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Saumitra Jha: How Financial Innovation Helped Start the English Civil War (and Why That’s Important Today)


Saumitra Jha: How Financial Innovation Helped Start the English Civil War (and Why That’s Important Today)

A Stanford scholar explains why financial mechanisms could be useful to align diverse interests.
An illustration of the Union Jack flag overlayed with British revolutionaries taking the scepter from King Charles I
A Stanford scholar shows how newly formed stock companies spurred the English Civil War. | Tricia Seibold and iStock

In the mid-1600s, something revolutionary happened in England: Parliament rose up against King Charles I, leading to a violent civil war that cost upward of 200,000 people their lives and Charles his head. The result was the establishment of what is now one of the world’s most enduring representative governments, a model that the United States and many other nations followed.

The question of why Parliament rebelled against Charles has attracted intense interest in the four centuries since. Most historians point to three causes for the revolt in England: overly greedy monarchs, the emergence of a commercial middle class, and the religious struggle accompanying the rise of Protestantism.

But a new paper by Stanford Graduate School of Business professor Saumitra Jha posits a different cause — one that is fraught with import, not only in the context of history but also in the modern context of how representative governments can be established and nurtured. Jha makes the case that financial innovation was a driving force in the rise of England’s representative government. In the following interview, edited for length and clarity, he explains why.

What got you interested in the ascendency of England’s Parliament?

I’m interested in strategies that societies can use to resolve conflicts of interest and adopt policies that benefit a lot of people without resorting to political violence. Financial innovations can be used to align the incentives of different groups in favor of broader policy objectives.

Specifically, I noticed that the period of the Civil War was a period during which there was a lot of innovation happening in England’s financial sectors, particularly around the new opportunities that emerged with the discovery of the New World and the expansion of overseas trade. The first English joint stock companies were formed to fund these overseas ventures, and for the first time, non-merchants gained ownership in trade activities.

How did these companies affect the domestic politics of England?

The king controlled these new trade opportunities. While the Crown didn’t have much discretion domestically, it had broad rights and discretion overseas. As a result, the Crown’s revenues from overseas customs rose from 5.2% of total revenue in 1552 to 52.5% on the eve of the Civil War in 1642.

If you benefit financially when your country does well, it can create a spillover effect on your political behaviors.
Saumitra Jha

But the political elites bought shares in the ventures — 23% of all members of Parliament [MPs] between 1575 and 1630 invested in overseas joint stock companies. Their ownership created a conflict of interest between them and the Crown. The more revenue the king claimed, the less they earned on their investments. This gave them the political incentive to try to get some of those overseas rights from the king. They tried to do that legislatively, and then, they did it violently via civil war.

How did you prove that overseas share ownership actually caused that to happen?

I was able to find data on which MPs invested, and then I used statistical analysis to determine how that affected their future political affiliation. The paper took some time because it required reading the biographies of and collecting data on more than 1,800 MPs. I feel like I know them personally, which turned out to be very useful because it helped me feel more confident that what I was onto was more than a statistical artifact.

What degree of influence did overseas shareholding have on the behavior of Parliament?

This is a critical question. Was it big potatoes or small potatoes? I show that shareholding investment changed propensity of MPs to support parliamentary supremacy by around 20 percentage points. The effect was big enough to move moderates away from supporting the royalists. Four out of the five MPs that the king himself identified as the ring leaders and whom he illegally entered Parliament to try to arrest — itself a major step on the road to violence — are people who would have been royalists in the absence of shareholding.

Because of this shareholding mechanism, a supermajority formed in Parliament. It created a broadening of interests that led to an institutional change, which supported representative government rather than government by the few.

Are there historical examples of financial innovation creating peaceful political change?

We saw it in America after the Revolution, when political elites and non-elites invested in institutions like the First Bank of the United States, which gave them a common interest in peace and lessened political risk between the states. It also happened in Japan, during the Meiji Restoration, when the samurai were given bonds in return for their feudal rights. The samurai who were the most likely to resist modernization became bankers who invested in the local rice and silk merchants. As a result, they didn’t want to go around marauding.

I’m working on a book called Swords into Bank Shares that includes a series of papers that look at the use of finance to align the political interests of people from disparate groups.

Does this suggest countries can use financial mechanisms like shareholding to move toward more representative forms of government today?

I think so. If you benefit financially when your country does well, it can create a spillover effect on your political behaviors. This is true whether you’re an elite or an individual voter.

If you think about it from a policymaker’s perspective — and as political economists, policymakers are one of our target audiences — financial mechanisms could be a very useful set of strategies for getting political interests aligned and reducing resistance to beneficial reforms. We know that these approaches have worked in certain contexts, but we are only beginning to learn how to apply these strategies to new environments. We need to do more research to figure that out.

Saumitra Jha is associate professor of political economy at Stanford Graduate School of Business. He earned his PhD in economics from Stanford University. His paper, “Financial Asset Holdings and Political Attitudes: Evidence from Revolutionary England,” will be published in Quarterly Journal of Economics in August.

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