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, 1694–1844
q
J. Lawrence Broz
a
and Richard S. Grossman
b,c,
*
a
Department of Political Science, University of California, San Diego, 9500 Gilman Drive, #0521,
La Jolla, CA 92093-0521, USA
b
Department of Economics, Wesleyan University, Middletown, CT 06459-0007, USA
c
Center for Basic Research in the Social Sciences, Harvard University, Cambridge, MA 02138, USA
Received 7 August 2002
Abstract
The Bank of England was established by Parliament in 1694 as an explicitly temporary in-
stitution, which could be dissolved upon one yearÕs 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 BankÕs existence reflected uncertainty, by both Parlia-
ment and the Bank, and we test this hypothesis by analyzing the timing of the renewals of the
BankÕs charter. We find renegotiation of the charter was initiated by Parliament when the
CrownÕs budgetary circumstances, shaped by unforeseen military expenditures, required addi-
tional funds and when the monopoly value of the BankÕs charter rose.
Ó 2003 Elsevier Inc. All rights reserved.
JEL classification: 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)
q
We thank Nathaniel Beck, Jeffry 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 financial support.
*
Corresponding author.
E-mail addresses: [email protected] (J.L. Broz), [email protected] (R.S. Grossman).
0014-4983/$ - see front matter Ó 2003 Elsevier Inc. All rights reserved.
doi:10.1016/j.eeh.2003.08.002
Explorations in Economic History 41 (2004) 48–72
www.elsevier.com/locate/eeh
Explorations in
Economic History
1. Introduction
The Bank of England is amongst the most studied of BritainÕs economic institu-
tions, with a long and distinguished history. It is the worldÕs second oldest central
bank,
1
was BritainÕs only incorporated bank for more than a century,
2
and, during
the heyday of the international gold standard in the late 19th and early 20th centu-
ries, was the worldÕs dominant financial 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

eead

ees
(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 finance that followed the Glorious Revolution of 1688.
The first innovation came in 1693, when government finances were placed under the
control of Parliament. North and Weingast (1989) contend that divesting public fi-
nance from the CrownÕs control removed a major source of time-inconsistent policy
making, followed by improvements in tax collection and fiscal administration, which
paved the way for serviceable long-term debt. The final 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 ParliamentÕs promises to repay its debts. By institution-
alizing those providing long-term finance in the Bank of England, Parliament effec-
tively tied the hands of later Parliaments (Weingast, 1992).
3
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 BankÕs charte r; in the
extreme, Parliament could have eliminated the Bank altogether. While Root (1994,
pp. 187–188) argues that the establishment of an independent judiciary prevented
the government from violating the BankÕs 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.
1
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.,
1994).
2
We refer to the Bank alternatively as a ‘‘corporation’’ and ‘‘joint-stock company.’’ Legally, any
institution with a corporate existence was technically a corporation while any firm that raised capital from
subscribers was a joint-stock company (Edwards, 1986).
3
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) 48–72 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 (PeelÕs 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 finance 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 flexibility into the
original 1694 Bank of England charter. Our simple argument draws on the ‘‘con-
tracting under uncertainty’’ 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 BankÕs existence. In both ways, we hope
to build on existing work that sees the Bank of England as a linchpin of credible pub-
lic finance 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 finance and credit markets that led to the BankÕs
founding: that is, the governmentÕs need for funds to pursue war with France and
the incentives faced by the group of private entrepreneurs who hoped to establish
a profitable institution with government-granted privileges. However, the BankÕs
founding in 1694 did not permanently establish the Bank in law. As shown in Table
1, the BankÕs original charter guaranteed a minimum lifespan of only 11 years. At the
end of that time, the government, with one yearÕs notice, could exercise an ‘‘option’’
to repay its loan and dissolve the charter. In fact, the BankÕs charter was not dis-
solved but was renewed nine times by Parliament between 1694 and 1844—the date
of the last ‘‘Continuance’’ Act. Each renewal extended the BankÕs 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 indefinitely after the option
date without a new charter, as it did after 1844, during the century and a half follow-
ing the BankÕs founding, charter renewals were a recurrent feature of the BankÕs life.
Although the initial charter has received a great deal of attention, the BankÕs 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 PeelÕs Act of 1844, since that charter so fundamentally chan-
ged the Bank that we take it as qualitatively different from earlier charters (Bagehot,
1873; Fetter, 1965).
Ideally, we would like to examine all aspect s of each of the BankÕs 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 benefits to both parties of
50 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
Table 1
Bank of England Charters, 1694–1844
Charter
date
Act of
Parlia-
ment
Option
date
Time to
option
Years
Time left at renewal Financial aspects Regulatory aspects
Years Proportion
of charter
1694 5 & 6
Will. 3,
c. 20
1705 11 — — B of E lends £1.2 million to
government at 8%
Incorporation via Royal Charter
gives B of E banking privileges,
including the issue of notes, and
limited liability
1697 8 & 9
Will. 3,
c. 20
1710 13 8 0.73 B of EÕs capital increases by
£1,001,171 in new subscriptions
(4/5 in tallies—then at a 40%
discount—and 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 profit thereon exempted from
taxation
1708 7 Anne,
c. 7
1732 23 1 0.08 Interest free loan of £400,000 by
B of E to government. B of E
doubles capital stock with new
subscription of £2,531,347
Bans joint stock companies
(of any description)
of more than six persons from
doing business as banks
1713 12 Anne,
c. 11
1742 29 19 0.83 B of E circulates £1.2 million in
Exchequer Bills at 2d per diem
per £100; receives allowance of
3% and fee of £8000 per annum
Repeats foregoing prohibitions
1742 15 Geo. 2,
c. 13
1764 22 0 0 B of E lends £1.6 million to the
government without interest;
reducing interest on total debt
of £3.2 million to 3%
Reasserts B of EÕs privilege
of exclusive banking
1764 4 Geo. 3,
c. 25
1786 22 0 0 B of E lends £1 million on
Exchequer Bills for two years
at 3% (repaid in 1766). Pays
a fee of £110,000 for privileges.
Repeats foregoing prohibitions
on banking
1781 21 Geo. 3,
c. 60
1812 31 5 0.23 B of E lends £2 million to
government at 3% for 3 years
Reasserts B of EÕs banking
privileges
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72 51
Table 1 (continued)
Charter
date
Act of
Parlia-
ment
Option
date
Time to
option
Years
Time left at renewal Financial aspects Regulatory aspects
Years Proportion
of charter
1800 40 Geo. 3,
c. 28
1833 33 12 0.39 B of E lends £3 million to
government without interest
for 6 years
Repeats prohibitions of 1697 and
1708 to clarify intent ‘‘that no
other bank shall be erected,
established, or allowed by
Parliament’’ (s. 15)
1833 3 & 4
Will. 4,
c. 98
1855 22 0 0 Government pays off 1/4
of its debt to the B of E
(£3,671,700)
Permits joint stock banks of
deposit in London or within 65
miles thereof
1844 7 & 8
Vict., c. 32
1855 11 11 0.5 Last continuance Act Separates Banking and Issue
Departments and confirms B of
EÕs 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
No. of
subjects
Time at
risk
Incidence
rate
Survival time
25% 50% 75%
9 151 0.06 11.0 17.0 22.0
Notes. ‘‘Option Date’’ refers to the date at which Parliament could dissolve the BankÕs charter, with one yearÕs 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) 48–72
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 specific period, renewals could
—and were—enacted before the previous charterÕs 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 reflected 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 BankÕs proprietors. The
government obtained immediate financial support from the Bank, but also benefited
from the rechartering feature of the contract as a means to adjust to unanticipated
changes in its fiscal environment. The BankÕs 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 flexibility to adjust the contrac t to changed conditions.
Briefly, we find that, like the original charter of 1694, the governmentÕs motive for
rechartering was primarily fiscal. 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 deficits and a need for increa sed financing. However, charters that were
renewed closer to their option dates were also preceded by heightened deficits. Statis-
tical tests indicate that the probability of enacting a new charter increased as fiscal def-
icits, most likely unanticipated and war-related, increased. We also find 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 finding 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 fitability.
As for the motivations of the Bank, we find that the BankÕs share prices typically
rose in the aftermath of recharters, suggesting that recharters benefited the BankÕs
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 BankÕs monopoly
franchise, the market apparently viewed a successful recharter as signal that the vol-
untary ‘‘rents-for-loans’’ bargain between the Bank and the government would be
maintained. Our results not only indicate that recharters had a positive and signifi-
cant effect on the price of Bank stock, but also that the governmentÕs fiscal 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 fi-
nance (Chandaman, 1975; Dickson and Sperling, 1970; Roseveare, 1973). The impe-
tus for the BankÕs founding was a large wartime loan to the government, but its roots
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72 53
go back to the Glorious Revolution of 1689 (Rogers, 1887). Prior to this political
event, the king had supremacy over fiscal policy; following it, the Crown lost most
of its fiscal independence (North and Weingast, 1989; Root, 1994, pp. 190–191).
Constraining the kingÕs power allowed Parliament to undertake a series of finan-
cial innovations during the period 1693–1720 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 specific sources of revenue. In the
language of the day, it was a switch from ‘‘unfunded’’ short-term to ‘‘funded’’ 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 finance the immediate needs of war on a relatively small and inelastic
revenue base (Brewer, 1989, pp. 119–122; Carruthers, 1996, p. 73). Second, the
funded debt allowed the government to borrow large sums to finance wars via a pol-
icy of tax smoothing (Barro, 1987; Brewer, 1989; Sargent and Velde, 1995). Third,
the loans were ‘‘funded,’’ meaning that Parliament set aside specific revenues to meet
interest payments, a feature that further enhanced confidence 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
first 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 ‘‘incorporation of the public debt’’ (Philippovich, 1911,
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1692
1697
1702
1707
1712
1717
1722
1727
1732
1737
1742
1747
1752
1757
1762
1767
1772
1777
1782
1787
1792
1797
1802
1807
1812
1817
1822
1827
1832
1837
1842
Funded
Unfunded
Fig. 1. Funded and unfunded debt as a share of total debt, 1693–1844. Source: (Mitchell, 1988).
54 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
pp. 80–84), 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 £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
revenues.
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.
4
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 governmentÕs 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 profits of the company (i.e., payments from the govern-
ment plus any additional profits 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 afforded (although there was no guarantee that
this would be exclusive). Extensive monopoly privileges did not come until the
BankÕs recharters of 1697 and 1708.
By the end of the war with Spain in 1721, the funded debt had grown to over £62
million, the bulk of which (£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. 143–
182). And, unlike the Eas t India Company and the South Sea Company, the Bank
4
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) 48–72 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 EnglandÕs initial charter was granted in 1694. Although a number of
innovations were introduced and specific 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 ‘‘Governor and Company of the Bank of England.’’ The Bank
was to provide the government a loan of £1,200,000 in return for an annual interest
payment of £100,000 per year
5
to be secured by tonnage duties. The original charter
did not grant the Bank a privileged position as the governmentÕs 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 BankÕ s notes legal tender. The main import of the char-
ter was to raise funds for the governmentÕs 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, 1694–1786. Source:
British Parliamentary Papers (1898).
5
Equal to 8.33%. According to Clapham (1944), the interest payment was construed as 8% interest
plus an annual £4000 management fee.
56 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
the governm ent was given the option to prepay the loan and terminate the BankÕs
charter, with one yearÕs 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 effect. 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 specified,
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 BankÕs 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
(Horsefield, 1960, Chapters 14–16). 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 ‘‘no
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.’’ The Bank ‘‘wanted no more Land Banks’’ (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 significant 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, ‘‘the 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 suppressed’’ (Feavearyear, 1963, pp. 167–168).
The Bank regarded its monopoly on paper currency (issued by banks with over six
partners) as critical to its profitability and was willin g to make financial 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 BankÕs assistance to
help it finance 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 confirmation 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 £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) 48–72 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, effects.
4. The argument
We conceive of Bank of England charters as mutually beneficial exchanges be-
tween the government and the BankÕs private owners (shareholders) designed to en-
sure that the parties remained mutual hostages to an initial incomplete contract. The
first 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 financial 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 flexibility 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-
ing.
6
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 actor—Parlia-
ment—that seeks to provide fiscal public goods (financing 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 firms trying to mitigate the
problems of armÕs-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 EnglandÕs 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.
7
Hence, we can analyze the characteristics of these charters in
terms that are familiar to economists and, increasingly, to political scientists.
6
See Hart (1995) and Tirole (1999) for the current state of this literature.
7
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) 48–72
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 governmentÕs fiscal position, and (2) uncertainty regarding the future
distribution of gains between the parties. As for the fiscal position, the government Õs
future financial 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 financial uncertainty,
the right of the government to terminate the contract with the Bank provided flexi-
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 yearÕs 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 financial assistance
from the Bank.
8
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 BankÕs 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 ‘‘by means of which the good behavior of the corporation might be
secured’’ (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 EnglandÕs 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
8
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 BankÕs 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) 48–72 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 firm 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.
9
Contemporary parliamentary debates suggest that the government and the Bank
understood the value of this flexibility. In 1781, for example, five 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 £2,000,000 at 3%,
in exchange for extending all the BankÕs 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 financial burden of the American war. The full amount of the
loan would be used to pay down the expensive navy debt that ‘‘hung like a millstone
on the neck of public credit’’ (CobbettÕs Parliamentary History, 1781, p. 520). By
‘‘paying off three times as much navy debt this year as was paid off the last,’’ North
hoped to raise the price of navy bills and lower the navyÕs borrowing costs—an im-
portant public benefit given that navy expenditures would reach a new all-time high
of £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 £300,000 to £500,000 (Cobb -
ettÕs Parliamentary History, 1781, pp. 520–521).
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 BankÕs monopoly fran-
chise too cheaply: ‘‘The 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?’’ (CobbettÕs Parliamentary History, 1781, pp. 522–523).
By SavileÕs calculations, the government was ‘‘about to sell several millions [of mo-
nopoly rents] for the paltry sum of £150,000.’’ Savile also questioned the timing of
the recharter. Since the previous charter had another five years to run, better terms
would be possible after the war ended and the governmentÕs creditworthiness im-
proved. The recharter passed despite these objections by a vote of 109 to 30.
In debates over the distribution of benefits between the government and the Bank,
Parliament struggled with the problem of esti mating the present value of the BankÕs
charter. In 1781, several members, including Savile, argued that all the BankÕs profits
were attributable to its charter. Others, such as North, Jenkinson, and Ewer (Gov-
ernor of the Bank), maintained that some portion of the profits resulted from the
BankÕs reputation, its large capital, and the ‘‘industry’’ of the BankÕs directors.
Clearly, some of these factors were endogenous to the charter, as some members
9
The erosion of the BankÕs 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. 57–58). The governmentÕs
willingness to weaken the BankÕs 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) 48–72
pointed out. David Ricardo was of this ilk. In a debate over the renewal of the 1800
charter, Ricardo said he opposed ‘‘to the utmost’’ the renewal of the charter because
he was ‘‘satisfied that every farthing made by the Bank ought to belong to the
public’’ (HansardÕs 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 governmentÕs fiscal situation. As noted earlier, the
impetus for the BankÕs foundation came primarily from the governmentÕs need to
raise money for war with France. If the fiscal incentive did, in fact, drive the rechar-
tering process, then we would expect to see a relationship between rechartering ac-
tivity and the governmentÕs budget balance.
Fig. 3 presents data on the average size of the governmentÕs surplus (revenue–ex-
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.
10
On average, the budget deficit grew in the half dozen or
so years preceding recharters, reaching a maximum two years prior to rechart er. The
deficit 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 deficit mirror changes
in military expenditures.
Fig. 3. Budget ratios before and after new charters.
10
The correlation coefficient between total expenditure and total military spending is 0.9.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72 61
Although the timing is somewhat imprecise, the general outline is clear. The pe-
riod prior to a recharter was typically one of increased fiscal pressure upon the gov-
ernment, possibly driven by military spending. Post-charter years were characterized
by declining deficits, as the governmentÕs budget was bolstered by infusion from the
Bank.
To further assess the proposition that the governmentÕs decision to seek a charter
renewal was driven by fiscal 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) 48–72
years prior to the ‘‘option date’’ and another for charters renewed more than ten
years prior to the ‘‘option date.’’ If charter renewals were driven, on the govern-
mentÕs side, by fiscal pressures, then we would expect early recharters to coincide
with greater fiscal stress than later recharters. In fact, although the average budget
balance does move towards deficit prior to recharter in both cases, the movement
is much more pronounced in the early recharters. Thus, the governmentÕs incentive
to press for an early charter renewal does appear to be fiscally driven.
What of the incentive faced by the proprietors of the Bank of England? This is
more difficult 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 specific information
on the BankÕs informal efforts 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
these decisions.
11
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 different between early and late
recharters. For the late recharters, the decline in price may reflect, in part, the uncer-
tainty of renewal as the ‘‘option date’’ drew near. For early recharters, the slig htly
more dramatic fall may reflect the more severe budget deficits 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 reflect 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.
12
Although these figures 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 specifically 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: ‘‘Given that the current charter has lasted for t pe-
riods, what is the likelihood that it will last for an additional period?’’ Such questions
are best addressed with duration models (Kalbfleisch and Prentice, 1980; Kiefer,
1988; Lancaster, 1990 summarize this class of models).
13
Duration models have a de-
pendent variable that measures how long it takes for some event of interest to occur.
11
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 (CobbettÕs Parliamentary History, 1781, p. 1515).
12
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).
13
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) 48–72 63
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-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
5.6
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.4
7.6
7.8
percent
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) 48–72
Analysts model the elapsed time until such an event (ter med a ‘‘failure’’ by conven-
tion), or equivalently, the length of a non-eventful ‘‘spell.’’ In our example, the event
of interest is a rechartering of the Bank of England—the BankÕs charter ‘‘survives’’
or is ‘‘at risk’’ until it fails and is replaced with a new charter. The ‘‘hazard rate’’ 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 effects of multi-
ple covariates.
In order to estimat e duration models, a distribution of the data must be selected.
The specification of the distribution determines the shape of the hazard function.
There are a number of duration distributions from which one might choose—e.g.,
the Weibull, the gamma, and the exp onential. Given that we have only nine cases
of charter ‘‘failure,’’ and are therefore unable to ascertain statistically significan t du-
ration dependence, we estimate the survival model with a Cox proportional hazards
model.
14
The Cox model is the most general—and a commonly used—duration
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 confirmed its validity with a test based on Schoenfeld residuals,
elaborated in Box-Steffensmeier and Zorn (2001).
15
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
‘‘failed’’ (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
0
) at time t—which is sim-
ply the hazard for an observation with all x variables set to zero—and 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
14
In fact, the data appear to exhibit positive duration dependence, although the trend is not
statistically significant. 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 coefficients on the budgetary measures have lower
statistical significance.
15
The test retrieves the residuals of a Cox model, fits 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) 48–72 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. Specifi-
cations 1–3 include as covariates different measures of the governmentÕs fiscal
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-
mentÕs 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
‘‘surplus to budget’’ (i.e., an increase in the deficit) increases the likelihood of a
new charter by 6.6%. This hazard ratio differs significantly (P ¼ :010) from one.
We can illustrate our argument that war-related fiscal deficits 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.
16
During these war years, the average ‘‘surplus to budg et’’ was )16.814% (i.e., a def-
icit). By subtracting this value from the sample mean of ‘‘surplus to budget’’ ()6.578)
and then raising the hazard ratio to the power of this difference, 0.934
10:236
, we get a
hazard ratio of 0.497. This estimate suggests that during periods of war-related fiscal
stress, the likelihood of a charter renewal increases by 50%.
Table 3
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
years)
Percent change in the Bank of England share price over the previous
one, two, or three years (Global Financial Database, Online, series
GBBEPM)
Table 2
Summary statistics
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
16
Our coding of war years—1694–1697, 1702–1713, 1718–1721, 1739–1748, 1756–1763, 1775–1783,
and 1793–1815—is from British Parliamentary Papers (1898), and Dickson (1967, p. 10).
66 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
Table 4
Cox proportional hazard model
123456789101112
Budgetary measures
Surplus to budget 0.934

(0.025)
0.913

(0.027)
0.756

(0.102)
0.762

(0.063)
Surplus to revenues 0.978

(0.010)
0.970

(0.010)
0.912

(0.037)
0.888

(0.046)
Surplus to expenditures 0.957

(0.016)
0.945

(0.015)
0.883

(0.037)
0.896

(0.019)
Change in Bank of England share price
One year 1.132

(0.048)
1.138

(0.045)
1.122

(0.047)
Two years 1.301

(0.183)
1.329

(0.186)
1.202

(0.085)
Three years 1.264

(0.095)
1.386

(0.208)
1.171

(0.063)
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 (Huber–White) standard errors in parentheses.

Significant at 7.5%;

Significant at 5%;

Significant at 2.5%;

Significant at 1%.
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72 67
Models 2 and 3 show hazard ratios for other measures of the governmentÕs fiscal
position. In each case, the hazard is less than one and significant: the larger the gov-
ernmentÕs deficit, 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 significance on the ‘‘surplus to expenditures’’ covariate than on
the ‘‘surplus to revenues’’ covariate. This makes sense since we would expect the gov-
ernment to be most sensitive to the deficit in relation to its desired expenditures.
Specifications 4–12 include, in addition to the three measures of the governmentÕs
fiscal position, a measure of the change in the Bank of EnglandÕs share price in the
preceding one, two, and three years. The fiscal measures retain negative coefficients
that are significantly different from one. The hazard on the change in Bank share price
over all three different time spans—despite the inclusion of fiscal covariates—are
greater than one and significant. 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 BankÕs monopoly rents rose in preceding years.
17
Fig. 6 provides a sense of the fit of our models. This figure plots the calculated
linear prediction from Model 4 for each observation (year) in the sample.
18
Vertical
lines indicate the actual dates of Bank of England charter renewals. Visual inspection
-4
-3
-2
-1
0
1
2
3
4
5
6
1694 1704 1714 1724 1734 1744 1754 1764 1774 1784 1794 1804 1814 1824 1834 1844
Year
Predicted Value
Dashed vertical lines indicate recharters
Fig. 6. Linear prediction from Cox estimation of Model 4.
17
Evidence from Parliamentary debates indicates that the government monitored Bank profitability 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. 177–182).
18
To obtain these predicted values, we fit Model 4 and then calculated the linear prediction as
^
yy
j
¼ b
1
x
1j
þ b
2
x
2j
þþb
k
x
kj
. Predicted values from our other models are very similar.
68 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
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 differences 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 different from prior Bank rechart ers,
since by then the Bank was more firmly established. On the one hand, the develop-
ment of government bond (consol) and annuity markets gradually reduced the gov-
ernmentÕs financial dependence on the Bank and other chartered companies for loans
(Fig. 2). With the development of alternative sources of public finance, the timing of
renewals no longer hinged on the governmentÕs fiscal position. On the other hand,
the Bank of England had become the nationÕs central bank, and charter debates after
1800 focused far more on monetary policy issues than on bank restrictions and pub-
lic finance. 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 fiscal necessity and the observed value
of the BankÕs monopolies. Charter renewals were more likely the larger the govern-
ment budget deficit. Early charter renewals seem to have been provoked by increases
in the deficit, 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
profits 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 governmentÕs incentive to renew the
BankÕs charter. Our quantitative evidence is less useful than the qualitative evidence
presented in Section 3 for discerning the motivation behind the Bank of EnglandÕs
willingness to finance 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.
6. Conclusion
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 BritainÕs important—and permanent—constitutional institutions.
19
The Bank
19
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 (CobbettÕs
Parliamentary History, 1781, p. 519).
J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72 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 itÕs 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 flowing 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
BankÕs 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 government—and the Bank—to adjust to changing conditions
and needs in the contractÕs renegotiation. We find that recharters of the Bank were
driven by fiscal concerns on the part of the government: wars and other increases
in expenditure tended to hasten the renewal of the BankÕs charte r. Thus, the pri-
mary motivation for the government to offer 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
recharter.
The BankÕs motivation in the recharter process is more difficult to analyze. If the
enactment of a new charter bolstered the BankÕs 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
governmentÕs enhanced fiscal 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 BankÕs 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. Specifically, we
hope to assess which side might have had the ‘‘upper hand’’ in negotiations and
how that balance might have affected 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
BankÕs motivations.
70 J.L. Broz, R.S. Grossman / Explorations in Economic History 41 (2004) 48–72
Third, we have assumed throughout out our analysis that government spending
decisions were exogenous.
20
That is, we have not allowed for the possibility that
spending decisions were affected 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 BritainÕs development in the
18th and 19th centuries. The charters of the Bank—and indeed, the process generat-
ing these charters—had 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.
21
Given the complicated nature of
these contracts, further analysis is warranted.
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