weakened, the gentry had to emerge and Parliament had to become a more powerful coordinating body. While for North and Weingast, the State is an agent of change, for Rajan and Zingales, it is only an arena, which different social groups try to control. While for North and Weingast, learning how to design institutions is central, for Rajan and Zingales, overcoming opposition to change is central. Law matters for finance, but it serves as a tool whose use is determined politically. It is not an exogenously and historically provided system as it is for LLSV. Rajan and Zingales go beyond the constraining of expropriation, which is a precondition. But for financial markets to expand, they need infrastructure. This infrastructure includes transactional standards, information disclosure, legal constructs (such as collaterals and bankruptcy law) and contract enforcement. The infrastructure is a public good. Thus, it can best be provided by the State. Note that this infrastructure can serve the secondary market in government bonds and the secondary market in corporate shares. I shall return to this point below.
When do stock markets emerge and where? The three theories do not all aim to predict timing. But I will try to identify their implications, even if implicit, regarding timing. For LLSV, the stock market was likely to emerge earlier in England. The 12th century divergence of the common law, and the development of the basic characteristics of the common law during the formative period that ended with the death of Edward I in 1307, created the preconditions. How long it should have taken for the maturation of conditions and the development of the necessary legal protection for investors is not altogether clear. But one would imagine that not too long. For North and Weingast, the precondition is the creation of credible commitment devices. These are associated with the rise of Parliament, with the 17th century upheavals and with the Glorious Revolution. For Rajan and Zingales, the key period is the reign of the Tudors in 16th century, when Henry VII, Henry VIII and Elizabeth I weakened the aristocracy and opened the way to the rise of the gentry and eventually to pro-market, pro-financial market merchants and investors. In their view, opposition to the stock market was sufficiently weakened by the turn of the 17th century. But they assert that for a stock market to develop, elimination of opposition or even protection of investors is not enough. Market infrastructure has to be supplied as a public good by the State. They claim that the infrastructure was not in place before the late 17th century.
What about the Dutch Republic? It receives less attention from all three. For LLSV, the Dutch are of inferior continental legal origin. For North and Weingast, the Dutch did not go through a Glorious Revolution and did not solve the credible commitment problem. For Rajan and Zingales, what is most crucial is not what is peculiarly English – the common law or the English constitution. If the Dutch had been able to weaken the aristocracy and put a market infrastructure in place, they could have been the first to develop stock market.
Which market was likely to appear first, the share market or the government bond market? Here the prediction of the three theories is not clear because each of them has a different emphasis. LLSV focus on the share market. North and Weingast focus on the bond market. Rajan and Zingales do not always distinguish between the two.
The demand for a stock market may arise separately for government finance and for corporate finance. The government needs to borrow in the market when government expenses increase. In the pre-modern setting, the main cause for this is wars. Longer, more frequent or more costly wars create new demands. Wars were funded by collecting military services from feudal lords, by turning the feudal duties to financial, by taxation or by sale of lands, offices, monopolies and the like. The feudal services and dues could fluctuate with wars. Other sources of income were more constant. Loans could smooth out the fluctuations, provide the needed resources rapidly in war time and be paid gradually out of the stream of constant revenues in the