Marketing Sovereign Promises: The English Model

Abstract

The difficulty sovereign actors face in making their promises credible is widely appreciated (e.g., North and Weingast 1989; Myerson 2008). In this article, I argue that the English repeatedly usedinstitutions of monopoly brokerageto mediate trades between the sovereign (offering various promises) and subjects (offering revenues). Once set up—at different times in different markets—institutions of monopoly brokerage sparked substantial and abrupt growth in state revenues. Moreover, these revenue increases cannot be explained by changes in promise-holders’ ability to punish nonperformance, changes in the preferences of pivotal state decision makers, or changes in high constitutional structure alone.

‘A new species of mony’: British Exchequer bills, 1701-1711

“…The Bank passed some of its monopoly profits along to the state in the form of a lower interest rate on its public loans. Cox (2015) offers a similar account.…”

How Fiscal Policy Affects Prices: Britain's First Experience with Paper Money

“…Parliament gained broad powers over public expenditures and taxation through the Glorious Revolution; loans to government and the taxes earmarked to service them necessitated parliamentary assent (Sussman and Yafeh 2006). Furthermore, the government created a separate sinking fund to cover the planned reimbursements in case revenues earmarked for specific loans proved insufficient (Cox 2015). Partisan politics further rendered outright default politically unacceptable (Stasavage 2007).…”

Review of periodical literature published in 2015

“…His exchequer bills may have been of interest to Cox, who outlines a new ‘constitutional theory of the credibility of sovereign promises’, where he defines classes of ‘brokers’ who held the sole rights to sell sovereign promises approved by Parliament. In this theory, brokers are ‘market makers’ who contributed to the structure of the promises.…”

“…In this theory, brokers are ‘market makers’ who contributed to the structure of the promises. Cox's definition of ‘brokers’ is wide, politically and economically, and includes ministers of the Crown. Cases in the very long run used to illustrate Cox's theory include the institutional arrangements of sovereign debt after the foundation of the Bank of England.…”

“…Cox's definition of ‘brokers’ is wide, politically and economically, and includes ministers of the Crown. Cases in the very long run used to illustrate Cox's theory include the institutional arrangements of sovereign debt after the foundation of the Bank of England. Santarosa also published an important eighteenth‐century case study for Marseille merchants.…”