Financial Innovations and Political Development: Evidence from Revolutionary England
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Financial Innovations and Political Development: Evidence from Revolutionary England Saumitra Jha∗ Stanford University October 2012 Abstract The English Parliament's struggle for supremacy in the seventeenth century was crucial for the development of representative government in the English-speaking world, yet its lessons continue to be debated. This paper provides the first sys- tematic evidence on the determinants of individuals' decisions to join the coalition for revolutionary reform. The paper employs a novel micro-dataset on the endow- ments of each member of the Long Parliament (1640-60) that initiated England's institutional transformation and finds that the key determinants of support for reform were overseas interests and other factors over which the executive enjoyed discretion under the existing constitution. Further, investment in newly available shares in overseas companies appears central in fostering support for reform, chiefly among those lacking prior overseas interests. The paper argues that the innovation of shares allowed new investors to take advantage of emerging economic oppor- tunities overseas, aligning their interests with overseas traders. However, since these shared opportunities were heavily exposed to executive discretion, financial innovation broadened support for parliamentary control of government. JEL codes: O10, F10, K00, P10, N23 Keywords: Institutions, Civil War, Conflict, Constitutional Reform, Economic Growth, Financial Markets, Trade, Political Economy, Revolution ∗Address: [email protected]; Graduate School of Business, 655 Knight Way, Stanford CA 94305. This is a revised version of paper circulating as \Financial Innovations and Political Develop- ment". I owe particular thanks to Susan Athey and Avner Greif as well as Elhanan Helpman, four anonymous referees and Ran Abramitsky, Amrita Ahuja, Ken Arrow, Dan Bogart, Ernesto Dal Bo, Ann Carlos, Mauricio Drelichman, Jeffry Frieden, Sean Gailmard, Oscar Gelderblom, Claudia Goldin, Luigi Guiso, Eric Hilt, Kimuli Kasara, Peter Koudijs, Timur Kuran, David Laitin, Jessica Leino, Kris Mitch- ener, Aprajit Mahajan, Noel Maurer, Ted Miguel, Pedro Miranda, James Robinson, Matthias Sch¨undeln, Carmit Segal, Jordan Siegel, David Stasavage, Nathan Sussman, Barry Weingast and seminar partici- pants at Clio, PacDev, Berkeley, Harvard, NYU, Penn, Princeton and Stanford. Zac Peskowitz provided excellent research assistance. This research benefits from articles made available prior to publication by the History of Parliament Trust. 1 1 Introduction The Father of Parliaments, which first rendered Parliaments supreme, and has since set the world upon the chase of Parliaments . - Thomas Carlyle (1845, pg.316), referring to the Long Parliament. The seizure of executive authority by Parliament from the Crown in the years spanning England's Civil War (1642-48) was arguably central for the development of representative government in the English-speaking world.1 Before the Long Parliament of 1640-1660, the king of England enjoyed independent sources of finance and possessed \sovereignty" rights over foreign policy, including rights to declare war, to collect customs and to charter monopolies on most goods and innovations introduced from abroad. The king called and dismissed Parliament at will. Between 1629 and 1640, no parliament sat in England. The summoning of parliament in 1640 initiated a remarkable process of institutional change. Through both legislative and ultimately violent means, the \Long" Parliament acquired rights to convene without royal approval, to control state finance and to direct foreign policy and war: in other words, Parliament acquired the Crown's sovereignty rights (Howat, 1974, Smith, 2003). These institutional changes have been since recognized as the beginning of a path of experimentation that left England with the one of the world's most enduring, and most commonly imitated, traditions of representative government.2 With the acquisition of executive authority, the Parliamentary victors of the Civil War instituted dramatically new policies. Large investments in a particular set of public goods{ the Navy{ supported the expansion of England's international trade. These policies are credited with London's emergence as the most important trading hub of Europe by the early eighteenth century and Britain's acquisition of an empire that spread the influence of its institutions{ including the common law, parliamentary paramountcy in government, and the Bill of Rights{ around the world (Rodger, 2004, de la Escosura, ed, 2004, Ormrod, 2003, Ferguson, 2002). Given the importance of this episode for political development in Britain and else- where, the key puzzle, among the most famous and enduring in political economy{ 1For example, Friedrich Hayek (1960, pg.160) suggests:\Out of the extensive and continuous discus- sion . during the Civil War, there gradually emerged all the political ideals which were thenceforth to govern English political evolution." See also Murrell (2009). 2The transfer of the rights over state finance and foreign policy to Parliament was intermittently chal- lenged following the Restoration of the monarchy in 1660, until being consolidated following the Glorious Revolution of 1688. This has led to debate about the relative importance of the Civil War and Glori- ous Revolution in England's subsequent development (see e.g. Murrell, 2009). However it is relatively uncontroversial that the activities of the Long Parliament made subsequent reforms possible (Pincus, 2009). 2 how a novel, broad and ultimately successful coalition in favor of representative gov- ernment was formed in seventeenth century England{ has been a focus of much debate ever since (Hobbes, 1682, Hayek, 1960, Moore, 1966, Acemoglu, Johnson and Robin- son, 2005b). Contemporary explanations for England's revolutionary reforms include the Protestant ethic, the emergence of a commercial \middle" class seeking to protect its new wealth or a coalition formed to defend property rights in response to excessive executive greed (North and Weingast, 1989, World Bank, 2002, Acemoglu, Johnson and Robinson, 2005b, Rajan and Zingales, 2003, de Lara, Greif and Jha, 2008, Murrell, 2009). This paper provides the first direct evidence on the importance of different endow- ments on individuals' decisions to join the coalition in favor of Parliamentary control of government during the English Civil War. It uses a novel micro-dataset collected by the author on the economic and social endowments of each of the 548 members of the Long Parliament (1640-1660) that initiated England's revolutionary reforms, and finds that a range of domestic wealth endowments show little effect on support or opposi- tion to Parliamentary takeover of executive authority. This suggests that constituencies formed around the defence of existing domestic property, whether old or newly acquired, do not appear to have played a major role in the initiation of England's transition to representative government. Instead, the paper documents that, consistent with a simple theoretical framework, support for Parliamentary control of government was most impacted by those areas over which the executive had greater discretion under the existing constitution, and thus were most likely to change with a change in regime. These included the Crown's \sovereignty" rights over foreign policy, overseas trade and colonies, which governed the return on new opportunities for wealth that accompanied the discoveries of direct sea routes to the New World and Asia. Further, the paper shows that a financial innovation{the introduction of shares in new overseas joint stock companies{ played a significant role in transforming fragmented interests into a broad coalition. The paper finds evidence of an alignment effect{ that shares, while having little effect on those with existing mercantile endowments, had a robust influence on the propensity to support constitutional reform among non-merchants (who were mainly sedentary landowners). In fact, shares appear to have been pivotal in swaying non-merchants in favor of reform, changing support for Parliamentary control of government from a minority position to one enjoying majority support. Non-merchant shareholders encompass a number of the central organizers of the Parliamentary rebellion, who far from being extremists, would have been slightly more likely to support the Crown had they not invested in overseas ventures. 3 The paper uses two complementary means to assess the causal effect of shares. First, the paper compares shareholders to non-investors matched along a range of those endowed characteristics that might plausibly lead to departures from the mean-variance efficient financial portfolio where every agent invests in shares (Markowitz, 1959). The paper finds that even under a lower bound estimate, the effect of shares was sufficient to push the support of the majority of MPs from Crown to Parliament. The second approach exploits a plausibly exogenous shock to the propensity to invest overseas: the spike in nationwide enthusiasm for foreign expeditions among agents who became free to control their finances just after Francis Drake's successful circumnavigation and raid on Spain's silver fleet. This regression discontinuity design also shows consistent increases in the propensity to support parliamentary control of government among shareholders. Beyond the stark choice to support Crown or parliamentary control of government during the violence of the Civil War, the paper traces a direct link between