaper to manufacture, which can save money.

On the other hand, the repair work on steam warships also costs tens of thousands of pounds every year.

All of these combined would require more than £80 per year.

The empire had previously spent a huge amount of money on military expenditures in the war with France, and was still burning through money in Gibraltar and Porto, leaving its finances already stretched thin.

Pete Jr. is exhausted from raising the $80 and has already planned to cut some projects. But if raising interest rates attracts a large influx of deposits, then not only will there be no need to cut projects, but additional funding could even be allocated to accelerate construction and research and development.

He nodded to Wilberforce and said, “Luckily I didn’t refuse this banquet today. You’ve solved a big problem for me.”

"It's my pleasure." The latter smiled and bowed slightly, then asked, "It seems that the recent financial situation is not very optimistic."

“That’s true.” Little Pete forced a smile. “The war has created a financial hole. Trade in North Germany is also shrinking.”

"But we are trying to find a solution."

“The trade in opium in the Far East is growing rapidly, and we plan to increase exports to more than 4 boxes within two years.”

"Furthermore, the Australian colonies are starting to turn a profit. With the completion of the Van Diemens settlement, the amount of seal skins and whale oil brought back next year will more than double. Oh, and the sheep population in Sydney has also increased significantly..."

Wilberforce patted his old friend on the shoulder and said with emotion, "The Empire really can't do without you."

(End of this chapter)