Public Debt and the Birth of the Democratic State: France and Great Britain, 1688-1789 (review)

This book tries to explain why some governments may create credible commitments toward servicing their debt whereas other governments fail. A permanent national debt, if it is to promote, rather than crowd out, economic growth, must be serviced faithfully enough by the government that the private sector is willing to hold it as an asset. Somehow, Britain accomplished this feat over the course of the eighteenth century, and France did not. One result was that Britain defeated France in the Napoleonic Wars; another result was that nineteenth-century Britain experienced a capital intensive Industrial Revolution, and France did not.

Stasavage makes three general, interlocking, arguments to explain the divergent outcomes. First, "Constitutional measures establishing multiple veto points may reduce default risk, but they are neither a necessary nor a sufficient condition for this outcome" (14). The problem is that government debt holders are likely to be a minority, and minorities in general have difficulty in maintaining control over any given "veto point" within a political system. Such was the case, he argues, for both Britain and France throughout the eighteenth century.

Second, "In societies with multiple dimensions of conflict, the process of party formation will reduce default risk provided that government creditors are members of the majority coalition" (17) This is his key argument. Theoretically, the political minority of government debtholders can ally with other groups to form part of a stable majority ruling party and control a veto point in this manner. Such was the role of the Whig party in Britain, especially after 1715 and the beginning of the Hanoverian Succession. No comparable set of multiple political conflicts, he argues, existed in France throughout the eighteenth century.

Third, "Bureaucratic delegation will improve credibility only if government creditors already have influence within a representative assembly" (19) This argument is used to explain the apparent success of the Bank of England in managing the ever-increasing debt of Britain during the eighteenth century and to explain why no comparable institution arose in France.

The second chapter lays out a game-theoretic model for these propositions, noting that the model requires decisions to be limited to deciding between two kinds of taxes, on land or on capital. Economic historians will find this model an annoying simplification; it leaves out the role of indirect taxes, whether customs revenues or excise duties, either of which served as the revenue source dedicated to debt service in the successful governments of early modern Europe. That labor is left out of the political game—appropriately enough for this period—is precisely the reason why it was so heavily taxed, if indirectly through excises and customs. Multiple issues in Britain divided legislators—royal succession, religious tolerance, governance of Scotland, and the relative privileges of landed gentry and urban merchants. France had to deal only with the issue of relative privileges; the landed gentry held the important veto point. (French historians may wonder why the regional diversity of France, especially as regards tax liabilities and privileges, did not offer the same possibilities for coalition formation in France as in Britain, at least theoretically.) For readers unfamiliar with the political-science literature, the formal exposition is difficult to follow, and even the technical appendix did not help this reviewer. But the logic of the models is clearly explained in the text.

Among the analytical history chapters that follow, most interesting is the exercise in Chapter 4 to show that interest rates on British government debt were consistently higher when the Tory party held power and fell when the Whigs had control. This observation is consistent with the more elaborate econometric exercise by Wells and Wills, showing how long it took the effects of the Glorious Revolution of 1688 to show up permanently in British public finance.¹ Comparing France and Britain during the second half of the eighteenth century, Stasavage finds that yields on British government debt responded as...