Crushing Parliament Military

To prevent the king from crushing Parliament militarily, the Bill of Rights forbade maintaining a standing army during peacetime without parliamentary assent and the Mutiny Act (1689) forbade forming a standing army without parliamentary assent. Neither provision had ever been embodied in statutory form before. Together they ensured that the Crown, were it determined to coerce Parliament, would need to undertake illegal acts early in the process of implementing its coercive strategy, thereby giving parliamentary forces more time to coordinate their countermeasures.

End-Running Parliament

To prevent the Crown from ruling legally without Parliament, parliamentarians put it on a shorter financial leash than ever before.Footnote ⁶ For example, when William III came to the throne, Parliament granted him the customs tax revenues for six months, then another six months, then one year, then four years, and then five.Footnote ⁷ A deadline always loomed at which the king would lose over a fifth of his total revenues, unless he could cut another deal with Parliament. This put William in a very different bargaining position than either Charles II or James II, both of whom had received the customs for life. I provide new evidence on just how much weaker William's bargaining position was below, as regards both taxes and loans.

Controlling Parliament

To prevent the Crown from controlling Parliament from within, the settlement erected new defenses against two of the main tactics of royal influence—viz., seat buying and vote buying. Let's consider each in turn.

The Bill of Rights proclaimed the goal of “no royal seat buying” clearly enough, in its call for freedom to elect Members of Parliament without royal interference. Yet, there was nothing new in this demand. The 1690 act reversing a King's Bench judgment against the city of London, however, was new. The original judgment, rendered in 1683, entailed forfeiture of the city of London's charter and franchises to the Crown; and constituted a landmark in the later Stuarts' long campaign to control Parliament by destroying old and issuing new charters of parliamentary corporations.Footnote ⁸ Parliament's explicit reversal of the decision was designed to make it more difficult in the future for monarchs to find sufficient legal pretexts for voiding parliamentary charters.

The Act of Settlement contained a new legal defense against royal vote buying. Reacting to William's vigorous attempts to influence the House of Commons, clause 5 declared that anyone who held an office under, or received a pension from, the Crown was ineligible to sit in Parliament. Statutes passed in 1705–1707 weakened this prohibition, allowing members to accept various offices from the king, so long as they resigned their seat in the Commons and stood for reelection. Even in this weakened form, however, the attack on placemen was a significant new attempt to reduce the Crown's vote buying.Footnote ⁹

Turning the Tables

In addition to playing defense by deterring the Crown's absolutist strategies, Parliament also played offense by extending its control over the executive branch. A series of reforms, some written and some unwritten, established ministerial responsibility to Parliament.Footnote ¹⁰ I take these reforms as the crowning achievement of the settlement (though they do not appear in the settlement documents as traditionally defined).

What Changed?

How did the English constitution change after the Revolution? Previous works have staked out at least three positions on this question. First, North and Weingast highlighted a particular set of reforms they viewed as crucial.Footnote ¹¹ Second, Epstein, Murrell, Steven Pincus and James Robinson, and other “minimalists” have retorted that the settlement articulated few new rules, none of major import.Footnote ¹² Third, Weingast has argued that what changed was not so much the articulation of new constitutional rules favoring Parliament as the coordination of support for its ancient rights.Footnote ¹³ Complementing this view, Julian Hoppitt has argued that the Revolution sharply weakened support for the divine right(s) of kings.Footnote ¹⁴

My account differs from all of the above as regards how the English constitution changed. It is true that many constitutional rules asserted after the Revolution had prerevolutionary precedents. From this perspective, it makes sense to debate whether the Revolution was simply one more signpost in a long and gradual evolution of support for these rules, or marked a sharper and more sudden increment of support. Rather than enter this debate, I highlight a series of newconstitutional rules enacted during the extended settlement period (1689–1706). My list of changes differs substantially from those offered by North and Weingast and their minimalist critics, none of whom mention either Parliament's short financial leash or ministerial responsibility. While popular support for old rules favoring Parliament may indeed have solidified, in what follows my aim is to trace the consequences of the particular new rules I identify, arguing that they were crucial.

While I differ as regards “what changed,” I nonetheless agree with North and Weingast that postrevolutionary constitutional reforms enhanced the Crown's credibility in a range of transactions. The next four sections describe the relevant transactions in greater detail. In particular, I consider how Parliament improved its control over taxes, debt, Crown acts, and property rights adjustment (as opposed to enforcement).

Increasing Use of Time Limits

Although Parliament had placed time limits on revenue grants before the Revolution, the Bill of Rights for the first time stipulated that “levying money…for longer time…than the same is or shall be granted [by statute], is illegal” (italics added).Footnote ¹⁸ Having made the point in principle, Parliament proceeded in practice to impose time limits much more intensively after the Revolution. Quantifying Parliament's increasing use of time-limited grants is an important exercise that, so far as I know, no one has previously undertaken.Footnote ¹⁹

My approach is to calculate the discounted present value of the funds that Parliament could potentially terminate, as a percentage of each monarch's total annual revenues. For example, if a monarch had a revenue stream of size T that could be terminated in n years; had a permanent revenue stream of P; and used a discount rate r; then the discounted present value of a threat to end the time-limited funds, expressed as a share of total annual revenue, would be T(1 + r)^-n/(P + T). Table 1 shows how important terminable grants were to the last prerevolutionary and first postrevolutionary monarchs.

Soon after his accession, James II was granted most of his revenues for life but also received time-limited customs duties on wines and vinegar (for eight years), tobacco and sugar (for eight years), and linens and silks (for five years). The discounted present value of his potentially disappearing revenues, over the first two years of his reign, represented about 7 percent of James' total revenues. In contrast, William III had essentially no settled revenues over the first two years of his reign. Even if one credits him as having a permanent income equal to that he eventually acquired, the discounted present value of the revenues that Parliament could potentially terminate was roughly 69 percent. This tenfold increase in Crown revenues under effective parliamentary control qualitatively altered their bargaining relationship.

Moreover, Parliament “rewrote” its tax power abruptly after the Revolution via a series of statutes. Whigs and Tories immediatelyagreed that the customs and other revenues should be granted only for short periods and neither side wavered thereafter.Footnote ²⁰ Thus, Parliament's right to place the Crown on a short financial leash was implied in the Bill of Rights' “for longer time” clause, repeatedly asserted as necessary in parliamentary debates, and put into practice by a series of statutes that granted revenues for short periods.Footnote ²¹

Table 1

PARLIAMENTARY USE OF TIME LIMITS ON TAX GRANTS

Notes:

⁽¹⁾My calculations use the formula in the text, focusing on each monarch six months after accession. I assume the Crown was risk neutral, was an unbiased estimator of future revenues, and discounted future revenues at a rate of 10 percent. Moderate alterations of these assumptions affect the results only slightly: the differences between James II and William III remain very substantial. The raw data for my calculations come from Shaw, “Revenue Accounts.”⁽²⁾Reitan (“From Revenue to Civil,” p. 572) estimates James' total annual revenue as £1,900,000. One can observe the receipts in 1689–1691 from each of the three grants of customs revenues to which time limits were attached, and convert to a discounted present value as of the first year of James II's reign (after his permanent revenues were settled). ⁽³⁾William and Mary's total income (not counting loans) over the period November 1688 to September 29, 1691 was £8,693,331. Their yearly income was thus on average £2,897,777. I estimate their permanent income at £691,836, following Roberts (“Constitutional Significance,” p. 62). Finally, I assume that their unsettled revenues could be terminated in a year. This is too generous for customs revenues, which initially had a six-month time limit; and too generous also for those revenues that Parliament had not yet addressed at all (as these could in principle have been withdrawn at any time).

Increasing Tax Revenues

How did shortening the Crown's financial leash affect tax revenues? Parliament's willingness to approve new taxes was lessened mainly by its worries that the resulting funds would be spent in ways it disapproved. In principle, such worries could be mitigated by (1) improving the precision with which Parliament communicated its desires regarding expenditures; (2) improving Parliament's ability to observe how funds were in fact spent; and (3) increasing the immediacy and credibility of the punishments Parliament could mete out. After the Revolution, new constitutional practices addressed each of these desiderata.

First, Parliament improved its communication skills simply by increasing the use of appropriation language (stipulating proper uses of funds) in supply bills. Anyone who reads supply bills from before and after the Revolution will note a substantial increase in such language.

Second, Parliament improved its ability to detect fiscal mismanagement simply by increasing its use of audits. North and Weingast describe the basic trend here.Footnote ²²

Third, Parliament increased the immediacy of its punishments by imposing stricter time limits on its tax grants. As just shown, these limits greatly increased the discounted present value of parliamentary threats to terminate funds. Relatedly, the post-Revolution practice of annual budgets meant that Parliament would have at least an annual opportunity to retaliate against any perceived misuse of funds.

Finally, Parliament improved the credibility of its punishments. As discussed in greater detail below, Parliament leveraged its increasing power over the purse to devise a newly credible and flexible mechanism of punishment: expelling ministers from office via votes of censure.

In my view, the key change after the Revolution, adumbrated in the Bill of Rights' “for longer time” clause, was Parliament's increasing use of time limits on tax grants. Indeed, without this crucial and large increase in its ability to punish, Parliament's increased investments in specifying ex ante how it expected funds to be spent (appropriation) and verifying ex post their actual use (audit) would both have been wasted. Once it had devised a credible punishment mechanism, however, Parliament had the confidence to invest in appropriations and audits.

The most direct consequence of the “for longer time” clause, and the combination of adjustments attendant on it, was that tax deals with Parliament were done on a regular basis, whereas before the Revolution they were rare and episodic. Thus, one's main expectation, on the account given above of how the Glorious Revolution changed bargaining over taxes, is simply that total tax revenues should have increased. What does the evidence show?

During the Restoration, notwithstanding the many improvements in tax collection, tax receipts showed a shallow decline from 1665 to 1685, averaging £1.53 million.Footnote ²³ After the Revolution, tax receipts more than doubled the Restoration average by 1695 and tripled it by 1700 (see Figure 1). The structural break is clear.

Figure 1

TAX RECEIPTS AT EXCHEQUER, BY YEAR, 1665–1715

Source: O'Brien, “Political Economy,” table 2. The vertical axis gives tax receipts in millions of constant pounds sterling.

Why a Veto over Debt Issuance?

One might ask why Parliament insisted on breaking the king's unilateral ability to borrow. After all, investors should have cared mainly about whether sufficient tax revenues funded the long-term debt; and they might have reasoned that Parliament would be willing to provide the needed taxes, because it had devised a credible system of appropriation, audit, and punishment. Thus, a parliamentary veto on debt issuance does not seem necessary to explain the enhanced credibility of England's long-term debt.

One reason Parliament insisted the Crown could not issue national debt unilaterally was to bring loan proceeds within the ambit of the appropriation-audit-punishment system. Were the Crown able to borrow unilaterally, Parliament might have no chance to articulate its demandsover how the resulting revenue would be spent or to set up audits. Worse, the Crown might substitute loans for taxes, thereby diminishing the pain Parliament could inflict by withholding tax grants.

Another reason Parliament disliked unilateral borrowing by the Crown had to do with the division of the “borrowing surplus” between the two sides. A king with the unilateral ability to issue national debtwould be able to present Parliament with a series of take-it-or- leave-it propositions: raise taxes to repay this loan or repudiate it. That such strong agenda control confers a formidable bargaining advantage is well-known theoretically and was presumably appreciated as a practical matter by contemporaries.Footnote ²⁸ To deprive the Crown of this bargaining advantage, Parliament leveraged its newly nimble ability to limit tax revenues and ultimately (in 1693) forced the Crown to accept its constitutional right to veto the issuance of new public debt.

Figure 2

LOANS TO CROWN AUTHORIZED BY PARLIAMENT BY YEAR, AS A PERCENTAGE OF ANNUAL ROYAL INCOME, 1672–1690, 1699–1700

Notes: For purposes of the graph, 1688 is counted as regnal year 4 James II, 1689 is counted as regnal year 1 William and Mary, 1690 is 2 William and Mary session 1, and 1691 is 2 William and Mary session 2.Source: See the Appendix.

Note that my story differs substantially from North and Weingast's.Footnote ²⁹ They envision the Revolution as giving Parliament a veto over debt repudiation (as do Weingast, David Stasavage, and others).Footnote ³⁰ In contrast, I envision it as conferring a veto over debt initiation. I would further argue that a veto over default is logically impossible, if—as was typically the case in England at the time—earmarked taxes proved insufficient to repay the loan. For, when the funds to repay a debt do not exist, either side can unilaterally impose a partial default by refusing assent to the statute needed to raise new funds; and neither side can wield its veto to avoid such an outcome. Consistent with this observation, and the remarks above concerning the value of preventing unilateral borrowing by the executive, most of the world's current constitutions insist on the legislature's right to authorize new debt; but relatively few restrict the process of default.

The Consequences of Parliamentary Supremacy for Public Debt

If indeed Parliament secured a constitutional right to veto new debt, similar to its ancient right to veto new taxes, what should the consequences have been? In this section, I argue that the Revolution improved the credibility of short-term debt much less than it improved the credibility of long-term debt. Thus, as credibility is the main theoretical driver of credit access and price, one should examine the two kinds of loan (which were not perfect substitutes) separately.

Consider short-term debt first. Before the Revolution, the credibility of short-term loans had been enhanced in three main ways. First, specific taxes were earmarked to repay the loans. Second, loans were repaid in the strict order in which claims for repayment were received, in order to prevent the king from discriminating among debtholders.Footnote ³¹ Third, Parliament occasionally authorized loans to the Crown; and lenders would recall that debt with parliamentary authorization had not been repudiated in the Stop of the Exchequer, whereas purely royal debt had been.

After the Revolution, earmarking and the order system continued with little change but, as shown in Figure 2, Parliament was much more involved in the authorization of new debt. Thus, one expects some improvement in both the amount of short-term debt and the interest rate paid.

The story regarding long-term debt is rather different. Before the Revolution, the market saw no reason to believe the Crown alone could raise new taxes and so no long-term royal loans were extended. After the Revolution—or, more precisely, after 1693—the market saw substantial reason to believe the Crown-in-Parliament could raise new taxes, if needed, and so long-term national loans emerged. Thus, the Revolution created long-term debt, whereas it merely facilitated short-term debt.

In the event, long-term debt consisted mainly of loans from corporate entities. The creation of the Bank of England in 1694 set a precedent for subsequent bargains establishing the New East India Company (1698) and the South Sea Company (1711); and government debt to these three chartered companies composed more than 90 percent of the funded debt until the late 1740s. As J. Lawrence Broz and Richard S. Grossman point out, repeated negotiations over how to reschedule the national debt, and on what terms to recharter the Bank of England, tied Crown, Parliament, and the financial interest together in ways that the market could observe and react to.Footnote ³²

Was There a Structural Break in Access to Credit?

If establishing a consolidated public debt was the sine qua non of England's long-term debt, then one should mainly predict that England's long-term debt increased after 1693. By this standard, the evidence is about as clear as can be (see Figure 3). England's long-term funded debt stood at zero from 1600 to 1693, and then increased to £1,200,000 in 1695, £4,100,000 in 1705, and £29,600,000 in 1715.

Short-term debt shows a less spectacular rise. Such debt had been roughly constant at £1,000,000 from the mid-1630s to the end of the Restoration.Footnote ³³ By Sussman and Yafeh's figures, short-term debt increased roughly fivefold by 1695 and was five to ten times the pre-Revolution mean until the Whig Supremacy began, declining slightly thereafter.Footnote ³⁴

Was There a Structural Break in Interest Rates?

North and Weingast point to declining interest rates as additional evidence of the Crown's enhanced credibility.Footnote ³⁵ Stasavage and Sussman and Yafeh, however, have shown that English interest rates did not match or dip below the best continental rates until 1730;Footnote ³⁶ and the latter have interpreted this 40-year delay as showing that “financial markets do not reward countries for institutional reforms in the short run.”Footnote ³⁷

One response to this line of criticism is theoretical. Robinson provides a model in which the market reacts to the risk of debt repudiation wholly by rationing credit.Footnote ³⁸ Intuitively, charging a higher interest rate is a dangerous way to deal with a sovereign borrower because it increases the sovereign's incentive to repudiate the debt. Far safer ways to deal with an untrustworthy sovereign borrower are limiting the amount one loans them and shortening the loan period. If the conditions of Robinson's model generally obtain, then the evidence on interest rates is simply irrelevant to testing (a properly amended version of) North and Weingast's argument.

Figure 3

ENGLAND'S LONG-TERM FUNDED DEBT, BY YEAR, 1665–1715

Source: Mitchell, Abstract, p. 401. The vertical axis gives the funded debt in millions of constant pounds sterling.

My own view is that Robinson's model does not apply universally. For example, ParikshitGhosh, DilipMookherjee, and Debraj Ray state conditions under which the market reacts to risks of default with a mixture of credit rationing and higher interest rates.Footnote ³⁹ Even in their model, however, rationing is the dominant tool with which the market seeks to manage the risk of default.Footnote ⁴⁰ Thus, my reading of the theoretical models is that they tell us the market should react primarily, but not wholly, by credit rationing.Footnote ⁴¹

While one cannot simply dismiss the evidence on interest rates, one can insist on two points. First, the evidence is tricky to evaluate because sovereigns self-select into the market. Put simply, one cannot observe the interest rate when the sovereign faces credit rationing (or is offered unacceptably high interest rates). Second, although previous studies have combined them, as argued above it makes sense to look at long-term and short-term interest rates separately. Once one separates the two interest rate series, the evidence of a prompt market response becomes much clearer.

Interest rates on long-term loans before the Revolution were apparently prohibitively high, since no such loans were voluntarily made. After the Revolution, Sussman and Yafeh show the cost of long-term debt debuting in 1694 at 13.5 percent and declining steeply and monotonically to 8.5 percent by 1699.Footnote ⁴² Michael Tomz has persuasively argued that new sovereign borrowers must pay a risk premium in the market.Footnote ⁴³ If we apply that insight to the English case, we see the invention of a wholly new debt instrument, the market demanding an initial risk premium, and that premium declining sharply as the market gained experience with the new debt and the new sovereign (the Crown-in-Parliament).

As for short-term sovereign debt, Epstein reports interest rates of 10 percent for the early 1690s, while Sussman and Yafeh report rates ranging between 7 percent and 9 percent in the period 1694–1700.Footnote ⁴⁴ As expected, the improvement is smaller—but still noticeable.

All told, after the great constitutional bargain which created national debt in 1693, one finds an abrupt fall from 10 percent to 7–9 percent for short-term interest rates; and a slightly less abrupt fall from “prohibitive” to 8.5 percent for long-term interest rates. It remains true that Britain did not match or excel its most formidable competitors until a generation later. However, the Revolution both immediately affected public debt and, arguably, put the country on a quite different path of development.

Buying Development Rights

Consider an entrepreneur with investible funds Y who seeks to secure from Parliament the right to build a turnpike road. The entrepreneur anticipates paying costs d to introduce a bill in Parliament, which will then have a probability p of enactment. If his bill fails, the entrepreneur will receive nothing. However, if his bill is enacted, he will then have the option to build a road and will decide how much to invest in that option. Thus, the entrepreneur faces two sequential decisions: whether to invest d in securing the option to build a road; and how much to invest in pursuing that option, if attained. Let's consider each of these decisions, beginning with the latter.

Conditional on having secured development rights, the entrepreneur chooses an amount c, out of a total investment budget Y – d, to invest in building the road. Any remaining funds, Y – d – c, are invested in a riskless asset with rate of return r ₀. After his investment decision, the king honors the entrepreneur's development rights with probability h and confiscates the built road (or the toll revenues therefrom) with probability 1 – h. If the king honors his rights, then the entrepreneur secures a total return of r(c); otherwise, he gets nothing.

All told, the entrepreneur's expected payoff, when he invests c in the road and Y – d – c in the riskless asset, is π(c) = hr(c) + (Y– d– c)(1+r ₀). His investment decision entails choosing c in order to maximize π(c), subject to the constraint c∊ [0,Y– d]. Assuming that r is concave increasing (r′ > 0, r″ < 0) and that an interior solution exists (r′(0) > (1+r ₀)/h>r′(Y– d)), the entrepreneur's optimal investment has the following closed-form solution: c* = r′^–1[(1+r ₀)/h]. For example, if r(c) = c ^1/2, then

It is easy to see in this case, and is true more generally, thatincreasing the king's probability of honoring development rights increases the optimal investment made by entrepreneurs. That is, c* increases with h. It is also true that the marginal return declines with h.Footnote ⁵⁵ This observation could be converted into a prediction about the total return, similar to that which Clark investigates. But such an extension would rely on further assumptions about the shape of the return function. Thus, the more straightforward and easily testable prediction is simply that entrepreneurs should invest more in their projects after the Revolution, to the extent that the Revolution reduced the probability of royal interference with developer's rights.

The Revolution should indeed have reduced the chance of royal interference, for two reasons. First, the Revolution ended the king's ability to sell development rights on his own account. Royal patents and charters had been a booming business at times during the seventeenth century, in competition with Parliament's statutes.Footnote ⁵⁶ Once ministerial responsibility was in place, however, no courtier and no king could sell development rights against the wishes of the ministers, since all Crown acts were on the advice of ministers. Thus, as ministers could be removed by Parliament, the market became wholly parliamentary. Second, once the Crown-in-Parliament had granted development rights, the Crown's ability unilaterally to interfere with those rights also disappeared (as, again, the issuance of a new royal patent or charter conferring competing rights was no longer an option).

Now consider the entrepreneur's initial decision, whether to purchase development rights (at price d) or not. If he does not seek any rights, the entrepreneur's payoff is Y(1+r ₀). If he does seek rights, his payoff is pπ(c*) – d. We can denote the entrepreneur's decision by d*, which is equal to zero, if he does not seek development rights, and equal to d, if he does.

The Glorious Revolution should have increased p, the probability of securing development rights from Parliament, for two reasons. First, ministerial responsibility put the king (and the courtier class) out of business as an alternative source of development rights. Second, Parliament sat more often, and the committee system—which processed the relevant bills—developed rapidly. Thus, post-Revolution entrepreneurs knew there was only one market for development rights, that market was open for business much more often, and was soon better organized to handle the increasing flow of business.

In the model just sketched, an increase in the probability, p, that the entrepreneur's bid for development rights will succeed leads to a greater demand for such rights (more bills), a greater volume of rights actually granted (more acts), and a decline in the option value, π(c*). The last is difficult to measure but the number of bills and acts is readily observable.

All told, the most direct predictions are three: the number of bills should have increased, the number of acts should have increased, and completed investment per act should have increased. Putting the last two together, total completed investment should have increased. What does the evidence show?

Bogart, exploiting a new and comprehensive database of investments in roads and rivers, reports as follows (see Figure 4): “The difference in completed investment before and after the Glorious Revolution is striking. Approximately the same amount was completed in the 15 years from 1695 to 1709 as in the previous 85 years from 1604 to 1688… [A]verage investment was £11,600 from 1689 to 1749 which is more than double the average of £5,000 from 1660 to 1688.”Footnote ⁵⁷

Complementing these data on total investments, William Albert shows that the number of acts creating turnpike trusts was nil during every year of the Restoration save one; but that almost no year goes by without a turnpike act after the late 1690s (with the running average below five until mid-century).Footnote ⁵⁸ Examining the broader category of “acts pertaining to property rights,” Bogart and Gary Richardson show the number of such acts increased sharply after the Revolution; while Bogart and Richardson focus particularly on estate acts.Footnote ⁵⁹

As to the efficiency of trade, the MPhours spent in committee— where the vast bulk of legislative action took place—increased greatly, indicating that the MPs, lobbyists, and agents who attended those meetings expected successful bargaining. D. W. Hayton's examination of all legislative initiatives—based on Hoppitt—shows a (slowly declining) decadal success rate at or below 30 percent throughout the Restoration, jumping to 44 percent in 1690–1700 and then to 59 percent in 1701–1715. MPs, with a little practice, doubled the chance of a legislative deal being done.Footnote ⁶⁰