The Political Economy of Government Debt in England (1693-1800): War, Liquidity, and Institutional Innovation

Economists and historians have offered several explanations for the significant fluctuations in 1 8th century British government interest rates. This article discusses their short-comings and supports the thesis that the fluctuations in interest rates were largely a function of England's participation in large-scale wars. The risks facing the government-being deposed in the event the war is lost or defaulting on loans because of a shortfall in revenues-hurt their "credit worthiness" in the eyes of investors. Thus, lenders demanded high interest rates to compensate themselves for investing in risky government loans.