forced Charles II to seek new lenders (Wheeler 1996). After the Glorious Revolution of 1688, public finance entered a new phase. Expenses rose due to prolonged wars with France, and tax incomes, with the excise leading the way, increased, but an unprecedented degree of borrowing was nevertheless needed to bridge the deficit gap.
A variety of institutional novelties coupled with the changing tax system to bring this about. These included the subjection of the Crown to parliamentary supervision through the Bill of Rights; the linking of loans to specific taxes that were supposed to provide the assured stream of income out of which interest would be paid – the so-called funded debt; the incorporation of the Bank of England as a pivot that connected private lenders with the Exchequer, and the evolvement of interest groups that used their political power to prevent expropriation of lenders. These political-constitutional-institutional changes were inspired by the Dutch model, which was well known to the newly arrived King William of Orange. An effective market for government bonds developed within a few years that introduced brokers, a marketplace, price reports, transaction techniques and a volume of trade to allow liquidity. All these changes and others amount to what is known as the Financial Revolution (Dickson 1967; Mathias and O’Brien 1976; O’Brien 1988; North and Weingast 1989; Brewer 1990; Harris 2004). The national debt mounted from around £1 million in 1688 to £15m a decade later, to £78m in 1750 and to £244m in 1790 (See Figure 2).
The timing of the Financial Revolution in England has been thoroughly researched by leading economic and political historians. Unless one is to challenge this timing, one has to acknowledge that throughout most of the 17th century, the Dutch had an effective stock market while the English did not. This timing fits North and Weingast's credible commitment theory well. But the timing generates two puzzles. Did the Dutch solve the credible commitment problem a century before the English and if so, how? How could widely held English corporations function throughout the 17th century, before the development of a government bond market and apparently also a share market? Rajan and Zingales do not have a problem with the Dutch being able to develop a bond market before the English and as early as the 16th century. LLSV do not have a clear prediction as to timing, but the order of emergence of bond markets, in which the Dutch appeared before the English, does not fit their theory. I will deal below with the puzzles generated by North and Wengast's theory.
Table 1: Financial Environment
No accumulated Asian trade capital
Accumulated Asian trade capital
No government bond market
Government bond market
Municipal bank (since 1609)
Sources: See text
From its inception, the VOC functioned in an environment that included a bond market that could be utilized for its shares, and the EIC functioned in an environment that did not have such a market. The VOC was formed after the appearance of a bond market and simultaneously with the market in shares; the EIC predated a bond market and a share market by close to a century. As I will show below, the absence of an effective share market in England did not altogether prevent the transfer of shares in the profits of the EIC.
3. Financing the Formation of the Companies – The Primary Share Market
The Dutch and the English were attracted to the lucrative Asian-European trade that promised considerable profits due to the vast arbitrage gaps in high value luxury goods between