Tax Collection in France and the Ottoman Empire at the End of the Sixteenth Century

At the end of the sixteenth century, the French fiscal system was relatively decentralized. Tax rates and bases varied greatly, reflecting the different terms under which various regions submitted themselves to royal authority. Consequently, taxes were also collected in many different ways. There were two basic organizational forms for tax collection. “Direct” taxes, on wealth such as the taille were collected by agents of the crown, usually venal office holders. The crown determined, at the beginning of each fiscal year, how much it required from a given tax, and then it was the duty of the collector to get that amount in addition to a percentage “cut” out of receipts. Thus, there was really no tax rate, as such, for direct taxes. The collectors decided, within certain bounds, how much to collect from whom. “Indirect” taxes on transactions, such as the gabelles (salt taxes), aides (sales taxes, usually on wine and spirits), and traites (internal and external customs duties) were typically leased to individuals known as tax farmers. Under tax farming, the tax farmer agreed to make a fixed payment to the crown in exchange for the residual claim to any tax revenues collected above the fixed amount. Tax farms had clearly defined rates on transactions which could be (and often were) subject to adjudication in tax courts. At the end of the sixteenth century, the tax farms composed about a third of royal revenues and the taille brought in another 50 percent. After 1661 the tax farms increased in importance and brought in between 40 and 50 percent of tax revenues a year.Footnote ⁸

Given the variety of taxes involved, each with its own tax base and method of collection, it was costly for the crown to determine exactly how much each tax was really worth. Local collectors, on the other hand, had at least a vague notion of how much the tax was worth to them. One way for the crown to overcome this information asymmetry was to allocate the tax contracts using competitive auctions. Tax farming as a means to minimize the king's cost of collecting taxes is consistent with the set of institutions that governed the sixteenth century tax farm system. For example, there were many laws designed to ensure competitive auctions.Footnote ⁹ The number of investors in a single farm was restricted and liability for any investor was unlimited.Footnote ¹⁰ The laws had the effect of making it very costly for a cartel of tax farmers to pool their capital and exert market power. There is convincing evidence that, during the sixteenth century, these regulations were binding in the sense that auctions were competitive.Footnote ¹¹

The Ottoman fiscal system shared many similarities with that of France during the sixteenth century.Footnote ¹² It too was complex and relatively decentralized. The costs of tax collection by state agents alone were considerable given the size of the empire, its diverse population, and the large number of taxes that varied by territory.Footnote ¹³ As in France, it was common for Ottoman rulers to subcontract with private agents.Footnote ¹⁴ Two forms of lease contracts were used in the Ottoman Empire, military lease contracts (timar) and tax farming contracts (iltizam). Timar holders were leased taxation rights in exchange for their regular military services. Timar contracts specified that, after the obligation to the timar holder was met, the residual from tax collection was to be sent to the Treasury in Istanbul. Two-thirds to three-quarters of Ottoman revenues came from the Timar System during the sixteenth century.Footnote ¹⁵

Most taxes collected through timar contracts were in kind. A second form of lease contracts was auction-based tax farming (iltizam), which served as the primary source of liquid funds to the central administration. A typical tax farming contract was constituted as a classical Islamic partnership (mudaraba).Footnote ¹⁶ Participants in these tax farm contracts came from diverse backgrounds. There are records of Christians and Jews, in addition to Muslims, contributing capital to the partnerships. As in sixteenth-century France, Ottoman tax farming contracts during the same period were typically limited to two, three, or four members.Footnote ¹⁷ Tax farmers were usually unable to pay the full auction price for the contract; instead they paid a portion upfront and the remainder in installments. The guarantors of these installments (kefils) offered collateral either in wealth or in person. Contracts lasted one to three years, after which the tax farm was again auctioned out. The tax farmers were legally liable to the sultan, and their accounts were regularly checked by bureaucrats.Footnote ¹⁸

As in France, the transaction costs of measuring and monitoring collections goes far towards explaining why timar contracts were used to collect some taxes and why tax farming contracts (iltizam) were used in other cases. Farming was the dominant form of taxation of mines, mints, salt works, mills, dyeing establishments, customs dues, and market taxes, all sources of revenue deemed difficult to forecast or collect.Footnote ¹⁹ It was also more prevalent in outlying regions of the empire, providing about 20 percent of revenues in Anatolia, 25 percent in the European provinces, and 80 percent in Egypt during the fiscal year 1527/28.Footnote ²⁰

As will be explained below, over the course of the seventeenth century, tax farming in both the Ottoman Empire and France grew in importance. In France, tax farming went from providing around a third of revenues at the beginning of the seventeenth century, to providing close to half of “ordinary” revenues at the beginning of the eighteenth century. Similarly, by the beginning of the eighteenth century, tax farming accounted for an estimated 30 to 50 percent of the sultan's revenues.Footnote ²¹ However, there were also significant differences in how the organization of tax farming evolved in each country. In France, all the various tax farms were consolidated into a single, quasi-private, organization known as the Company of General Farms. During the eighteenth century, the company became one of the most influential stakeholders in the French fiscal system, and protected that position with a great deal of success. The organization of Ottoman tax farming, by contrast, moved towards greater decentralization during the seventeenth and eighteenth centuries.

By the middle of the eighteenth century, after decades of deteriorating property rights, the relationship between the tax farmers and the sultan had broken down to such an extent that many tax farmers were operating their farms in the provinces with virtual autonomy from the center. How do we explain the relative security of property rights over fiscal contracts in eighteenth century France, at least when measured relative to the Ottoman Empire? More specifically, what caused the emergence of a durable and powerful political coalition from within the French fiscal system, whereas no such coalition crystallized in the Ottoman Empire?

The Fiscal Crisis of the Seventeenth Century and Its Effect on Fiscal Contracts

War and the financial necessities it created was the driving force behind institutional change in early modern public finance.Footnote ²²Figures 1 and 2 show the effect of increased military spending on French and Ottoman budgets at the end of the sixteenth and into the seventeenth century.Footnote ²³ In France, not only did spending increase dramatically just before and during wartime, as in 1635 with the entry into the Thirty Years War, in 1672 with the Dutch War, and in 1689 with the Nine Years War, but the size of expenditures increased with each successive crisis.Footnote ²⁴ These deficits were large. In 1680 the king was borrowing about twice his revenues. In the Ottoman Empire, the first deficits appeared towards the end of the sixteenth century and lasted through the seventeenth century. Ottoman deficits were particularly large during times of war.Footnote ²⁵ For example, in 1597/98, as the Ottomans were fighting the Habsburgs, the sultan borrowed twice his revenues, and in 1690/91, while again fighting the Habsburgs, he borrowed about 50 percent of his revenues.Footnote ²⁶

While certainly a fascinating area for future research, we do not delve into the multifaceted reasons behind the fiscal pressures that struck Europe and Asia towards the end of the sixteenth and the beginning of the seventeenth century.Footnote ²⁷ We are primarily interested in their impact on French and Ottoman fiscal institutions. We content ourselves with the observation that many of the organizational and technical innovations which boosted costs were common to both the Ottoman Empire and France. As such, the seventeenth-century military revolution constituted a common, negative, shock to the fiscal systems of both countries. What is of particular interest to us is that this negative shock had a similar effect on property rights in both countries. Faced with increasing expenditures and constant revenues, both Ottoman sultans and French kings began to borrow and default more on fiscal contracts.Footnote ²⁸ The effect of this decrease in the security property rights on institutional evolution in each country, however, was very different.Footnote ²⁹

Figure 1

BUDGET SURPLUS AND DEFICIT IN FRANCE, 1523–1698 (100,000's of setiers of wheat)

Sources: The sources for the data for Figure 1 and how the series was constructed are contained in footnote 23.

Figure 2

BUDGET SURPLUS AND DEFICIT IN THE OTTOMAN EMPIRE, 1523–1698 (100,000's of kile of wheat flour)

Note: 1 kile equals 26.24 kg. The budget data were compiled by the authors with the sources below.Sources: The nominal budget data came from İnalcık and Quataert, Economic and Social History, p. 99, for 1520–1608; and from Çizakça, Comparative Evolution, p. 144, for 1660–1700. Wheat prices came from the data appendix in Őzmucur and Pamuk, “Real Wages.” See footnote 26.

We should emphasize that large deficits, in and of themselves, did not constitute a “fiscal crisis” in France or the Ottoman Empire. But deficit spending did significantly alter fiscal contracts and ultimately led to more uncertain property rights. The growing insecurity of property rights is what we consider a “fiscal crisis.”

The link between increased deficits and uncertain property rights is well illustrated by the evolution of French tax farm contracts during the first half of the seventeenth century. Many of the earliest loans to the crown came from tax collectors, especially tax farmers. The most straightforward way to do so was for the tax farmer to forward payments on his lease price to the king before they were due. Such early payments were called anticipations on future tax receipts.Footnote ³⁰ In 1623 at least 1,300,000 livres were borrowed through the aides in anticipation of tax revenues worth about 2,300,000 livres.Footnote ³¹ The king was thus anticipating about half of his receipts from the aides before they were collected. In a like manner, the king borrowed at least 1,668,212 livres from the tailles in 1688 in anticipation of future payments of about 2,000,000 livres.Footnote ³²Figure 3 shows the real value of loans through the three largest tax farms between 1614 and 1647.Footnote ³³ These data indicate that lending was a major role of the farms by the first half of the seventeenth century.

As lending funds became a larger role for French tax farmers during the seventeenth century, the incentives surrounding their contracts with the crown changed. The transaction costs of acting as “bankers” for the king were very different from those associated with being his tax collectors. As the king's borrowing through the farms increased, his incentive to “renegotiate” leases with his farmers ex post, also increased. Evidence of these renegotiations during the first half of the seventeenth century is significant. Of the 68 largest tax farms between 1598 and 1655, twenty-six had their leases broken.Footnote ³⁴ The largest tax farms by capitalization experienced the greatest rate of renegotiation.Footnote ³⁵ For example, between 1598 and 1655, 64.7 percent of contracts on the aides were ruptured.

Competitive tax farming made sense when the only role for tax collectors was to collect taxes. It created incentives which encouraged the individual with the lowest cost of collection to do so, and ensured that the crown would reap most of the benefits of this specialization. However, competitive allocation of tax farm contracts was inconsistent with the increasing role of the farmers as financial intermediaries. As things stood in the first half of the seventeenth century, the king could default on a loan by revoking a farmer's lease and then re-lease it to one of his competitors at a relatively low cost.Footnote ³⁶

In the Ottoman Empire, the costly wars of the last decades of the sixteenth century and the seventeenth century also introduced large budget deficits, just as in France. In their attempts to raise more revenues, the sultans ran roughshod over the property rights of public officials, the clergy, and fiscal agents. Existing institutions, including a system of emergency war loans from the wealthy, were no longer sufficient.Footnote ³⁷ So the sultan forced loans from the wealthy and confiscated funds from the pious foundations (waqf) and trust funds of minors.Footnote ³⁸

Figure 3

ANTICIPATIONS THROUGH THE FRENCH TAX FARMS, 1614–1648

Sources: The source and description of the data for Figure 3 are contained in footnotes 31 and 33.

At the end of the sixteenth century, the Ottoman state resorted to debasing its currency for the first time in over one hundred years. The Venetian golden ducat was worth 60 akçes in 1584, 120 in 1588, 150 in 1618, and remarkably 310 in 1624.Footnote ³⁹ Seignorage was recognized as a form of expropriation and was met by popular dissent. Following the first debasement in 1589, the Janissary Corps revolted. A very powerful political group, when their salaries were paid in debased currency, they demanded and succeeded in having the chief treasurer and other officials responsible for the policy executed. This was the first of such uprisings followed by many in the seventeenth century. Sultan Osman II (1618–1622) was assassinated in one such revolt.Footnote ⁴⁰

In response to fiscal pressures, the availability of liquid funds became a high priority as the central administration struggled to cover military salaries. As a result, during the early seventeenth century, competitive tax farming became the primary method of tax collection. Footnote ⁴¹ Uncertainty with regard to these tax farming contracts, similar to that seen in France, was prevalent. Figure 4 shows the difference between the intended duration of Ottoman tax farming contracts and their actual duration between 1535 and 1620.Footnote ⁴² Of the 206 tax farm contracts during the period, 10 percent were revoked in less than a year. A good example is the tax farm of Salonica Salt Works, which in 1618 was taken over by four different partnerships within one year. The first of these was a partnership of four Jewish tax farmers; the last one involved two Christians and one Jew.Footnote ⁴³ Murat Çizakça's sample of tax farm contracts is consistent with the observation that, “[t]he central administration was not obliged to leave the tax farm in the hands of any contractor for the duration of the farm. Whenever a better bid was made, the tax farmer either paid the difference or lost his right to collect.”Footnote ⁴⁴ So the sultan could simply default on a contract by revoking a tax farmer's lease and then re-lease it to one of his competitors. The effect was to increase the uncertainty of property rights over tax farm contracts.

Figure 4

DIFFERENCE BETWEEN INTENDED AND ACTUAL DURATION OF OTTOMAN TAX FARM CONTRACTS, 1535–1620

Notes: Intended vs. actual duration data come from Çizakça, “Tax Farming,” pp. 233–50, which tracks 134 tax farms and their associated contracts over the period 1534–1687. Not all contracts sampled by Çizakça contain information on both the actual and the intended duration of the lease. See footnote 42 for an explanation.Source:Çizakça, “Tax Farming,” pp. 233–50.

The Response by Fiscal Agents to Uncertain Property Rights

The highly decentralized tax systems in both France and the Ottoman Empire during the first half of the seventeenth century made it easier for rulers to manipulate the rules of the game. Faced with incentives to renege on or tamper with fiscal contracts, rulers confronted only weak resistance from within their existing tax systems. The long-run response to increasingly uncertain property rights in France and the Ottoman Empire, however, was very different. In France, a coalition of tax farmers emerged after 1661 that could coordinate punishments against the crown. This coalition emerged because existing institutions were conducive to capital pooling, which allowed the tax farmers to credibly threaten the crown. In the Ottoman Empire, existing institutions were not as amenable to pooling capital, which kept fiscal agents from organizing in large enough numbers to credibly constrain the sultan.Footnote ⁴⁵

There were two significant barriers to the initial consolidation of the French tax farm system. First, the individual tax farms were already under contract. Before they could be consolidated, either these contract holders had to be legally “bought out,” or, their contracts had to be illegally abrogated. Second, there were explicit laws in place that outlawed consolidation of the farms. Initially created to prevent collusion on the part of the farmers, by the middle of the seventeenth century, these now constituted an explicit cost to any group of tax collectors attempting to consolidate the system. Louis XIV's Finance Minister, J. B. Colbert, was instrumental in overcoming these two costs of organizing the Company of General Farms. Through the judicious use of legal investigations of tax farmers (Chambre de Justice), Colbert managed to buy out at reduced price, or kick out, many of the existing tax farmers.Footnote ⁴⁶ He then combined many of these tax farm contracts and re-leased them to members of his trusted inner circle.Footnote ⁴⁷ Lastly, Colbert issued new regulations concerning the legality of a consolidated tax farm system.Footnote ⁴⁸

The creation of the Company of General Farms gave rise to more secure property rights for the king's tax collectors and this, in turn, led to an increase in the value of the tax farms. Figure 5 shows the sustained increase in the aggregate value of lease prices for the tax farms that coincided with the creation of the Company of General Farms.Footnote ⁴⁹ The dramatic increase in lease prices after 1661 reflected the increased security of property rights over the tax farms relative to the previous period.Footnote ⁵⁰ Between 1681 and 1789 the financiers who controlled the Company of General Farms lost their property rights to the farms only once, during the Law Affair (1716–1720).Footnote ⁵¹

Figure 5

FRENCH TAX FARM REVENUES, 1600–1695

Note: See footnote 49. Also, the data are adjusted for inflation using Baulant and Meuvret's, Prix, price series for wheat (the same series used to adjust the numbers for Figure 1).Sources: The sources for Figure 5 are contained in footnote 49.

We should emphasize that we are not claiming that the French tax system was more efficient than the Ottoman system because of this constraint. Rather, we are simply arguing that fiscal agents in France could more effectively restrict the actions of the crown after 1661. The king's hands were tied more tightly after 1661, and eventually this restricted range of motion would lead the crown down the path of fundamental institutional reform rather than a path of incremental reforms as followed by Ottoman sultans.

The evolution of the French tax farms illustrates how, in response to uncertain property rights, tax collectors were able to form a coalition that allowed them to successfully constrain the king. They then limited the crown's options when confronted with fiscal problems during the eighteenth century, a situation that contributed to the political crisis facing the monarchy at the end of the eighteenth century.Footnote ⁵² Fiscal crises like the one confronting Louis XVI in 1789 were nothing new to French rulers. But the rise of organizations like the Company of General Farms fundamentally limited Louis XVI's options by significantly raising the cost of violating the property rights of stakeholders in the existing fiscal system. The reason was that defaulting on a large corporate body was different than revoking the property rights of a single subject. As a result of the increased cost of predation, Louis XVI was forced to pursue alternative routes to solve his fiscal problems—he had to call the Estates General—and that eventually led to fundamental fiscal and political reforms.

No constraining organizations resembling the Company of General Farms arose from within the fiscal system in the Ottoman Empire. Instead, in the 1690s the Ottoman fiscal system moved in a direction opposite that of France, towards greater decentralization and less security over fiscal contracts. Faced with the need to collect even more money, the sultan raised taxes at the end of the seventeenth century and converted old short-term tax farming contracts (iltizam) to lifetime contracts (malikane) beginning in 1695.Footnote ⁵³

In the early years of the life grant system, 150 to 300 new leases were auctioned annually.Footnote ⁵⁴ The new tax farmers obtained full rights to the tax farm upon winning the auction, including the right to subcontract the revenue collection to smaller tax farmers.Footnote ⁵⁵ Non-Muslims, such as Jews, Greeks, and Armenians, though prohibited from holding tax farm leases, could serve as financiers.Footnote ⁵⁶ Throughout the eighteenth century, the number of life grant tax farm holders averaged from one to two thousand.Footnote ⁵⁷ Five to ten thousand secondary tax farmers and financiers were also part of this system. The sub-tax farmers were often the same individuals who had participated in short-term tax farming (iltizam), although they now held longer tenures. Through the life grant system, the Ottoman state increased the amount of tax collection it contracted through tax farming to include almost all tax collection outside the religiously prescribed head tax (cizye).Footnote ⁵⁸

In contrast to the ability of tax farmers in France to increase the security of their property rights during the eighteenth century, fiscal contracts under the new life grant system were far from secure. In 1714 the sultan retracted contracts in most provinces and then reinstated them in 1717 at prices nearly 50 percent above the original bids.Footnote ⁵⁹ In response to this type of disregard for the law by the sultan, the owners of life grant contracts in the provinces began to ignore the law as well. For example, they would often pass tax farms from one generation to the next instead of returning the farm to the state. Some stopped sending revenues to Istanbul altogether. As a result, revenues fell even further. Provincial problems were further exacerbated by the rise of a class of ex-bandits that took hold of some territories and administered them in full autonomy from Istanbul. Provincial notables (ayan) more broadly grew in autonomy, particularly during the period 1768–1774.

As the disregard on the part of tax collectors for the laws governing life grant contracts worsened, the Ottoman state followed suit. Confiscations of farms and removal of local lords became common. An example comes from the city of Aleppo. A prominent figure in Aleppo, Muhammad Chalabi Tahazade, held nearly one-fifth of all life grant lands as late as 1777. He was exiled in 1775 and although was allowed to return in the 1780s, his titles were never restored.Footnote ⁶⁰ In the late eighteenth and early nineteenth century, an ex-bandit Albanian lord, Ali Pasha of Yanina, conquered and held at least one thousand fiscal estates, conducted foreign policy of his own, and protected merchants for a fee.Footnote ⁶¹ To regain control over revenue collection, the Ottoman state often used brutal force to eliminate these provincial rulers. Ali Pasha of Yanina, for example, was assassinated in 1822 and his head sent to the sultan in Istanbul.Footnote ⁶²

The chaos within the life grant system continued until 1793 when, after failing to get a loan from Morocco or Europe as part of the “New Order” Treasury reforms, Selim III was forced to finally revoke the life grant farms and re-contracted them on a short-term basis.Footnote ⁶³ Life grants made a comeback in 1808–1840 in restricted form, but even into the 1840s, expropriation by the Ottoman government was a regular part of revenue raising.Footnote ⁶⁴

The contrast between the direction of institutional change within the French and Ottoman fiscal systems during the later seventeenth, early eighteenth centuries is stark. In France, tax farmers consolidated their holdings into a single interest group with a large stake in maintaining the existing fiscal system. In the Ottoman Empire, tax collectors did not consolidate, instead, both their numbers and their interests increased. The sultan could “pick off” any given tax collector, but, he could not go after them all. And by selectively engaging in predatory behavior, confidence in the entire system was undermined. Neither the French move towards centralization, nor the Ottoman move towards decentralization, was necessarily efficient. Yet each had profound effects on the margins of maneuver that each government faced. However, they profoundly affected the degrees of freedom of the different governments. French kings were more strongly tied to the existing set of fiscal institutions during the eighteenth century than their Ottoman counterparts. Ultimately, their bond to existing fiscal institutions would unleash a major fiscal crisis in France, which could only be solved by extensive reforms that swept away entrenched interests. The Ottoman sultans, by contrast, were free to engage in incremental reforms to the fiscal system well into the nineteenth century.

The Transaction Costs of Collusion

Why did a coalition of fiscal agents emerge in France during the second half of the seventeenth century, but not in the Ottoman Empire? Tax farmers in France faced lower costs when they sought to overcome their collective action problem than their Ottoman counterparts. The costs were lower for two reasons. First, the French tax farmers simply started off as a more homogenous group. In seventeenth-century France, there were fewer tax farmers, fewer tax farms, and the farmers belonged to similar social networks. The homogeneity facilitated, at least initially, the creation of the Company of General Farms. The second, and in our opinion more important, difference lay in the ability of French tax farmers to pool capital at a lower cost than their Ottoman counterparts. Social networks may have encouraged the initial formation of a French tax farming coalition, but its long-run survival depended on the organization's ability to align the interests of its members and enforce cooperation through relatively sophisticated “corporate” institutions. Nascent institutions already existed in Western Europe that made it relatively easy to form an organization with legal personhood, separation of ownership from control, and transferable shares. Such institutions allowed the Company of General Farms to amass enough capital to make punishments against the crown matter by, for example, withholding loans. In addition, since a relatively small number of General Farmers (who cared about the long-run interests of the company) controlled these funds, these institutions made implementing punishments much less costly. It was easier for a council of ten farmers to decide to withhold a loan than for thousands of investors to decide.

One obvious difference between the two countries was that France was a more homogenous political entity, with tax collectors who were a small and relatively homogenous group. Between 1590 and 1653, before French tax farms were unified, about 303 different signatures can be found on French tax farm contracts.Footnote ⁶⁵ Eighty-one of these farmers signed multiple contracts. After unification, for the period 1681–1708, the number of tax farmers decreased significantly, to 88. The majority, 62, signed more than one contract during the period.Footnote ⁶⁶ In the eighteenth-century Ottoman Empire, by contrast, some 1,000 to 2,000 life grant tax farmers operated in the cities with 5,000 to 10,000 additional agents serving as subcontractors in the provinces.Footnote ⁶⁷ The large number of tax farmers reflects a geographic reality. The empire stretched wide over southeastern Europe, North Africa, and the Middle East. It was much larger than France.

Even when French tax farms were decentralized, there were always one or two “big” farms that united large numbers of tax farmers.Footnote ⁶⁸ Between the years 1600 and 1652—before the creation of the Company of General Farms—the two largest tax farms composed about 52 percent of total revenues going to the king from the entire tax farm system. This number continued to grow until the two large farms (along with many smaller ones) were formally unified into the Company of General Farms in 1681.

Because the Ottoman Empire was so large, it may not have been feasible, or optimal, to consolidate the tax farms as happened in France. But geography alone does not explain why multiple tax farmer coalitions did not emerge in the Ottoman Empire, with each one able to constrain the sultan. Heterogeneity does not necessarily imply the decentralization observed in the eighteenth century. Farmers could have organized along regional lines, creating, for example, an Egyptian consolidated farm, or one big farm over the European territories. These would have been comparable in size to the Company of General Farms and could have acted as effective constraints against the sultan.

Another possibility is that seventeenth-century Ottoman tax collectors were not homogenous enough as a class to overcome the collective action costs of unifying. In France, there is ample evidence that, especially by the post–1661 period, many of the tax farmers were either related, or friends.Footnote ⁶⁹ During the eighteenth century, the vast majority of French tax farmers came from the upper bourgeoisie, lived in Paris, read the same books, went to the same operas, went to the same churches (Protestant), and intermarried.Footnote ⁷⁰

By contrast, Ottoman tax farmers reflected the diverse ethnic and religious composition of the empire: Muslims, Christians, and Jews all participated in both large and small tax farms.Footnote ⁷¹ In the city of Bursa during the first half of the seventeenth century, Jews won the majority of urban tax farms, consistently outbidding the military.Footnote ⁷² Some tax farm contract data from Çizakça generalize this point to the rest of the empire.Footnote ⁷³ Of ninety-six tax farmers in his empire-wide sample of contracts between 1611 and 1630, 60 percent were Muslim, 27 percent Jewish, and 13 percent Christian. Of the ten partnerships between two tax farmers in the sample, four were made up by two Muslims, three by two Christians, one by two Jews, and one partnership involved a Muslim and a Jewish tax farmer. Of the six partnerships of three tax farmers, four were exclusively Jewish and two were mixed Muslim and Jewish.

The eighteenth-century Ottoman tax farmers did not share the homogenous backgrounds of their French counterparts.Footnote ⁷⁴ While definitely a more homogenous group than the seventeenth century tax farmers, the life grant farmers still came from high-ranking military officials, bureaucrats, and clergy. Furthermore, non-Muslims such as Jews, Greeks, and Armenians, while on paper prohibited from holding tax farm leases, served as critical financiers. Despite this heterogeneity, however, there is ample evidence suggesting that non-Muslims used the religious Muslim (the Shari'a) legal courts astutely and “entered into legal partnerships using the technicalities of Muslim law.”Footnote ⁷⁵ Dealing with the ruler under Islamic law, however, did pose potentially serious blocks to pooling significant amounts of capital.

The French Company of General Farms could manage to pool large amounts of capital and use that capital, when necessary, to punish rulers for several reasons. First, the company represented a vital step towards a “modern” form of corporate organization in which the organization adopts “legal personhood” and thus grants individual investors limited liability. After 1668 the individual whose name appeared on tax farm contracts, the adjudicataire-général, was a mere personal attendant (valet-de-chambre) of the finance minister.Footnote ⁷⁶ In contrast to the first half of the seventeenth century, loans made by the company to the crown were no longer treated as the personal debt of any individual farmer. This played an important role in 1697 when the General Farmers, acting as a single group, successfully renegotiated their debt contracts with the king. What a contrast to the less successful renegotiation back in 1623 between the largest tax farmer at the time, Antoine Feydeau, and the king: Feydeau ended up fleeing the country and losing most of his property.Footnote ⁷⁷ More striking still was the difference between the punishments meted out to tax farmers and non-tax farmers during the legal investigations (Chambre de Justice) of 1716. Tax farmers were tried in this court, but rarely implicated. Those who were most severely punished were without connections to major organizations like the General Farms.Footnote ⁷⁸ The treatment of the tax farmers in 1716 stood in marked contrast to the earlier legal investigations of 1661–1665, in which many were convicted and assessed significant fines.

A second advantage the French tax farmers had was that they could organize themselves as a limited partnership (société en commandite), a legal form that Colbert introduced in 1673. Every six years, when the old lease had expired, the Company of General Farms was reconstituted as a limited partnership by an acte de société.Footnote ⁷⁹ This acte was a part of private law, not public law. It was written between the members of the company and did not rely on upon the authority of the crown for enforcement and ratification.Footnote ⁸⁰ Technically, each of the twelve leases signed between the crown and the farms between 1726 and 1786 was a separate legal entity. Each lease had a primary signee (adjudicataire) who acted as a representative to the crown for the other farmers. Each of the forty core financiers in the company was technically a guarantor (cautions) of the primary signee (adjudicataire), and thus only liable for the amount they invested into the company.

The de facto standing of the Company of General Farms as a “legal person” was but a small step in the long development of the modern corporate form in Western Europe.Footnote ⁸¹ One could date the beginning of this evolution as early as the eleventh and twelfth centuries, with the increasing recognition of mercantile law (lex mercatoria). This evolution is easiest to trace in Italy. Commenda contracts dominated capital pooling arrangements before the thirteenth century and required the dissolution of the contract upon the death of a partner. This severely raised the cost of pooling large amounts of capital for extended periods of time.Footnote ⁸² By the thirteenth century, the family firm, or compagnia, was often used. As the name implies, participants were generally kin who shared unlimited liability. Unlike the commenda contract, however, upon the death of a family member, the compagnia was immediately reconstituted under the same name and using the same capital.Footnote ⁸³ By the fifteenth century, Italians were using the “hub and spoke” system to effectively give limited liability to investors.Footnote ⁸⁴ During the seventeenth and eighteenth centuries, royally chartered companies (such as the British East India Company, the Dutch East India Company, and the French East India Company) continued the trend towards the modern corporate form in which the liability of individual investors was limited.Footnote ⁸⁵ The Company of General Farms should be viewed as part of this trend, a vital link in the gradual evolution towards the modern corporation in France.Footnote ⁸⁶ A vital link because it was the General Farms that ushered the French corporation from a period in which the government did not credibly acknowledge investor rights to a period when it did. The company was able to flourish during this period because of its ability to protect the property rights of its investors through its credible threat to punish the crown.

Why did a concept of “legal,” as opposed to “natural,” personhood not emerge in the Ottoman Empire too? One hypothesis is that Islam, from its earliest conception, precluded such a distinction. However, this explanation alone is not sufficient. After all, the concept of a legal person exists today in Islamic societies. The real question is why such a concept didn't evolve within Islamic societies of the Middle East more quickly. Simply stated, we believe the historical circumstances of Islam's creation help explain this fact. The politics of pre-Islamic Arabia were characterized by separate tribes which joined individuals together through kinship bonds. These tribes often feuded and there was a great deal of disunity and chaos as a result. Early Islamic teaching reflected these times through its emphasis on the Muslim community (umma) as a unifying force.Footnote ⁸⁷ The Quran enumerates duties for individuals and for the umma, but none for any intermediate organizations. The evolution of the corporate form in Europe was, of course, not a matter of the evolution of religious law. Yet that is part of the point. The separation between church and state, which was present relatively early in western political and legal theory, did not develop as quickly in Islamic lands.Footnote ⁸⁸ There is no statement in the Quran similar to the Christian Bible's, “… render unto Caesar that things that are Caesar's, and to God the things that are God's.”Footnote ⁸⁹ Unlike early Christianity, which emerged in the shadow of the strong secular authority of Rome, Islam developed as both a political and a religious system.

Two consequences of the early history of Islam help explain the lack of institutional innovation towards corporate forms in the Ottoman Empire. First, Islam quickly became the religion of the empire as its adherents imposed order on the political void surrounding them. As we discuss above, this resulted in a larger, and more diverse, set of interest groups in the fiscal system than in France. A second consequence was that, from the beginning, political authorities in the Middle East were more dependent upon religious authorities for legitimacy than their counterparts in the West. To the extent that economic laws were more likely based on the teachings of religious leaders (the muftis and kadis) who derived legitimacy from upholding religious doctrine, the costs of changing these laws were much higher in Islamic states.Footnote ⁹⁰ This does not mean the concept of legal person could not develop within Islamic society. Indeed, as we have already argued, the paradox of French and Ottoman institutional history is that, from the point of view of the ruler, many Ottoman institutions were more flexible than their Western counterparts. This is what made achieving credibility elusive by the seventeenth century. The institutional environment of the early Islamic empires simply resulted in lower demand for the concept of legal personhood from those who would benefit from it.

Aside from having access to the notion of legal personhood, the tax farmers in France were also aided in forming their coalition because they could create tradable shares in their organization, which allowed for the separation of ownership and control. In practice, the means by which this was done was through the “guarantor system.”Footnote ⁹¹ Most people invested in the Company of General Farms as guarantors (croupiers). There were forty “core” members of the General Farms. Upon being asked to join, each of these individuals was obliged to pay a sum of money into the capital fund of the company known as a guarantee payment (caution). The guarantee payment was rarely affordable for a single individual. The potential farmer would, therefore, sell stock in his position in exchange for a portion of his guarantee payment. The holder of this stock was entitled to a proportion of the profits of the farmer each year, but liable only for the amount he or she invested.Footnote ⁹²

Through the guarantor system, many thousands of ordinary French men and women tied their fortunes to that of the General Farms. By the end of the eighteenth century, the company had upwards of 30,000 employees. Any employee achieving a rank equivalent to middle manager also had to provide a guarantee payment. Many of these were also sold as stock to the public. In 1774, for example, 200 employees of the farms sold in the regions of Caen and Rouen. Among the investors were thirty-three shopkeepers, thirty urbanites (“bourgeois”), fifteen lawyers, ten farmers, seven doctors, eleven constables, three officers of the courts, two army officers, five artisans, six preachers, two teachers, and ten widows.Footnote ⁹³ Hardly a slice of the high nobility, yet, these were the people who had a direct interest in the General Farms. The transformation of the tax farm system at the end of the seventeenth century was more than the creation of a cartel, it was the birth of a powerful lobby interested in preserving the way in which half of the country's taxes were collected and in protecting the debt guaranteed by those taxes.

The process of dividing ownership in a business venture into tradable shares was of course not an invention of the Company of General Farms; rather, it was simply an incremental step in the long development of the corporation in Europe. In the fourteenth century, Italian maritime partnerships (societas navalis) divided the capital value of a ship into shares (carati). The purchaser of a share was liable only for his investment and could often trade that share.Footnote ⁹⁴ Steven Epstein outlines how the fifteenth-century Genoese Bank of San Giorgio separated ownership from control rights through the issuance of shares.Footnote ⁹⁵ The Company of General Farms, as we noted, was a société en comandite, which allowed for the issuance of shares to special partners (the croupiers), who had limited liability and played no role in management but were able to trade their shares. As with the evolution of the corporation as a legal person, the Company of General Farms was thus an intermediate step on the path towards the modern corporation.Footnote ⁹⁶ The forty or so core members of the farm bore greater liability for the obligations of the company, but those who invested in them did not. Once enough capital was accumulated the company did use it to ensure that even the core members of the farm would be insulated from the full risks of dealing with the absolute monarchy. In effect, the Company of General Farms became “too big to fail.”

The key to understanding how the Company of General Farms became too big to fail after 1683 was their use of short-term debt (billets des fermes). When the king borrowed from the company, or, assigned another debt to them, the farmers would issue short-term paper to finance the king's transaction. This debt was issued in the name of the Company of General Farms and actively traded on private markets. In 1697 the amount of short-term debt in circulation was equal to the sum of all the lending through the three largest tax farms between 1600 and 1640.Footnote ⁹⁷ During the eighteenth century, the company was responsible for holding up to a quarter of long-term royal debt.Footnote ⁹⁸ The main source of leverage which the tax farmers held against the crown, however, was their role in financing the debt service on royal borrowing.

Once the role played by the company in intermediating between private credit markets and the king reached a certain threshold, they could prevent the crown from undermining their role in the tax system by threatening to withhold these services. If the crown owed money to the Company of General Farms, then it could not alter its agreement with them on how taxes were collected, because that would have been tantamount to defaulting on its debts.Footnote ⁹⁹ Although we would not expect to see punishments actually occur in equilibrium, there is at least one clear case in which the actions of the crown did trigger a punishment. This was in October 1783, when Finance Minister Lefèvre D'Ormesson attempted to eliminate a significant number of the farms and “reform” several others. Sensing that their investments would not be safe with the company out of the picture, the holders of 30,000,000 livres in short-term debt issued on the credit of the Company of General Farms demanded payment. After meeting with thirty of the general farmers, the king was sufficiently concerned that his credit might be ruined that he immediately fired D'Ormesson.Footnote ¹⁰⁰ Shortly thereafter, debt began trading at its previous, higher, value.Footnote ¹⁰¹

The question still remains as to why nascent institutions allowing for corporate personhood, tradable shares, and separation of ownership from control rights were not present in the early-seventeenth-century Ottoman Empire. Why had previous generations not demanded institutional innovation? It is not sufficient to point out a greater separation of church and state in the West than in the Near East. After all, Islamic law was perfectly capable of adapting to changing circumstances. If there were gains to be had from introducing corporate institutions, as we claim there was, then their failure to emerge must be explained.

Timur Kuran offers two suggestions as to why corporate forms failed to emerge more quickly in the Ottoman Empire. He first points to Islamic laws governing inheritance and partnerships. A partnership lapsed at the death of a participant in France as in the Ottoman Empire. But in contrast to the West, where primogeniture dominated, a deceased Ottoman was likely to have a substantial number of heirs in the Ottoman Empire. The Islamic inheritance system was more egalitarian and mandated a division of the deceased's property across many heirs in the nuclear and extended family. Thus, to minimize the chances of costly and premature dissolution of the partnerships, they were kept small. Small partnerships inhibited capital pooling with negative repercussions for investment and economic growth.Footnote ¹⁰²

As we have seen, after 1681 the French Company of General Farms was managed by a tight-knit group of financiers. This group was able to insulate itself from the predatory behavior of the crown in large part because of its ability to credibly withhold a large amount of capital from the king as a punishment for “bad behavior.” This strategy required that the company amass a large amount of capital (so the punishments would hurt) and also to separate the ownership of this capital from control rights. Had ownership and control not been separated, it might have been too costly to get all of the investors in the company to agree at the same time to withhold their capital from the crown when necessary.

Ottoman life grant tax farmers were never able to pool capital on the same scale as the French tax farmers, at least from the end of the seventeenth century on. In 1788 sixteen individuals controlled 25 percent of the capital invested in the life grant (malikane) system. In France, by contrast, sixteen individuals controlled virtually all of the capital associated with the tax farm system.Footnote ¹⁰³

Ottoman investors, large and small, consistently chose to diversify across tax farms. For example, the tax farm of Tobacco Customs in Istanbul averaged four owners between 1707 and 1737 but had 22 by 1759, with the smallest share being 1/128.Footnote ¹⁰⁴ In fact, the number of share owners per life grant tax farm doubled between 1720 and 1820.Footnote ¹⁰⁵ Investments in 20 to 30 separate tax farms were frequently observed in the later period. As these numbers suggest, the number of tax farming partnerships was growing in the late eighteenth century, and a secondary market for tax farm shares was slowly developing. In fact, the life grant system single handedly paved the way to multiple profit-sharing arrangements and enlarged the base of lenders to the Ottoman state.Footnote ¹⁰⁶ Still, an individual's investment in any given tax farm remained small. Thus, while the Company of General Farms was able to pool enough capital to be “too big to fail” during the eighteenth century, this critical mass was never reached by an Ottoman tax farm.

There was also no natural progression towards the joint-stock company and the corporation in the Ottoman Empire during the eighteenth century.Footnote ¹⁰⁷ This is especially relevant since, even if a single Ottoman tax farm had been large enough to threaten the sultan, without an effective separation of the ownership from control rights over the invested capital, the costs of punishing the government would have been high. Making a threat to stop lending credible is complicated by the fact that punishments are typically costly for both the punished and the punisher. There were no guarantees that all investors would agree to forego the short-term gains from continued lending at the cost of long-run uncertainty, thereby necessitating the placement of control over the capital in the hands of a group that was less likely to be subject to this free rider problem. In the Company of General Farms, the group that decided when to “punish” the crown by withholding financial services was known as the Caisses. Since it was intended to protect the long-run interests of the company, even core members had to wait for years to get a seat (it took Antoine Lavoisier 15 years). Adrian Delahante wrote of the Caisses that it was, “… fundamentally the senate, or better, the council of ten of the oligarchic republic of finance.”Footnote ¹⁰⁸

The second reason given by Kuran for the absence of corporate institutions in Ottoman society is that there already existed a viable substitute for the corporation in the institution known as the waqf.Footnote ¹⁰⁹ The waqf was an Islamic unincorporated trust typically established to enable a charitable service. In essence, the provision of public goods, such as education and feeding the poor, was tied to the waqf system. Because of their association with the high clergy and sacred activities, waqfs received preferential tax treatment and were not as vulnerable to predation by rulers. Yet the waqf differed from a corporation in several important respects: it was not a legal person, lacked transferable shares, and its purpose (at least for any given waqf) was supposed to be unchanging.Footnote ¹¹⁰ The capital invested in a traditional waqf was, in a very real sense, tied to the purpose laid out in the founding of the enterprise.Footnote ¹¹¹

After the fourteenth century, an alternative to the traditional waqf, known as the “cash waqf” was available, which earned a return on investors capital by lending money out. But cash waqfs were forbidden to merge together in order to pool greater amounts of capital.Footnote ¹¹² The cash waqfs were able to provide a relatively safe haven for investors, but they could not coalesce and create an organization as large as the Company of General Farms. In fact, the enlargement of the cash waqf system in the eighteenth century is indirect evidence of increased risk of predation by the sultan in other sectors of the economy.Footnote ¹¹³ In the course of the eighteenth century, as Ottoman holders of capital sheltered their assets in the waqf system, cash waqfs grew into large lenders and, as an unintended consequence, also defused the demand for the sort of institutional innovations pursued by the members of the French General Farms.

The French tax farmer (and meticulous record keeper) Antoine Lavoisier, estimated that in 1762, 1767, and 1770, there were 60 million, 48.5 million, and 60 million livres tournois respectively of billets des fermes in circulation.Footnote ¹¹⁴ This compares to the total amount of debt service facing the crown in 1764 of 124 million livres tournois.Footnote ¹¹⁵ The company used its role as a financial intermediary for the crown to block attempts to reform the fiscal system. Finance ministers, from Turgot up until the end of the Old Regime, attempted to wrest control of the tax system from the company with limited success. Either they could not afford to buy the farmers out, or they ran into the same threats of punishment that D'Ormesson faced in 1783.Footnote ¹¹⁶ By this time, the French government was trapped in an explosive cycle of borrowing to cover existing debt.Footnote ¹¹⁷ With the tax farmers blocking manipulation of the fiscal system, the crown was forced to appeal to a broader coalition to aid with reform. The first Estates General since 1614 was called in 1788 and, from that point, the momentum for fundamental reform only grew. Ultimately, it took the guillotine to excise the company from its role in the fiscal system in 1794, just one of many ancien régime institutions swept away by revolution.

In contrast to the fundamental institutional reforms undertaken in France at the end of the eighteenth century, Ottoman sultans were able to manipulate fiscal institutions in order to meet their short-term financial needs, and the manipulation continued into the nineteenth century. To meet the demands of the Treaty of Küçük Kaynarca after losing the war of 1768–1774 with Russia, the Ottoman Treasury took over many large tax farms, had them run by state agents, and issued shares on their future revenues. These shares were public annuities which could be purchased by individuals of far lower incomes than the life-term tax farmers. Under this new fiscal system, known as Esham, the Ottoman bureaucracy was unable to raise enough revenue to cover its spending and it was forced to issue large amounts of debt.Footnote ¹¹⁸ Yet with no intermediary protecting lenders from the whims of the sultan, the Esham system was unable to generate the capital necessary to meet the needs of the government, and the government was forced to borrow abroad. By the early 1870s the Ottoman state was spending about 60 percent of its tax revenues to service its foreign debt. The Treasury all but officially defaulted in 1875. Facing pressure from its European creditors, the bankrupt state called its first parliament in 1876.Footnote ¹¹⁹ The empire would be fully dissolved less than 50 years later.

There were many similarities between the Ottoman Empire and France during the early modern period. Both shared an absolute government which faced high transaction costs of extracting revenues from the population. Both sultans and kings had to exchange property rights for tax revenues and both sultans and kings manipulated those property rights when it was in their best interests. It was their differences, however, that shaped the evolution of institutions after the fiscal crises of the seventeenth century. In both countries, deficit spending led to uncertain property rights, which induced tax collectors to create new institutions in order to protect their property rights. We argue that the transaction costs associated with pooling large amounts of capital explain why a more effective constraint on rulers emerged in France and not the Ottoman Empire.

The differential response of French and the Ottoman tax collectors to the fiscal crises of the seventeenth century led to different paths of institutional development during the eighteenth century. In this article, we contrast the Company of General Farms to the life grant system, but the trends we highlight in the context of tax farming are symptomatic of the economic and political developments that ultimately led to an increased income gap between Western Europe and the Near East. The institutional rigidities, which the French overcame endogenously, and sooner than the Ottomans, were manifested in greater political constraint through the fiscal system. More generally, we argue that private sector institutions (such as those allowing for tradable shares, separation of ownership from control rights, and legal personhood for private companies) played a vital role in bringing about the reform of public sectors institutions in France.

The standard of living in Middle Eastern cities was similar to that of their Western counterparts until the middle of the eighteenth century, when the West started to pull ahead.Footnote ¹²⁰ This fact recently prompted Bernard Lewis to pose the question, “What went wrong?” in the Middle East. Scholars strongly disagree over the extent to which Islamic institutions are what went wrong. There is debate over the flexibility of Ottoman versus Western institutions (which is often broadened to Islamic versus Christian institutions). We argue that those engaged in this debate are overlooking an important point. Having malleable institutions is not always a good thing. The great paradox of French and Ottoman institutional history is that Ottoman fiscal institutions were more flexible than their Western counterparts and yet, in the long run, Western institutions proved more conducive to growth. We are in complete agreement with Şevket Pamuk's observation that the Ottoman state showed, “… considerable flexibility to adapt not only its military technology but also its fiscal, financial, and monetary institutions in response to changing circumstances.”Footnote ¹²¹ Ultimately, however, French rulers were better served by the constraints that prevented them from altering institutions than Ottoman sultans were by their relative freedom.

One implication of our story is that there was nothing intrinsic to Islam which prevented the emergence of those specific institutions that allowed the Company of General Farms to constrain the monarchy. Rather, initial conditions and historical contingency played a significant role. If Islam had not developed in a political vacuum, then perhaps there would have been greater demand for institutional innovation. Egalitarian inheritance and the provision of public goods through the cash waqf were prescient and, initially, highly successful institutions that had the unintended consequence of reducing the demand for corporate forms. Perhaps if different institutions had emerged in seventh-century Arabia, then the corporation would have developed along a similar path in the Middle East as it did in the West. This is not how history unfolded, however, and as a result Ottoman sultans were able to manipulate fiscal institutions on the margin throughout the seventeenth and eighteenth centuries; they thereby avoided the fundamental institutional reforms that French kings were ultimately forced to pursue. Whereas Ottoman sultans were free to continue ruling as absolute monarchs, Louis XV and Louis XVI came under increasing pressure from Louis XIV's creation in the previous century. The Company of General Farms was a thorn in the side of absolute monarchy, and to the extent that one believes unpaid debt (much of it held by the company) and upset taxpayers (many of them “clients” of the company) contributed to the Revolution of 1789, it was part of the process that brought democracy to France.