Sovereign Borrowing in Europe before 1688
This chapter briefly surveys the development of institutions for sovereign borrowing in early modern Europe, from the first long-term loans contracted in medieval Italian city-states through the innovations introduced in the Netherlands in the sixteenth and seventeenth centuries. I pay particular attention to the precedent set by the Netherlands, because the methods of borrowing used by the Estates of Holland were to become a model for subsequent reforms in England after 1688. In fact, during the reign of King William III in England, newly adopted techniques of long-term borrowing were initially referred to as “Dutch finance.” This historical survey reveals a clear trend: There was a connection in many states between the development of sovereign borrowing and the development of representative political institutions. This helps support the claims made by North and Weingast (1989) about representative government and credibility.1 However, the experience of states such as Holland shows that credibility derived not only from having representative institutions, but equally importantly from the fact that government creditors were well represented within assemblies. Those assemblies in which creditors were well represented tended to be city-states where mercantile groups played a major role (as in Venice, Florence, or Genoa) or states where representation was biased in favor of urban groups (as was the case in the Estates of Holland). This raises the question for later chapters of how devolving power to a representative assembly could improve the credibility of borrowing in a much larger state, such as Great Britain or France, where debt
1 It also parallels the link observed by Hoffman and Norberg (1994), who in a comparative study suggest that representative institutions in early modern Europe were associated with higher levels of taxation.