Debt crises and fiscal problems are nothing new. On 2 January 1672, King Charles II of England put a “stop on the exchequer,” suspending repayment of his debts for a year. Such events would have been more common for the Stuart kings if people had been prepared to lend them money in the first place. Few were. Prior to the stop, Charles had already been refused an “advance” from the bankers of Lombard Street. His father Charles I had resorted to “forced loans” when short of money.
The main problem was that the English kings were insolvent. The House of Commons wanted more influence on policymaking prior to agreeing to vote new taxes. As a result, England’s Stuart kings lurched from fiscal crisis to debt crisis and back again.
Then a curious thing happened. In 1688 the Stuart monarchy persisted but suddenly it was able to borrow heavily again. This inflection point in the debt data came when the House of Commons agreed to taxes – lots of taxes. Fiscal revenues were soon 10% of national income, something still an aspiration for most Sub-Saharan African countries today. This was part of a broader reform known as the Glorious Revolution. Parliament began meeting every year instead of intermittently. It also met for longer sessions and embarked on a legislative frenzy. Members of Parliament agreed to expand and modernise the state, urged the foundation of the Bank of England, and, in concert with the Stuart monarchy, initiated a financial revolution. They passed laws that generated a rapid growth of infrastructure – starting with turnpike roads and moving on to canals. And they fostered patenting that in turn led to an acceleration of technological change and ultimately the industrial revolution.
What caused the Glorious Revolution?
At a factual level there is one big correlation with the inflection point: the Glorious Revolution. With the support of a great many English, William of Orange, the Dutch Stadholder, brought an army from the Netherlands and drove Charles II’s brother and successor, James II, into exile. William, married to James’s daughter Mary, was crowned king on 11 April 1689. At the coronation, before being given the crown, William was read the Declaration of Rights and list of principals and grievances compiled by Parliament.
The causal role of the Glorious Revolution in inducing this massive institutional and economic transition was at the heart of a seminal paper by North and Weingast (1989). They portrayed the Glorious Revolution as inducing a set of institutional changes, codified in the Declaration of Rights, whose fundamental impact was to resolve a problem of “credible commitment”, thus stabilising property rights. The Stuart kings had been unable to commit to pay back their debts, so hardly anyone risked lending to them. As a consequence of the Revolution, Parliament held the purse strings and repayment was guaranteed, so loans flowed and property rights became more secure. These institutional changes laid the framework from which the industrial revolution emerged less than a century later.
North and Weingast’s arguments have been dismissed by economic historians who claim that property rights were secure prior to 1688, that the government was credible, that the higher taxes were bad for the economy, and that data on interest rates does not support the thesis (Clark 1996, Sussman and Yafeh 2006, Allen 2009, Murphy 2009). These criticisms have fit snugly with the arguments of those revisionist historians who claim that nothing new or radical happened in 1688, that England’s Revolution was a conservative and restorative Revolution (see Chapter 1 of Pincus 2010).
A revision of the revisionist view
In Pincus and Robinson (2011), we argue that the economic historians and the revisionist historians are wrong about the Glorious Revolution and in fact the thrust of North and Weingast’s argument is correct. The year 1688 was an institutional turning point, it did usher in significant changes in policy and the political process and it plausibly did establish the conditions that led to the industrial revolution.
The problem with North and Weingast’s paper is that they mischaracterised what actually happened in 1688 and as a result they emphasised the wrong channels. In short, they got the mechanism, not the message, wrong. Most of the debate about the North and Weingast’s evidence, for example, on the consequences of 1688 for interest rates and the security of property rights has chased red herrings.
The Glorious Revolution derailed the attempt of James II to create an absolutist monarchy modelled on the one created in France by Louis XIV. However, unlike the US constitutional convention in Philadelphia in 1787, it did this not through a de jure “re-writing the rules” that constrained the future actions of the king, as North and Weingast argued. In fact, the Revolution Settlement of 1688-89 established very few new de jure rules or rights. The Declaration of Rights, the centrepiece of North and Weingast’s claims that the Revolution rewrote the political rules, largely restated old laws that James II had violated. Its insistence of frequent parliaments, for example, merely recapitulated legal language from the age of Edward III.
The power shifts to Parliament
In derailing absolutism, the Glorious Revolution caused a significant shift in power and authority to Parliament and did so in the context of the emergence of party politics. Particularly significant was the formation of the Whig party in the later 1670s and 1680s, which aligned itself with the emerging manufacturing and long-distance trading sectors of the economy.
The shift in power is illustrated by the fact that William summoned Parliament every year and allowed them to start auditing his expenditures and by many other decisions he took once he became king. William III willingly surrendered claims to traditional sources of revenue, such as a lifetime grant of customs or the right to create overseas monopolies. These changes set in motion a set of de facto (“informal”) institutional changes with very important consequences.
Though these institutional changes were not significant because they solved a “problem of credible commitment,” there were two ways in which they had momentous implications for the economy.
- The first set flowed from parliamentary dominance itself with the consequent switch in the nexus of authority.
This led to very significant policy changes because party political ministries, rather than the king’s private advisors, now initiated policy. Since party ministries depended on public support to stay in power, they were necessarily more responsive to public pressure. It was this that led, for example, to the transportation revolution and rationalisation of archaic property rights (Bogart 2011, Bogart and Richardson 2009).
- The second set emanated from the Whig dominance because it meant that the economic programme of the Whigs began to be implemented.
That programme was intentionally designed to accelerate growth and the manufacturing sector. Whigs were willing to build the state, increase the national debt, and increase taxes on less productive sectors of the economy to repay that debt in the medium and long term. This is why the Whigs created the Bank of England.
Lessons for the Eurozone debt crises
There are some simple lessons of this experience for the current fiscal and debt crises plaguing the Eurozone.
- England did not solve its fiscal crises in the 17th century by defaulting on its debt or coming up with complex write-downs or other clever mechanisms. These would have been mere palliatives that would have only bought time until the next crisis.
- Rather, those who forged the Glorious Revolution tried to tackle the fundamental institutional and political problems that caused the crisis in the first place.
By politically empowering those who bore the brunt of the taxes, these changes allowed the government to become solvent.
The English case suggests that simply passing draconian fiscal packages, as Greece or Portugal has done, without institutional changes, will not work because they will either be reneged on or not enforced. Such problems will also not be resolved by some natural process of “institutional convergence” within the EU.
If the EU wants to avoid debt crises in the future, it has to devise a system of governance so that those who ultimately pay the taxes have control rights over fiscal policy. The English case suggests that not only will this solve fiscal crises but it may also have the effect of unleashing much more general economic dynamism, something which has escaped southern Europe. Southern Europeans facing wage and social spending cuts might even consider that conceding a certain amount of “sovereignty” might be worth the price.
Allen, Robert C (2009), The British Industrial Revolution in Global Perspective, Cambridge University Press.
Bogart, Dan (2011), “Did the Glorious Revolution contribute to the transport revolution? Evidence from investment in roads and rivers”, Economic History Review, forthcoming.
Bogart, Dan and Gary Richardson (2011), “Making Property Productive: Reorganizing Rights to Real and Equitable Estates in Britain, 1660 to 1830”, European Review of Economic History, 13:3-30.
Clark, Gregory (1996), “Political Foundations of Modern Economic Growth: England, 1540-1800”, Journal of Interdisciplinary History, 26(4):563-588.
Murphy, Anne L (2009), The Origins of English Financial Markets: Investment and Speculation before the South Sea Bubble, Cambridge University Press.
North, Douglass C and Barry R Weingast (1989) “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England”, Journal of Economic History, 49(4):803-832.
Pincus, Steven CA (2010), 1688: The First Modern Revolution, Yale University Press.
Pincus, Steven CA and James A Robinson (2011), “What Really Happened During the Glorious Revolution?”, NBER Working Paper No. 17206.
Sussman, Nathan and Yishay Yafeh (2006), “Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690-1790”, Journal of Economic History, 66:4:906-935.