exact nature of this revolution.8 This may have led North and Weingast not to interpret it as solving the basic problem of conveying credible commitment. But there is agreement with respect to the fact that this revolution predated the English financial revolution by almost a century. It is agreed that the creation of public debt was a precondition for the creation of a market for trading in public-debt instruments. It is agreed that a significant public debt was created in the Dutch republic long before it was created in England. Tracey, Hart and others date the formation of a market for government bonds in the Dutch Republic a few decades before the formation of the VOC. This enabled the market for VOC corporate shares, when it emerged, to free ride on institutions that were already in place. Even Fritschy’s revisionist account of the Dutch financial revolution, that delays its timing and downplays its extent, concludes that public finance played a role in the development of Dutch financial markets. He notes that, “Holland’s ‘post-revolt’ public credit and the Amsterdam stock market were apparently born around 1600 as Siamese twins!” (Fritschy 2003).
English Bond Market
How and why did English sovereigns manage their public finance until then without Dutch-type borrowing and a Dutch-type bond and share markets? It is now common wisdom that England’s commercial credit market, intended for small-scale, short-term, overseas transactions and based on bills of exchange, followed advances on the Continent. This was not the case with public finance. The massive sale of Church lands due to the Reformation enabled Henry VIII and Elizabeth, during whose reign the EIC was formed, to be less heavily dependent on borrowing than were later English monarchs or the Dutch. In hard times, such as wars, when they needed liquidity, they resorted to foreign lenders. Henry and Elizabeth raised all of their loans in the period 1544-1574 in Antwerp, the leading financial center of the time. Between 1574 and 1588, Elizabeth was able to avoid borrowing altogether. When war resumed against the Spanish Armada in 1588, she had to return to limited domestic borrowing. This borrowing did not rely on a functioning stock market. Elizabeth used archaic, cumbersome and unpopular methods to coerce loans from wealthy individuals and from the Corporation of London. Of the £461,000 she borrowed after 1588, all but £85,000 was raised at zero interest and only £10,000 at market terms (Outhwaite (Outhwaite 1966; Outhwaite 1971). The early Stuarts gradually increased their loans but maintained the same practice of raising money from corporate bodies such as the City of London, and by receiving advances from tax farmers (Ashton 1960), pp. 79-131) (Braddick 1996). Thus, at the time of the formation of the EIC and in its years of infancy, the financial needs of the State were met without the existence of a government stock market. State loans were based on personal connections, on ad hoc intermediaries, on coercion, and on short-term borrowing. A domestic secondary market, which is essential for the creation of public debt that is based on long-term, irredeemable and voluntary bonds because it allows liquidity, did not exist.
As conflicts between Crown and Parliament intensified with the progression of the Stuart reign, and as the stock of land for sale decreased, so did the creditworthiness of the State. The use of voluntary loans declined. Strict parliamentary control over taxation after the 1660 Restoration
8 Some scholars place its timing in the 1570s while others around 1600. Some call attention to the fact that municipal borrowing began in the 15th century. Some stress the introduction of public borrowing while others view the reorganization of taxation as equally important. Some argue that the fundamental change was achieved by a shift to the level of the province while others believe that it was accomplished on the city level. Several scholars argue that on the debt side, it was the shift from short-term debt to long-term debt in the form of annuities that allowed more creditworthiness and increased borrowing, while others argued that transferable short-term obligations were in higher demand. Some argue that the suppliers of credit were mostly rentiers, while others claim that they were primarily merchants in search of liquid investment. See Tracey (1985); Hart (1992); Fritschy (2003).