How did Britain Democratize? Views from the Sovereign Bond Market Aditya Dasgupta1 Daniel Ziblatt2 Abstract To assess competing theories of democratization, we analyze British sovereign bond market responses to the 1832, 1867 and 1884 Reform Acts, and to two failed Chartist agitations. Analyses of high-frequency 3% consol yield data and historical financial press suggest three conclusions. First, democratic reform episodes were preceded by increases in perceived political risk, comparable to democratizing episodes in other countries. Second, both democratic reform and repression were followed by yield de- clines. Third, the source of political risk in Britain was both social unrest and political deadlock. Together, the findings challenge the \Whig" characterization of British de- mocratization as exceptionally risk-free. Introduction The process of democratization in Britain { the franchise expansions legislated in the 1832, 1867, and 1884 Reform Acts in particular { has attracted a great deal of scholarly argument over how democracy emerged. One long-standing view, rooted in a classical \Whig" interpre- tation of history (see critique by Herbert Butterfield (1965)), is that Britain was distinctive in requiring little social and political conflict to democratize. Others argue that, whether driven by destabilizing constitutional crises or even the threat of mass revolution (Acemoglu and Robinson, 2005), the process of democratization in Britain was deeply conflictual. A key empirical issue at stake in this debate is this: what was the level of perceived political risk during each of Britain's major episodes of suffrage expansion? Scholars on both sides of 1PhD Candidate, Department of Government, Harvard University. Email: [email protected] 2Professor, Department of Government, Harvard University. Email: [email protected] 1 the debate have mined the historical record for evidence favoring their view, at considerable risk of choosing facts to fit the theory. A key methodological problem in this debate has been that scholars have relied considerably on the written and verbal statements of historical protagonists to try to reconstruct their perceptions. Since politicians are strategic in their rhetoric, it is difficult to accurately reconstruct on the basis of statements how fearful political and other social actors actually were of the political events surrounding democratization. This paper takes a new empirical approach to the debate based on examining the response of the market for British sovereign bonds to the Reform Acts. We analyze high-frequency yield data on the British 3% consol, a perpetual government bond which was among the most widely traded securities in nineteenth-century Europe. Bond yields, which impound default and currency risk associated with possible regime instability, represent a reliable contemporaneous indicator of perceived political risk or \barometer of the agitation which is working the public mind," as The Times of London financial pages reported during the 1832 reform crisis (The Times, 12 May 1832). Fluctuations in bond yields represent revealed preferences and therefore can plausibly be viewed as less strategic and more \sincere" than political speeches alone. Finally, analysis of bond yields has two further benefits: it enables comparison of perceived political risk during British reform episodes with analogous events in other countries as well as comparison within Britain across time periods. Our semi-parametric statistical analysis of trends in monthly averages of 3% consol yields around the passage of each of the Reform Acts suggests that franchise extension was preceded by a sharp increase in perceived political risk in the case of the 1832 and 1867 Reform Acts but not the 1884 Reform Act. Surprisingly, however, we also find that the passage of reform was viewed by markets as reducing, rather than contributing to, risk, with yields returning to pre-crisis levels with the passage of democratic reform. We also apply the analysis to two well known \failed" cases of agitation for reform, the Chartist agitations for franchise extension of 1842 and 1848, which suggests that the bond market also viewed repression as 2 an effective form of political stabilization. How large was the political risk during British reform episodes? A within-country com- parison with other time periods in Britain suggests that reform episodes in Britain were associated with exceptionally high levels of bond market volatility. A cross-country com- parison suggests that bond market volatility associated with the reform episodes in Britain was comparable to that of major reform episodes in other western European countries. At the height of the 1832 reform crisis, investors discounted the value of consols by 16.6% from the pre-crisis baseline, while at the height of the 1867 reform crisis investors discounted the value of consols by 8.7%. Finally, to identify the source of this perceived political risk, we conduct structural break analyses utilizing daily and weekly 3% consol yield data and historical analysis of the events corresponding to the detected breaks. We find that both incidents of social unrest, such as the 1831 Swing Riots, and political deadlock, such as failure of reform bills in the legisla- ture, drove major increases in yields { with social unrest playing a large role mainly in the case of the 1832 Reform Act. We find that forward progress on reform, such as Benjamin Disraeli's pivotal acceptance of the Hodgkinson amendment to the 1867 reform bill, drove major decreases in bond yields. We corroborate these findings qualitatively, utilizing digital archives of The Times of London, The Economist, and The Investor's Monthly Manual, the major financial news sources of the time. In sum, our findings point to two main conclusions. First, we find evidence of major perceived political risk in bond markets immediately preceding the passage of the 1832 and 1867 Reform Acts, which was comparable to that of major democratic episodes in other western European countries. This finding runs against the classical \Whig" view that the \constitutional watershed" of 1688 meant that subsequent political and economic modernization in Britain, including nineteenth century mass democratization, could proceed absent significant political crisis. The results suggest that Britain's path of democratization, 3 especially in 1832 and in 1867, was more turbulent than analysts normally recognize. Second, we find that bond markets reacted favorably to the passage of democratic reform, with forward progress on reform corresponding to sharp drops in the premium that investors demanded to hold British sovereign debt. This second finding suggests that democratic reform in Britain was viewed by markets as an effective form of political stabilization. The paper is organized as follows. We first provide a brief history of the 1832, 1867 and 1884 Reform Acts as well as an overview of the theoretical debate. In the second section, we explain our empirical strategy and present the data. In the third section, we report the results. Finally, we conclude with interpretation of the results and thoughts on the the implications of our findings for the study of democratization more generally. Theoretical Debate The question of why incumbent nondemocratic elites dilute their power by expanding the franchise is a central question for the historical study of democratization (Acemoglu and Robinson, 2005). The case of Britain { and the successive franchise expansions legislated in the Reform Acts of 1832, 1867, and 1884 { has attracted particular attention because it is considered to be an unusually gradual and consensual case of democratization without much of the crisis and social and political conflict that is normally thought to accompany democratization (Dahl, 1971). This unusually tranquil trajectory is typically explained with reference to the constitu- tional settlement of the 1688 Revolution that generated institutional checks that made the process of political and economic modernization one absent major political risk. In this view, the pre-industrial political violence of the seventeenth century (Moore, 1966), and the early supremacy of the English parliament, gave rise to a path of smooth democratization in Britain because its constitutional order was secure long before the age of mass suffrage 4 (North and Weingast, 1989; Ansell and Samuels, 2010; Cox, 2012). Whether suffrage expan- sion occurred as a result of an effort by political elites to shift British politics away from patronage to programmatic party competition (Lizzeri and Persico, 2004) or, as argued by Maurice Cowling (1967) and Gertrude Himmelfarb (1966), resulted from partisan political competition, in each of these views democratization in Britain was a low-stakes political process in a constitutional system that already provided well-institutionalized guarantees for secure property rights. But, challenging this account, a second prominent perspective highlights the presence of major social unrest and constitutional crisis in nineteenth century Britain, asserting that old regime elites only reluctantly conceded democratic reform in the face of intense social and political instability (Acemoglu and Robinson, 2005; Morrison, 2011; Aidt and Franck, 2013). In one prominent illustration of this argument, Acemoglu and Robinson (2005) elegantly formalize and extend the old but controversial claim, made by the British historian G.M. Trevelyan (1920), that the Reform Acts were reluctant concessions intended