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Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England

  • Douglass C. North (a1) and Barry R. Weingast (a2)
Abstract

The article studies the evolution of the constitutional arrangements in seventeenth-century England following the Glorious Revolution of 1688. It focuses on the relationship between institutions and the behavior of the government and interprets the institutional changes on the basis of the goals of the winners—secure property rights, protection of their wealth, and the elimination of confiscatory government. We argue that the new institutions allowed the government to commit credibly to upholding property rights. Their success was remarkable, as the evidence from capital markets shows.

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The authors gratefully acknowledge the helpful comments of Robert Bates, Gary Cox, Paul David, Aaron Director, John Ferejohn, Jack Goldstone, Max Hartwell, Derek Hirst, Leonard Hochberg, Paul Milgrom, Glenn Nichols, Roger Noll, Alvin Rabushka, Thomas Sargent, Kenneth Shepsle, Gordon Tullock, and David Weir. They also thank Elisabeth Case for her editorial assistance. Barry Weingast thanks the National Science Foundation (grant no SES-8617516) for partial support.

1 Our discussion of the events prior to the Glorious Revolution (1603 to 1628) simply characterizes this period; it does not model or explain it. Moreover, since our history emphasizes the problems the winners (the Whigs) sought to solve, it necessarily contains strong elements of “Whig” history.

2 Throughout late medieval and early modem times, if rulers did not maintain a comparative advantage in coercion, they soon failed to be rulers. See McNeill, William, Pursuit of Power (Chicago, 1983);North, Douglass, Structure and Change in Economic History (New York, 1981); and Tullock, Gordon, Autocracy (Dordrecht; 1987).

3 Williamson, Oliver, Economic Institutions of Capitalism (New York, 1985), pp. 4849.

4 Our formulation of the problem draws on the “new economics of organization.” Application of this approach to political problems—and especially to the problem of providing institutions to enforce bargains over time—is just beginning. See, however, Weingast, Barry R. and Marshall, William, “The Industrial Organization of Congress; or Why Legislatures, Like Firms, Are Not Organized as Markets,” Journal of Political Economy, 96 (02 1988), pp. 132–63; and Moe, Terry, “The New Economics of Organization,” American Journal of Political Science, 28 (08 1984), pp. 739–77.

5 Milgrom, Paul R., North, Douglass C., and Weingast, Barry R., “The Role of Institutions in the Revival of Trade, Part I: The Medieval Law Merchant,” Mimeo., Hoover Institution, Stanford University, 1989.Bullow, Jeremy and Rogoff, Kenneth, “A Constant Recontracting Model of Sovereign Debt,” Journal of Political Economy, 97 (02 1989), pp. 155–78;veitch, John M., “Repudiations and Confiscations by the Medieval State” this JOURNAL, 46 (03 1986), pp. 3136.

6 Schumpeter, Joseph, “Fiscal Crises and the Tax State,” in Musgrave, Richard A. and Peacock, Alan T., eds., Classics in the Theory of Public Finance (London, 1962).Hicks, John, A Theory of Economic History (Oxford, 1969).North, Structure and Change, and veitch, “Repudiations and Confiscations.” This is not to say that the sovereign will never honor commitments, only that he will not always do so.

7 Weingast and Marshall, “Industrial Organization of Congress”; Milgrom, North, and Weingast, “The Role of Institutions.”

8 Vertical integration is the standard example: because of potential transactions problems due to “asset specificity” or “appropriable quasi-rents,” firms that internalize the problem via vertical integration outperform those which do not. See Williamson, Economic Institutions.

9 In this sense our argument parallels that of James Buchanan and Geoffrey Brennan, who argue that the “recognition of the temporal dimensionality of choice provides one ‘reason for rules’—rules that will impose binding constraints on choice options after the rules themselves have been established.” Buchanan, James and Brennan, Geoffrey, Reason of Rules (Cambridge, 1981), p. 67.

10 See, for example, Hirst, Derek, Authority and Conflict: England, 1603–1658 (Cambridge, MA, 1986), chap. 4, and Stone, Lawrence, The Crisis of the Aristocracy, 1558–1641 (Oxford, 1965).

11 Ashton, Robert, The Crown and the Money Market, 1603–1640 (Oxford, 1960), p. 35.

12 Ashton, Crown and the Money Market, p. 36. Richard Cust, in his recent study of the 1626 forced loan, provides several instances of sanctions imposed on individuals refusing to provide funds: leading refusers were “either committed to prison or pressed in readiness for service abroad.”Cust, Richard, The Forced Loans and English Politics (Oxford, 1987), p. 3.

13 Ekelund, Robert B., and Tollison, Robert D., Mercantilism as a Rent-Seeking Society (College Station, 1981).

14 Price, W., English Patents of Monopoly (Boston, 1906). Examples include soap, tobacco, and starch.

15 Maitland, F. W., Constitutional History of England (Cambridge, 1908);Notestein, Wallace, The Winning of the Initiative by the House of Commons (London, 1924); and Stone, Crisis of the Aristocracy.

16 There were two separate reasons for this: the total number of voters was increasing, and the expansion added new members whose views systematically differed from those of existing nobles. The exchange that brought new nobles to the Lords undoubtedly entailed a commitment of support for the king.

17 Hirst, Authority and Conflict, p. 103; and Hill, C., Century of Revolution, 1603–1714 (2nd edn., New York, 1980), chap 4. See also Kenyon, John, Stuart England (2nd edn., New York, 1985).

18 Hirst, Authority and Conflict, pp. 113–14.

19 Ibid., p. 103.

20 Hill, C., Century of Revolution, p. 103.

21 For details, see Notestein, The Winning of the Initiative.

22 Part of the Crown's motivation appears to have been a desire to move toward the absolutism prevalent on the continent, notably in France and Spain. As Kenyon observes, at the onset of the seventeenth century, “any further adjustments [in the balance of power between Parliament and the Crown] were likely to be at the expense of Parliament” (Kenyon, Stuart England, p. 43). It almost succeeded. Hirst describes debates in Parliament in which the participants were explicitly concerned with this possibility (Hirst, Authority and Conflict, chap. 3).

23 Dispensations for individuals, like most powers under the Stuarts, were put up for sale (Maitland, Constitutional History, pt. IV).

24 The Star Chamber, in which the most egregious examples of arbitrary power occurred, became a regular feature of Stuart England. See Maitland, , Constitutional History, and Hayek, Friedrich A., Constitution of Liberty (Chicago, 1960), chap. II.

25 Coke's dismissal, “the first of a judge in over thirty years, ushered in a period of increasing royal pressure on the bench: in Charles's reign two other chief justices, Crew and Heath, and one chief baron of the exchequer court, Walter, were to follow Coke” (Hirst, Authority and Conflict, p. 121). See also Hayek's excellent and extensive discussion, in Constitution of Liberty, chap. II.

26 See Perkins, H. J., “The Social Causes of the British Industrial Revolution,” Transactions of the Royal Historical Society, 18 (1968). Hill, discussing the 1660 Act confirming the abolition of feudal tenures, notes that in the eighteenth century Blackstone called this Act a greater boon to property owners than the Magna Carta itself (Century of Revolution, p. 127).

27 Jones, Revolution of 1688, pp. 47, 50. As B. W. Hill observes, James's efforts to repack the constituencies “came near to success in every respect but one: they alarmed landed society, Tory as well as Whig.” See Hill, B. W., The Growth of Parliamentary Parties: 1689–1742 (Hamden, 1976).

28 Dickson, P. G. M., The Financial Revolution in England (New York, 1967).

29 See, for example, Maitland, Constitutional History, pp. 298–301, or Keir, David, The Constitutional History of Modern Britain Since 1485 (London, 1966).

30 Jones, on p. 6 of the Revolution of 1688, concludes: “None of its architects could have predicted its effectiveness in securing the liberties, religion, property and independence of the nation after so many previous attempts had failed.”

31 Ekelund and Tollison, Mercantilism, p. 149.

32 We emphasize, however, that this division of powers was not a clear-cut system of checks and balances. Nor can it be considered a true separation of powers. The designers of the new institutions were far more worried about constraints on the Crown than on protecting the Crown from encroachments by Parliament. Thus in the latter half of the eighteenth century, the power of the Crown diminished, and with it the constraints (or checks) on Parliament. See Pollard, A. F., The Evolution of Parliament (London, 1926).

33 May, Erskin, Parliamentary Practice (17th edn., London, 1966; 1st edn., 1844). Further investigation of the procedures devised at this time is called for.

34 Braun, R., “Taxation, Sociopolitical Structure, and State-Building: Great Britain and Brandenburg-Prussia,” in Tilly, Charles, ed., Formation of Nation Stales in Western Europe (Princeton, 1975).

35 Ashton, Crown and the Money Market, p. 113.

36 Ashton reports only two such loans, the second of which (£58,400 in 1616) was still outstanding in 1636. Here too the Stuarts failed to develop a reputation for honoring agreements. By the 1630s the Crown was unable to borrow at all from either international sources or London.

37 See Nichols, Glenn O., “English Government Borrowing Before the Financial Revolution,” manuscript, Anderson College, 1988.For details about the stop of the exchequer, see Dickson, Financial Revolution. In exchange for its short-term notes, the Crown gave new long-term loans. Much of the interest from the latter was still unpaid at the time of the Glorious Revolution, however.

38 Macaulay, Lord, The History of England, (London, 1914), vol. V, p. 2438.

39 As David Ogg explains: “Thenceforth, the investor knew that, in lending money on a specified tax, he had parliamentary guarantee for the security of this investment, based not only on the particular fund, but on the whole of the national revenue.” Ogg, David, England in the Reigns of James II and William III (Oxford, 1955), p. 413. Regarding the second, see pp. 422–25.

40 Chandaman, C. D., The English Public Revenue: 1660–88 (Oxford, 1975).

41 For figures on government debt and GNP estimates, see Mitchell, B. R., British Historical Statistics (Cambridge, 1988). On interest rates, see Homer, Sidney, A History of Interest Rates (New Brunswick, 1963), p. 149.

42 Prices rose a little over 20 percent between 1690 and 1710 (and then fell again between 1710 and 1730). But the enormous increase in debt during this period suggests that the government did not attempt to meet its debt obligations through inflationary finance. The modern view of inflation suggests two further inferences (see, for example, Sargent, Thomas, Rational Expectations and Inflation [New York, 1986]). Since inflation in part reflects expectations about future governmental finance of deficits, the lack of major increases in prices suggests that the market did not expect inflationary finance. Since this pattern was maintained for several decades, it indicates that these expectations were “confirmed” in the sense that new information about current governmental behavior did not change expectations. Robert Barro provides evidence that budget deficits had almost no effect on prices from 1700 until the Napoleonic campaigns.Barro, Robert, “Government Spending, Interest Rates, Prices, and Budget Deficits in the UK, 1701–1918,” Journal of Monetary Economics, 20 (09 1987), pp. 221–48.

43 This section summarizes the conclusions of the literature on the early eighteenth century. See, for example, Ashton, T. S., An Economic History of England (London, 1955);Clapham, John, The Bank of England (New York, 1945);Deane, Phyllis, The First Industrial Revolution (2nd edn., Cambridge, 1979);Dickson, , Financial Revolution; Peter Mathias, The First Industrial Nation (2nd edn., London, 1983); and Powell, E., The Evolution of the Money Market: 1385–1915 (London, 1966).

44 Ashton, Economic History, p. 178.

45 “The essence of the financial revolution of the early 18th century was the development of a wide range of securities in which new mercantile and financial companies—the chartered trading companies, the partnership banks, the insurance companies, etc.—could flexibly and safely invest and disinvest” (Deane, Industrial Revolution, p. 185).

46 Ibid., pp. 184–85.

47 Clapham, Bank of England;Pressnell, L. S., “The Rate of Interest in the 18th Century,” in Pressnell, L. S., ed., Studies in the Industrial Revolution (London, 1960), p. 181; and Homer, A History of Interest Rates.

48 Pressnell, “Rate of Interest,” p. 181.

49 As Dickson notes, “The development of a market in securities in London in the period 1688–1756 was one of the more important aspects of the Financial Revolution.” Dickson, Financial Revolution, p. 457.

50 See Kindleberger, Charles P., Financial History of Western Europe (London, 1984), p. 74; and Mathias, Industrialized Nation. The earliest provincial bank cited by Mathias was in Bristol (1716), and there were not more than a dozen in 1750. By 1784, however, there were 120, and by 1800, 370 (Mathias, p. 151).

51 Ashton, Economic History, p. 185. Ashton's claim is also supported by the study of credit instruments other than those provided by banks. B. L. Anderson, discussing the rise of inland bills, notes that their legal status was markedly improved in the first years of the eighteenth century. “This recognition of the bill as a transferable means of payment was a decisive turning point in the development of the English credit system …[The] English practice made it an instrument of credit in a system of accommodation paper that was highly responsive to the community's demand for money.”Anderson, B. L., “Money and the Structure of Credit in the 18th Century,” Business History, 85 (No. 1, 1970), p. 90.

52 Clapham, Bank of England, p. 126.

53 While other banks issued notes, by far the largest source for most of the period we are studying are those of the Bank of England. Throughout this period, these notes were convertible to gold. See Joslin, D. M., “London Private Bankers, 1720–1785,” in E. M. Carus-Wilson, ed., Essays in Economic History, vol. 2, pp. 340–59.

54 The only year before 1720 reported by Clapham is 1698.

55 An additional piece of evidence concerns investment in transportation infrastructure, which also increased at this time. By 1724 there were over 1,160 miles of river open to navigation, double that of a century earlier. See Ashton, Economic History, p. 73;Mathias, Industrial Nation, p. 100. While the “canal age” is usually dated at mid-century, it “did not spring to life in 1750” but was the “conclusion of a mounting momentum of effort”;Mathias, Industrial Nation, p. 100. Both Ashton and Mathias noted that there were two big booms in improving rivers during this period, one at the turn of the century and one between 1718 and 1720.

56 See, for example, Crouzet, F., “England and France in the Eighteenth Century,” in Hartwell, Max, ed., Causes of the Industrial Revolution in England (London, 1967).

57 Dickson, Financial Revolution.

58 See Bien, David, “Offices, Corps, and a System of State Credit: The Uses of Privilege under the Ancient Regime,” in Baker, K., ed., The French Revolution and the Creation of Modern Political Culture (New York, 1987), vol. I, pp. 89114;Hoffman, Philip, “Taxes, Fiscal Crises, and Representative Institutions: The Case of Early Modern France,” manuscript, California Institute of Technology, 1988;and Root, Hilton and Ingberman, Daniel,“Tying the King's Hands,” manuscript, University of Pennsylvania, 1987.

59 Jeffrey Williamson's recent, if controversial, work provides further support for this thesis. It suggests that British growth rates rose substantially once the long series of wars with France, ending with the Napoleonic campaign, were over. If during this period England's growth rates were not substantially larger than France's, its ability to spend more on war without bringing financial peril meant at most lower domestic consumption and investment, and hence came at the expense of growth. France's near bankruptcy shows that, in comparison, it was living on borrowed time. See Williamson, Jeffrey G., “Why Was British Growth so Slow During the Industrial Revolution” this JOURNAL, 64 (09 1983), pp. 687712.

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