Introduction

The development of large-scale trading enterprises (discussed in Chapter 2) was an essential part of the growth of national economies. Similarly, the financial requirements of nascent nation-states nurtured the growth of broad, anonymous financial markets. Although the prototypes of modern public debt instruments first appeared in the Italian city-states of Genoa and Venice and in the Low Countries in Antwerp and Bruges, the markets for these obligations reached great efficiency in England between 1688 and 1815. The primary impetus for innovation was in financing the heavy economic burdens in the form of high taxes and huge public debts that stemmed from the warfare between the island kingdom and France as they vied for European political leadership. In this competition English political and business leaders proved resourceful in forming economic institutions that helped to achieve political stability and to ensure their nation's leadership in international markets: The Bank of England was formed in 1694 and the Board of Trade was revived in 1695.

Several factors placed British public finance on a much firmer basis. Foremost were the political reforms, resulting from the Revolution of 1688, that established Parliament as the key agency in managing national fiscal affairs. This substitution of the rule of law for the divine right of a monarch made investor interests more secure. The guarantee of the nation-state was better protection than the personal promise of the sovereign. The standardization of contractual details for governmental debt obligations allowed for their uniform market pricing and rationalized the relationship between lenders and the state.