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

Published online by Cambridge University Press:  03 March 2009

Douglass C. North  and
Barry R. Weingast
Douglass C. North
Affiliation:
Luce Professor of Law and Liberty, Washington University, St. Louis, MO 63130.
Barry R. Weingast
Affiliation:
Senior Research Fellow, Hoover Institution, Stanford University, Stanford, CA 94305.
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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.

Type
Articles
Information
The Journal of Economic History , Volume 49 , Issue 4 , December 1989 , pp. 803 - 832
Copyright
Copyright © The Economic History Association 1989

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References

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.Google Scholar

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.Google Scholar

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);Google ScholarNorth, Douglass, Structure and Change in Economic History (New York, 1981);Google Scholar and Tullock, Gordon, Autocracy (Dordrecht; 1987).CrossRefGoogle Scholar

3 Williamson, Oliver, Economic Institutions of Capitalism (New York, 1985), pp. 48–49.Google Scholar

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;CrossRefGoogle Scholar and Moe, Terry, “The New Economics of Organization,” American Journal of Political Science, 28 (08 1984), pp. 739–77.CrossRefGoogle Scholar

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.Google ScholarBullow, Jeremy and Rogoff, Kenneth, “A Constant Recontracting Model of Sovereign Debt,” Journal of Political Economy, 97 (02 1989), pp. 155–78;CrossRefGoogle Scholarveitch, John M., “Repudiations and Confiscations by the Medieval State” this JOURNAL, 46 (03 1986), pp. 31–36.Google Scholar

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

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.Google Scholar

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.Google Scholar

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

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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.”Google ScholarCust, Richard, The Forced Loans and English Politics (Oxford, 1987), p. 3.Google Scholar

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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;Google Scholar and Hill, C., Century of Revolution, 1603–1714 (2nd edn., New York, 1980), chap 4.Google Scholar See also Kenyon, John, Stuart England (2nd edn., New York, 1985).Google Scholar

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

19 Ibid., p. 103.

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

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

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).Google Scholar

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

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.Google Scholar

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.Google Scholar

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).Google Scholar

27 Jones, Revolution of 1688, pp. 47, 50. As B. W. Hill observes,Google Scholar 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).Google Scholar

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

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

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.”Google Scholar

31 Ekelund and Tollison, Mercantilism, p. 149.Google Scholar

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).Google Scholar

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

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).Google Scholar

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

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.Google Scholar

37 See Nichols, Glenn O., “English Government Borrowing Before the Financial Revolution,” manuscript, Anderson College, 1988.Google ScholarFor 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.Google Scholar

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

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.Google Scholar

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

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

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.Google ScholarBarro, Robert, “Government Spending, Interest Rates, Prices, and Budget Deficits in the UK, 1701–1918,” Journal of Monetary Economics, 20 (09 1987), pp. 221–48.CrossRefGoogle Scholar

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);Google ScholarClapham, John, The Bank of England (New York, 1945);Google ScholarDeane, Phyllis, The First Industrial Revolution (2nd edn., Cambridge, 1979);Google ScholarDickson, , Financial Revolution; Peter Mathias, The First Industrial Nation (2nd edn., London, 1983);Google Scholar and Powell, E., The Evolution of the Money Market: 1385–1915 (London, 1966).Google Scholar

44 Ashton, Economic History, p. 178.Google Scholar

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).Google Scholar

46 Ibid., pp. 184–85.

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

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

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.Google Scholar

50 See Kindleberger, Charles P., Financial History of Western Europe (London, 1984), p. 74;Google Scholar 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.Google Scholar By 1784, however, there were 120, and by 1800, 370 (Mathias, p. 151).Google Scholar

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.”Google ScholarAnderson, B. L., “Money and the Structure of Credit in the 18th Century,” Business History, 85 (No. 1, 1970), p. 90.Google Scholar

52 Clapham, Bank of England, p. 126.Google Scholar

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.Google Scholar

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

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;Google ScholarMathias, 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”;Google ScholarMathias, 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.Google Scholar

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).Google Scholar

57 Dickson, Financial Revolution.Google Scholar

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. 89–114;Google ScholarHoffman, Philip, “Taxes, Fiscal Crises, and Representative Institutions: The Case of Early Modern France,” manuscript, California Institute of Technology, 1988;Google Scholarand Root, Hilton and Ingberman, Daniel,“Tying the King's Hands,” manuscript, University of Pennsylvania, 1987.Google Scholar

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. 687–712.Google Scholar