Paying For Privilege: The Political Economy Of Bank Of England
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Paying for privilege: the political economy
of Bank of England charters, 1694â1844
J. Lawrence Broz
and Richard S. Grossman
Department of Political Science, University of California, San Diego, 9500 Gilman Drive, #0521,
La Jolla, CA 92093-0521, USA
Department of Economics, Wesleyan University, Middletown, CT 06459-0007, USA
Center for Basic Research in the Social Sciences, Harvard University, Cambridge, MA 02138, USA
Received 7 August 2002
The Bank of England was established by Parliament in 1694 as an explicitly temporary in-
stitution, which could be dissolved upon one yearÃs notice after the 11-year life guaranteed by
its initial charter had passed. Renewed nine times between 1694 and 1844, we argue that the
element of renegotiation inherent in the BankÃs existence reï¬ected uncertainty, by both Parlia-
ment and the Bank, and we test this hypothesis by analyzing the timing of the renewals of the
BankÃs charter. We ï¬nd renegotiation of the charter was initiated by Parliament when the
CrownÃs budgetary circumstances, shaped by unforeseen military expenditures, required addi-
tional funds and when the monopoly value of the BankÃs charter rose.
Ã 2003 Elsevier Inc. All rights reserved.
JEL classiï¬cation: N23; N43; L14; G28; H63
The establishment of the Bank of England can be treated, like many historical events both
great and small, either as curiously accidental or as all but inevitable. Clapham (1944, p. 1)
We thank Nathaniel Beck, Jeï¬ry Frieden, Jennifer Gandhi, Kristian Gleditsch, Lisa Martin, David
Selover, Eugene White, an anonymous referee, and seminar participants at Columbia, the University of
Massachusetts, Rutgers and New York University for helpful comments and Stephanie Rickard for
research assistance. Grossman thanks the National Science Foundation for ï¬nancial support.
0014-4983/$ - see front matter Ã 2003 Elsevier Inc. All rights reserved.
Explorations in Economic History 41 (2004) 48â72
The Bank of England is amongst the most studied of BritainÃs economic institu-
tions, with a long and distinguished history. It is the worldÃs second oldest central
was BritainÃs only incorporated bank for more than a century,
the heyday of the international gold standard in the late 19th and early 20th centu-
ries, was the worldÃs dominant ï¬nancial institution, private or public. Despite this
impressive lineage, an observer who had been present at its creation in 1694 could
be forgiven for viewing the Bank of England as just another privileged entity that
loaned the government money in return for favors.
The founding of the Bank has been the subject of extensive study and debate.
Classic scholarly works on the Bank and its early years include those by Andr
(1924), Clapham (1944), Rogers (1887), and Richards (1965). More recently, North
and Weingast (1989) have taken a more analytical approach to the causes and con-
sequences of the founding of the Bank of England, arguing that it was one of several
innovations in modern public ï¬nance that followed the Glorious Revolution of 1688.
The ï¬rst innovation came in 1693, when government ï¬nances were placed under the
control of Parliament. North and Weingast (1989) contend that divesting public ï¬-
nance from the CrownÃs control removed a major source of time-inconsistent policy
making, followed by improvements in tax collection and ï¬scal administration, which
paved the way for serviceable long-term debt. The ï¬nal innovation was the creation
of the Bank of Englan d by Parliament in 1694. Broz (1998), Jones (1994), Root
(1994), and North and Weingast all argue that the creation of the Bank of England
enhanced the credibility of ParliamentÃs promises to repay its debts. By institution-
alizing those providing long-term ï¬nance in the Bank of England, Parliament eï¬ec-
tively tied the hands of later Parliaments (Weingast, 1992).
A shortcoming of this account is the implicit assumption that the delegation to the
private and privileged Bank of England was permanent. In fact, Parliament could
have passed legislation at virtually any time revising the BankÃs charte r; in the
extreme, Parliament could have eliminated the Bank altogether. While Root (1994,
pp. 187â188) argues that the establishment of an independent judiciary prevented
the government from violating the BankÃs charter to usurp creditor rights, he
ignores the possibility that a government might have passed a new law alte ring or can-
celing the original charter. Any such statutory actio n would have been legal since
there were no constitutional limits on what a statute could achieve (Jones, 1994,
p. 83). Parliament was fully sovereign with respect to the Bank of England.
The Swedish Riksbank predates the Bank of England by more than three decades, although the
modern concept of central banking did not emerge until the 19th century (Broz, 1998; Goodhart et al.,
We refer to the Bank alternatively as a ââcorporationââ and ââjoint-stock company.ââ Legally, any
institution with a corporate existence was technically a corporation while any ï¬rm that raised capital from
subscribers was a joint-stock company (Edwards, 1986).
Sargent and Velde (1995) argue that the absence of a similar commitment mechanism prevented the
French government in the 18th century from establishing its credibility. See also Bordo and White (1991).
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 49
The Bank of England, of course, was not voted out of existence or seriously al-
tered by Parliament until the Bank Charter Act of 1844 (PeelÃs Act) changed its
structure to accommodate its emergent role as monetary manager under the gold
standard. Indeed, the Bank persisted despite its legal vulnerability and played a ma-
jor role in establishing the credibility of public ï¬nance to 1844. But the micro-foun-
dations behind the persistence of the Bank have not been previously explored.
In this essay, we make two contributions to the extant literature. First, we delin-
eate the incentives of both the government and the Bank to build ï¬exibility into the
original 1694 Bank of England charter. Our simple argument draws on the ââcon-
tracting under uncertaintyââ perspective to explain why the Bank was not created
as a permanent institution de novo. Second, we exploit information on the timing
of rechartering legislation to 1844 in order to statistically evaluate the motivations
that lay behind decisions to maintain the BankÃs existence. In both ways, we hope
to build on existing work that sees the Bank of England as a linchpin of credible pub-
lic ï¬nance in early-modern Englan d.
Most of the modern studies of the Bank cited above have focused on the condi-
tions of late 17th century public ï¬nance and credit markets that led to the BankÃs
founding: that is, the governmentÃs need for funds to pursue war with France and
the incentives faced by the group of private entrepreneurs who hoped to establish
a proï¬table institution with government-granted privileges. However, the BankÃs
founding in 1694 did not permanently establish the Bank in law. As shown in Table
1, the BankÃs original charter guaranteed a minimum lifespan of only 11 years. At the
end of that time, the government, with one yearÃs notice, could exercise an ââoptionââ
to repay its loan and dissolve the charter. In fact, the BankÃs charter was not dis-
solved but was renewed nine times by Parliament between 1694 and 1844âthe date
of the last ââContinuanceââ Act. Each renewal extended the BankÃs lifespan to a new
option date, but these renewals occurred at irregular intervals, as the government
and the Bank often renegotiated the terms of their ongoing contract prior to the op-
tion date. Although the Bank could continue to exist indeï¬nitely after the option
date without a new charter, as it did after 1844, during the century and a half follow-
ing the BankÃs founding, charter renewals were a recurrent feature of the BankÃs life.
Although the initial charter has received a great deal of attention, the BankÃs sub-
sequent charters have, for the most part, not been subject to detailed analysis. Our
goal in this paper is to examin e the process of rechartering after the initial 1694 char-
ter up until 1844 in order to discern the motivation behind and timing of the renew-
als. More generally, we exploit data on Bank of England recharters to quantitatively
evaluate arguments about the purposes and persistence of this important institution.
Our analysis ends with PeelÃs Act of 1844, since that charter so fundamentally chan-
ged the Bank that we take it as qualitatively diï¬erent from earlier charters (Bagehot,
1873; Fetter, 1965).
Ideally, we would like to examine all aspect s of each of the BankÃs charter renew-
als. These include the size of the outstan ding loan, the terms of the loan (e.g., interest
rate, management fee), and other aspects of the charter (e.g., granting the Bank a
monopoly on incorporated banking). In theory, each element of each charter could
be valued, allowing us to precisely calculate the costs and beneï¬ts to both parties of
50 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
Bank of England Charters, 1694â1844
Time left at renewal Financial aspects Regulatory aspects
1694 5 & 6
1705 11 â â B of E lends Â£1.2 million to
government at 8%
Incorporation via Royal Charter
gives B of E banking privileges,
including the issue of notes, and
1697 8 & 9
1710 13 8 0.73 B of EÃs capital increases by
Â£1,001,171 in new subscriptions
(4/5 in talliesâthen at a 40%
discountâand 1/5 in B of E bills
or B of E notes, all paying 8%)
Bans absolutely the establishment
of any other banks. B of E stock
made personal, not real, property,
and proï¬t thereon exempted from
1708 7 Anne,
1732 23 1 0.08 Interest free loan of Â£400,000 by
B of E to government. B of E
doubles capital stock with new
subscription of Â£2,531,347
Bans joint stock companies
(of any description)
of more than six persons from
doing business as banks
1713 12 Anne,
1742 29 19 0.83 B of E circulates Â£1.2 million in
Exchequer Bills at 2d per diem
per Â£100; receives allowance of
3% and fee of Â£8000 per annum
Repeats foregoing prohibitions
1742 15 Geo. 2,
1764 22 0 0 B of E lends Â£1.6 million to the
government without interest;
reducing interest on total debt
of Â£3.2 million to 3%
Reasserts B of EÃs privilege
of exclusive banking
1764 4 Geo. 3,
1786 22 0 0 B of E lends Â£1 million on
Exchequer Bills for two years
at 3% (repaid in 1766). Pays
a fee of Â£110,000 for privileges.
Repeats foregoing prohibitions
1781 21 Geo. 3,
1812 31 5 0.23 B of E lends Â£2 million to
government at 3% for 3 years
Reasserts B of EÃs banking
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 51
Table 1 (continued)
Time left at renewal Financial aspects Regulatory aspects
1800 40 Geo. 3,
1833 33 12 0.39 B of E lends Â£3 million to
government without interest
for 6 years
Repeats prohibitions of 1697 and
1708 to clarify intent ââthat no
other bank shall be erected,
established, or allowed by
Parliamentââ (s. 15)
1833 3 & 4
1855 22 0 0 Government pays oï¬ 1/4
of its debt to the B of E
Permits joint stock banks of
deposit in London or within 65
1844 7 & 8
Vict., c. 32
1855 11 11 0.5 Last continuance Act Separates Banking and Issue
Departments and conï¬rms B of
EÃs monopoly of note issue
Average 21.7 6.22 0.31
SD 7.99 6.78 0.32
Median 22 5 0.23
Baseline Hazard Rate
25% 50% 75%
9 151 0.06 11.0 17.0 22.0
Notes. ââOption Dateââ refers to the date at which Parliament could dissolve the BankÃs charter, with one yearÃs prior notice. Recharters could and did occur
before this date. Sources: Statutes of the Realm (various years), Statutes at Large (various years), and British Parliamentary Papers (1875).
52 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
the recharter. However, because of the complicated and multifaceted nature of the
contracts, we cannot, at this stage of our research, assess all aspects of the charters.
Consequently, we focus on one simple element of each charter: timing. Although
each of the charters we consider was granted for a speciï¬c period, renewals could
âand wereâenacted before the previous charterÃs option date, sometimes many
years before. The irregular intervals between recharters provide the leverage neces-
sary to empirically investigate the motivations that led to periodic recharter.
We argue that the rechartering process reï¬ected the needs of both the government
and the Bank of England to respond to unforeseen contingencies. The initial charter
was an incomplete contrac t between the government and the BankÃs proprietors. The
government obtained immediate ï¬nancial support from the Bank, but also beneï¬ted
from the rechartering feature of the contract as a means to adjust to unanticipated
changes in its ï¬scal environment. The BankÃs managers, acting as agents of stockhold-
ers, saw the government as a source of economic rents, and gained from renegotiating
its charter when it faced new competition in banking. A permanent contract could not
be written to cover all future contingencies. The renegotiation clause thus gave the
parties the ï¬exibility to adjust the contrac t to changed conditions.
Brieï¬y, we ï¬nd that, like the original charter of 1694, the governmentÃs motive for
rechartering was primarily ï¬scal. Recharters that took place more than a decade be-
fore the option date of the previous charter seem to have been motivated by substa ntial
government deï¬cits and a need for increa sed ï¬nancing. However, charters that were
renewed closer to their option dates were also preceded by heightened deï¬cits. Statis-
tical tests indicate that the probability of enacting a new charter increased as ï¬scal def-
icits, most likely unanticipated and war-related, increased. We also ï¬nd that a new
charter was more likely when the Bank appeared to be earning excessive rents from
its monopoly privileges, as signaled by prior upward movement in Bank of England
share prices. This ï¬nding accords with our view that the government was also uncer-
tain about the franchise value of the monopoly it granted the Bank, and that it used the
rechartering process to adjust to unanticipated increases in Bank pro ï¬tability.
As for the motivations of the Bank, we ï¬nd that the BankÃs share prices typically
rose in the aftermath of recharters, suggesting that recharters beneï¬ted the BankÃs
shareholders as well as the government. Althou gh the government may have used
Bank of England share prices as an indicator of the value of the BankÃs monopoly
franchise, the market apparently viewed a successful recharter as signal that the vol-
untary âârents-for-loansââ bargain between the Bank and the government would be
maintained. Our results not only indicate that recharters had a positive and signiï¬-
cant eï¬ect on the price of Bank stock, but also that the governmentÃs ï¬scal balance
was an impor tant determ inant of Bank share prices.
2. The Bank of England and public credit
From its origins, the Bank of England played a major role in English public ï¬-
nance (Chandaman, 1975; Dickson and Sperling, 1970; Roseveare, 1973). The impe-
tus for the BankÃs founding was a large wartime loan to the government, but its roots
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 53
go back to the Glorious Revolution of 1689 (Rogers, 1887). Prior to this political
event, the king had supremacy over ï¬scal policy; following it, the Crown lost most
of its ï¬scal independence (North and Weingast, 1989; Root, 1994, pp. 190â191).
Constraining the kingÃs power allowed Parliament to undertake a series of ï¬nan-
cial innovations during the period 1693â1720 that have come to be known as the Fi-
nancial Revolution (Dickson, 1967). This revolution was marked by the replacement
of short-term debt with long-term loans secured by speciï¬c sources of revenue. In the
language of the day, it was a switch from ââunfundedââ short-term to ââfundedââ long-
term debt (British Parliamentary Papers, 1898).
Funded long-term loans had three advantages over short-term debt. First, sub-
scribers to the loans were paid back annually over long periods, which helped the
government to ï¬nance the immediate needs of war on a relatively small and inelastic
revenue base (Brewer, 1989, pp. 119â122; Carruthers, 1996, p. 73). Second, the
funded debt allowed the government to borrow large sums to ï¬nance wars via a pol-
icy of tax smoothing (Barro, 1987; Brewer, 1989; Sargent and Velde, 1995). Third,
the loans were ââfunded,ââ meaning that Parliament set aside speciï¬c revenues to meet
interest payments, a feature that further enhanced conï¬dence in lending to the gov-
ernment. Fig. 1 shows the evolution of the funded and unfunded debt as a propor-
tion of total government borrowing between 1693 and 1844.
Borrowing from corporate entities was an important part of the funded debt. The
ï¬rst such loan came with the creation of the Bank of England in 1694 and this loan
formed a model for subsequent bargains establishing the New East India Company
in 1698 and the South Sea Company in 1711 (Neal, 1990; Scott, 1911). The principle
behind such loans was the ââincorporation of the public debtââ (Philippovich, 1911,
Fig. 1. Funded and unfunded debt as a share of total debt, 1693â1844. Source: (Mitchell, 1988).
54 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
pp. 80â84), which is to say the government incorporated creditors into joint-stock
companies and granted these companies economic privi leges in exchange for perma-
nent loans. The initial 1694 charter of the Bank of England, for example, provided
for a loan of Â£1,200,000 to the government at 8%. The capital stock of the Bank thus
constituted a loan to the state, which was secured by new customs and excise
Borrowing from corporations created permanent debts, meanin g that subscrib ers
would receive interest in perpetuity, but no repayment of principal. Although the re-
payment of principal was possible, it was not required by the initial contract. This
was an advantage over the other forms of long-term borrowing for two reasons.
First, the government could borrow larger sums on the same revenue ba se. Second,
since the government retained the right to repay the capital of the loan after a certain
date, it could always dissolve the contract with the corporate creditor if the creditor
would not agree to a change in the terms.
The right of the government to terminate
a corporation at notice could also be a useful tool to cajole new loans or other ser-
vices from the corporations.
Another advantage of corporation loans was that they created but one creditor,
thus reducing the governmentÃs transactions costs. Subscribers to these loans were
ordinary stockholders in every sense of the word: they were entitled to regular div-
idend payments out of the proï¬ts of the company (i.e., payments from the govern-
ment plus any additional proï¬ts earned in the course of business) and were free to
transfer their shares, which were more liquid than other types of government obliga -
tions (Philippovich, 1911, p. 83). Company shares could be sold, which allowed cred-
itors to regain their capital without the government having to repay the loan
(Carruthers, 1996, p. 82).
Finally, each company received monopoly privileges in its area of economic activ-
ity. The two foreign trading companies received exclusive rights in their original
charters to trade in their respective areas of the world. The Bank of England received
no exclusive privileges in its initial 1694 charter beyond making the notes of the Bank
assignable by law. It was granted rights to conduct a general banking business, some-
thing no other corporation had been aï¬orded (although there was no guarantee that
this would be exclusive). Extensive monopoly privileges did not come until the
BankÃs recharters of 1697 and 1708.
By the end of the war with Spain in 1721, the funded debt had grown to over Â£62
million, the bulk of which (Â£32.8 million) was owed to the three major joint-stock
companies. After mid-century, the share of long-term borrowing from the companies
fell steadily as lotteries and various combinations of annuity loans became more fa-
vored (Fig. 2). Yet the companies, especially the Bank of England, grew to play a
predominant role in administering the public debt (Philippovich, 1911, pp. 143â
182). And, unlike the Eas t India Company and the South Sea Company, the Bank
The 1694 charter of the Bank of England allowed the government to repay the debt to the Bank and
dissolve the corporation after giving 12 months notice any time after August 1, 1705.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 55
of England was able survive, in close association with the government, as it success-
fully negotiated continuances of its charter.
3. Bank of England charters
The Bank of EnglandÃs initial charter was granted in 1694. Although a number of
innovations were introduced and speciï¬c terms changed in subsequent charters,
many important features of the charter remained remarkably constant for the next
century and a half. The original charter granted a group of individuals a corporate
existence styled as the ââGovernor and Company of the Bank of England.ââ The Bank
was to provide the government a loan of Â£1,200,000 in return for an annual interest
payment of Â£100,000 per year
to be secured by tonnage duties. The original charter
did not grant the Bank a privileged position as the governmentÃs banker, as it woul d
later become, nor did it grant the Bank a monopoly on joint stock banking (also to
follow), nor did it make the BankÃ s notes legal tender. The main import of the char-
ter was to raise funds for the governmentÃs war against France, in return for which
the government promised a predetermined annual payment secured by a discernable
source of revenue.
Important aspects of the loan contract were asymmetric and, from a modern
perspective, favorable to the government. For example, the loan contract was
non-callable. That is, the Bank could not demand early repayment. Conversely,
Fig. 2. Government debt to the chartered companies as a share of the funded debt, 1694â1786. Source:
British Parliamentary Papers (1898).
Equal to 8.33%. According to Clapham (1944), the interest payment was construed as 8% interest
plus an annual Â£4000 management fee.
56 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
the governm ent was given the option to prepay the loan and terminate the BankÃs
charter, with one yearÃs notice, at any time starting 11 years from the date of the
charter. Subsequent charters held to this same general pattern, specifying the amount
that the loan would be increased, if at all, the loan terms, and the guaranteed min-
imum length of time that the loan/charter woul d be in eï¬ect. The basic features of the
charters of 1694 to 1844 are summarized in Table 1.
On the asset side, the Bank could deal in bills of exchan ge, make loans on prom-
issory notes, an d lend on mortgages. Its borrowing privileges were not speciï¬ed,
however, it could take deposits on any terms as long as its liabilities did not exceed
the amount of the government debt (which formed the BankÃs capital stock). The
Bank could issue notes up to the amount of its capital. Notes, bills of exchange,
and other debts of the Bank received the same treatment: they were the liabilities
of the Bank, and their security rested on the government debt. It was not long, how-
ever, before competitive threats led the Bank of England to seek and receive exclusive
rights in the banking and in managing government debt (see Table 1).
In 1695, Parliament chartered a rival Land Bank that never began operation be-
cause its promoters failed to raise the capital needed for a loan to the governm ent
(Horseï¬eld, 1960, Chapters 14â16). The Land Bank challenge prompted the Bank
of England to negotiate an exclusive privilege in the recharter of 1697. In return
for additional loans to the government, the 1697 Continuance Act stated that ââno
other Bank or Constitution in the nature of a bank be erected or established, permit-
ted or allowed by Act of Parliament during the Continuance of the Bank of En-
gland.ââ The Bank ââwanted no more Land Banksââ (Clapham, 1944, p. 47).
In 1708, during the War of Spanish Succession and again in exchange for a fresh
loan, the Bank obtained from Parliament its most signiï¬cant protection from com-
petition: the legal prohibition of associations of more than six individuals from car-
rying on a banking business in England. This was crucial in restricting competition,
because issuing bank notes was the major source of bank funding in this era (White,
1989, p. 73). The Act of 1708 thus gave the Bank a monopoly over joint-stock note
issue. Despite the absence of a ban on joint-stock deposit banking, ââthe intention
was to give the Bank of England a monopoly of joint-stock banking, and had any
other institution of more than six partners attempted to carry on a banking bus iness
in England... it would have been suppressedââ (Feavearyear, 1963, pp. 167â168).
The Bank regarded its monopoly on paper currency (issued by banks with over six
partners) as critical to its proï¬tability and was willin g to make ï¬nancial concessions
to the government in order to protect and extend it. The government, in turn, was
willing to grant the Bank a monopoly, because it needed the BankÃs assistance to
help it ï¬nance frequent foreign wars. Just prior to the expiration of its charter in
1742, the Bank provided an interest-free loan to the government in return for receiv-
ing a conï¬rmation of its monopoly powers (the privilege of issuing circulating notes
was reinforced) and an extension its charter to 1764. In that year, the Bank gave the
government a gift of Â£110,000, plus a loan at 3%. In 1781, another extension was
granted in return for yet another cheap loan, giving the Bank a charter until 1812.
Our decision to focus on the timing of charter renewals does not signal a belief
that other aspects of the charters were not important. On the contrary, we believe
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 57
that other aspects of the recharters were crucial aspects of the contract between the
Bank and the government. For example, the charter of 1697 gave the Bank a monop-
oly on joint stock banking in England and Wales that would last for more than a
century. Similarly, the charter of 1708 exempted the Bank from a law that limited
note issue to partnerships of no more than six people. These elements clearly had im-
portant, although for purposes of the current analysis, hard-to-quantify, eï¬ects.
4. The argument
We conceive of Bank of England charters as mutually beneï¬cial exchanges be-
tween the government and the BankÃs private owners (shareholders) designed to en-
sure that the parties remained mutual hostages to an initial incomplete contract. The
ï¬rst three charters of the Bank of England (1694, 1697, and 1708) established the ini-
tial contrac t: the government would use its authority to restrict competition in the
banking and government debt markets to the advantage of the Bank in exchange
for permanent loans and other ï¬nancial support from the Bank. Subsequent charters
were designed to ensure that both parties lived up to this agreement in the face of
changing circumstances. A single permanent contract could not be written to cover
all future contingencies, nor could it prevent either party from acting opportunisti-
cally ex post. Every Bank of England charter thus contained a renegotiation clause
that gave the parties the ï¬exibility to adjust the initial bargain to changed conditions
and allowed for sanctioning in the event of opportunism. In short, the Bank of En-
gland was not made a permanent institution due to problems of incomplete contrac t-
The rechartering process mitigated these problems.
Our argument relies on a combination of political economy and the economics of
information and uncertainty. On one hand, we have a political actorâParlia-
mentâthat seeks to provide ï¬scal public goods (ï¬nancing wars via a policy of tax
smoothing) and which also holds the power to create monopoly rents for favored
groups. On the other hand, we have a rent-seeking group that lobbies the govern-
ment for special favors. These features sets our analysis apart from much of the con-
tracting literature in which the two parties are modeled as ï¬rms trying to mitigate the
problems of armÃs-length exchange. That the two parties here are not the archetypal
agents of the existing literature does not change the basic nature of contracting in the
face of uncertainty and asymmetric information. The Bank of EnglandÃs charters
were contracts, albeit incomplete contracts, that stipulated the initial terms of the re-
lationship between the Bank and the government and allowed for future renegotia-
tion of these terms.
Hence, we can analyze the characteristics of these charters in
terms that are familiar to economists and, increasingly, to political scientists.
See Hart (1995) and Tirole (1999) for the current state of this literature.
For analogous literatures on labor and loan contracts, see Dye (1985) and Harris and Holmstrom
(1987). See also Koremenos (1999) on international agreements.
58 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
In our view, the Bank of England was designed to exist as series of agreements
(charters), renegotiated at irregular intervals, in order to acco mmodate two kinds
of uncertainty that accumulated during each agreement period: (1) unforeseen
changes in the governmentÃs ï¬scal position, and (2) uncertainty regarding the future
distribution of gains between the parties. As for the ï¬scal position, the government Ãs
future ï¬nancial requirements were a complex combination of the likelihood of war,
its creditworthiness, its access to other types of loans (e.g., annuities, lotteries, and
various short-term loans), and its capacity to adjust revenues an d expenditures to
meet unforeseen contingencies. In the face of such persistent ï¬nancial uncertainty,
the right of the government to terminate the contract with the Bank provided ï¬exi-
bility. By design, the charters gave the government the authority to repay its perma-
nent debt to the Bank and to dissolve the corporation upon a yearÃs notice. This
feature provided the government with an instrument of leverage over the Bank. Since
the Bank valued its exclus ive banking privileges and its role in managing the public
debt, the threat of dissolution could be used to extract further ï¬nancial assistance
from the Bank.
The government could use the threat to renegotiate the terms of
the existing debt due the Bank to obtain new loans from the Bank or to require
the Bank to aid in the consolidation of other existing loans (short- and long-term)
by engrafting these loans to the debt due to the Bank.
In addition, the renegotiation provision allow ed the government to adjust the dis-
tribution of the gains in an environment where the players learned about the actual
distribution over time by observing outcomes under the agreement. The parties
selected an initial dist ribution of gains, based on their relative bargaining power
at the time of the BankÃs founding, but this distribution then evolved over time under
the agreement. The government could not know with certainty the future value
of the monopolies it granted the Bank, however, by planning ex ante to renegotiate
the agreement after some time has passed, the governm ent ensured that it could
recontract in light of experience. It might employ the threat of redemption to ensure
that the Bank did not earn excessively high rents from its monopoly. More generally,
it was a threat ââby means of which the good behavior of the corporation might be
securedââ (Philippovich, 1911, p. 71).
While the loan contract was asymmetric in the sense that the government retained
discretion over the continuance of the Bank of England, the Bank also found advan-
tages to renegotiating its charters. Most importantly, the dependence of the govern-
ment on the Bank allowed the Bank to protect its monopoly franchise when faced
with new competition that was unforeseen at its founding. The case of the Land
Bank is illustrative of this point. The Bank of EnglandÃs original charter contained
no limitation on the ability of Parliament to charter competing banks. But when Par-
liament acted opportunistically on this loophole by chartering the Land Bank
in 1695, the Bank of England may have demanded in the 1697 renegotiation of its
Following through on any such threat would have been costly for the government. First, they would
have had to actually repay the loan. Second, they would no longer have access to the BankÃs fund-raising
potential. Finally, if Parliament decided to found a replacement institution, its shareholders might be even
more wary of the actions of a future Parliament and demand a greater risk premium.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 59
charter that the government commit itself to enforcing a legal Bank of England mo-
nopoly. Likewise, when the Bank realized that its charter had not prevented the rise
of unincorpo rated (private) bank competitors, it secured a new clause in the rechar-
ter of 1708 stipulating that no ï¬rm consisting of more than six persons could issue
bills or notes in England. In short, the rechartering process allowed the government
and the Bank to adjust to changing economic and political conditions.
Contemporary parliamentary debates suggest that the government and the Bank
understood the value of this ï¬exibility. In 1781, for example, ï¬ve years before the
prior charte r had reached its option da te, Prime Minister Lord North advocated pas-
sage of a new charter that would secure the government a loan of Â£2,000,000 at 3%,
in exchange for extending all the BankÃs privileges to 1812. Though the record does
not indicate who initiated the early recharter, North made it clear that the bargain
would help ease the ï¬nancial burden of the American war. The full amount of the
loan would be used to pay down the expensive navy debt that ââhung like a millstone
on the neck of public creditââ (CobbettÃs Parliamentary History, 1781, p. 520). By
ââpaying oï¬ three times as much navy debt this year as was paid oï¬ the last,ââ North
hoped to raise the price of navy bills and lower the navyÃs borrowing costsâan im-
portant public beneï¬t given that navy expenditures would reach a new all-time high
of Â£10,807,000 in 1782 (Mitchell, 1988, p. 580). Lord North estimated the overall
gain to the publ ic from the bargai n to be of the order of Â£300,000 to Â£500,000 (Cobb -
ettÃs Parliamentary History, 1781, pp. 520â521).
For some members of parliament, the use of loans from the Bank was secondary
to the distribution of the gains between the government and the Bank, and recharters
were opportunities to reallocate the gains. In 1781, for example, George Savile of
Yorkshire pointedly asked Lord North if he was selling the BankÃs monopoly fran-
chise too cheaply: ââThe public had an estate to sell. It was not therefore the question,
how the produce of the sale was to be applied? The real jet of the question was, what
was the worth of the estate?ââ (CobbettÃs Parliamentary History, 1781, pp. 522â523).
By SavileÃs calculations, the government was ââabout to sell several millions [of mo-
nopoly rents] for the paltry sum of Â£150,000.ââ Savile also questioned the timing of
the recharter. Since the previous charter had another ï¬ve years to run, better terms
would be possible after the war ended and the governmentÃs creditworthiness im-
proved. The recharter passed despite these objections by a vote of 109 to 30.
In debates over the distribution of beneï¬ts between the government and the Bank,
Parliament struggled with the problem of esti mating the present value of the BankÃs
charter. In 1781, several members, including Savile, argued that all the BankÃs proï¬ts
were attributable to its charter. Others, such as North, Jenkinson, and Ewer (Gov-
ernor of the Bank), maintained that some portion of the proï¬ts resulted from the
BankÃs reputation, its large capital, and the ââindustryââ of the BankÃs directors.
Clearly, some of these factors were endogenous to the charter, as some members
The erosion of the BankÃs monopoly on joint stock banking followed the crisis of 1825, which was
blamed, in part, on the weak state of the country banks (Thomas, 1934, pp. 57â58). The governmentÃs
willingness to weaken the BankÃs monopoly can, perhaps, be traced to the fact that it had developed
alternative sources of funds by then (see Fig. 2).
60 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
pointed out. David Ricardo was of this ilk. In a debate over the renewal of the 1800
charter, Ricardo said he opposed ââto the utmostââ the renewal of the charter because
he was ââsatisï¬ed that every farthing made by the Bank ought to belong to the
publicââ (HansardÃs Parliamentary Debates, 1822, p. 760).
5. Quantitative evidence
Among the widely noted incentives faced by the government in chartering (and
rechartering) the Bank was the governmentÃs ï¬scal situation. As noted earlier, the
impetus for the BankÃs foundation came primarily from the governmentÃs need to
raise money for war with France. If the ï¬scal incentive did, in fact, drive the rechar-
tering process, then we would expect to see a relationship between rechartering ac-
tivity and the governmentÃs budget balance.
Fig. 3 presents data on the average size of the governmentÃs surplus (revenueâex-
penditure), measured as a percentage of expenditure, revenue, and total budget, as
well the proportion of the budget devoted to military expenditure, in the years before
and following recharters.
On average, the budget deï¬cit grew in the half dozen or
so years preceding recharters, reaching a maximum two years prior to rechart er. The
deï¬cit declined in the subsequent year (the year preceding recharter), rose again in
the year in which the new charter was granted and declined in subsequent, post-char-
ter years. The broad outlines of the rise and fall of the budget deï¬cit mirror changes
in military expenditures.
Fig. 3. Budget ratios before and after new charters.
The correlation coeï¬cient between total expenditure and total military spending is 0.9.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 61
Although the timing is somewhat imprecise, the general outline is clear. The pe-
riod prior to a recharter was typically one of increased ï¬scal pressure upon the gov-
ernment, possibly driven by military spending. Post-charter years were characterized
by declining deï¬cits, as the governmentÃs budget was bolstered by infusion from the
To further assess the proposition that the governmentÃs decision to seek a charter
renewal was driven by ï¬scal factors, Figs. 4A and B present similar data for two dif-
ferent types of charter renewals: one for charters that were renewed less than two
Fig. 4. (A) Budget ratios in early and late recharters. (B) Surplus to expenditure and budget ratios in early
and late recharters.
62 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
years prior to the ââoption dateââ and another for charters renewed more than ten
years prior to the ââoption date.ââ If charter renewals were driven, on the govern-
mentÃs side, by ï¬scal pressures, then we would expect early recharters to coincide
with greater ï¬scal stress than later recharters. In fact, although the average budget
balance does move towards deï¬cit prior to recharter in both cases, the movement
is much more pronounced in the early recharters. Thus, the governmentÃs incentive
to press for an early charter renewal does appear to be ï¬scally driven.
What of the incentive faced by the proprietors of the Bank of England? This is
more diï¬cult to assess since we do not know much about the wealth and opportu-
nity costs of Bank lending to the government. Nor do we have speciï¬c information
on the BankÃs informal eï¬orts to initiate a renegotiation of its charter. While the gov-
ernment alone had legal authority to call for a recharter, the Bank was consulted on
But records of these pre-recharter negotiations were either not kept
or have not survived, as far as we know. We can, however, see the reaction of the
price of Bank of England shares and dividends to charter renewals (Fig. 5). The price
of Bank shares declined before recharter and rose in its aftermath, although the pat-
tern is neither especially dramatic nor substantially diï¬erent between early and late
recharters. For the late recharters, the decline in price may reï¬ect, in part, the uncer-
tainty of renewal as the ââoption dateââ drew near. For early recharters, the slig htly
more dramatic fall may reï¬ect the more severe budget deï¬cits that characterized
early recharters, and an accompanying fear that the government would not be able
to meet its obligations. The price of Bank shares should reï¬ect the present dis-
counted value of expected future dividends; although we have not mo deled the pat-
tern of expected dividen d payments, the parallel between share price and dividend
payments is suggestive.
Although these ï¬gures are illustrative, they only describe what happens, on aver-
age, to various measures prior to an d after a charter renewal. Furthermore, they as-
sess only one factor at a time and do not speciï¬cally consider the decision to
recharter. How then, should we evaluate the timing of charter renewals?
Our goal is to understand the characteristics that lead to a charter renewal. More
precisely, the question we pose is: ââGiven that the current charter has lasted for t pe-
riods, what is the likelihood that it will last for an additional period?ââ Such questions
are best addressed with duration models (Kalbï¬eisch and Prentice, 1980; Kiefer,
1988; Lancaster, 1990 summarize this class of models).
Duration models have a de-
pendent variable that measures how long it takes for some event of interest to occur.
During the parliamentary debate on the 1800 recharter, an MP asked William Pitt whether the
proposal originated with him or with the Bank, to which Pitt responded that he drew it up and submitted
to the Bank for consideration and consultation (CobbettÃs Parliamentary History, 1781, p. 1515).
Our Bank share price and dividend data are taken from Global Financial Data. There appear to be
some discrepancies in dividends reported in this source and Clapham (1944, vol. 1, Appendix B).
This question can also be addressed with a binomial dependent variable model, in which the
dependent variable is whether or not a new charter was issued in any given year. See Beck et al. (1998) for
how to deal with temporal dependence in logit/probit models of grouped duration data. We also ran probit
models, incorporating a time variable (i.e., the time since last event), and obtained results that are
qualitatively similar to the hazard model results presented below.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 63
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Years Before(-) and After(+) Charters
Log of Detrended Bank of England Stock Price
Price: Early Recharters
Price: Late Recharters
Price: All Charters
Dividends: All Charters (right scale)
Fig. 5. Dividends and price of Bank of England stock.
64 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
Analysts model the elapsed time until such an event (ter med a ââfailureââ by conven-
tion), or equivalently, the length of a non-eventful ââspell.ââ In our example, the event
of interest is a rechartering of the Bank of Englandâthe BankÃs charter ââsurvivesââ
or is ââat riskââ until it fails and is replaced with a new charter. The ââhazard rateââ in-
dicates of how likely a charter is to fail at any given time, provided it has survived
until that time. We model baseline hazard rates and then estimate the eï¬ects of multi-
In order to estimat e duration models, a distribution of the data must be selected.
The speciï¬cation of the distribution determines the shape of the hazard function.
There are a number of duration distributions from which one might chooseâe.g.,
the Weibull, the gamma, and the exp onential. Given that we have only nine cases
of charter ââfailure,ââ and are therefore unable to ascertain statistically signiï¬can t du-
ration dependence, we estimate the survival model with a Cox proportional hazards
The Cox model is the most generalâand a commonly usedâduration
model because it does not make any assumptions about the nature or shape of the
underlying survival distribution. The model assumes that the underlying hazard rate
(rather than survival time) is a function of the covariates (i.e., independent vari-
ables); no assumptions are made about the nature or shape of the hazard function.
However, the Cox model does assume that the hazard ratio is proportional over
time; in other words, that the ratio is the same at any point in the time scale. That
is, given two observations with particular values for the covariates, the ratio of the
estimated hazards will be constant over time; hence the name of the method: the pro-
portional hazard model. The validity of this assumption may often be question able,
but for our data, we conï¬rmed its validity with a test based on Schoenfeld residuals,
elaborated in Box-Steï¬ensmeier and Zorn (2001).
At the bottom of Table 1, we present summary information on the baseline haz-
ard rate. Note that there are nine subjects in our data, representing each charter that
ââfailedââ (in the sense of being replaced by a new charter) in our sample period. These
nine subjects were at risk for 151 years, conforming to the fact that a charter could
fail (be replaced) at any time. The median survival time of a charter is 17 years and
the incidence rate (i.e., the hazard function) is estimated as 0.0596 per year.
The Cox model estimates a hazard rate for a Bank of England charter at a par-
ticular point in time as a function of the baseline hazard (h
) at time tâwhich is sim-
ply the hazard for an observation with all x variables set to zeroâand our
explanatory variables, the estimates of which indicate proportional changes relative
to the baseline hazard. Table 4 presents results for our Cox model with robust
In fact, the data appear to exhibit positive duration dependence, although the trend is not
statistically signiï¬cant. We have also run survival analysis assuming a Weibull distribution (which would
be the appropriate distribution in the case of positive duration dependence). The results are qualitatively
similar to those yielded by the Cox model, although the coeï¬cients on the budgetary measures have lower
The test retrieves the residuals of a Cox model, ï¬ts a smooth function of time to the residuals, and
then tests whether there is a relationship. A graph of our scaled Schoenfeld residuals depicted a curve with
essentially a zero slope, providing support for our proportional hazards assumption.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 65
standard errors (i.e., errors adjusted for clustering on each subject/charter). Note
that hazard ratios of more than one indicate an increase in the rate of charter fail-
ures, while ratios of less than one indicate a reduction in the rate of failure. Speciï¬-
cations 1â3 include as covariates diï¬erent measures of the governmentÃs ï¬scal
situation: the government surplus (revenues minus expenditures) as a proportion
of the total government budget (revenues plus expenditures), as a proportion of rev-
enues, and as a proportion of expenditures (See Table 2 for summary statistics, and
Table 3 for variable descriptions and sources). In each case, the estimated hazard
ratio is less than 1, indicating that a one percent age point increase in the govern-
mentÃs budget surplus decreas es the hazard rate by the given percentage. For
example, the estimate in Model 1 suggests that a one percentage point decrease in
ââsurplus to budgetââ (i.e., an increase in the deï¬cit) increases the likelihood of a
new charter by 6.6%. This hazard ratio diï¬ers signiï¬cantly (P Â¼ :010) from one.
We can illustrate our argument that war-related ï¬scal deï¬cits prompted the gov-
ernment to initiate recharters as a means to extract fresh loans from the Bank with a
simple example. Great Britain was at war for 70 of the 151 years in our sample.
During these war years, the average ââsurplus to budg etââ was )16.814% (i.e., a def-
icit). By subtracting this value from the sample mean of ââsurplus to budgetââ ()6.578)
and then raising the hazard ratio to the power of this diï¬erence, 0.934
, we get a
hazard ratio of 0.497. This estimate suggests that during periods of war-related ï¬scal
stress, the likelihood of a charter renewal increases by 50%.
Variable descriptions and sources
Surplus to budget (revenue ) expenditure)/(revenue + expenditure) (Mitchell, 1988)
Surplus to expenditure (revenue ) expenditure)/expenditure (Mitchell, 1988)
Surplus to revenue (revenue ) expenditure)/revenue (Mitchell, 1988)
Bank of England share price
growth (one, two, and three
Percent change in the Bank of England share price over the previous
one, two, or three years (Global Financial Database, Online, series
Observed Mean SD Max. Min.
Surplus to budget (%) 151 )6.58 13.94 15.15 )49.03
Surplus to revenues (%) 151 )19.94 40.14 26.31 )192.41
Surplus to expenditures (%) 151 )9.41 22.69 35.71 )65.80
Change in Bank of England
share price (one year)
150 0.93 8.94 25.28 )27.71
Change in Bank of England
share price (two years)
149 1.87 13.62 46.77 )35.42
Change in Bank of England
share price (three years)
148 2.73 16.38 77.10 )35.63
Our coding of war yearsâ1694â1697, 1702â1713, 1718â1721, 1739â1748, 1756â1763, 1775â1783,
and 1793â1815âis from British Parliamentary Papers (1898), and Dickson (1967, p. 10).
66 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
Cox proportional hazard model
Surplus to budget 0.934
Surplus to revenues 0.978
Surplus to expenditures 0.957
Change in Bank of England share price
One year 1.132
Two years 1.301
Three years 1.264
Log likelihood )10.230 )10.461 )10.110 )8.629 )8.699 )8.674 )4.565 )3.967 )5.536 )4.671 )3.642 )5.631
Observations 151 151 151 150 150 150 149 149 149 148 148 148
Robust (HuberâWhite) standard errors in parentheses.
Signiï¬cant at 7.5%;
Signiï¬cant at 5%;
Signiï¬cant at 2.5%;
Signiï¬cant at 1%.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 67
Models 2 and 3 show hazard ratios for other measures of the governmentÃs ï¬scal
position. In each case, the hazard is less than one and signiï¬cant: the larger the gov-
ernmentÃs deï¬cit, the greater the likelihood that it would enact a ne w charte r includ-
ing, presumably, additional funding for the governme nt. The estimated hazard has a
slightly higher level of signiï¬cance on the ââsurplus to expendituresââ covariate than on
the ââsurplus to revenuesââ covariate. This makes sense since we would expect the gov-
ernment to be most sensitive to the deï¬cit in relation to its desired expenditures.
Speciï¬cations 4â12 include, in addition to the three measures of the governmentÃs
ï¬scal position, a measure of the change in the Bank of EnglandÃs share price in the
preceding one, two, and three years. The ï¬scal measures retain negative coeï¬cients
that are signiï¬cantly diï¬erent from one. The hazard on the change in Bank share price
over all three diï¬erent time spansâdespite the inclusion of ï¬scal covariatesâare
greater than one and signiï¬cant. For example, a 1% increase in the price of Bank
stock over the preceding year increased the chance that the government would rechar-
ter the Bank by 13%. This suggests that the government was more likely to initiate a
recharter if the value of the BankÃs monopoly rents rose in preceding years.
Fig. 6 provides a sense of the ï¬t of our models. This ï¬gure plots the calculated
linear prediction from Model 4 for each observation (year) in the sample.
lines indicate the actual dates of Bank of England charter renewals. Visual inspection
1694 1704 1714 1724 1734 1744 1754 1764 1774 1784 1794 1804 1814 1824 1834 1844
Dashed vertical lines indicate recharters
Fig. 6. Linear prediction from Cox estimation of Model 4.
Evidence from Parliamentary debates indicates that the government monitored Bank proï¬tability by
comparing Bank stock prices (and Bank dividends) to market rates of return. See, for example, the
discussion of the 1781 renewal in Clapham (1944, pp. 177â182).
To obtain these predicted values, we ï¬t Model 4 and then calculated the linear prediction as
. Predicted values from our other models are very similar.
68 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
indicates that most renewals do, in fact, occur near peaks in our linear predictions. In
some instances, prediction lead or lag actual renewal dates. The 1764 renewal, for
example, occurs just after our model indicates a charter failure. We are not sure
why, but we speculate that the lengt h of time it takes to renegotiate a new charter
varies idiosyncratically across the cases, due perhaps to diï¬erences in personalities
or procedures. Archival research might bear this out.
In other instances, such as the 1833 renewal, our model does not perform well. We
think that renewals after 1800 may have been diï¬erent from prior Bank rechart ers,
since by then the Bank was more ï¬rmly established. On the one hand, the develop-
ment of government bond (consol) and annuity markets gradually reduced the gov-
ernmentÃs ï¬nancial dependence on the Bank and other chartered companies for loans
(Fig. 2). With the development of alternative sources of public ï¬nance, the timing of
renewals no longer hinged on the governmentÃs ï¬scal position. On the other hand,
the Bank of England had become the nationÃs central bank, and charter debates after
1800 focused far more on monetary policy issues than on bank restrictions and pub-
lic ï¬nance. Our arguments are therefore less relevant to these charters.
The results presented in this section indicate that government recharters of the
Bank of England were motivated by both ï¬scal necessity and the observed value
of the BankÃs monopolies. Charter renewals were more likely the larger the govern-
ment budget deï¬cit. Early charter renewals seem to have been provoked by increases
in the deï¬cit, which may have been brought about by war or other unforeseen spend-
ing demands. The government also appears to have been sensitive to the monopoly
proï¬ts accruing to the Bank: the greater the share-price increase in the recent past,
the more likely the government to enact a new charter.
Our statistical analysis has focused on the governmentÃs incentive to renew the
BankÃs charter. Our quantitative evidence is less useful than the qualitative evidence
presented in Section 3 for discerning the motivation behind the Bank of EnglandÃs
willingness to ï¬nance a charter renewal. Evidence present ed in Fig. 5 indicates that
as the time remaining on a charter declined, the value of Bank stock fell, suggesting
that the uncertainty faced by Bank shareholders had a negative impact on stock
prices. Supporting this view, new charters, with their extension of the guaranteed life
of the Bank, had a positive impact upon Bank dividends and share prices.
In most industrial democracies, important constitutional institutions are perma-
nently established. Although the personnel at the head of these institutions change,
the continued existence of the institution itself is generally not in question. In this
paper, we look at an institution that, over the course of a century and a half, became
one of BritainÃs importantâand permanentâconstitutional institutions.
The de facto constitutional status of the Bank was acknowledged as early as 1781 by the prime
minister, Lord North, when he argued in favor of the charter renewal of that year (CobbettÃs
Parliamentary History, 1781, p. 519).
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72 69
of England was not, however, permanently established at the time of its foundation.
By the middle of the 19th century, however, the Bank had become so well established
that itÃs continued existence was no longer in doubt.
The incentives that allowed the Bank to maintain its existence in the face of the
possibility that the government would drastically ch ange or eliminate the institu-
tion have not been previously explored. In fact, the pioneering paper by North
and Weingast (1989) and the work ï¬owing from it largely ignores this possibility
and treats the Bank as essentially characterizing a stable equilibrium. By specifying
the incentives of both the government and the Bank in the context of contracting
under uncertainty, we are able to uncover the inducements that allowed the insti-
tution to persist.
We analyze the timing of the renewal of Bank of England charters after the
BankÃs initial charter in 1694 until the adoption of the Bank Act of 1844 as a
means to test our simple contracting hypothesis. Our view is that the periodic re-
charters allowed the governmentâand the Bankâto adjust to changing conditions
and needs in the contractÃs renegotiation. We ï¬nd that recharters of the Bank were
driven by ï¬scal concerns on the part of the government: wars and other increases
in expenditure tended to hasten the renewal of the BankÃs charte r. Thus, the pri-
mary motivation for the government to oï¬er recharters is clear. In addition, the
government used the renewal process to assess the value of the monopoly franchise
it conferred upon the Bank. Since the value of the franchise could not be accu-
rately foreseen at the time when anticompetitive barriers were established, the gov-
ernment looked to increases in the price of Bank stock as an indicator of excessive
rents. Hence, persistent ly high share prices also increased the probability of a
The BankÃs motivation in the recharter process is more diï¬cult to analyze. If the
enactment of a new charter bolstered the BankÃs monopoly position, new charters
should have a positive impact on the price of Bank stock. The data presented in
Fig. 5 suggest that as charters approach expiration, the value of Bank stock did fall.
Bank share prices seem to get a larger boost from early recharters, suggesting that
governmentÃs enhanced ï¬scal demands in these early recharters translated into a bet-
ter deal for Bank shareholders.
Our preliminary analysis of the rechartering process leaves many unanswered
questions, which we hope to address in future work. First, although we have ad-
dressed the timing of Bank charter renewals, we have largely ignored other aspects
of the BankÃs charters. In futur e work, we hope to explicitly address other aspects
of these contracts, ranging from the terms of the loan and the length of the charter
granted, to the privileges granted by the government to the Bank. Speciï¬cally, we
hope to assess which side might have had the ââupper handââ in negotiations and
how that balance might have aï¬ected the outcome of the negotiations.
Second, our analysis relies entirely on annual data. By employing monthly data
and a closer examination of the historical record about when negotiati ons over char-
ter renewals began, we could conduct more formal tests on the consequences of an-
ticipated renewal versus actual renewal and thus gain a better understanding of the
70 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48â72
Third, we have assumed throughout out our analysis that government spending
decisions were exogenous.
That is, we have not allowed for the possibility that
spending decisions were aï¬ected by chartering decisions. It is possible that the gov-
ernment undertook new spending in the years before a charter was up for renewal in
the knowledge that new funds would be available.
The Bank of England played a central role in the BritainÃs development in the
18th and 19th centuries. The charters of the Bankâand indeed, the process generat-
ing these chartersâhad important consequences. The economic privileges the Bank
secured in recharters, for example, helped propel its rise to a modern central bank,
with monetary and lender of last resort functio ns.
Given the complicated nature of
these contracts, further analysis is warranted.
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