5 - Establishing Monopoly Brokerage of Sovereign Debts

Summary

In this chapter, I describe the emergence of Parliament's monopoly over the issuance of sovereign debt, the Bank of England's monopoly over the sale of such debt, and effective limits on executive discretion over repayment. In other words, I describe the emergence of monopoly brokerage in the loans-for-debts market.

Establishing a parliamentary monopoly over debt issuance meant that, whereas the vast bulk of sovereign promises to repay loans prior to the Revolution had been merely royal, afterward they quickly became almost wholly parliamentary. The process was completed by the development of ministerial responsibility, after which the prerogative right to borrow could no longer be exercised by the Crown unilaterally.

Establishing the Bank of England's monopoly took some time, but the first important steps were taken over the period 1694–1708. As its monopoly strengthened, I argue that the Bank should have become reliably more hostile to sovereign default than the Crown.

Limiting executive discretion over repayment involved securing seniority and proper funding for all debts. As seniority and funding improved, a sea change occurred in how English debts were repaid. A very substantial fraction of debts before the Revolution were paid out of discretionary funds; debt-holders had only junior claims or senior claims on inadequate funds. By 1715, the vast bulk of payments flowed out of earmarked accounts; debt-holders held senior claims on more ample funds.

Parliament's Monopoly over Debt

In this section, I consider how Parliament came to control the issuance of all debt. To begin, it is important to note that English monarchs had long borrowed on their own initiative, and had long been free to revise the terms of such loans. In other words, sovereign promises to repay loans were, for most of English history, merely royal.

The Commons’ Dislike of Royal Borrowing

The Commons disliked unilateral royal borrowing for two main reasons. First, as Jones observed, “Loans from bankers, secured on taxes already voted or on the permanent revenue, could enable the crown to evade the restrictions imposed by appropriation” (1994, p. 71). In other words, if the Commons wished to control expenditure, it had to control borrowing.