EXPLAINING SOVEREIGN CREDIBILITY

When an actor can write a contract enforceable by a third party, promises can be made credible in many ways (e.g., Akerlof Reference Broz and Grossman1970). Sovereigns, however, enjoy immunity from suit, which hamstrings contractual techniques of enhancing their credibility. The main theories of why sovereign promises can be credible, despite the inability to enforce them as contracts, divide into three broad families. One family views states as unitary actors and traces the credibility of their promises to promise-holders’ ability to punish default. A second family views state decisions as determined by the preferences of pivotal actors and traces credibility to market anticipations of those preferences. A third family views state decisions as made according to specific constitutional rules and traces credibility to the procedural difficulty of reversing previous commitments. I refer to these as punishment theories, majoritarian theories, and constitutional theories, respectively.

In punishment theories, sovereign promises are credible if, and only if, the cost that promise holders can impose after default exceeds the benefit of default. Such theories have been common in studies of sovereign debt since Jonathan Eaton and Mark Gersovitz (Reference Eaton and Gersovitz1981). Most of the literature focuses on a particular punishment—namely, a credit boycott—but others (such as physical coercion) have been considered as well.Footnote ³

Majoritarian theories hinge on the postulate that sovereign promises will be honored if, and only if, a majority of relevant actors (elites, voters, legislators, etc.) wish to honor them, when performance comes due. Some studies of sovereign debt, for example, rely on the median voter theorem (e.g., Dixit and Londregan Reference Dixit and Londregan2000; Guembel and Sussman Reference Bogart and Richardson2009). David Stasavage (Reference Stasavage2003, Reference Stasavage2007) and Steven Pincus and James Robinson (Reference Pincus and Robinson2011), while not employing the median voter theorem, offer an essentially majoritarian explanation of Britain's improved credit-worthiness after the Glorious Revolution. They argue that more and more elite actors invested in commerce over the course of the seventeenth century. Eventually, the mercantile interest—which had money to loan and thus favored punctilious repayment of public debt—began to compete for control of government. A step-up in the credibility of public debt occurred at the Revolution because a partisan majority responsive to mercantile interests first emerged then. The Whig Supremacy then “locked in” that majority in 1715, producing another step-up in credibility. In this story, socio-economic events drove changes in preferences, and majority preferences in the House of Commons drove the credibility of state commitments.Footnote ⁴

As another example, consider a majoritarian analysis of why sovereign promises conveying development rights are credible. Naomi Lamoreaux (Reference Lamoreaux2011) surveys a long list of uncompensated violations of property rights in the United States, some of which (such as the Charles River Bridge case) involved legislatures authorizing competing development projects in the proximity of previously authorized projects, thereby lessening the latter's profitability. She then asks a version of the question at issue here—viz., how can property rights be worth purchasing, given the long history of governmental infringements? Her answer rests on the majoritarian postulate: “Because most voters owned property, they could safely grant government the authority to rearrange property rights,” because a majority of voters could punish politicians who abused their delegated powers (p. 299). Just as bonds are credible if, and only if, a majority of voters will foreseeably support their repayment (Dixit and Londregan Reference Dickson2000), so property rights are credible if, and only if, a majority will foreseeably support their enforcement.

Constitutional theories of credibility build on classic notions about the rule of law and the supremacy of statute law over royal decrees (Sir Edward Coke Reference Coke1777 [1572–1617]; John Locke 1690). The seminal modern treatment, due to North and Weingast (Reference North and Weingast1989), runs as follows. Prior to the Revolution, the legislative status quo in many areas could be altered by royal decree; thus change needed only the Crown's approval. Afterwards, altering the status quo in key areas required an Act of Parliament and hence the concurrence of Commons, Lords, and Crown. Because it was more difficult to repudiate or revise sovereign promises embodied in statutes than it had been to repudiate or revise sovereign promises embodied in decrees, the former were more credible than the latter (cf. Weingast Reference Broz and Grossman1997).

A NEW CONSTITUTIONAL THEORY

In this section, I outline a new constitutional theory of the credibility of sovereign promises. To elaborate, suppose the polity runs through the following four stages connected to the sale of a particular kind of sovereign promise:

1. (1) Proposal: Either Crown officials or Members of Parliament (MPs) introduce a bill authorizing the sale of some new sovereign promises.

2. (2) Approval: Parliament has the monopoly right to approve, amend or reject the proposed sale. If no decision—in the form of an Act of Parliament—is reached, then the proposed sale cannot go forward.

3. (3) Sale: If a sale is approved, a class of brokers holds the monopoly right to sell the authorized promises. The brokers earn a commission per promise sold, bear no cost of performance, and cannot legally gain from repudiation.

4. (4) Performance: When performance comes due, the state performs if the law mandating performance still obtains and the funds legally earmarked to finance performance prove sufficient. Thus, default occurs only if Parliament has retracted the original promise, Parliament has diverted the original funding, or the original funding simply proves insufficient.

Let's briefly consider how the system of interlocking monopolies just outlined worked.

Parliament's monopoly right to authorize the sale of sovereign promises implied that the Crown could not unilaterally do so. Had Parliament lacked this right, the Crown could have presented the Commons and Lords with faits accomplis, thus extracting most of the bargaining surplus (Gary Cox Reference Cox2012, p. 579).

Parliament's monopoly right to retract or revise sovereign promises implied that the Crown could not unilaterally do so. This made sovereign promises hard to change (“sticky”), once they had been embodied in law, as argued by North and Weingast.

Sticky promises helped promise holders if, and only if, performance was the reversionary outcome of the legislative process. In the case of inadequately funded sovereign debt, however, the reversionary outcome was partial nonpayment. Full payment required an Act of Parliament specifying the ways and means. Thus, the stickiness of the legislative process made it harder, not easier, for holders of unfunded debt to secure repayment.Footnote ⁵

The brokers' monopoly right to sell sovereign promises for a commission motivated them to maximize the flow of trade in such promises. They thus cultivated an interest in Parliament and used their influence to promote performance. In particular, the brokers lobbied for adequate initial funding (so that performance would be the reversionary outcome) and then fought to block legislation that would erode the value of the sovereign promises they had brokered.

In standard punishment theories, monopoly brokers make sovereign promises more credible because they can organize boycotts in retaliation to default (e.g., Root Reference Root1989). In my story, brokers play a more extensive role. They are “market makers” who control the initial crafting and funding of promises, enabling them to ensure that performance is the legal reversion. Having accomplished that central task, they can then block statutes authorizing default, rather than merely threatening to coordinate market reactions after the fact.

PARLIAMENT'S AND THE BROKERS' MONOPOLIES

To flesh out the account just given, I consider the development of monopoly brokerage in four markets. For each market, I describe what was traded, when Parliament first secured a monopoly right to approve sales, and when subordinate institutions secured monopoly rights to conduct sales. As will be seen, the Crown repeatedly challenged Parliament's and the brokers’ monopolies by creating wholly new institutions—new bodies in which litigants could seek justice, new bodies that could grant taxes, new syndicates from which loans could be procured, or alternative sources from which to buy development rights. The details of how Parliament's and the brokers’ monopolies were asserted, challenged and decisively re-asserted differ in each market, but they all bear a striking resemblance.

THE MARKET FOR WRITS

Following Henry II's famous legal innovations, royal justices began touring the country on eyres or assize circuits in 1166, offering their services directly to a mass market. In particular, nonbaronial freemen could soon litigate possession and ownership of property before such royal justices, via an array of writs (cf. van Caenegem Reference van Caenegem1973). The canonical sovereign promise sold to freemen via the royal judiciary was title to land. A title was a promise that the owner could use his or her property in any of a number of allowed ways and would have legal recourse against anyone who impeded such uses.Footnote ⁶

The writ of novel disseisin offers a concrete example of such recourse. It allowed a recently dispossessed property owner to secure a trial in which a jury would render a verdict based largely on specific questions of fact, including whether the plaintiff had occupied the disputed land as of certain dates and whether he had been dispossessed without judgment. The court's verdict would then be enforced by the Crown. Thus, subjects who paid “a moderate fee” (van Caenegem Reference van Caenegem1973, p. 43) secured a sovereign promise of a jury trial before royal justices in eyre, with subsequent enforcement of the court's verdict.

In the earliest years of Henry's system, new kinds of writ (i.e., new forms of action) were authorized at royal pleasure. Because most writs allowed the transfer of cases from local to royal courts, however, local elites sought to regulate their use. In 1215, the Magna Carta required baronial permission to transfer some cases to royal courts. In 1258, the Provisions of Oxford stipulated that new kinds of writ could be created only with the sanction of the King's council. By 1285, new writs could be created only with the express sanction of Parliament (per the second Statute of Westminster, c. 24; cf. Maitland Reference Maitland1913, pp. 104–5).

Efforts to professionalize those pleading cases before the common-law courts began in Edward I's reign—with the first Statute of Westminster, c. 29, in 1275; the London Ordinance of 1280; and the Ordinance “de Attornatis et Apprenticiis” of 1292. These laws, by regulating both admission to practice and conduct before the courts, established the first form of monopoly brokerage of the law in England. Subsequently, the Crown did not seriously challenge either Parliament's exclusive right to approve writs or the legal profession's exclusive right to purchase and execute them.

There were, however, further developments within the legal profession itself. It became increasingly common to purchase writs via solicitors and the Inns of Court secured a legal monopoly on pleading cases before the superior common-law courts after the decision rendered in Broughton v. Prince in 1590. Thus, lawyers trained in the Inns of Court secured exclusive rights both to purchase writs for clients and to execute those writs in court, between the period of 1390–1590.

Parliament's and the Inns’ of Court monopoly extended only as far as the jurisdiction of the common-law courts. The prerogative courts always threatened the common-law courts’ status as the unique suppliers of justice and this threat became severe under the early Stuarts, who made a determined effort to transfer jurisdiction to, most notoriously, the Star Chamber. The common-law courts won a great victory during the Long Parliament and the sole prerogative court to survive the Restoration was the Court of Requests (which had minor business and disappeared before the eighteenth century). Thus, the jurisdictional claims of the common-law courts had been largely vindicated by 1660.

The Inns of Court remained subordinate to Parliament, however. Because Parliament could enact legislation that specified the kinds of writ solicitors could sell, the Inns of Court had every incentive to establish a firm presence in Parliament, in order to protect their monopoly and to ensure parliamentary authorization for new writs that looked profitable.

THE MARKET FOR PLATFORMS

Consider next the King's promise to use taxes he collected from his subjects for agreed purposes, such as fighting off foreign invaders. Since such a promise—a platform in my lingo—pertained to a public good, it was not sold separately to individual subjects, as were writs and bonds. Nonetheless, platforms were written promises, typically articulated in the summons to Parliament and/or the speech from the throne. For example, in 1295 Edward I promised to protect the kingdom from an impending invasion by the King of France, who “proposes to destroy the English language altogether from the earth, if his power should correspond to the detestable proposition of the contemplated injustice, which God forbid” (E. P. Cheyney Reference Cheyney1897, pp. 33–35). In summoning Parliament, Edward stipulated that the participating knights of the shire and burgesses must have “full and sufficient power” to grant any taxes he might demand in exchange for his protection. In essence, then, MPs were put in the role of platform brokers. The King wanted them to “sell” their localities on both the platform—vague and dodgy though it might be—and the tax price. Actual collection of the agreed taxes was typically left to various species of sales broker.

Kings were predictably tempted to alter their platforms—for example, by diverting funds to other purposes. In other words, kings were prone to reneging. Medieval kings throughout Christendom mitigated their credibility problems by creating councils or Parliaments with monopoly rights to grant new taxes (cf. Marongiu Reference Marongiu1968; Barzel and Kiser Reference Barzel and Kiser2002). The council's or Parliament's monopoly, if respected, meant that the sovereign could not find new sources of taxation after reneging on whatever commitments he had made to procure his original taxes. Tax-granting monopolies thus enhanced the credibility of Parliament's threat to withhold funds in the future, should current funds be misspent. In the English case, Scott L. Waugh (Reference Waugh1991, p. 203) reckons that “Parliament's monopoly [over the granting of taxes] was not firmly established until the 1340s,” while Simon Payling (Reference Payling and Jones2009, p. 76) casts the 1350s as the crucial decade.

Because taxpayers “purchasing” platforms had incentives to free ride that litigants purchasing writs lacked, the specialized agents “selling” platforms sometimes had to be given stronger incentives than those selling writs. Thus, tax farmers were residual claimants to the tax streams they farmed, while solicitors (and barristers) worked for a share of the state revenues they generated.

From 1604 to 1683, English tax farmers sought a monopoly of tax collection, just as the Inns of Court had sought a monopoly on writs and their pleading. However, a monopolist tax farmer posed a threat to the state. According to Michael Braddick (Reference Braddick1996, pp. 64), the end of tax farming in England came about in part because “there were fears that the successful bidder, William Bucknall, had secured control over too large a share of national revenues.” Noel Johnson and Mark Koyama (Reference Johnson and Koyama2014) add that the English Crown was in an administratively good position to take over tax collection.

In any event, the Crown introduced a system of direct collection of customs in 1671 and of excise in 1683. In essence, after 1683 various state agencies held a monopoly in tax collection, but the compensation earned by individual tax collectors consisted of a fixed salary, rather than a share of revenues collected or a residual claim.

The most famous challenge to Parliament's right to assent to new taxes arose in the crisis over the wool tax granted by the Merchant Staplers (Power 1942, p. 14):

Even after the struggle with the Merchant Staplers had successfully ended, exceptions and threats to Parliament's monopoly right to grant new taxes continued. The Parliamentum of the County Palatine of Chester had, until Henry VIII's time, the right to assent to taxes there (cf. Morrill Reference Morrill1974, p. 1). The Tudors’ policy of fiscal feudalism “threatened to diminish the importance of the Commons’ right of assent to taxation” (Payling Reference Payling and Jones2009, p. 77). The early Stuarts secured revenues in exchange for grants of monopoly to various entrepreneurs, thereby essentially repeating the tactic that had been earlier used with the Merchant Staplers (Harris Reference Harris2000, pp. 46–7). More generally, North and Weingast (Reference North and Weingast1989, pp. 809–12) list an array of tactics the Stuarts used to avoid Parliament's monopoly of tax grants, all of which can be put under the general rubric of “divide and conquer.”

Parliament's legal authority over taxation was finally entrenched in two important steps. First, “prerogative revenues…were all abolished or replaced by tax revenues in 1660” (Braddick Reference Braddick1996, pp. 10, 14). In other words, various sorts of state revenue, that a modern observer would call “taxes” but that were not legally recognized as such before the Restoration, were so afterwards. Second, the Bill of Rights contained a crucial new reform that established Parliament's power to set time limits on its tax grants and this reform led quickly to the invention of annual budgets (cf. Cox Reference Cox2012).

THE MARKET FOR SOVEREIGN BONDS

The market for sovereign debt involved the sale of a sovereign promise to repay with interest (later) in exchange for a loan (now). Some sovereign debts could be traded on secondary markets by the late 1660s and the markets expanded thereafter, especially after the Revolution (Carlos et al. Reference Carlos, Fletcher, Neal, Wandschneider, D'Maris, Leonard and Neal2014).

Parliament formally sought to prevent the King from borrowing unilaterally as early as 7 January 1680, when it resolved that “whosoever shall hereafter lend or cause to be lent by way of advances any money upon the branches of the King's revenue arising by customs, excise, or hearth money shall be judged to hinder the sittings of Parliament and shall be responsible for the same tax” (Einzig Reference Einzig1959, p. 98). In 1682, the House of Commons resolved more broadly “that anyone who lent to the Crown without Parliamentary authority would be judged an enemy of Parliament” (O'Brien Reference O'Brien2005, p. 25). Yet, it was not until 1693 that Commons, Lords, and Crown agreed to issue England's first-ever long-term sovereign debt. Henceforth, all long-term debt would be both funded (backed by specified taxes dedicated to repayment) and national (approved by statute). In other words, Parliament attained a monopoly right to approve new loans, similar to its right to approve new taxes (cf. Cox Reference Cox2012).

The Bank of England increasingly attained a monopoly on floating new sovereign debt between the period of 1694–1711. Stephen Quinn (Reference Quinn2004) reckons that the Bank dominated the administration of short-term debt by 1706 and of new long-term debt after 1711.Footnote ⁷ Thus, as in the market for writs, Parliament retained monopoly control over authorizing new promises, while a subordinate institution eventually secured de facto monopoly control over the sale of those promises.

Just as the Merchant Staplers threatened Parliament and the prerogative courts threatened the common-law courts, so the Land Bank challenged the Bank of England's monopoly. It was not until this and other similar challenges—e.g., from the South Sea Company—had been beaten off that the Bank's monopoly looked secure. Indeed, because Parliament could de-charter it, or transfer its privileges elsewhere, the Bank took care to maintain a large enough “interest” in Parliament to defend its monopoly (Broz and Grossman Reference Broz and Grossman2004).

THE MARKET FOR LOCAL DEVELOPMENT RIGHTSFootnote ⁸

Entrepreneurs seeking to build turnpike roads, bridges, or canals faced the daunting task of cutting through a maze of existing property rights. Negotiating with all rights-holders was typically too costly and so developers sought either royal patents or private acts of Parliament to confer the needed development rights. In either case, they paid an array of fees to obtain their rights.

It is unclear when parliamentarians first sought the exclusive right to approve new development rights. In the case of rights—development or otherwise—conferred on corporations, the House of Lords’ decision in Phillips v. Bury (1 Ld. Raym. 5, 1694) “definitively established the legal principle that the king could not alter or abolish a corporate charter or intervene in a corporation's internal affairs. Only Parliament had that power” (Lamoreaux Reference Lamoreaux2009, p. 14). Development rights conferred on other groups, such as turnpike trusts, also became the exclusive domain of Parliament, with competition from royal patents ending (Bogart Reference Bogart2011).

Once the only route to obtaining local development rights lay through Parliament, its private bills committees quickly emerged as the monopoly “sales force” for such rights. Both backbench MPs and a specialized class of “parliamentary solicitors” emerged to handle the booming business in private bills, for which proportional fees were collected (cf. Rydz Reference Rydz1979).

The challenge to Parliament's monopoly of assent in this market had come from the royal court, where courtiers offered to arrange royal patents in direct competition with MPs offering to shepherd private acts. This bifurcation in the market stunted its growth considerably, as entrepreneurs either purchased rights only from one source (and then feared predation by the other) or bore the double costs of buying both a royal patent and a private act.

THE BROKERS' COMPENSATION

When brokers established their monopoly right to sell sovereign promises of a particular kind, they also established compensation schemes with three important features. First, individual brokers received fees roughly proportional to the value of the trades they brokered. Second, no broker could share in the fruits of promise repudiation. Third, no broker bore any cost of promise performance.

Lawyers and judges both received fees proportional to the value of the litigation undertaken in the common-law courts: “The usual scale was 6 s. 8 d. for every 100 marks claimed” (Encyclopedia Britannica, 11^th edition, p. 848). The Bank of England's fees for bond flotations were also indexed to the total revenue secured.

MPs’ compensations were more complex. Some MPs tried to extract “fees” in the platform-for-taxes trade. But the Crown was very unhappy with individual MPs’ attempts to secure payment for their votes in support of supply. After the Glorious Revolution, new standing orders forbade anyone but a Minister to propose new charges upon the public funds, thereby greatly eroding backbenchers’ ability to salt supply bills with payments for their votes (Todd Reference Todd1867, v. I, pp. 428–29).

Instead of demanding a commission on the state's total tax revenues, unofficial MPs secured their own market in sovereign promises—namely, the trade of private bills in exchange for fees. Beginning in the fourteenth century (cf. Payling Reference Payling and Jones2009, p. 78), Parliament established the principle that statutes were void without its assent and began crafting its own bills, usually at the behest of interested external parties. Many of these bills embodied sovereign promises to protect assets, rights, or profits (Bogart and Richardson Reference Bogart and Richardson2009, Reference Bogart and Richardson2011; Bogart Reference Bogart and Richardson2011).

If MPs could discover a private actor willing to pay, they classified a bill as “private” and extracted an array of fees (ydz Reference RydzR1979, p. 3). Otherwise the bill was “public” and MPs’ compensation depended on their being placed on boards of directors, offered shares of stock, or otherwise cut in on the deal.Footnote ⁹ Whether private or public, MPs' compensation was roughly proportional to the value of the legislation purchased.

While backbench and opposition MPs plied the waters of private and parochial legislation, Ministers took care of the platforms-for-taxes trade and it was they who effectively received a commission on the state's total tax revenues. I describe their rise to power later.

Brokers never bore a legal share of the costs the Crown incurred in fulfilling its promises. The money used to pay for the enforcement of court judgments, to fight wars, to repay loans and to enforce development rights, had already been appropriated and was beyond the legal control of both the “sales force” (lawyers, tax collectors, bankers, parliamentary solicitors) and of individual MPs. The only way to claw back these appropriated funds would be to install a Ministry committed to such a claw back.

Brokers never had a legal right to share in the profits that the Crown might secure by reneging on its promises. If the Crown failed to enforce a court judgment, no solicitor had a right to get a portion of the cost savings. If the King decided not to carry out his war platform, and thereby freed up the taxes previously granted for that purpose, no MP had a right to get any tax money back. If the government refused to pay its debts, no banker had a right to share in the revenue gained by repudiation. If the Crown failed to enforce the terms of a private act conferring development rights, no individual MP or parliamentary solicitor had a legal right to share in the cost savings.

While the direct fruits of nonperformance went to the Crown, the brokers might anticipate some new commissions, in the event of partial repudiation. For example, if old debts were exchanged for new ones, bankers might handle the new issue—and earn commissions. Although the prospect of these “refinancing commissions” did reduce bankers’ incentives to oppose default, they should still have favored performance more than the government.

First, bankers and government officials were not identically patient. The government of the day might face war and liquidity crises, greatly increasing their appetite for immediate funds. The Bank of England, a chartered company of great wealth, should have been more patient. Because the pain of future market shrinkage would be felt more keenly by a patient Bank than a desperate government, public creditors could generally expect the Bank to act as a brake on sovereign default.

Second, as the size of the haircut grew, the two sides’ incentives increasingly diverged. In the extreme of complete repudiation, the brokers would receive no refinancing commissions at all.

MONOPOLY BROKERAGE AND THE VOLUME OF TRADE

When monopoly brokerage attained its mature form in a particular market, we should observe two reactions: market expansions and rate-of-return declines. For example, if sovereign debt became more credible at some date, then more debt at a lower interest rate could be sold. Similarly, if writs became more credible vehicles by which to protect property rights at a particular date, then more writs could be sold and the rate of return on the underlying asset (property) should decline.

Scholars dispute which indicator, market volume, or rate of return, best captures credibility (see Stasavage Reference Stasavage2007, p. 136; Cox Reference Cox2012, pp. 582–84, 592–94). I first focus on volume, showing that the aggregate value of trade, the variety of traded products, and the efficiency of trade all increased sharply upon emergence of monopoly brokerage in a particular market. In the next two sections, I consider property rights and bonds at greater length, including relevant rate-of-return evidence.

LAWYERS AND WRITS

As previously described, the post-1166 system of writ manufacture and sale increasingly exhibited the features of monopoly brokerage. Parliament's monopoly right to authorize sales became increasingly clear over the period 1215–1285 and the legal profession's monopoly on conducting those sales emerges at about the same time.

Although annual statistics on the number of writs purchased do not exist, R. C. van Caenegem (Reference van Caenegem1973, ch. 2) makes clear that sales expanded greatly after Henry's reforms. The variety of writs also evolved rapidly. Whereas only four original writs existed in 1166, by the mid-1260s the Lullfield Register lists 314 writs, and by 1687 the Registrum Omnium Brevium lists over 2,500 (Wiener Reference Wiener1972, pp. 499–500). Finally, market efficiency increased: relative to their predecessors, Henry's writs could be purchased more easily and their legal consequences were substantially clearer.

MINISTERS AND PLATFORMS

In the earliest days, the King controlled the manufacture of platforms. He chose when to convene Parliament and his written summons stipulated the danger against which he promised protection and for which he demanded taxes. The speech from the throne further articulated the royal platform.

After the Glorious Revolution, a new breed of monopolist broker—Ministers—arose to manage the increased flow of Parliament-Crown trade (Cox Reference Cox2011). The Ministry soon determined the content of the speech from the throne and, more generally, of the bills that embodied sovereign promises intended as bait for taxes. By the mid-1690s, the Ministry also controlled the construction of supply bills (cf. Hayton Reference Hayton2002, pp. 393, 425–26); and by 1707 the Ministry had a monopoly right to propose new expenditures to Parliament. Once the Ministry controlled the manufacture of both platforms and supply bills, the value, variety, and efficiency of trade surged.Footnote ¹⁰

One can estimate the aggregate value of the taxes-for-platforms trade by the aggregate value of taxes granted. During the Restoration, notwithstanding the many improvements in tax collection (Roseveare Reference Roseveare1991), tax receipts showed a shallow decline from 1665 to 1685, averaging £1.53 million. After the Glorious Revolution, tax receipts more than doubled the Restoration average by 1695 and tripled it by 1700 (O'Brien Reference O'Brien1988, Table 2). I have no evidence on the variety of platform promises. My conjecture, however, is that post-Revolution speeches from the throne should (controlling for war/peace) have become more varied.

A key index of the efficiency of the taxes-for-platforms market is simply the frequency with which Parliament met.Footnote ¹¹ By that index, the Revolution's effect is clear. In the decade before the Revolution, Parliament did not sit in six of the ten years, 1680–1689. In contrast, Parliament met in every year of the decade 1690–1699 and typically stayed in session for longer periods than it had under the Stuarts.Footnote ¹²

BANKERS AND THE MANUFACTURE OF BONDS

A similar story can be told about sovereign bonds. As long as the King had the right to borrow unilaterally, the voluntary market often failed. After the Bank of England was created in 1694, the two sets of brokers (MPs and central bankers) increasingly controlled the manufacture of bonds.Footnote ¹³ The result was an explosion in the aggregate value, variety, and efficiency of the bonds trade.

England's long-term funded debt stood at zero from 1600–1693, and then increased to £1,200,000 in 1695, £4,100,000 in 1705, and £29,600,000 in 1715. Short-term debt, which had been roughly constant at £1,000,000 from the mid-1630s to the end of the Restoration, increased five-fold after the Revolution (cf. North and Weingast Reference North and Weingast1989, p. 822; Mitchell Reference Mitchell1962, p. 401; Cox 2012). The variety of products in the bond market increased, too. Indeed, in addition to the introduction of long-term funded debt, the first generation after the Revolution saw experimentation with a wide range of new types of loan, including debt securitization schemes (cf. Dickson Reference Dickson1967; Quinn Reference Quinn2008).

To assess the efficiency of the bond market, consider how often the Crown asked parliamentarians to co-sign loans but they refused to do so. Before the Glorious Revolution, the Crown rarely succeeded in getting Parliament to authorize new debt, just as it rarely succeeded in getting it to authorize new taxes. Indeed, Cox (Reference Cox2012) shows that loans backed by Parliament equaled only about 5 percent of James II's annual tax income. The first four Stuart kings typically sought purely royal loans directly from their subjects. They often had trouble finding any subjects willing to lend, whereupon the pre-Civil War kings resorted to forced loans. Both unilateral royal borrowing and especially forced loans were symptoms of market failure. In the first decade after the Glorious Revolution, in contrast, parliamentary loans equaled almost 75 percent of William and Mary's annual tax income (Cox 2012). Thus, especially after the grand bargain that gave birth to the Bank of England, monarchs sought parliamentary backing for loans far more often and successfully than the Stuarts ever had.

MPs AND THE MANUFACTURE OF PRIVATE BILLS

After the Revolution, royal patents were no longer available and the content of private bills delineating development rights was almost wholly controlled by Parliament (Bogart and Richardson Reference Bogart and Richardson2011; Bogart Reference Bogart and Richardson2011). Moreover, Parliament delegated to its committees. Thus, backbench MPs and parliamentary solicitors had every incentive to improve the operation of the market from which they earned their fees.

The consequence of empowering the brokers was that the market for local development rights boomed. Dan Bogart (Reference Bogart2011, p. 1090), exploiting a new and comprehensive database of investments in roads and rivers, reports as follows: “The difference in completed investment before and after the Glorious Revolution is striking. Approximately the same amount was completed in the fifteen 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.”

Complementing these data on total investments, W. Albert (Reference Albert1972, pp. 202–3) 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). Examining the broader category of “acts pertaining to property rights,” Bogart and Richardson (Reference Bogart and Richardson2011) show the number of such acts increased sharply after the Revolution, while Bogart and Richardson (Reference Bogart and Richardson2009) focus particularly on estate acts.

As to the efficiency of trade, the MP-hours 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. David W. Hayton's (Reference Hayton2002, p. 385) examination of all legislative initiatives—based on Julian Hoppit (Reference Hoppit1997)—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.

PROPERTY RIGHTS

Gregory Clark (Reference Broz and Grossman1996) argues that the rate of return on property should have declined at the Revolution, if indeed sovereign promises to respect property rights became more credible, as claimed by North and Weingast (Reference North and Weingast1989). But, Clark shows, rates of return on various types of domestic property did not change at the Revolution.

My argument is that domestic property rights became substantially more secure when monopoly brokerage of common-law writs emerged in the late thirteenth century. By this account, rates of return should have declined from the mid-twelfth to the mid-thirteenth century, but should have been stable thereafter. The latter prediction is consistent with Clark's evidence over the period 1540–1800.

Additional evidence of the importance of monopoly brokerage can be gained by considering the stark difference between rights in domestic and foreign property. Prior to 1660, the admiralty courts, which operated under civil rather than common law, often regulated English subjects’ foreign assets (Jha Reference Jha2012, pp. 27–8). Moreover, the right to trade internationally was typically granted by royal charter. Among other things, the dominance of decretal law in creating and regulating foreign property meant that the Crown could predate upon joint stock companies’ profits. The Crown could and did raise customs charges on specific items in which trade was booming and it could and did revoke charters, in order to reallocate profits (Jha Reference Jha2012, p. 28).

After the Restoration, trading companies continued to face two substantial threats. First, the monarch could extract concessions by threatening to revoke royal charters or veto statutory re-charterings. Second, the monarch retained vast legal prerogatives in foreign affairs and the right to dismiss common-law judges at pleasure. Thus, profitable companies might well have feared vigorous assertion of prerogative rights before such judges.

The first threat to company profits waned substantially after Phillips v. Bury (Reference Quinn1694) established that only an Act of Parliament could alter corporate charters (Lamoreaux Reference Lamoreaux2009, p. 14). It waned further when ministerial responsibility emerged, after which the monarch was less able to extract side payments by threatening to veto re-chartering Acts.

The second threat to company profits abated after the Act of Settlement (1701) established that judges would serve “during good behavior” rather than “at royal pleasure.” Two similar statutes had previously been rejected by William III or blocked by his parliamentary allies. By inserting service “during good behavior” in a bill that the Crown otherwise strongly favored, advocates of judicial reform extracted the King's grudging assent.

Daniel Klerman and Paul Mahoney (Reference Klerman and Mahoney2005) show that shares in English trading companies experienced abnormal positive returns, when the amendment stipulating service “during good behavior” was introduced. Evidently, investors believed that English companies would bring home a larger share of their foreign profits, once judges were more independent of the Crown.

All told, then, my approach accommodates the rate-of-return evidence on property rights well. Phillips v. Bury and the Act of Settlement should not have affected enforcement of domestic property rights but they should have improved merchants’ control of their trading income and assets—and that is what the evidence shows.

SOVEREIGN DEBT

Why was funding so vital for the credibility of sovereign debt? Considering this question helps clarify how my account differs from North and Weingast's and why it can accommodate the rate-of-return evidence marshaled against them. I begin by arguing—contra North and Weingast—that embodying promises of repayment in statutes should not necessarily have improved their credibility.

To see why better-entrenched promises of repayment were not necessarily more credible, note that many government loans were either unfunded (no specific funds were legally dedicated to their repayment) or inadequately funded. When tax receipts proved insufficient to pay the principal and interest on a funded loan, the English said that a “deficiency” existed. In such cases, a new statute was required to identify the ways and means to repay the loan; otherwise, bondholders would take a haircut proportional in size to the deficiency. To put it another way, deficiencies meant that the reversionary outcome of the legislative process—i.e., what happened if Commons, Lords, and Crown could not agree—was partial default. Thus multiple veto points worked against rather than for bondholders, because it was they who wanted a new statute.

While Treasury officials might repay un- and under-funded loans with general revenues, they were not legally obligated to repay them with specific funds at specific times. Predictably, this led to substantial delays in the repayment of such debts, which tended to accumulate to crisis proportions before Parliament would deal with them.Footnote ¹⁴

Contemporaries recognized that deficiencies threatened public creditors. Daniel Defoe (Reference Defoe1710, p. 17), for example, identified the major reason that English debt lacked credibility (circa 1700–1710) as “the settling Funds that were in themselves deficient; and making no Provision to supply those Deficiencies.” Thus, investors closely examined loan prospectuses, to see whether the taxes earmarked to fund a particular loan were likely to prove sufficient.Footnote ¹⁵

Realizing this, the Commons undertook a series of technical reforms reducing the expected size of deficiencies. The eventual eradication of deficiencies (on which more below) was a central achievement, because it made bond repayment the reversionary outcome of the legislative process. That is, absent a new statute specifically repudiating or rescheduling a given debt, it would be repaid in full and on time. In this setting multiple veto players were obviously advantageous to bondholders.

The main method the English used to combat deficiencies was straightforward: they consolidated funds. For example, when 15 separate short-term loans proved intermittently deficient by 1697 (see Dickson Reference Dickson1967, pp. 348–49), all were combined into one large fund. This consolidation reduced the probability of gaps, because surpluses in any fund were dedicated to making good deficiencies in others. Only if a net surplus arose in the aggregated funds could Parliament use that surplus for other purposes. Previously, Parliament could use the surplus from any component fund for current expenses.

The next major move toward consolidation came with the creation of the Aggregate Fund (1715) and the South Sea Fund (1717). The process culminated in 1752, with Henry Pelham's conversion to consols, and 1787, when all existing public funds were collapsed into one Consolidated Fund. At this point, the probability of a deficiency was essentially zero, since the entire revenue of the state flowed through the Consolidated Fund and payments on the debt were senior to annual expenditures.Footnote ¹⁶

Figure 1 presents a quantitative picture of funding and deficiencies over the period 1695–1720. The upward-trending curve shows the fraction of all debts that were funded (per Brian R. Mitchell Reference Mitchell1988).Footnote ¹⁷

Figure 1

THE GROWTH OF FUNDING AND FALL OF DEFICIENCIES, 1695–1720

Source: The share of debt funded is from Mitchell 1988, p. 600. The sources for deficiencies are described in footnote 18.

As can be seen, the practice of earmarking funds to repay particular loans (and stipulating that creditors' claims on those funds would be senior to others) does not emerge all at once after the Revolution. Instead, funding arrives in several steps. There was a steady increase in the 1690s (starting from a base of 0); no change from 1700 to 1710; a sharp increase from 1710 to 1712; and continued growth after 1712 (reaching 92% funding by 1720).

The other curve in Figure 1 gives total deficiencies, divided by the total debt. Based on four parliamentary reports with reasonably comparable data, we see that before 1711 between 24% and 44% of the debt could not be paid off by earmarked revenues.Footnote ¹⁸ The corresponding figure drops dramatically, to 3%, by 1714. Thus, it appears that deficient funding became rare over a short time period, 1710–1714.

Moreover, after the creation of the Aggregate Fund (1715) and the South Sea Fund (1717), the issue became one of surplus management. The surpluses from the three main funds (General, Aggregate, and South Seas) were swept into the Sinking Fund, which was intended to retire the principal on otherwise unfunded debts. In practice, Ministers typically raided the Sinking Fund for current expenses (Dickson Reference Dickson1967, p. 86). This no doubt irritated debt holders. However, their structural position had still changed considerably for the better, from the days in which the problem had been deficiencies. Now, all debts with a “senior” claim on one of the three big funds were paid; deficiencies occurred only on “junior” debts (defined as those whose repayment depended on the Sinking Fund actually being used for repayment rather than current expenses).

How does this revised account of when constitutional commitment arrived in England gibe with the evidence marshaled by North and Weingast's critics? I take the main elements of their critique to be that interest rates after the Revolution improved only slowly (Sussman and Yafeh Reference Sussman and Yafeh2006), were sensitive to which party controlled the Commons (Stasavage Reference Stasavage2003), and exhibited a structural break in 1715, not 1689 (Stasavage 2007). Yet, each of these observations is consistent with the new account of when constitutional commitment actually arrived. Interest rates should have slowly improved, because it took some time to recognize and combat the problem of deficiencies. Creditors should have been sensitive to which party controlled the Commons, because curbing deficiencies required positive action by Parliament.Footnote ¹⁹ Finding a structural break near 1715 rather than 1689 makes sense, because constitutional commitment in a form beneficial to bondholders emerged nearer the latter than the former date.

COMPETING EXPLANATIONS

In this section, I consider whether the punishment or majoritarian theories of sovereign credibility can explain the various market expansions documented in the previous sections. When the sale of writs boomed, for example, did this coincide with an improved ability of property owners to punish the Crown for predatory acts, or to the emergence of a new majority in favor of enforcing property rights, rather than to the emergence of monopoly brokerage?

Let's start with punishment theories. They can in principle explain abrupt improvements in credibility, if promise-holders’ ability to boycott abruptly increases. One might interpret the Bank of England as creating a force that could help organize lenders’ boycotts, similar to Root's (Reference Root1989) analysis of France. However, the Bank seems much better designed to help creditors prevent default than to punish it. The Bank could be trusted to lobby for better funding and more secure seniority for debts and to oppose efforts to rewrite the terms of repayment in ways unfavorable to lenders. After a default had occurred, however, the Bank would have been keen to re-establish the market quickly, so that its flow of flotation fees would recommence. Thus, the Bank was not the best agent to deliver threats of a long boycott, in order to extract concessions from the government.

A punishment account seems even less plausible for the other markets studied here. For example, should we understand the increasing sale of common-law writs after 1166 as reflecting litigants’ improved ability to settle out of court, thus forcing royal courts to provide better justice in order to attract business? While logically possible, there is no evidence that litigants’ ability to settle out of court changed enough to explain a seven-fold increase in the number of writs from 1166 to the mid-1260s. Moreover, if out-of-court settlements in fact became easier for some exogenous reasons, then the credibility of all courts would have been enhanced. Litigants would have had no need to flee the baronial courts and flock to the royal courts, as they did.

What about majoritarian theories? They can in principle explain abrupt improvements in credibility, if new majorities emerge at critical junctures. However, no one has argued, nor does it seem plausible, that changes in preferences explain why the sale of common-law writs, supply bills, and development rights boomed at the particular times they did. In contrast, there is a majoritarian explanation on offer for debt. As noted earlier, Stasavage (Reference Stasavage2003, Reference Stasavage2007) and Pincus and Robinson (Reference Pincus and Robinson2011) explain the increased credibility of England's debt after 1688 in terms of the emergence of a mercantile majority at the Revolution, followed by the entrenchment of that majority in 1715. But did a mercantile majority emerge only with the Revolution? One might argue that the parliamentary side won the English Civil War because it had the support of the mercantile interest (cf. Jha Reference Jha2012), which would suggest that that interest contended for power much earlier than the Revolution.

Moreover, although Stasavage (Reference Stasavage2003, Reference Stasavage2007) shows that post-revolutionary interest rates followed Whig party fortunes in the House of Commons, a purely institutional account of credibility may be consistent with the patterns he documents. As noted earlier, innovations in solving the problem of deficiencies occurred throughout the first three decades of the Bank of England's life. Were it possible to code each loan in terms of the anticipated sufficiency of its funding, one might find that party strength in the Commons has no predictive value, once “anticipated sufficiency” is controlled. To illustrate this conjecture, consider the two largest credit crises that post-revolutionary England faced before the South Seat Bubble—in 1697 and 1710–1711.

Although the First Whig Junto (1694–1699) remained in power before, during, and after the crisis of 1697, deficiencies mounted steadily over the first few years’ of its tenure in office. By the spring of 1697, “deficiencies on short-term tax funds were over £5m, and in April a lottery loan for £1.4m was almost entirely unsubscribed” (Dickson Reference Dickson1967, p. 352). Confronted with an outright refusal of credit, capping a sharp rise in interest rates, the Junto responded with the consolidation of funds known as the First General Mortgage (8&9 Wm. III, c. 20). The ensuing turn-around was, by the autumn, dramatic (Dickson Reference Dickson1967, p. 357). Clearly, one cannot attribute England's improved interest rates and credit access in 1697 to partisan shifts in the Ministry (as the Junto remained) or the Commons (as the 1695 Parliament was not prorogued until July 1698). The main events restoring public faith in English debt were the end of the Nine Years’ War and the better funding of the debt.

The problem of deficiencies—and the remedy of consolidation—also played leading roles in the crisis of 1710–1711. It is true that the crisis coincided with the accession to power of a new Tory Ministry, whose enemies characterized it as hostile to the interests of public creditors (Defoe Reference Defoe1710). However, the fundamental problem the new Ministry faced was similar to that faced by the Junto in 1697: the unfunded debt threatened to get out of control (Dickson Reference Dickson1967, p. 64). The remedy was also similar, involving a considerable consolidation of funds, along with a swap of old debts for equity in the South Sea Company. And, finally, market reactions were similar, with a substantial improvement in credit access and price.Footnote ²⁰ All told, the Tory Ministry stayed without much change, the war continued for several more years, yet the credit-worthiness of British debt improved—immediately after the South Sea Company came into being and funding of the debt improved dramatically.