1 - Sovereign Credibility and Public Revenue

Summary

Rulers throughout history have sought monetary and labor contributions from their subjects in exchange for promises to provide future benefits. Military officers have been asked to serve now, in exchange for a promise of salary and pension later. Contractors have been asked to supply goods now, in exchange for a promise of remittance later. Investors have been asked to loan money now, in exchange for a promise of repayment later.

In all these promissory markets, rulers have been beset by credibility problems. In seventeenth-century Europe, for example, elites would have known Niccolò Machiavelli's notorious advice that a “wise ruler … should not keep his word when such an observance of faith would be to his disadvantage” (1979[1532], ch. 18). Many would also have known Hugo Grotius's related observation that “almost all jurists believe that the contracts, which a king enters into with his subjects, [cannot be enforced] by [state] law” (1949[1625], bk. 2, ch. 14).

Scholars such as North and Weingast (1989), Root (1989), and Myerson (2008) have highlighted the fiscal consequences that ensue when agreements with sovereigns cannot be legally enforced. Simply put, subjects will not willingly buy the king's promises if they are not credible, whereupon the flow of revenues from voluntary sales will dry up. Thus, we arrive at a fundamental question in political economy: How can sovereigns make their promises credible enough to sell if they cannot be legally enforced?

In this book, I analyze the English solution to this problem, which entailed three main steps: (1) giving Parliament a monopoly right to make, revise, and transfer sovereign promises; (2) granting certain actors a monopoly right to broker the resulting sales (and earn commissions); and (3) removing the legal discretion of executive officials, at both the policy-making and administrative levels, over performance. The earliest version of this tripartite system, which I dub “monopoly brokerage,” emerged in the late thirteenth century to protect real property rights. The same design principles were, after the Glorious Revolution of 1688, used to enhance the credibility of sovereign promises to spend money for stipulated purposes. Later still, English ideas were imperfectly transcribed into post-Enlightenment European constitutions. Part I of this book describes the English experience with monopoly brokerage, while Part II considers the checkered dispersion of monopoly brokerage to the rest of Europe and the world.