How Did Britain Democratize? Views from the Sovereign Bond Market
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How did Britain Democratize? Views from the Sovereign Bond Market Aditya Dasgupta∗ Daniel Ziblatty May 5, 2013 Abstract This paper examines the response of the market for British sovereign bonds to the passage of the Reform Acts of 1832, 1867, and 1884. We show that the nineteenth century British bond market was acutely sensitive to political events and impounded the risk of default and currency depreciation associated with possible regime instability into bond yields. We demonstrate that British sovereign bond yields therefore represent an accurate barometer of perceived political instability, which we utilize to shed light on the nature of British democratization. Our analysis of monthly data on yields on the British 3% consol, as well as analysis of the contemporaneous reactions of the financial press, suggests that political disorder [Huntington, 1968], broadly conceived as the joint occurrence of social unrest and political stalemate, was the impetus for suffrage reform in Britain, challenging the classical \Whig" view that Britain's pre-modern institutional history predestined it for a uniquely tranquil process of democratization. In the reactions of the bond market, we find indications of intense political disorder preceding major moments of democratization. We also find, quite unexpectedly, that the passage of democratic reform was viewed not as a potential incitor of, but as a resolution to, the incidence of political disorder, prompting nearly immediate drops in bond yields. Finally, we find that this dynamic appears to have varied over time, with a great deal of bond yield volatility in 1832, a smaller, though important, amount in 1867 and none whatsoever in 1884. ∗PhD Candidate in Government, Harvard University. Email: [email protected] yProfessor of Government, Harvard University. Email: [email protected] 1 1 Introduction The process of democratization in Britain { 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" interpretation of history (see critique by, e.g. [Butterfield, 1965]), is that Britain was distinctive in requiring little social and political conflict to democratize in the age of mass politics. Yet, it is a historical fact that agricultural strikes, protests, and mass demonstrations preceded each of the Reform Acts. However, whether political elites of the time perceived a genuine \threat of revolution" or not is a matter of intense debate amongst researchers. Empirically, scholars on both sides of the debate have mined the historical record for evidence favoring their view, at considerable risk of choosing facts to fit the theory. Of equal concern is the fact that scholars have relied considerably on the written and verbal statements of historical protagonists to assess their perceptions and motivations. Since politicians do not have to \put their money where their mouths are", how do we know if these statements were sincere or if they were strategic? 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. The nineteenth century British bond market was acutely sensitive to political events and impounded the risk of default associated with possible regime instability into bond yields, we show. Bond yields therefore represent a good barometer of perceived political instability. Bond yields are potentially a better measure of perceptions when analyzed alongside written and verbal statements of politicians because they directly represent revealed preferences and therefore can plausibly be viewed as less strategic and more \sincere" than political speeches alone. Finally, bond yields enable comparison of perceived po- litical risk across time and Reform Acts, especially because a single type of government bond, the British 3% consol, was traded heavily on the London stock exchange over the entire period in question. In this paper we first provide a brief history and literature overview of the 1832, 1867 and 1884 Reform Acts and summarize our argument. In the second section, we explain the research design. In the third and fourth sections, we present and analyze the bond market data. Finally, we conclude with some thoughts on the implications of our findings for the study of democratization more generally. Overall, we come to three new conclusions. First, against the classical \Whig" view that British democratization was in some way uniquely genetically \hardwired" into British political development, rooted in the shrouds of England's seventeenth century history, making political violence a minimal factor in the democratization of Britain, we 2 find evidence of major turmoil in bond markets preceding moments of democratization. But, second, quite surprisingly, we find that that against a backdrop of deep-seated po- litical disorder, bond markets \liked" democratization: the passage of suffrage reform, especially early in the century, coincided not with increases but rather with sharp drops in the premium that investors demanded to hold British sovereign debt. Finally, we find that the market volatility associated with the process of democratization declined over the century. Political disorder seems to have played a large role in 1832, with yields rising sharply in 1830-31 in response to social and political conflict but declin- ing as the 1832 Reform Act's passage approached, returning to pre-crisis levels within months. A similar pattern is apparent around the passage of the 1867 Reform Act, though the scale of the spike in bond yields prior to the passage of reform was much less, suggesting relatively lower perceived political risk. Bond markets were extremely calm around the passage of the 1884 Reform Act, suggesting that the threat of political disorder played no role whatsoever in this case. This evidence of over-time variation suggests a new periodization of the consolidation of the British political order, in which the constitutional order was still in flux in the first third of the nineteenth century, and only firmly consolidated in the second half of the nineteenth century. 2 Background and Theory The question of why old nondemocratic elites would ever dilute their power by ex- panding the suffrage is a central question for the historical study of democratization. (e.g. [Acemoglu and Robinson, 2005]). To date the debate has tended to be bifurcated between two views, that democratization emerges out of revolutionary threats from below and is only conceded when threats of revolution are so severe that democrati- zation is the \lesser of two evils," or alternatively that democratization is an \elite project" [Collier, 1999], negotiated among elites in competition with each other but quite independent of social forces. The former view conjures images of reactive elites only ceding democracy in the face of intense social conflict and contention, while the latter account suggests a dynamic in which political elites pursue suffrage reform while forging back-room pacts, largely in isolation from societal changes. Britain is often taken as a crucial test case that is a battleground for these two perspectives. One the one hand, it is frequently regarded as paradigmatic of a type of political development in which industrialization proceeded alongside a gradual or consensual 19th century process of democratization (e.g. [Dahl, 1971]) in which political violence and social unrest is thought to have played only a minimal role. From this view, 3 the pre-industrial political violence of the seventeenth century [Moore, 1966], and early supremacy of the English parliament established after the 1688 Glorious Revolution gave rise to a path of smooth democratization in Britain because its constitutional order was secure long before the age of mass suffrage ( [North and Weingast, 1989]; [Ansell and Samuels, 2010]). Whether suffrage expansion came as a result of elite competition as argued by Collier [Collier, 1999], building on Cowling [Cowling, 1967] and Himmelfarb [Himmelfarb, 1966], or occurred as a result of an effort by political elites to shift British politics away from a patronage to programmatic party competition [Lizzeri and Persico, 2004], in all of these views, democratization in Britain was a low-stakes political competition among elites in a constitutional system that already provides well-institutionalized guarantees for secure property rights.1 On the other hand, a second prominent perspective argues that suffrage expansion is only achieved when elites reluctantly concede democratic reform facing a \threat of revolution" ( [Acemoglu and Robinson, 2005]; [Morrison, 2011]; [Aidt and Franck, 2013]. This view reminds us that democracy in Britain was achieved piecemeal, chiefly in the reforms of 1832, 1867, and 1884, and always in the face of social conflict.2 Fur- thermore, from this view, the role of social conflict in prompting suffrage reform was decisive, as has recently been elaborated by Acemoglu and Robinson [Acemoglu and Robinson, 2005], who elegantly formalize the old but controversial claim, made by the liberal historian Trevelyan [Trevelyan, 1920], for example, that the Reform Acts were unwilling concessions intended by the political establishment to avoid revolution and appease the increasingly restless disenfranchised sectors of society. For evidence, pro- ponents of this view point to the steady stream of public demonstrations and strikes and other forms of extra-parliamentary pressure that led up to each of the reforms. These include the chaotic `Days of May' of 1832, the Hyde Park riots of 1867, and the anti-House of Lords protests of 1884. It has even been argued that 1831 was the closest that Britain has ever come to revolution [Evans, 1994]. In the `revolutionary 1In the `elite project' perspective, the Reform Acts represented the efforts of ambitious politicians to gain votes by pandering to pro- reform sentiment. In this perspective, the strikes and protests leading up to the Reform Acts were unimportant; Himmelfarb, for example, argues that the much vaunted Hyde Park riots of 1867 amounted to little more than \broken railings and trampled flower beds".