Financial History Review . (), pp. –. © European Association for Banking and Financial History e.V.
doi:./SX
Special issue on war, taxes and finance in the
long eighteenth century
Introduction: maximising revenues, minimising
political costs – challenges in the history of
public finance of the early modern period
M AR J O L E I N ’ T H A R T, * PE PIJN BRANDON * * a n d
R A FA E L TO R R E S S Á N C H E Z * * *
*Huygens Institute for the History of the Netherlands and Vrije Universiteit Amsterdam
**International Institute of Social History and Vrije Universiteit Amsterdam
***Universidad de Navarra
Taxation is accepted as a fact of modern life, despite recurring political conflict over the nature and direction of fiscal policies. Most financiers regard obligations issued by the state as a safe investment option.
Neither taxation nor state obligations were taken for granted during much of the history of public
finance, however, at least not before the early s. The ‘tax state’ developed in fits and starts, driven
by the exigencies of warfare, which provided the main rationale for raising state income. Although
wartime fiscal innovations eventually facilitated the rise of an efficient military state, the options available
for implementing such improvements and preferences for specific fiscal or financial instruments varied
greatly across early modern states. Focusing on the ‘long’ eighteenth century, this introduction presents
a framework for assessing these differences and introduces the other articles in this special issue.
Keywords: state finances, warfare, taxation, public debt, history
JEL classification: G, H, H, H, H, N, N
M. ’t Hart (corresponding author), Huygens Instituut voor Nederlandse Geschiedenis, Oudezijds
Achterburgwal , DK Amsterdam, The Netherlands; email: m.c.t.hart@vu.nl; marjolein.
thart@huygens.knaw.nl; web pages: www.huygens.knaw.nl/t-hart-marjolein/ and https://research.
vu.nl/en/persons/marjolein-t-hart. R. Torres Sánchez, Departamento de Economia, Facultad de
Ciencias Económicas y Empresariales, Universidad de Navarra, Spain. P. Brandon, International
Institute of Social History, Amsterdam, and Department of History, Vrije Universiteit Amsterdam,
The Netherlands. Several of the articles collected in this special issue were first presented at the international workshop ‘The Economic Impact of War –’, which took place at the Netherlands
Institute for Advanced Study on – December , and was co-funded by NIAS and HuygensING Amsterdam. Further discussion took place at a session with the same title at the XVIIth World
Economic History Congress in Kyoto, – August . Editorial work on the special issue and the
work on the introduction were executed with the help of a grant from the Spanish government, ref.
HAR --C--P, and an NWO Veni grant, no. --. The latter grant also permitted
the writing of Brandon’s article.
1
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Should foreigners, staring at English taxation,
Ask why we still reckon ourselves a free nation,
We’ll tell them we pay for the light of the sun;
For a horse with a saddle, to trot or to run; …
How great in financing our statesmen have been,
From our ribbons, our shoes, and our hats may be seen …
One would think there’s no room one impost to put,
From the crown of the head to the sole of the foot;
Like Job, thus John Bull his condition deplores,
Very patient, indeed, and all covered with sores.
(Anonymous c. , quoted by Dowell , p. )
This anonymous poem introduces one of the major challenges in the history of public
finance: how to tackle increasing expenditure, especially the expenses caused by war,
whilst ensuring that the population remains ‘patient’, like the ‘very patient John Bull’
of the last lines. The poem dates from the aftermath of the War of American
Independence, which saddled the British with one of the highest tax burdens per
capita in the world. The author could not have envisaged that yet more burdensome
taxes would be added in the next decade, including the novelty of an income tax,
caused by the exhausting and extremely expensive French and Napoleonic Wars
(O’Brien ). The history of early modern public finance is an ongoing story of
state rulers trying to maximise revenues whilst minimising the political costs, to paraphrase the political scientist Richard Rose (; cf. Irigoin and Grafe ). How
state rulers tried to achieve that precarious balance was and continues to be a fascinating story, one that is recapped in this special issue, in which the challenge is viewed
from different angles. In addition to taxation, the solutions for maintaining that
balance included forming coalitions with other states, manipulating currencies,
extracting even more revenues out of state enterprises or domains, developing a
stable system of state credit, exploiting networks of financiers, economic warfare,
the sale of offices, or engaging in severe austerity measures – to mention just the
most common solutions. By the end of the eighteenth century, however, the most
durable and flexible systems of public finance combined a variety of domestic taxes
with domestic credit that was relatively easy to obtain, firmly grounded in a given
territory; a combination that eventually facilitated the rise of nation states.
The consolidation of state finances occurred in fits and starts, and included a learning process whereby states copied other states. In the s, the French minister of
finance, Jacques Necker, wrote:
No nation has established at a single moment all the taxes and levies with which it is presently
burdened. The contributions necessary for each state have been established in stages. Such
stages are not equal, because expenses have increased as a result of wars and other extraordinary
calamities. (Quoted in Bonney , p. )
This special issue focuses on the ‘long’ eighteenth century that stretched from the final
decade of the seventeenth century to the early years of the nineteenth century; an era
INTRODUCTION
characterised by the crystallisation of various public finance instruments that would
last into the twentieth century and help to shape the different models of the
modern state. The individual contributions show how this period was one that featured an intensification of existing financial networks and new short-term credit
instruments that eased transnational war transactions; how currency manipulation
without safeguarding the stability of coin circulation led to high political costs;
how severe austerity measures without proper innovations in public finance weakened the overall establishment; and how the escalating war expenses of the long
eighteenth century sparked increasing debate about the relationship between war
expenses and economic growth, accompanied by the rise of mercantilist state policies.
In this introduction, a longer timeframe is employed in order to view these strategies
in a wider context; it seeks to establish the conditions under which taxpayers came to
tolerate increasing levels of taxation, and why creditors believed the state’s commitment to paying the interest charges on public loans to be credible. Taxation brings
about political disputes, whereas a developed system of public debt requires not
only a specific institutional framework, but also decades of tried and compliant behaviour by state authorities. All in all, state rulers needed to fulfil two basic and often
contradictory functions: stimulating the accumulation of capital within the state
whilst maintaining the conditions for social peace (O’Connor , p. ).
The article starts by addressing the challenge posed by war finance and the resulting
transition towards the tax state in its various forms. In doing so, the analysis draws upon
recent quantitative studies. The second section addresses eighteenth-century innovations
within government, especially centralisation and increased direct control, which resulted
in new types of interaction between state, elites and taxpaying communities. The third
part considers the innovative schemes that followed the Financial Revolution, enabling
the rise of secure long-term debt, and discusses the role of parliaments and secondary
financial markets. The final section introduces the articles in this special issue and summarises the major conditions underlying the rise of the modern tax state.
I
Taxation always involves conflict, since tax structures are part of what economists call
‘property rights’. These structures also entail distributive effects, giving preference to
one group over another (Alt , p. ). Historically, politicians have tended to be
risk-averse and have preferred to avoid the contention and turmoil associated with
new or higher taxes (Rose ). As a result, they have tried to maintain the status
quo; yet the history of state formation shows that state rulers could not avoid the
levying and restructuring of taxes.
The maxim that the king should ‘live of his own’ – that he should finance the state
with the revenues from his own domains – dominated the political discourse in medieval Europe. The king could only levy taxes on a temporary basis, usually during wars.
Historians and social scientists have described the transition from this situation to one
in which tax revenues became ‘ordinary’ as the evolution from the ‘domain state’ to
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the ‘tax state’ (Schumpeter ; Krüger ). The historians Bonney and Ormrod
developed a broader conception of this process, starting with the tributary state, mainly
financed by payments from dominated, foreign or external subjects; the domain state,
based on the personal property and perquisites of the ruler; the tax state, with regular
taxation on the inhabitants’ properties; and finally the fiscal state, with a sophisticated
credit structure for state loans (Ormrod, Bonney and Bonney , pp. –; cf.
Monson and Scheidel ). Most of the literature, however, continues to focus primarily on the transition from domain states to tax states.
The economists Peacock and Wisemann explained the acceptance of gradually
expanding levels of taxation with their thesis on the ‘displacement effect’:
People will accept, in a period of crisis, tax levels and methods of raising revenue that in quieter
times they would have thought intolerable, and this acceptance remains when the disturbance
itself has disappeared. (; Peacock , p. )
They observed peaking tax levels during wars which were separated by plateaus in
times of peace, whereby each new plateau was always higher than the previous
one. Indeed, this is a trend that can be observed throughout the early modern
period (Bonney , p. ; Kiser and Linton , p. ; Sabaté , p. ).
The displacement effect diminished in the nineteenth and twentieth centuries, at
least in the Western world, when tax levels had already reached substantial heights.
The transition towards gradually higher tax plateaus was not a uniform one, and it
occurred in various time frames (Yun-Casalilla and O’Brien , p. ). Whereas
tributary states dominated much of central Eurasia for centuries, China was already
a tax state after the victory of the Qin in the third century BCE (Deng ; Liu
, p. ). There was no true tax state to be found in medieval Europe, apart
perhaps from city states that drew most of their revenues from regular taxation. It is
not until the fifteenth century that we witness the embryonic rise of regular and
‘ordinary’ taxes in a number of territorial states, such as France. Tax states developed
rapidly in the sixteenth and seventeenth centuries, especially in southern and western
Europe; eastern Europe would maintain the dominant features of the domain state
until the eighteenth century (Krüger , p. ; North , pp. –). In the
Far East, Japan would essentially remain a domain state until the later nineteenth
century (Nakabayashi ). The delimitation of a territorial entity constituted an
important accompanying factor in the development of the tax state. In Europe, the
sixteenth century marked a watershed in the rise of the proto-national territorial
state with clearly defined borders; an essential precondition for legitimate taxation,
all at the expense of the revenue-raising capacity of the landlords, churches and
cities of the medieval period (Schulze , p. ; Körner , p. ).
In recent decades, numerous quantitative studies, based on extensive data from
several European states, have established much firmer ground for such claims. The
Wars of Religion in particular stand out, with a doubling of the per-capita tax
burden calculated in its grain equivalents between and , followed by
another acute wave of rising war costs between and , roughly coinciding
INTRODUCTION
with the Thirty Years’ War. Western Europe experienced the highest tax increases per
capita between and , with the significant exception of England; the English
per-capita tax burden only took off in the eighteenth century (Gelabert , p. ;
Ashworth , p. ). Eastern European countries such as Russia, Prussia and the
Austrian Empire joined Britain in doubling their per-capita tax burden in the same
period (Karaman and Pamuk , p. ).
All of these rising tax burdens were accompanied by redefinitions of property rights
and new regulations regarding access to the ‘state-making’ process, causing disputes
and widespread discontent (’t Hart , p. ). Violent clashes involving rebellious
peasants and town-dwellers peaked in the sixteenth and seventeenth centuries
(Mousnier , p. ; Zagorin , p. ). Gabriel Ardant, the French tax
historian, remarked:
The letters of Richelieu, Mazarin, Séguier, Colbert, Charles V, or of Granvelle and of the officials who were their collaborators make clear their daily concerns: … how they strove to
predict revolts, to put them down, and to avoid their recurring. (Ardant , p. )
Peasants often clashed with tax collectors, because taxes needed to be paid in coin,
whereas feudal duties had usually been levied in kind. Monetisation advanced
slowly, as much of Europe was dominated by subsistence farming. Nevertheless, by
the eighteenth century the fiercest conflicts had subsided; the degree of monetisation
had increased, not least because of the ongoing pressure of money taxes needed to pay
soldiers in cash (Schumpeter ; Torres Sánchez ). People continued to resist
taxation, but this resistance was integrated into broader political movements (Klooster
, p. ). Demands for more equitable taxation and control over spending became
louder, whilst complaints about the tax burden per se declined and taxation came to be
regarded as a natural phenomenon.
Urban taxpaying communities tended to demand control over spending at an early
stage. Charles Tilly divided the paths to European state formation into ‘capital-intensive’ and ‘coercion-intensive’ trajectories; the first was dominated by ‘struggle, negotiation, and sustained interaction’, with representatives – especially the governing
bodies of municipalities – already controlling much of the tax revenue; the second
was exemplified by vast agricultural territories with top-down, bulky and coercive
bureaucracies (Tilly ). Karaman and Pamuk confirmed the logic of Tilly’s trajectories on the basis of quantitative evidence from European states: ‘it was authoritarian
regimes in more rural economies and representative regimes in more urban economies that tended to better translate into state-building’ (, p. ). The rulers
of Russia (Muscovy), for example, taxed the peasants by sending cavalrymen to
collect the rent; Peter the Great introduced new land taxes and a poll tax, levied
by state commissioners (Hellie , pp. , ). No middlemen managed and
disbursed the funds, in contrast to most of urbanised western Europe.
The ‘poor kings’ of the medieval period eventually became ‘rich kings’ in the following centuries (Webber and Wildavsky , p. ), yet in order to stay in power,
they needed to allow for the ‘political ceiling of taxation’ (Fujita , p. ; cf.
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Irigoin and Grafe ). ‘Rich kings’ usually had various tax options at their disposal,
especially in the more monetised and urbanised parts of Europe. The Reformation
reduced the political cost of breaking the fiscal immunity of the clergy; monarchs
confiscated church property on a vast scale, such as in sixteenth-century Sweden
and England (Gelabert , pp. –). Countries with a substantial volume of
foreign trade often resorted to customs duties, since these tax instruments tended to
shift the burden of taxation to foreigners and a relatively small number of merchants
(Centeno ; Bordo and Cortès ). Raising customs duties was long a prerogative of the English king and one that he exploited to the full, since it avoided the political cost of negotiating with Parliament; customs yielded about half of all English
revenue. In the eighteenth century, after customs duties had become an instrument
of Parliament, this levy again became a major pillar of the state (Aylmer ,
p. ; Brewer , p. ). Customs supported the Chinese Empire after the
Opium Wars necessitated higher revenues, whilst the land tax was deliberately kept
low in order to avoid political unrest (Deng , p. ). A wealthy society such
as the Dutch Republic could refrain from levying high duties on trade and instead
chose the instrument of excises, since raising customs was unpopular with the politically powerful merchant communities, who were keen to keep the costs of trade as
low as possible (’t Hart , p. ). The rich Dutch East India Company paid hardly
any customs, for instance, whilst monarchs elsewhere used such monopolistic trading
agencies as milking cows for the state treasury.
Excises also taxed consumable goods, especially beer, wine, bread (or grain) and
salt. In urbanised and commercialised Europe, excises became a regular occurrence,
yielding substantial revenues. The infamous French salt tax or gabelle, for example,
produced twice the total English revenue in (Hill , p. ). One negative
aspect of excises was their regressive distributional effect, in that they burdened the
lower classes disproportionally. Yet even in societies with no strong tradition of
excises, the political costs of this instrument were low, as the link between state policies and higher consumer prices was not directly evident to the population at large. In
the midst of the Civil War, for instance, England managed to introduce ‘nationwide’
excises at a low political cost (Wheeler , p. ). Nevertheless, excises did have
their limits; in more agricultural and less populated areas, these taxes were notoriously
difficult to levy, usually yielding meagre results; only duties upon consumer goods
that were needed on a large scale, such as salt, were worth the costs of collection
(Ardant , p. ).
The indirect duties on trade and consumable goods became the mainstay of almost
all early modern states in western Europe (O’Brien , p. ). States could not avoid
levying direct taxes on land, houses or property either, however. The ‘direct’ character of such levies confronted the individual taxpayer with state claims, which made
them politically risky, in particular when raising or changing them. Yet certain countervailing factors could facilitate these levies; indeed, property taxes could function to
strengthen claims to ownership (Alt , p. ). A Dutch manual from stressed
that the wealthy rarely protested when they were placed in the highest tax category of
INTRODUCTION
property-owners, since a ‘capitalist’ (the term used for this category) had more opportunities to obtain credit and was known as a trustworthy trading partner (’t Hart ,
p. ). Rates could also be kept deliberately low; one such example is the land taxes
in China, made possible by its vast territory and the sheer size of the state budget in
relation to those of the much smaller and weaker neighbouring states. Chinese treasury reserves could usually cover war budgets until the later eighteenth century (Wong
, p. ; Kaske, this issue). The strength of the Ottoman Empire likewise rested
upon its land taxes for as long as the state expanded its territories (Karaman and Pamuk
, p. ; Fritschy , p. ). Yet in most European states, land taxes were
based on former feudal or church levies and outdated registries, creating inequitable
burdens with numerous exemptions or reduced rates for nobles, church officials and/
or urban landowners. Be that as it may, all fiscal systems based largely upon land taxes
proved vulnerable during lengthy wars, since duties could never be raised to the
extent needed to continue to pay troops for longer periods of time (Alt , p. ).
II
In wartime, one financial emergency tended to follow another in rapid succession,
resulting in a hodgepodge of revenue-raising methods. In addition to the raising of
customs, excises and land or property taxes, currency debasements offered a tempting
alternative. Ottoman, French and Prussian rulers, as well as the English Tudors, frequently resorted to currency manipulation in order to increase government revenue,
often to the vexation of the trading community (Pamuk ; Bonney ,
pp. –; Félix, this issue). Domains, crown lands, trade privileges, monopolies
and offices were leased or sold; the sale of offices provided as much as per cent
of French revenues in the s. In order to obtain funds in due time, intermediaries
such as tax farmers, financiers or army suppliers were given ample opportunity for
private enrichment, and collusion between local magnates and local tax collectors
was all too common. Although such methods limited central control by the state,
they did sustain the development of territorial consolidation and larger military establishments throughout Europe. In fact, government receipts rose continually in real
terms during the sixteenth and seventeenth centuries (Webber and Wildavsky
, p. ).
Although the European state would not become truly centralised until the nineteenth century, the eighteenth century saw a substantial consolidation of the tax
state, with state rulers aiming for increased control over the instruments to hand,
instead of constantly raising taxes or creating new devices (Dincecco ; North,
Wallis and Weingast ). Eighteenth-century innovations included the professionalisation of the financial administration by reducing the number of intermediaries and
the replacement of tax farming with direct tax collecting, supported by new registries
for property levies. Taxes became more equitable as the number of exemptions was
reduced (Ashworth , p. ). Tax payment in kind became outmoded; by ,
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for example, the Danish state required all tax payments in coin (Bonney ,
pp. –).
The most important goal was to centralise and consolidate the financial administration, supported by a stronger legal framework (Torres Sánchez ; Besley and
Persson , p. ). Much of Europe had been characterised by systems of
multi-layered government, with semi-autonomous provinces, regions and towns.
Powerful provincial estates, municipalities, tax farms and other corporations had
managed and collected the funds. Central government often decided on how the
apportioned funds were to be spent, yet the actual implementation lay in the hands
of local authorities (Pezzolo , p. ; Muto , p. ; Brandon ,
pp. –). Few funds reached the central treasuries. In seventeenth-century France,
for example, over per cent of the yield of the taille, the main land tax raised in
Languedoc, was paid directly to Languedoc notables in the form of interest payments,
salaries, wages, pensions and compensation; of the remainder that ‘truly’ went to the
king, again, over per cent was used for the defence of Languedoc and never
reached the central treasury (Beik , p. ). Taxation always proved difficult in
peripheral provinces, with the result that ‘core’ areas, such as Castile in Spain,
Holland in the Dutch Republic, and Île-de-France and the pays d’élections in
France, were always taxed much more heavily than the outlying regions. The high
political costs simply precluded the levying of similar taxes throughout the realm.
Decentralisation and indirect rule continued to hinder the Ottoman Empire until
the later nineteenth century (Balla and Johnson , p. ; Karaman and Pamuk
, p. ). European states, however, developed their coercive capacity during
the eighteenth century; they possessed more fiscal and financial powers, enabling
their militaries to act more purposefully in more peripheral areas. Centralised
regimes assumed direct control over the majority of the resources (O’Brien ,
p. ). In doing so, states clearly learned from copying each other. The British
enlargement of the tax base, for example, was inspired by Holland:
For it is from that country that we have borrowed the great department of the stamps, the taxes
on carriages, horses, and servants, the duties on goods by auction or acquired by collateral succession, together with some of the regulations in the late tobacco act, and other means of
securing revenue. (Sinclair , III, p. )
In the end, ‘Britain … became, like her main rivals, a fiscal-military state, one dominated by the task of waging war’ (Brewer , p. ). The country’s achievements
rendered it a model ‘fiscal military state’ with instruments that were, in turn,
copied by other states (Torres Sánchez , p. ; Storrs ). It was in this centralised polity that the first nationwide income tax was introduced in . The
measure was extremely unpopular, yet, as one receiver of the tax noted: ‘Among
responsible people there was a growing recognition of the fact that, however unpleasant, the Income Tax was necessary for the duration of the War’ (quoted by HopeJones , p. ). This corroborates the Peacock–Wisemann thesis mentioned
earlier. In order to mitigate the political costs, the tax was intended as a temporary
INTRODUCTION
measure and applied a rather low flat rate. Nevertheless, owing to its complicated
nature, the levy necessitated far-reaching innovative devices within the financial
apparatus (Hope-Jones , p. ). As was so often the case, war proved to be a gestation period for new ideas (Kiser and Linton , p. ). Voting in Parliament
facilitated these ideas by regulating political support, as a contemporary observer
noted:
It is a singular circumstance attending despotic governments, that however arbitrary they may
be in other respects, yet it is very difficult for them to impose new taxes on their subjects …
Such is the confidence placed by the public at large in the British Parliament, that the raising of
money, when once voted, never meets with any opposition. (Sinclair III, pp. –)
Recent quantitative historical research confirms that representative institutions did
indeed achieve higher tax revenues, even when GDP per capita was kept constant
(Dincecco , p. ; Besley and Persson , p. ; Karaman and Pamuk ).
III
Loans eased the financing of wars, shifting much of the cost of military campaigning
onto a more peaceful future and lowering the burden of wartime taxation. Stable government revenue played an indispensable role in sustaining this long-term public
debt, its viability resting upon future tax revenue. Medieval European towns had
‘invented’ a debt model that circumvented the impediments posed by the church:
they concealed interest payments as annual compensation through annuities, the
funds for the debt charges being met by their rewarding urban excises (Munro
). The tradition of urban annuities exerted a profound influence on the fiscal
history of the more urbanised parts of Europe and ingrained the notion of a collective
guarantee for public loans backed up by regular taxation, which was known as ‘funded
debt’ (Ucendo and Limberger , p. ).
Funded debt could flourish only in tax states. In domain states, public loans were
backed only by the personal surety of the prince, resulting in short-term contracts.
The prince’s death often implied a repudiation of the bonds, which led to higher
rates of interest; the relative burden of debt charges in the budget was quite high.
Tax states with poor credit reputations likewise had to offer higher interest rates in
order to make the bonds worthwhile for investors (Drelichman and Voth ).
Even high returns, however, could not prevent numerous Genoese financiers from
suffering severe losses following the Spanish-Habsburg bankruptcy of , and
Genoa lost its leading position as major financial centre as a result (Muto , p. ).
Autocrats did not wish to depend upon powerful creditors at home, and thus
refrained from establishing long-term public debt (Macdonald , p. ). Bonds
were usually held by a limited group of government officials, privileged state
bankers, religious institutions and foreign bankers. In eighteenth-century Bavaria,
for example, the church and charitable institutions constituted the main creditors;
private investors owned just per cent of the securities (Ullmann , p. ).
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Beyond Europe, public credit hardly gained ground; neither China nor Japan issued
long-term bonds before the mid nineteenth century. The Ottoman state did not rely
on public credit either, although the sale of offices and tax-farming arrangements constituted hidden means of contracting loans from moneyed elites (Pamuk ). Such
measures did not encourage the development of a transparent financial market,
however, a difficulty that was also faced by certain European states. The French secondary market for government bonds was particularly opaque, due to the multitude
of loans issued against all sorts of conditions by the crown, tax farmers, tax receivers,
financiers, sub-financiers and numerous intermediaries, also resulting in rather high
rates of interest (Félix ). In order to obtain funds more cheaply, the Provincial
Estates of Burgundy agreed beneficial long-term contracts with the crown, secured
by the province’s regular tax revenues, thus creating a more transparent form of
public debt (Potter and Rosenthal , p. ). Around , the Scottish financier
John Law aimed to reform French credit by developing an efficient, centralised
system, using the Compagnie d’Occident as a major intermediary. Although the
project failed, it proved an unexpected boon to the crown, since much of the state
debt was wiped out instantly with the failure of the Compagnie. Despite unfortunate
events such as these, the Paris financial market recovered and thrived between
and , thanks to the effective information networks established by notaries
(Hoffman, Postel-Vinay and Rosenthal ; Neal , pp. , ).
During much of the seventeenth century, English debts were also marked by a lack
of transparency and carried high interest rates. The introduction of excises in the s
undoubtedly facilitated the development of funded debt at a later stage. The reforms
introduced by Sir George Downing in the s, based on the Dutch example, convinced Londoners to provide loans to the state on longer terms than they had previously done (Wheeler , p. ). Additional reforms in the wake of the Glorious
Revolution furthered the development of the financial market, thanks above all to
the intermediation of the Bank of England and Parliament’s firm grip on taxation,
and not least on excises and customs. The new ‘limited’ government was unable to
act without the consent of Parliament (North and Weingast ).
Scholars dispute the causes of the spectacular rise of British public debt in the
eighteenth century. Whether the security of property rights constituted the crucial
factor remains inconclusive (Clark ; Cox ; Allen , p. ). The policies
of King William of Orange did not cause a rapid decline in interest rates, either
(Sussman and Yafeh ; Cox , p. ; ’t Hart ). The political scientist
David Stasavage has argued that representative institutions gave voice to creditors’
interests and thus enabled the expansion of long-term public debt (, p. ).
Although Parliament’s expanding role did matter in the British case, the fact that creditors were reassured that revenues would be steady and forthcoming might have been
even more important. Political representation did not exist in the Papal State, for
example, yet it managed to contract enormous public debts at the very low rate of
per cent, since the budget was backed up by a great variety of solid revenues,
INTRODUCTION
including tithes, taxes on the clergy and annates. As a result, even small artisans were
willing to furnish loans (Pezzolo , pp. –).
More important than political representation was the presence of a viable secondary
money market that could absorb government bonds, such as the Roman market for
papal debts (Partner , p. ). In general, extensive domestic government borrowing was only possible in an economy in which creditors had become accustomed
to lending, with a network of financiers to facilitate the transfer of funds on the secondary market (Ardant , p. ; Gelderblom and Jonker ). Even eighteenthcentury British credit was dependent upon the presence of the strong secondary
market in London. The infamous South Sea Bubble foreshadowed an imminent
state bankruptcy around , which was weathered only because of the high
degree of marketability of the securities. On their own, Parliament and the Bank
of England failed to provide the necessary credible commitment (Carlos and Neal
). Dutch public debt was strong, too, relying on a widespread network of
semi-private receivers and other intermediaries, even though the secondary market
for securities was much more fragmented and less centralised than the London one
(Van Bochove ; Feenstra ). In addition, the British and the Dutch
enjoyed the advantage of having numerous intermediaries linking the Amsterdam
and London markets. In fact, each was strong in its own respect: London for the
more risk-loving capital-seekers, Amsterdam for portfolios with a secure backing.
Combined, they boosted all kinds of financial transactions in northwestern Europe
throughout the eighteenth century (Neal , p. ; Carlos and Neal ,
pp. , ; Neal and Quinn , p. ; Brandon, this issue).
A thriving financial market could even absorb the forced government loans that
had been pressed upon the financial elite, and usually disregarded property rights.
Venetian and Florentine public credit, for example, flourished thanks to the possibility of selling such forced bonds easily (Pezzolo , p. ). In this regard, Stasavage
has suggested that small-scale oligarchic polities had an enormous advantage when
furthering public credit, because of the short distances to decision making (,
p. ). Numerous other towns failed to establish secure public credit, however; and
Florentine creditors continued to believe in the myth of their infallible funded
public credit, despite being confronted by obvious signs of decline (Veseth ,
p. ; De Vijlder and Limberger ).
The existence of long-term public debt contracts increased the interdependency
between the state and its domestic creditors, as receipt of regular interest payments
bound the latter more consciously to the fate of the state (’t Hart , p. ). It
was even said that ‘Bishop Burnet … advised William III to run the nation into
debt, in order to secure the support of the wealthiest individuals in the kingdom’
(Sinclair , I, p. ). Contemporaries criticised the political influence of the financial elite; as early as , the complaint was being heard that ‘the Bank [of England]
and the East India Company had interlocking directorates, whose joint powers gave
the companies a sinister control of the City and the Parliamentary elections’ (quoted
by Dickson , p. ). Apart from the potential political implications, public debt in
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general implied a transfer from the poorer taxpayers to financiers with government
bonds, since most debt charges were paid out of receipts from land taxes, which
were paid disproportionally by the peasantry, or from excises, which were paid
largely by the urban lower and middle classes. In Venice, the allocation of interest
upon government bonds even exceeded the sums paid by state investors in taxation
(Lane , pp. , ).
Public credit thus secured the accumulation and concentration of capital; and once
established, it seemed to expand easily, even in times of war. The merchant banker
and philosopher Isaac de Pinto said of the British public debt: ‘The enormous sum,
of which the national debt is composed, never existed at once … The public funds
have literally a magnetic virtue with respect to money’ (, p. ). This ‘magnetic
virtue’, the proliferation of all sorts of government bonds, served the rise of the state
and private capital accumulation simultaneously.
IV
All of the contributions in this issue examine how the governments of the long eighteenth century tried to maintain a balanced budget during wartime, whilst avoiding
political risks. Although it was shown in the previous section how financial markets
could back up state finances, wartime emergency measures often threatened the viability of the financial sector directly, not least through currency manipulation. Joël
Félix describes the French monetary policies that were intended to avoid tax increases,
because of the imminent threat of tax revolts during the wartime decades around
. The first monetary reform of proved to be successful; all coins issued
since received a stamp, after which they increased in value, the difference
being pocketed by the state to pay the troops. Subsequent reforms, however, were
introduced at short intervals and disturbed the financial market. The issue of paper
money was a novel expedient in ; a state bank, the Caisse des emprunts, issued
receipts for coins that needed to be stamped anew. The value of the paper money
in circulation spiralled, however, whilst the French economy suffered from a scarcity
of coins, resulting in interest rates on cash as high as per cent. In the end, the solution was to convert bank bills into loan bonds managed by semi-state officials who
enjoyed the trust of the market. Despite such complications, French soldiers received
their pay in relatively timely fashion and the political power of the French state was
not diminished.
Paying soldiers was not only a matter of paying on time, but also of transferring
massive sums over vast distances. In the long term, war costs could be covered by
state loans issued on the public market, but emergency payments during wartime
demanded rapid solutions. Travelling with chests full of cash (soldiers were always
paid in cash) was not an option. Pepijn Brandon reveals how Dutch and English
financial networks solved the problem of how to get pay to distant troops by using
increasingly interlocked networks of transnational intermediaries. On the English
side, these networks extended outwards from a relatively centralised system under
INTRODUCTION
the Paymaster-General, whereas the Dutch used a more decentralised and privatised
system of semi-private financiers under government contract. All financiers relied
heavily upon personal networks within the financial market, as exemplified by the
dealings of the English Paymaster-General James Brydges and the Dutch intermediaries Paulus Gebhardt, Hendrik van Heteren and the Amsterdam-based merchant
banker Andries Pels. Although these four men made substantial private profits from
their activities, they also boosted the capacity of the state to pay the troops on time
over great distances, stimulating cross-Channel financial interdependency at the
same time.
On the other side of Eurasia, governments also engaged in wartime reforms and
innovations in order to keep budgets balanced. Elisabeth Kaske has studied how
the Chinese Empire aimed to achieve ‘cheap government’, specifying relatively
low quotas for land tax levies in order to avoid political unrest. The threat of war
nevertheless resulted in soaring deficits in the early nineteenth century. Without
the possibility of increasing taxes (because of the wish to remain austere) or raising
funds on a public financial market (because such instruments did not exist), the government resorted to selling offices and academic degrees; merchant elites were granted
trading monopolies in return for ‘gratitude contributions’. These policies resulted in a
weakening of the military establishment, as army commanders received less funding in
practice. The monopolies and sold offices limited the available options, and China
failed to respond forcefully to the British invasion during the Opium War. The combination of low taxes and austere government turned out to be a disaster, one that
remained limited only because the British military was unable to conquer China as
a whole.
During wars, governments also aimed to weaken the economic position of their
opponents whilst simultaneously strengthening their own, a practice especially
common in the European mercantilist states that dominated much of the eighteenth
century. The question remains, however, as to how wars affected the economy.
This long-standing debate, one that is closely related to the debate about the rise of
the West, is picked up by Patrick O’Brien. How were Europeans able to engage in
such long and costly wars, and nevertheless gain so much in terms of international economic power? Most economists have tried to answer this question with the help of
models based on twentieth-century data, but such analyses cannot be made for the
period prior to the s, since serial data on GDP, factors of production, real prices
or even population figures are fragmented or non-existent. Wars also tended to last
much longer than those of the twentieth century, meaning that the economic
impact was always an accumulated one. Nevertheless, O’Brien observes wartime innovations in financial intermediation, in the agglomeration of economic activity in maritime cities, in the efficiency of taxation and in the mobilisation of revenues. Public
credit played a facilitating role, especially in Britain, which did not suffer from
wartime crowding-out effects, as interest rates remained modest. All of these measures
later proved useful for non-war purposes and thus strengthened the political economy
and the state. In fact, mercantilist warfare seems to have paid off in the long term.
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This brings us to an overview of the conditions that enabled states to conduct
expensive wars at a relatively low political cost during the long eighteenth century.
A picture of favourable circumstances emerges from the study of the literature
above and the contributions to this issue: the existence of a tax state with regular
ordinary taxation; monetisation; urbanisation; foreign trade; the centralisation and
professionalisation of government; limited government with representative institutions; public credit with secondary financial markets; and economic growth in
general. Population growth may have contributed, too, but only in combination
with economic growth (Ardant , pp. –; Goldstone , p. ). States
were able to do without some of these factors, since each factor in itself was never sufficient, and each had its obvious limits. Taxes had a ‘political ceiling’ and could be of
little use when governments feared the political consequences of tax increases, as the
examples of both China (Kaske, this issue) and France (Félix, this issue) show.
Monetisation furthered the payment of all taxes, yet frequent monetary manipulation
threatened the economy as a whole, as shown by Félix in this issue.
Despite such adverse policy choices, the factors listed above undoubtedly widened
the available options for increasing taxes and issuing public loans. Urbanisation
implied an environment that facilitated the levying of customs and excises, whilst
the availability of urban-based capital and financial networks eased the mobilisation
and transfer of funds needed to pay troops. The secondary market played a decisive
role in the success of public credit both in the Netherlands and in Britain. O’Brien
has demonstrated the crucial role played by more efficient and centralised government, not least in advancing economic growth through foreign trade. Pre-war
economic growth also promoted rapid post-war recovery (O’Brien ). In the
end, the consolidation of the nation state in the nineteenth century was tied to the
financial consequences of warfare, with wars constituting the main rationale for
raising state income in previous centuries in Europe, Asia and the former colonies
in the New World alike.
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