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Revolution, trade & dominance

Using New Institutional Economics to understand the political, social and economic changes that led up to the competition between England, France and Holland for control of global trade between the 17th and 19th century

Revolution, trade & dominance
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In the last article, we examined the institutional factors responsible for the rise of Portugal and Spain. We saw that the Roman Catholic Church, as well as their superior shipping and navigational skills, were primary factors responsible for this. However, by the early 17th Century, three other European powers, namely, England, Holland and France were flexing their muscles to get a slice of the global trade pie as well as competing for political and military dominance. In the meantime, Spain was steadily losing steam. In addition to the Protestant Reformation, other factors such as financial innovation in England and Holland, Spain's 'resource curse' because of the vast silver and gold (which gave little incentive for industry and commerce to develop) were also responsible for Spain's decline. Further, Spain's empire had become too big to control and constant wars had led the Spanish crown to default on its debt repeatedly in the end-16th Century.

In this two-part article, we will first look at where England, Holland and France stood at the beginning of the 17th Century. In the second part to follow, we will explore why England left its competitors behind in the global 'sweepstakes' in the next 200 odd years. I contend that the institutions that evolved in the three countries were largely responsible for the way things panned out.

England in 17th-19th centurY

To analyse how England evolved vis-à-vis its competitors, it would be instructive to look at the development of the political, economic/financial and judicial institutions over this period.

Political Institutions

In the early 17th Century, the British Isles was an underdeveloped island, which was largely agricultural and constantly at war on the issue of religion. Spain was the ruling superpower with the best ships, weapons and booming trade. Unlike the Spanish, who used to send out orderly expeditions for trade to Asia, the English were an unorganised group of seafarers, many of whom were pirates who raided Spanish ships (Francis Drake, Walter Raleigh). The East India Company was formed at this time and given the royal charter to trade with the East Indies in 1600 by Queen Elizabeth I. Soon after this, the Crown passed from the Tudors to the Stuarts in 1603. The Stuarts faced financial problems from the beginning with the revenue falling short of the expenditure. They resorted to selling of crown lands, dispensing monopoly rights and even selling peerages. All revenues were raised without the consent of the Parliament. The ever-increasing demand for revenue, which the Crown demanded from the Parliament led to frequent confrontation and even dissolving the Parliament. The Stuarts also used their power to influence some of the Judges. This led to a situation where the executive, legislature and the judiciary were all under the influence of the Crown. However, the common law courts were generally neutral and hence came into conflict with the Crown.

This led to the formation of a coalition against the Crown which challenged the king and led to a civil war in the 1640s. After the Civil War, the monarchy was abolished and the House of Lords was established. However, the post-Civil War period was even more chaotic and the monarchy was restored in 1660. The Stuarts came back to rule but had not learnt their lessons. They annoyed the Whig-led opposition and disenfranchised them leading to the Glorious Revolution of 1688. William of Orange defeated the Stuart king James II. The Crown passed from the Catholic Stuarts to the Protestant William of Orange from Holland and political institutions were restructured to bring about a balance of power between the Crown and the Parliament. Parliamentary supremacy was established and restrictions placed on the discretionary power of the Crown.

Financial Institutions

These institutional changes raised the predictability and credibility of the Government and enabled orderly tax administration thereby leading to rational financial policymaking. With the establishment of the Bank of England in 1694, the ground for efficient capital markets was laid. This helped England raise substantial resources during wars and other crisis.

Another related development was the development of private capital markets. Not only was the Government able to raise larger loans for its war effort, but it was also the credible commitment of the Government to honour its loans that led to more private savings coming into the financial system. This, coupled with the expansion of the banking system, the positive role of the Bank of England and the creation of different securities, led to the establishment of a private capital market. These factors led to England winning wars against the French in the end-17th Century and the seven years war in 1765. This also allowed England to expand its Empire all over the world steadily. In particular, the East India Company, which had the strong support of the Parliament grew from strength to strength and became the jewel in the Crown of England. The strong financial position of England also laid the foundation for the Industrial Revolution in England in the 19th Century.

Judicial Institutions

In England, the common law system took root as opposed to the Roman/civil law. The common law system placed great emphasis on precedents and gave the judges a great deal of flexibility on deciding cases. This helped in settling cases quickly and amicably and better suited to the protection of private property and enforcement of contracts. This, in turn, helped create suitable conditions for fast-paced economic growth, not matched by other countries.

France in 17th-19th centurY

The French were in intense competition with England since the early 17th Century. The competition played out across the globe and expressed itself in wars fought over the acquisition of colonies and resources. While the England-Dutch and England-Spain rivalries were primarily commercial, the competition with the French was intensely political. After frequent confrontations during the Hundred Years' War (1453-1546), the two countries continued to be at loggerheads for most of the 18th-19th centuries. The seven-year war that ended in the 1760s and later the Battle of Waterloo in 1815 saw France on the losing side. While religion was a factor sometimes (Catholic France versus Protestant England), political factors took centre stage at other times.

Political Institutions

Different paths of social, economic and political development also meant that a different set of institutions prevailed in France. For example, France was a formidable power at around the time of the Glorious Revolution. However, while the Monarchy's powers were constrained after the revolution in England, the French Monarchy's powers increased after the 'Fronde' or the civil wars in the late 17th Century.

In France, as far as political institutions are concerned, there was no standing Parliament in the 17th Century and all the power was concentrated in the hands of the Monarch. Hence, there was no check on the Monarch as opposed to the situation in England where the Parliament and the Crown were at constant loggerheads.

Financial Institutions

In respect of the economy and finances, Louis XIV, who ruled for 72 years from 1643 to 1715, consolidated the finances through more efficient taxation thereby raising more revenue and reducing the national debt. He also reorganised the army and the civil administration and sidelined the nobles and clergymen. These changes stood France in good stead through the 18th Century but the reforms put in place by Louis XIV were more individual initiatives rather than institutional. Hence, even though France had a larger economy in 1740 and the largest standing army in Europe, this was not sustainable and France was staring at bankruptcy in 1765, having lost the seven years war to England a few years back.

Judicial Institutions

Even the judicial system that evolved in France was more of code as compared to the common law in England. Louis XIV laid down the basics of the 'Code', which became the basis of the Napoleonic Code later. This adherence to a fixed code reduced the adaptability of the judiciary to take decisions as per the need of the case. This was in contrast with the common law system followed in England, which was largely based on precedent and gave a great deal of flexibility and discretion to the judge to decide the case on merits. This had the maximum impact on economic policy and protection of private property.

After the French Revolution in 1789, there was a long period of instability until the Napoleonic Wars. But the foundations of the institutions had already been laid.

To sum up, the economic, political and judicial institutions that took root in France were markedly different from those in England. And these played an important role in the global power play and other significant events such as the Industrial Revolution.

Holland in 17th-19th century

Political Institutions

The political structure in the Netherlands was a non-absolutist monarchy. The leader of the government was mostly a member of the Dynastic House of Orange (recall that William of Orange had defeated the Catholic Stuart King James II of England in the Glorious Revolution), but as an elected representative rather than as a monarch. Moreover, the Dutch Government had a lot of representation from the merchants, which allowed it to raise more loans than the monarchs of France or Spain.

However, the Netherlands was caught up in a long 30-year war with Louis XIV of France in the 18th Century, which was a fight for its survival. This led the Netherlands to mount one of the highest taxes in Europe. Adam Smith has also noted that the high taxes in the Netherlands had raised the public debt to an unsustainable level and also killed off it's manufacturing. As a result, the Netherlands, while still a rich country in the 18th Century had conceded the lead in the global sweepstakes to England and France. Not only did the long years of war with Louis XIV drain its economy, but it was also much smaller in size than England or France.

Financial Institutions

The Dutch were arguably far ahead of their European competitors when it came to financial innovation and international trade. In the late 16th Century, the Dutch ships were already trading spices from Indonesia. William Dalrymple has mentioned in his book The Anarchy that there was a Dutch delegation sent to London in end-16th Century to buy up English ships for further voyages eastwards. In fact, this is what spurred the English traders to form a company to seek monopoly rights over trade to the East Indies and India. The Dutch East India Company or the VOC was far more successful than its English counterpart. In 1602, two years after the English East India Company was formed, it had only been able to raise less the seventy thousand Pounds as compared to five hundred and fifty thousand pounds raised by the Dutch VOC. Niall Ferguson in his book The Ascent of Money has detailed the financial innovations initiated by the VOC such as the joint-stock company, which was copied by the English later.

Judicial Institutions in Holland

As regards the judicial system in the Netherlands, the civil law system was prevalent, similar to the French system. As noted above, this system was rigid as compared to the common law system followed in England and in the Netherlands too, this had implications for the protection of private property.

Conclusion

To conclude, England and France were the only two powers that were still in an intense competition by the beginning of the 19th Century. The other major European powers namely Spain, Portugal and the Netherlands had receded into the background. The journey of England from the 17th Century to the 19th Century was a story of the evolution of institutions over 200 years and how these institutions helped in expanding their Empire all over the world. The way the institutions unfolded and worked qua the objectives of the British varied across geographies and time. Hence, it was piracy and robbery against the Spanish, grabbing large plantations and land in early 17th Century in Ireland (Ulster and Munster were settled as such), religion and fishing profits in North America, sugar plantations in the Caribbean and trading and warfare in India. In the next part, we will examine why England forged ahead and became the home of the Industrial Revolution and continued to win battles over France across the world from North America, India and South-East Asia.

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal

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