How Did Britain Democratize? Views from the Sovereign Bond Market

How did Britain Democratize? Views from the Sovereign Bond Market

Aditya Dasgupta∗ Daniel Ziblatt† 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] †Professor 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 political 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 political 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 declining 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 democratization 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, proponents 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”. Proponents of the ‘elite project’ hypothesis claim that the 1832 Reform Act also originated in political opportunism from above, with Earl Gray and the Whig party seeking to profit electorally by championing reform. A similar story-line has been told to explain the passage of the 1884 Reform Act ( [Collier, 1999]; [Hayes, 1982]). 2It is worth noting, of course that universal suffrage was not achieved in Britain until 1928, when the voting age for women was equalized to that for men, the final step in successive series of franchise extensions over the course of the nineteenth and early twentieth centuries. The so-called ‘Great Reform Acts of 1832, 1867, and 1884 expanded the size of the electorate from 490,000 to 800,000, from 1.3 million to 2.48 million, and from 2.5 million to 5 million, respectively, by lowering property and income voting qualifications for men.

4 threat’ perspective, democracy was ceded by political elites stuck between a rock (i.e. democracy,) and an even harder place (i.e. revolution). In addition to pointing to events themselves, proponents of this view typically point to the statements of politicians such as Thomas Babington Macaulay, the Whig member of parliament who in 1831 famously urged the House of Commons to pass the Reform Bill as an essentially conservative measure: “Reform, that you may preserve!” (Quoted in [Pearce, 2010]). Who is correct? Overall, the scholarly debate has been oddly and unsatisfyingly inconclusive and confusing. Rueschmeyer et al. [Rueschemeyer et al., 1992] state: “The British case is so singular in so many ways, both in terms of the antecedents of democracy and the process of democratization, that is impossible to decide which factor(s) was (were) the most important on the basis of comparative analysis”. In this paper we seek to contribute to the debate in two main ways. First, theoretically, we argue that currently debate has been built on an appealing but deeply misleading dichotomy between elite- and mass-led democratization. Social unrest typically occurs, as a long body of scholarship shows, with elites not just re- sponding to, but also inciting or co-opting mass movements (e.g [McCarthy and Zald, 1977]; [McCarthy and Zald, 1973]). Furthermore, it is difficult to imagine elites making choices in complete isolation from structural conditions and societal constraints . So while it is certainly a historical fact that mass strikes and protests, such as those which preceded each of the Reform Acts, are correlated with democratic reform, as Prze- worski [Przeworski, 2009] finds in his cross-national times series analysis of franchise extensions, the question of whether mass movements for democratic reform originated in “exogenous” events, or in the “endogenous” actions of political elites, is a chicken- or-egg problem. Democratization emerged in Britain as a solution to the occurrence of political disorder: political stalemate, constitutional crisis, and social unrest, which all went hand-in-hand. Finally, democratization did not prompt fears of redistribution as existing theory assumes (e.g. [Meltzer and Richard, 1981]); rather democratization tamed the fears of investors, since it helped resolve political instability. Second, empirically, we develop this argument by circumventing a basic method- ological problem that has plagued scholarship on this topic. Efforts to reconstruct perceptions of “threat” have proven difficult. As Aidt and Franck [Aidt and Franck, 2013] put it in a similar context, “The empirical challenge associated with testing this theory is that, while reform actions can usually be observed, we can never observe threat perceptions”. Scholars on both sides of the debate have been able to select statements and historical evidence supporting their views. Yet we lack a mechanism besides individual judgment to adjudicate between these competing bodies of evidence We elaborate more fully below that the benefit of analyzing bond yields is to overcome

5 precisely this problem by exploiting the perceptions of political instability revealed by investor decisions. Additionally, by utilizing bond yield data, we are able to compare levels and patterns of political risk across Reform Acts. In sum, in the following we come to three new conclusions. First, we find more concrete evidence that social and political conflict, jointly conceptualized as political disorder, were in the minds of important contemporaries in the lead-up to major moments of democratization that stand in contrast to the tradition “Whig” view of the uniquely tranquil British trajectory of democratization. In this sense, British democratization appears to have required, or at the very least been prompted by, major moments of political and social unrest not unlike in the rest of Europe. Second, however, we find that democratic reforms themselves were regarded as alleviating rather than contributing to this political risk, as evidenced by sharp drops in sovereign bond yields. Finally, in a pattern that we have also identified in Europe more broadly, this “ameliorative” effect of suffrage reform declined over the course of the century, as the process of democratization itself appears to have become systematically less volatile in the perception of investors. In contrast to the Whig view in which Britain was already in a political equilibrium in the seventeenth century, we find that Britain’s stable path of democratization was only established in the 1880s.

3 Empirical Strategy and Data

We propose two novel ways of measuring perceived threats to the established political order. Instead of relying exclusively on the verbal statements of politicians with a strategic interest in misconstruing their perceptions of the threat of revolution, or on the retrospective judgment of historians writing more than a century later, we first exploit British bond yield data as an indicator of contemporaneous perceptions of political risk. Such an approach enables us to quantify political risk as it was perceived during the process of democratization or potential democratization. We can test the consistency of theories of democratization which emphasize reform as a response to the threat of deep-seated political disorder against patterns in the bond yield data, and to compare these patterns across Reform Acts. Second, we also utilize references to democratic reform in the financial press of the time to analyze how the financial press and investors themselves explained bond market fluctuations, thereby checking our conclusions drawn from analysis of the bond yield data. On the first measure, by looking at changes in asset valuations, it is possible to gauge sincere perceptions, because buyers and sellers, unlike politicians, must put their money

6 where their perceptions are. We build on a growing political economy literature which utilizes market data to quantify perceptions of political events, including Willard et al. [Willard et al., 1996], who attempt to identify important turning points in the US Civil War by looking fluctuations in the price of the “greenback”, and Ferguson [Ferguson, 2006], who uses historical European bond yield data to show that World War I came as a “bolt from the blue”, and Fisman [Fisman, 2001], who uses Indonesian stock market responses to news of Suharto’s ill health to estimate the value to Indonesian firms of political connections. Economic theory dictates that sovereign bond yield, or the effective interest rate earned by an investor on a government-issued bond, is a good indicator of the political stability of that government, for in an efficient market yield represents the marginal productivity of capital in the economy plus a political premium for default and currency depreciation risks, both of which increase during times of social and political instability. To see this, consider a simple model of a perpetual bond (a consol), paying a fixed coupon amount, C, per period, with per-period market interest rate of R. Let us denote the per-period probability of default as θ. In an equilibrium where investors cannot profit from arbitrage,3 the equilibrium price, P ∗, of the bond is equal to the net present value of expected payments from the next period onward, discounted according to the market interest rate:

C(1 − θ) C(1 − θ)2 C(1 − θ)n P ∗ = + + ... + (1) (1 + R) (1 + R)2 (1 + R)n

Simplifying, together with the fact that yield, Y , in the case of a consol is computed by dividing the bond’s coupon payment by its selling price, gives us:

C R + θ Y = = (2) P ∗ 1 − θ

The basic idea is apparent in this simple expression. Yield increases in θ, the per- period probability of default, because investors demand a higher premium for holding a riskier asset: ∂Y 1 + R = > 0 (3) ∂θ (1 − θ)2 Yield also increases in R, since in equilibrium the yield on the bond must be suffi- ciently large relative to outside investment options to attract buyers. When θ = 0, in equilibrium the yield is equal to the market interest rate. Presuming R to be fixed, and presuming an efficient market, we can use use fluctuations in yield, Y , to gauge

3i.e. in the case of an ‘eﬃcient market’.

7 changes in default risk, θ, associated with the process of democratization. In addition to basic economic theory, a considerable literature documents the impact of political events upon bond yields in nineteenth-century Europe. Ferguson [Ferguson, 2006], for example, finds that wars and revolutions were the source of the largest spikes in European bond yields between the revolutions of 1848 and World War I. Neal [Neal, 1993] writes of the inputs in the decision by investors to purchase perpetual bonds issued by the British government: “But [the bonds’] attractiveness to the investing public depended on the relative ease by which it could be acquired and disposed of, the clear terms of the interest payments, and the readily available information about its current price and the military and political events likely to affect its price.” The predictions yielded by alternative theories of democratization, discussed in the previous section, are relatively clear. In “settled” episodes of democratization, in the sense of democratic reforms not adopted as a resolution to deep social and political disorder, we would anticipate relatively little perturbation of bond markets. “Dis-orderly” episodes of democratization, however, should be associated with sharp, statistically significant increase in bond yields from the mean existent prior to democratization, peaking at the height of perceived conflict, but returning to normal with the passage of alleviating democratic reform. We test these predictions using high-frequency data on the yield of the British 3% consol, based on secondary market quotations from the London Stock Exchange. The British 3% consol, a perpetual government bond which was among the most widely traded securities in nineteenth-century Europe, is ideal for our purposes, because it was widely held and frequently traded, approximating the “efficient market” assumption and because its existence over the entire time period in question enables us to compare market perceptions of political risk across the 1832, 1867, and 1884 Reform Acts using the same financial instrument. The 3% consols in circulation during this time originated in legislation consolidating a variety of government securities into this form of bond in 1751, as well as periodical new issues of debt, especially for the purposes of war financing. Using this data, our empirical strategy involves four main steps. First, we use semi- parametric regression methods to estimate patterns in 3% consol yields in windows of time around the passage of democratic reform across the 1832, 1867, and 1884 Reform Acts. We conduct a placebo test, repeating a similar procedure for randomly generated windows of time in order to assess how likely the patterns we observe are to have occurred by chance. Second, in a form of counter-factual analysis, we also apply our analyses to two well known “failed” cases of agitation for reform, the Chartist movements for franchise extension of 1842 and 1848, in order to compare levels and

8 patterns of political risk in “failed” against “successful” episodes of franchise expansion. Third, we use a method from ﬁnancial econometrics to look for structural “break points” within the windows of time around the passage of each Reform Act, seeking to assess whether they correspond to important reform-related political events. Finally, to further assess the validity of our results, we examine references to democratic reform in the ﬁnancial press of the time, utilizing digital archives of the Times of London, the Economist, and the Investor’s Monthly Manual. Finally,

4 Results

We test the theory that the Reform Acts in Britain were passed as an attempt to stabilize severe political disorder by looking at bond yield patterns in windows of time around the passage of the Reform Acts. We settle on four year windows of time on the basis of qualitative judgment, though our estimates are robust to using windows of diﬀerent sizes. For the 1884 and 1867 Reform Acts we have weekly data; but for the 1832 Reform Act we have only monthly data. Since we will need to model the temporal auto-correlation of errors in our statistical analysis, we need evenly spaced time intervals. In order to preserve data, we could have imputed the missing weekly data. In the interest of parsimony, however, we average over weeks to create a dataset of monthly yields on the British consol. In Figure 1, we display monthly yields on the 3% Consol averaged by year, with vertical lines representing + or - the standard deviation of monthly yields in that year. As we discussed previously, we expect bond yields to follow a decidedly non- monotonic pattern in the case of “disorderly” episodes of democratization, with yields rising initially as perceived instability increased but declining with the passage of alleviating democratic reform, though we are agnostic about the precise timing of this pattern. Given our non-linear functional form priors, we estimate a generalized additive model (GAM). GAMs, which allow the relationship between the explanatory and outcome variables to take a ﬂexible, smooth functional form, are the semi-parametric equivalent of generalized linear models (GLM), including OLS [Beck and Jackman, 1998]. We estimate a model of the form:

yit = τi + f(xit) + εit (4)

εit = ρεi,t−1 + νit (5) 2 νit ∼ N (0, σ ) (6)

9 Figure 1: Plot of Mean and Volatility of Annual Yields on 3% Consol

● 3.6

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3.4 ● ● ● ● ●

● ● ● ● ● ● ● ● ● ● ● ● Yield ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 3.2

● ● ● ● ● ● ● ● ● ● ● ● ●

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3.0 ● ● ● ● ● ●

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1830 1840 1850 1860 1870 1880 1890

Year

where xit represents the time in months (from -24 to 24) from the passage of democratic reform (which occurs in month 0) in the case of Reform Act episode i and at time t and the outcome variable yit represents bond yield in the case of Reform Act episode i at time t. Month 0 is coded as the month in which a given Reform Act was ﬁnally passed in the House of Commons (June, 1832; July, 1867; December, 1884). In this speciﬁcation, the empirical sample includes only the 49 month windows around each

Reform Act. The “episode fixed effect” τi is vector of dummy variables, one for each Act to control for time-invariant omitted variables in each 49 month period. The function f(·) is a smooth ‘penalized spline’ function, with the degree of flexibility (number of knot points) optimized through cross-validation. The model also stipulates an Reform-specific AR(1) normal distribution of errors; in other words, within each 49 month window the error in any single month is assumed to be normally distributed and correlated with the last’s. A partial auto-correlation plot (not reported) suggests that

10 this auto-correlation structure is appropriate to stipulate. Because GAM estimates are difficult to interpret in terms of point estimates, we report the model estimates in the form of an added variable plot (including residuals) of the estimated effect of time to democratization on bond yields. We also present a marginal effect plot (which corresponds to the first derivative of the fitted line in the added variable plot) of time to democratization on bond yields. Both plots, in Figure 2, include 95% confidence intervals:

Figure 2: GAM Estimates of Change in Yield Around Passage of Reform

Added Variable Plot Marginal Effect Plot

1832 Reform Act

1867 Reform Act 0.03 1884 Reform Act 0.4 0.02 0.01 0.2 0.00 Yield (De−meaned) Yield Marginal Effect on Yield Marginal Effect 0.0 −0.01 −0.02 −0.2 −0.03

−30 −20 −10 0 10 20 30 −20 −10 0 10 20

Months from Democratization Months from Democratization

11 This analysis, which ‘pools’ data from across the Reform Acts, appears to find evidence for a statistically significant increase in yields prior to democratic reform, followed by a return to the pre-existing mean with the passage of democratic reform. The estimates are not particularly sensitive to the choice of time span over which to analyze bond yields (visually evident in the faded residuals displayed outside of the 49-month span [from -24 to 24] used in the statistical analysis). We note considerable heterogeneity across Reform Acts, however, with a considerable spike in bond yield preceding the 1832 Reform Act, on the order of a 12.5% increase, a moderate spike prior to the 1867 Reform Act, on the order of a 4.5% increase, and no discernible spike prior to the passage of the 1884 Reform Act. Thus far we have provided evidence that the passage of democratic reform was viewed by bond markets as providing a resolution to political instability, particularly in the cases of the 1832 and 1867 Reform Acts. This begs the question of how markets perceived well known cases of agitation for democratic reform which ultimately failed, however. To examine this question, we follow the exact same empirical strategy, but examine patterns in bond yields in the windows of time around the failure of two organized drives for franchise reform, the Chartist movement of 1842 and of 1848. We estimate a semi-parametric GAM, just as in (1), but now regress bond yields on time from the failure of suffrage reform, coded as May, 1842, when a Chartist petition brought before parliament was rejected for consideration and July, 1848, when mass Chartist agitations for reform were repressed. We again present the estimates in graphical form below. Interestingly, we observe a pattern and magnitude of bond yields similar to that found in the windows of time around episodes of successful suffrage reform. Bond yields rose initially, presumably with the threats to political stability posed by Chartist strikes and demonstrations, but fell with the ultimate failure/repression and dissipation of these threats. This suggests that while bond markets perceived a genuine threat to political stability in these movements, the repression and dissipation of those movements was viewed as providing a resolution to this threat. A concern may be that by applying non-parametric techniques to volatile financial data we obtain statistically significant estimates by random chance. We are skeptical of this possibility, given financial press statements which corroborate the story-line of democratic reform being viewed favorably against a backdrop of social and political conflict, which we discuss further in the following section. But one way of assessing this concern statistically is to conduct a placebo test, conducting a similar analysis many times using randomly generated 49 month windows to see how often such a pattern emerges by chance. We drop the 49 month windows of time around each of the

12 Figure 3: GAM Estimates of Change in Yield Around Failure of Reform

Added Variable Plot Marginal Effect Plot

Chartist 1842

Chartist 1848 0.03 0.4 0.02 0.01 0.2 0.00 Yield (De−meaned) Yield Marginal Effect on Yield Marginal Effect 0.0 −0.01 −0.02 −0.2 −0.03

−30 −20 −10 0 10 20 30 −20 −10 0 10 20

Months from Revolutionary Failure Months from Democratization

successful and failed episodes of democratization from our data series, and randomly draw 49-month windows of consecutive bond yield data one thousand times. For each randomly drawn window of yield data, we compute the standard deviation. In table 1, we compare the standard deviation of bond yields during each actual window of time around the 1832, 1867, and 1884 Reform Acts and the 1842 and 1848 Chartist movements with the placebo distribution generated by this procedure. Episodes of

13 successful democratic reform as well as failed attempts at democratic reform were associated with bond yield volatility systematically greater than was typical for the 3% consol during the nineteenth century.

Table 1: Placebo Test Results Percentile Episode 1 100% 1832 Reform Act 2 87% 1867 Reform Act 3 14% 1884 Reform Act 4 90% 1842 Chartist Movement 5 100% 1848 Chartist Movement

The analysis so far is based on the claim – untested to this point – that 3% consol yields are a good barometer of the political disorder and resulting elite anxiety that preceded and that was, we argue, assuaged by the passage of suffrage reform. Is there evidence that this is what really drove the bond yield fluctuations we observe? To address this concern, we employ two strategies to investigate the relationship political events and bond yield fluctuations more closely within the three windows of time in which reform occurred. First, we employ a method from financial econometrics [Bai and Perron, 2003] to look for multiple “structural breaks” in the bond yield series during each of the Reform Act windows, and assess whether these breaks correspond to major historical political events, as described by the secondary literature, in a way consistent with our story. Such an analysis has the advantage of allowing the data to “speak for itself” instead of specifying ex ante which events we judge to have been pivotal but, but also the disadvantage of permitting ex post rationalization. Thus, secondly, we also supplement the break-point analysis with a qualitative examination of suffrage reform in the financial press of the time, utilizing digital archives of the Times of London, the Economist, and the Investor’s Monthly Manual, to confirm whether or not contemporary investors viewed the bond market implications of political events in a way that is consistent with the argument.

Structural Break-point Analysis Our ﬁrst problem, given volatile bond yield data, is to detect mean shifts that are unlikely to have occurred simply by chance. For

14 each Act window, we estimate an equation of the form:

X yt = λjDjt + εt, (7) j

εt = ρεt−1 + νt (8) 2 νt ∼ N (0, σ ) (9) where each Djt corresponds to a dummy variable that ‘switches on’ at time t = j and represents a break point. We employ the method of [Bai and Perron, 2003] to obtain the ‘optimal’ number and location of breakpoints. We again present our estimates of the location of these break points, with 95% conﬁdence intervals, visually.

Figure 4: 1832 Break Point Analysis

9/1830 4/1831 11/1832 1/1834

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3.5 ●

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12/1829 12/1830 12/1831 12/1832 12/1833 12/1834

1832

We begin with the 5-year window of bond yield data around the passage of the 1832 Reform Act. As Figure 4 shows, yields rose sharply around a break point of September, 1830. The secondary literature makes clear that this break occurred simul- taneously with the violent so-called “Swing Riots” of landless agricultural workers that

15 began across the United Kingdom in August 1830 and peaked in November 1830 and that have been studied closely by scholars of contentious politics (e.g. [Tilly, 2003]) because of the massive scale of mobilization and violence, including arson, attacks on landowners property, as well as calls for suffrage reform ( [Tilly, 2003]; [Aidt and Franck, 2013]). The “Swing Riots” did not occur in a political vacuum, however. They occurred against the political backdrop of a closely-fought parliamentary election that also fell precisely in this same window as the first “structural break” between July and September 1830 that followed the unexpected death of King George IV and the dissolution of parliament. By many historical accounts, in no small part due to these events, along with the July 1830 Revolution in France, the issue of franchise reform came to the fore during the elections, with pro-reform rallies and gatherings held in multiple cities [Aidt and Franck, 2013]. In this context of domestic social mobilization and political crisis, yields continued to rise after anti-reform Tories won a majority of seats but because of internal divisions a fragile Whig government led by Lord Grey formed in November 1830. A bond yield peak was reached in March 1831, the same month the Whig government’s bill passed by one vote, 302-301, but then fell with the failure of the reform in committee. Yields then fell sharply around a second break point of April, 1831, with a decision by the Whig government to dissolve their government and call for new elections, which by June 1831 had generated a landslide Whig majority of 136 seats. With a new stronger pro-reform majority in place, bond yields followed a general decline with a small increase in October 1831 when the House of Lords blocked reform which also set off a wave of serious violent protests and riots in Derby, Nottingham, and Bristol [Beckett, 2008]. But, with the Kings agreement to create new peers in the House of Lords, to help pass reform, a final passage finally came in the summer of 1832.1 The third structural break came in November, 1832, when yields fell sharply again. In this month, general elections implementing the reforms of the 1832 Reform Act were held, resulting in the election of a large Whig majority to parliament. Finally, in December, 1833, we detect another break point, with yields appearing to fall. However, we were unable to find any major political event corresponding to this change. This may simply be a false positive or a change resulting from some non-political event or news. We next consider the 5-year window of bond yield data around the passage of the 1867 Reform Act as reported in Figure 5. Here we observe a smaller bond yield surge before the passage of reform in 1867, but still around November, 1865, the first structural break occurs, following the death of Lord Palmerston in the month prior, when bond yields rose sharply in response to Lord Russell becoming prime minister. According to historical accounts, this change was widely perceived to have brought the

16 Figure 5: 1867 Break Point Analysis

11/1865 6/1866 4/1867 11/1868

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3.45 ●

● ●

● 3.40

● ● ● ● ● ● ● ● ● ● 3.35 ● ● ●

● ● ● ● ● ● 3.30

● ● ● ● 3.25 ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 3.20 ● ● ● ● ● ● ● ● ● ● ● ● 3.15 1/1865 1/1866 1/1867 1/1868 1/1869 1/1870

1867

issue of franchise reform onto the political table, as Palmerston had been opposed to further reform while Russell was well known a veteran reformer with strong pro-reform views [Seymour, 1915], though without offering a clear way forward for a political resolution. Following months of political deadlock and failed attempts at reform, bond yields dropped with the formation of a Conservative ministry in June, 1866, led by Derby as prime minister and Disraeli as Chancellor or the Exchequer. A third break point is detected around April, 1867; this in fact likely picks up social unrest that first culminated on May 6, 1867, when protests began in Hyde Park ( [Himmelfarb, 1966]; [Briggs, 2000]) which were quickly followed by Disraeli accepting the Hodgkinson amendment to a franchise reform bill tabled by Disraeli himself a radical amendment that paved the way for the eventual passage of bill. A final break point is detected on January, 1869, when the Liberal party won a large majority in general elections, apparently prompting an increase in bond yields. Finally, in Figure 6, we consider the 5-year month window of bond yield data around the passage of the 1884 Reform Act. A break point is detected on September, 1884,

17 Figure 6: 1884 Break Point Analysis

9/1884 4/1885

● 3.10

●

3.05 ● ●

● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● 3.00 ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

2.95 ● ● ● ● ● ● ●

● 2.90 6/1882 6/1883 6/1884 5/1885 5/1886 5/1887

1884

which does not appear to correspond to a moment of significant impasse between the House Commons and the House of Lords over franchise reform that emerged in the summer of 1884. With a break in the parliamentary session in August 1884, both political parties took their agenda to the streets, and organized mass campaign-like events in August and September 1884 across the UK, including events in Hyde Park with the hope altering the balance of power within the parliament [Hayes, 1982]. Mass meetings in Hyde Park, for example in the Summer of 1884 had the appearance of large numbers, perhaps leading to a spike in yields, but when the Prince and Princess of Wales “gave it their unofficial patronage by viewing it publicly” (ibid, p. 185), we get a sense for why bond yield spikes in 1884 never approached the levels they did in the two earlier episodes. And, finally, another break point is detected in April, 1885, corresponding to sudden fears of a possible conflict between Britain and Russia on the Afghan border, completely unrelated to domestic political reform. Does a pattern emerge? It appears that the bond market reacted consistently negatively to events, such as the election of a weak minority government in 1830 or the replacement of

18 anti-reform Palmerston with pro-reform Russell as prime minister, that heightened the conﬂict over franchise reform. Events that were viewed to alleviate this conﬂict by facilitating reform, such as the election of a large pre-reform Whig majority in 1831, the overcoming of the House of Lords veto in Summer 1832, or the acceptance of the Hodgkinson amendment in 1867, appear to have provoked consistently positive reactions.

Financial Press Analysis In addition to tracing how structural breaks in the bond yield data correspond to political events the secondary literature has identified, we can turn to a primary source, the financial press from the 19th century and how it interpreted bond yield fluctuations and political events. In 1832, 1867, and 1884, the financial press gives us a view of how the business press reported how investors themselves interpreted financial market fluctuations as events were unfolding. Our examples are drawn from a digital archive of the Times of London, the Economist and The Investor’s Monthly Manual, the three most important financial press publications of the time that together provide coverage of the entire period. The qualitative picture is one that largely confirms three key points that are consistent with the quantitative findings. First, in moments of bond yield spike before suffrage reforms the troubles of domestic politics displaces all other possible concerns of investors (e.g. foreign policy) that do occupy the attention of investors. Second, of all domestic political concerns, the financial press consistently reports that it is political unrest and turmoil associated with the reform bills that is the chief driver of spikes in bond yields. Third, forward progress of the Reform Bills, especially in 1832, is linked in financial press accounts to the re-stabilization of bond yields. The predominant position of domestic political events in the press is seen, for example, when the Bill was stopped in its tracks by a House of Lords Veto of the bill in October 8, 1831. The Times reported two days later how domestic politics now “trumped” all other issues in the minds of investors,

“Nothing can exceed the indignant feeling and the consternation which have been manifested today in the city on the throwing out of the reform bill in the House of Lords...The city is doomed to a long period of anxious suspense, during which nothing will be talked or thought of but the Re- form Bill (The Times, Money Market and the City Intelligence, October 10, 1831)”

Similarly, after the House of Lords second veto of the bill in May 1832 which was followed up by the news that the King would introduce new Peers to the House of Lords

19 to facilitate passage, The Times reported on the nearly exclusive attention investors were paying to domestic political aﬀairs,

“Up to a late hour this afternoon, the money market wore a tranquil appearance... Near to the termination of business a report reached the Stock exchange that all was settled and that the King, displeased at the conduct of the Duke of Wellington and Lord Lundhurst [Tory Party opponents of reform], had consented to the creation of Peers to any extent that may be 1 necessary. This report produced some activity...at an advance of nearly 2 percent in Console. It may be mentioned as a proof of the absorbing interest of the reform question that the death of M. Casimir Perier [French Prime Minister] scarcely received a passing notice. A few days ago the vent would have been speculated on as involving the most important change in the state of Europe. The subject will not evidently acquire its due importance with our city politicians until the present crisis has passed over (The Times, May 19, 1832)”

But even if domestic affairs captured the attention of investors, is there qualitative evidence that bond yields spikes were interpreted as reflecting political unrest? In October 1831, in its discussion of popular reactions to the House of Lords first veto, The Times “Money Market and City Intelligence” column reported, “Prices are well maintained at the Stock Exchange but the state of feeling in the money market is not on the whole so tranquil as yesterday. Some uneasiness is created at the continuance of the riots at Derby and at Hot- tingham and still more by doubts as to the period to which Parliament is to be prorogued. The opinion generally is, that the peace of the country can only be maintained by a short prorogation attended with some indicators to show the success of the Reform Bill is certain” (October 13, 1831) Also, on May 12, 1832, after Lord Greys resignation from his office as Prime Minister in response the House of Lords veto, Times wrote, “The funds have fluctuated very considerably today and are becoming, much more than was the case at first, the barometer of the agitation which is working the public mind. Prices rose and fell as circumstances rendered it more or less probable that Lord Grey will resume office. The Consol market opened at 83 3/8 but rose to 84 1/3 in consequence of last night’s vote in the House of Commons”

20 And finally, between these setbacks, at each moment of forward progress during the 1831/1832 period, the financial press, such as the Times reported, “The better prospects which by the debate of last night would appear to await the Reform Bill have given a greater degree of firmness to the funds (April 13, 1832)” We also see similar patterns in 1867 and 1884, in the pages not only of the Times of London but two additional new publications: the Economist and the Investor’s Monthly Manual. In advance of the 1867 Reform Act, the financial pages of The Economist expressed considerable concern with the “reform question” and relief upon its resolution. By February 1867, as a political settlement on the issue of franchise reform neared, the reaction was almost dismissive of previously grave concerns about the threat of mass unrest: “By this time, the few foreign investors in English mercantile paper have, no doubt, been enabled to calculate the importance of the Reform agitation which was but a short time back looked on as something dangerous to the mercantile position of this country. Such an idea is apparently discarded and the matter attracts as little observation abroad as at home. (The Economist, Feb. 23 1867)” In July, with the official passage of the 1867 Reform Act, the response was one of satisfaction: “The passage of the Reform Bill has been but little commented on in connection with stocks, but the settlement of a question that might have led to grave inconveniences, and perhaps to worse results, had it been long delayed, can but be regarded be feelings of satisfaction. (The Economist, Jul. 1867)” By contrast, though the financial press continued to follow closely important political events that might affect the markets, we were unable to find any mention of the 1884 Reform Act in the financial pages of The Economist or The Times. We found a single obligatory mention, with no reference to a threat of political unrest, turmoil, or social conflict, in the Investor’s Monthly Manual annual review of 1884: “Politically, 1884 will be a landmark in the history of the country....These consultations finally led to the framing of a Redistribution bill acceptable to both sides, and in consideration of the Government pressing this bill forward and staking their existence upon it, the Lords passed the Franchise Bill, which has become law. Thus in domestic legislation the Government

21 has been successful beyond expectation. (The Investors Monthly Manual, Dec. 31, 1884)”

5 Conclusion

Britain is typically viewed as a model of gradual, stable, political and economic development. Indeed, for this reason many historical studies of European bond markets treat the yield on the 3% consol as representing the baseline “risk-free” rate of return in the market. Our findings cast doubt on the idea that Britain’s constitutional order was fully consolidated making the movement to mass democratization in Britain an utterly tranquil process. The Great Reform Acts as well as the failed Chartist movements were associated with large-scale volatility in bond yields. In fact, a tentative look at cross- national data from other European countries of the time, make plainly evident that although Britains 3% consol had, over the century, a lower baseline level of risk than many other equivalent sovereign bond offerings, the relative size of the spike in 1832 was as large as the relative size of the bond spikes associated with moments of suffrage reform in other countries sovereign bond markets (e.g. Netherlands in 1814, Belgium in 1848; Denmark in 1849; Germany in 1848). Furthermore for the entire historical period in question, in Britain, each of the largest spikes in 3% consol yields was associated with one of these successful or failed episodes of attempted democratic reform. We have shown, on the basis of overall patterns, break point analyses, and financial press analysis, that increases in the premium demanded by investors to hold British debt were associated historically with political disorder, broadly conceived, which emerged several years prior to and were alleviated by the passage of democratic reform or the repression of movements for democratic reform Our findings therefore recast British democratization as a deeply turbulent process, at least early in the nineteenth century, challenging the widespread periodization of British political development that Britain was a consolidated constitutional regime after 1688 that shared few similarities with the rest of Europe. The findings also suggest, counter-intuitively, that bond markets reacted positively to the passage of democratic reform because such reform, though altering the median voter in ways that it is often thought threatened debt-holders, offered stability in a context of deep social and political disorder. The caveat, of course, must be added that, as the 1842 and 1848 episodes of “failed democratization” also show, bond markets, when faced with apparent instability, also appeared to “like” stabilization through repression as well. The fact that “repression” and “democracy” have similar effects on the bond market is a puzzling

22 and important finding. Finally, our break point analysis and financial press analysis suggests that the nature of this political disorder that prompted democratization in Britain cannot be neatly classified as a “threat of revolution” or “elite competition” as it was precipitated by both mass and elite level conflict. Looking forward, interesting topics for future research include: first, why similar levels of perceived political disorder were resolved in some cases through the passage of democratic legislation and in other cases through repression; and, second how and whether the findings hold up in a broader sample of European cases.

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