Paths toward the modern fiscal state : England (1642-1752), Japan (1868-1895), and China (1850-1911)

Abstract

This dissertation examines the rise of the modem fiscal state, which enabled the state to use centrally collected revenues from indirect taxes to mobilize financial resources either through long-term borrowing or issuing paper notes. The modem fiscal state greatly enhanced state capacity and stimulated financial development; it thus represented a crucial stage in the transformation from early modem to modem state and economy. My comparative analysis of England, Japan, and China shows multiple sequences and outcomes. All three cases had well-established early modem states and sophisticated market economies. Under the pressure of increasing spending demands, state actors conducted similar experiments, such as short-term borrowing, issuing of paper notes, and the collection of taxes upon domestic consumption. England became a modem fiscal state by the 1750s when its government used the revenues from excises and the customs to service its massive long-term debt. Japan made the leap in the late 1880s when tax revenues were employed to back up paper money, i.e., banknotes issued by the Bank of Japan. China, however, failed to develop into a modem fiscal state. I put forward a temporally-based causal mechanism which resulted from the interactions between a profound state credit crisis and socio-economic conditions. Such credit crises were caused by excessive dependence upon fictitious credit instruments such as bills of short-term borrowing unfunded by tax revenue in England or non-convertible paper notes in Japan. As these credit crises were an unintended consequence of earlier policies or events, they were exogenous to subsequent institutional development.

(cont.) As a problem that had to be solved, they forced experimentation, "selected" effective institutional arrangements and competent financial officials, and facilitated a continuous learning and accumulation of effective elements in a process full of uncertainties. Socio-economic conditions, such as the size of consumption and the degree of concentration of production, were important to sustain this process in which various elements came to form a mutually reinforcing system. The lack of such an interactive process is used to explain the absence of a modem fiscal state in China. This institutional model reconciles the uncertainties and multiplicity of possible outcomes in the early stages of the process and the eventual observed outcome. This dissertation contributes to the study of institutional dynamics, which aims to understand how specific institutions emerge and consolidate.