Optimal Rent Extraction in Pre-Industrial England and France – Default Risk and Monitoring Costs



Before the Revolution, both the English and the French monarchs often
defaulted on their loans [see e.g. Ekelund and Tollison 1981, Brewer
1988, North and Weingast 1989, Bordo and White 1991 and Velde and
Weir 1992]. Velde and Weir [1992, p. 5], for example, find that: “Prior
to 1688, both monarchies / England and France / resorted to default
in times of fiscal crisis”. Brewer [1988, p. 20] states that before 1688
in France: “In a crisis, the fiscal prudence of rulers was thrown to the
winds, the long-term liability of venality overlooked in the headlong rush
for immediate funds”.

After the Revolution, this tradition was stopped in England but not
in France and the credibility of the English Parliament was far higher
than that of the French monarchs. According to Stasavage [2002, p.
164], for example, “English governments after 1688 did, on average, im-
prove their credibility with regard to debt repayment when compared
with their predecessors”. When discussing France, Stasavage [2002, p.
177] instead finds: “...there is ample evidence to show that the French
government lacked credibility as a borrower throughout the eighteenth
century”. Ferguson [2001, p. 172], for example, writes that in contrast
to England “French yields in the eighteenth and nineteenth centuries
reveal starkly the impact of fiscal unreliability on investor confidence”.
To quote Matthews [1958, p. 9] “On its own credit backed by the profits
derived from an exploitation of the General Farms, the Company bor-
rowed from those who, for good reasons, were reluctant to lend directly
to the /French/ king.”

Two reasons why the English Parliament was more credible than the
French monarchs are given by North and Weingast [1989] and Bordo and
White [1991]. North and Weingast [1989] argue that after the Glorious
Revolution, checks and balances emerged among the parliament, the ju-

11



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