is chosen in combination with the issuing of debt.8
Our paper thus gives formal support to a number of studies arguing
that high interest rates led to the change in the English revenue system.
Brewer [1988] and Bordo and White [1991] argue that owing to higher
interest rates faced by French monarchs, they could not afford to borrow
and thus had a more inefficient revenue system than in England.
The divergence in the default risk of the French and English govern-
ments around the time of the Glorious Revolution makes sense of this
story and suggests that default risk may have played an important role
in shaping government’s method of tax collection. Before the Revolu-
tion, the credit worthiness of both the English and the French monarchs
was typically low and defaults on loans were common [see e.g. Ekelund
and Tollison 1981, Brewer 1988, North and Weingast 1989, Bordo and
White 1991 and Velde and Weir 1992]. After the Revolution, however,
the English Parliament, in contrast to the French monarchs, never de-
faulted on their loans again [Brewer 1988] and it is a well-known fact
that the credibility of the English Parliament was far higher than that
of the French monarchs [see e.g. Bordo and White 1991 and Velde and
Weir 1992].
Several papers also support the notion that monitoring costs affected
the government’s choice between tax farming and direct tax collection.
Ekelund and Tollison [1981], Brewer [1988], O’Brien and Hunt [1999]
and Kiser and Kane [2001] argue that high monitoring costs reduced the
possibilities of using direct collection of taxes so that the rulers’ only
option was to grant monopolies.9
8 Matthews [1958, p. 9] sums up our theory neatly: “Tax-farming offered two
advantages: it relieved the king from the necessity of developing (in a direct sense)
his own system of tax collection, and it satisfied an urgent need of cash.”
9 Our theory may also help explain the development in the German states. How-
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