diciary and the king in England, which raised the predictability of the
government. Bordo and White [1991] similarly argue that English insti-
tutions such as checks and balances and the Bank of England, enhanced
credibility compared to France.
Lenders want a high risk premium when the credibility of the bor-
rower is low. In line with what we would expect, historical data confirms
that the interest rate was typically high both in France and England be-
fore the Glorious Revolution, and low afterwards in England but still
high in France. In the first half of the seventeenth century, the English
monarchs typically paid 10-14 percent on their loans, and in the second
half the interest was 6-12 percent. Even though the French monarchs
seem to have borrowed at low interest rates, 3.5-5 percent, in the first
half of the seventeenth century, the interest rate in the second half was
5-7 percent and sometimes as high as above 14 percent [Homer 1963,
Epstein 2000].19 After the Glorious Revolution, the interest rate fell
steeply in England and fluctuated between 3 and 5 per cent during the
eighteenth century [North and Weingast 1989, Weir 1989, Bordo and
White 1991, Velde and Weir 1992, White 1995 and Clark 2000].20 This
is in sharp contrast to the conditions in France, where the interest rate
was always higher, rarely below 5 per cent, and sometimes much higher,
up to 13 per cent [Homer 1963, Velde and Weir 1992, Epstein 2000 and
Ferguson 2001].
This discrepancy seems to have been due to differences in the default
risk. Velde and Weir [1992] show that the market interest rate was
similar in England and France, in the 4-5 percent range, and argue that
19It is difficult to collect information about market interest rates in this early period
and the default risk premium is therefore also difficult to measure.
20This rate was often below the market interest rate, indicating that the English
government was highly credible [Clark 2000].
12