by Prosperity;Poverty Why Nations Fail: The Origins of Power
The initial circumstances in Sydney, New South Wales, were very similar to those in Jamestown, Virginia, 181 years earlier, though the settlers at Jamestown were mostly indentured laborers, rather than convicts. In both cases the initial circumstances did not allow for the creation of extractive colonial institutions. Neither colony had dense populations of indigenous peoples to exploit, ready access to precious metals such as gold or silver, or soil and crops that would make slave plantations economically viable. The slave trade was still vibrant in the 1780s, and New South Wales could have been filled up with slaves had it been profitable. It wasn’t. Both the Virginia Company and the soldiers and free settlers who ran New South Wales bowed to the pressures, gradually creating inclusive economic institutions that developed in tandem with inclusive political institutions. This happened with even less of a struggle in New South Wales than it had in Virginia, and subsequent attempts to put this trend into reverse failed.
AUSTRALIA, LIKE THE UNITED STATES, experienced a different path to inclusive institutions than the one taken by England. The same revolutions that shook England during the Civil War and then the Glorious Revolution were not needed in the United States or Australia because of the very different circumstances in which those countries were founded—though this of course does not mean that inclusive institutions were established without any conflict, and, in the process, the United States had to throw off British colonialism. In England there was a long history of absolutist rule that was deeply entrenched and required a revolution to remove it. In the United States and Australia, there was no such thing. Though Lord Baltimore in Maryland and John Macarthur in New South Wales might have aspired to such a role, they could not establish a strong enough grip on society for their plans to bear fruit. The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich. The path these countries took was followed by colonies such as Canada and New Zealand.
There were still other paths to inclusive institutions. Large parts of Western Europe took yet a third path to inclusive institutions under the impetus of the French Revolution, which overthrew absolutism in France and then generated a series of interstate conflicts that spread institutional reform across much of Western Europe. The economic consequence of these reforms was the emergence of inclusive economic institutions in most of Western Europe, the Industrial Revolution, and economic growth.
BREAKING THE BARRIERS: THE FRENCH REVOLUTION
For the three centuries prior to 1789, France was ruled by an absolutist monarchy. French society was divided into three segments, the so-called estates. The aristocrats (the nobility) made up the First Estate, the clergy the Second Estate, and everybody else the Third Estate. Different estates were subject to different laws, and the first two estates had rights that the rest of the population did not. The nobility and the clergy did not pay taxes, while the citizens had to pay several different taxes, as we would expect from a regime that was largely extractive. In fact, not only was the Church exempt from taxes, but it also owned large swaths of land and could impose its own taxes on peasants. The monarch, the nobility, and the clergy enjoyed a luxurious lifestyle, while much of the Third Estate lived in dire poverty. Different laws not only guaranteed a greatly advantageous economic position to the nobility and the clergy, but it also gave them political power.
Life in French cities of the eighteenth century was harsh and unhealthy. Manufacturing was regulated by powerful guilds, which generated good incomes for their members but prevented others from entering these occupations or starting new businesses. The so-called ancien régime prided itself on its continuity and stability. Entry by entrepreneurs and talented individuals into new occupations would create instability and was not tolerated. If life in the cities was harsh, life in the villages was probably worse. As we have seen, by this time the most extreme form of serfdom, which tied people to the land and forced them to work for and pay dues to the feudal lords, was long in decline in France. Nevertheless, there were restrictions on mobility and a plethora of feudal dues that the French peasants were required to pay to the monarch, the nobility, and the Church.
Against this background, the French Revolution was a radical affair. On August 4, 1789, the National Constituent Assembly entirely changed French laws by proposing a new constitution. The first article stated:
The National Assembly hereby completely abolishes the feudal system. It decrees that, among the existing rights and dues, both feudal and censuel, all those originating in or representing real or personal serfdom shall be abolished without indemnification.
Its ninth article then continued:
Pecuniary privileges, personal or real, in the payment of taxes are abolished forever. Taxes shall be collected from all the citizens, and from all property, in the same manner and in the same form. Plans shall be considered by which the taxes shall be paid proportionally by all, even for the last six months of the current year.
Thus, in one swoop, the French Revolution abolished the feudal system and all the obligations and dues that it entailed, and it entirely removed the tax exemptions of the nobility and the clergy. But perhaps what was most radical, even unthinkable at the time, was the eleventh article, which stated:
All citizens, without distinction of birth, are eligible to any office or dignity, whether ecclesiastical, civil, or military; and no profession shall imply any derogation.
So there was now equality before the law for all, not only in daily life and business, but also in politics. The reforms of the revolution continued after August 4. It subsequently abolished the Church’s authority to levy special taxes and turned the clergy into employees of the state. Together with the removal of the rigid political and social roles, critical barriers against economic activities were stamped out. The guilds and all occupational restrictions were abolished, creating a more level playing field in the cities.
These reforms were a first step toward ending the reign of the absolutist French monarchs. Several decades of instability and war followed the declarations of August 4. But an irreversible step was taken away from absolutism and extractive institutions and toward inclusive political and economic institutions. These changes would be followed by other reforms in the economy and in politics, ultimately culminating in the Third Republic in 1870, which would bring to France the type of parliamentary system that the Glorious Revolution put in motion in England. The French Revolution created much violence, suffering, instability, and war. Nevertheless, thanks to it, the French did not get trapped with extractive institutions blocking economic growth and prosperity, as did absolutist regimes of Eastern Europe such as Austria-Hungary and Russia.
How did the absolutist French monarchy come to the brink of the 1789 revolution? After all, we have seen that many absolutist regimes were able to survive for long periods of time, even in the midst of economic stagnation and social upheaval. As with most instances of revolutions and radical changes, it was a confluence of factors that opened the way to the French Revolution, and these were intimately related to the fact that Britain was industrializing rapidly. And of course the path was, as usual, contingent, as many attempts to stabilize the regime by the monarchy failed and the revolution turned out to be more successful in changing institutions in France and elsewhere in Europe than many could have imagined in 1789.
Many laws and privileges in France were remnants of medieval times. They not only favored the First and Second Estates relative to the majority of the population but also gave them privileges vis-à-vis the Crown. Louis XIV, the Sun King, ruled France for fifty-four years, between 1661 to his death in 1715, though he actually came to the throne in 1643, at the age of five. He consolidated the power of the monarchy, furthering the process toward greater absolutism that had started centuries earlier. Many monarchs often consulted the so-called Assembly of Notables, consisting of key aristocrats handpicked by the Crown. Though largely consultative, the Assembly still acte
d as a mild constraint on the monarch’s power. For this reason, Louis XIV ruled without convening the Assembly. Under his reign, France achieved some economic growth—for example, via participation in Atlantic and colonial trade. Louis’s able minister of finance, Jean-Baptiste Colbert, also oversaw the development of government-sponsored and government-controlled industry, a type of extractive growth. This limited amount of growth benefited almost exclusively the First and Second Estates. Louis XIV also wanted to rationalize the French tax system, because the state often had problems financing its frequent wars, its large standing army, and the King’s own luxurious retinue, consumption, and palaces. Its inability to tax even the minor nobility put severe limits on its revenues.
Though there had been little economic growth, by the time Louis XVI came to power in 1774, there had nevertheless been large changes in society. Moreover, the earlier fiscal problems had turned into a fiscal crisis, and the Seven Years’ War with the British between 1756 and 1763, in which France lost Canada, had been particularly costly. A number of significant figures attempted to balance the royal budget by restructuring the debt and increasing taxes; among them were Anne-Robert-Jacques Turgot, one of the most famous economists of the time; Jacques Necker, who would also play an important role after the revolution; and Charles Alexandre de Calonne. But none succeeded. Calonne, as part of his strategy, persuaded Louis XVI to summon the Assembly of Notables. The king and his advisers expected the Assembly to endorse his reforms much in the same way as Charles I expected the English Parliament to simply agree to pay for an army to fight the Scottish when he called it in 1640. The Assembly took an unexpected step and decreed that only a representative body, the Estates-General, could endorse such reforms.
The Estates-General was a very different body from the Assembly of Notables. While the latter consisted of the nobility and was largely handpicked by the Crown from among major aristocrats, the former included representatives from all three estates. It had last been convened in 1614. When the Estates-General gathered in 1789 in Versailles, it became immediately clear that no agreement could be reached. There were irreconcilable differences, as the Third Estate saw this as its chance to increase its political power and wanted to have more votes in the Estates-General, which the nobility and the clergy steadfastly opposed. The meeting ended on May 5, 1789, without any resolution, except the decision to convene a more powerful body, the National Assembly, deepening the political crisis. The Third Estate, particularly the merchants, businessmen, professionals, and artisans, who all had demands for greater power, saw these developments as evidence of their increasing clout. In the National Assembly, they therefore demanded even more say in the proceedings and greater rights in general. Their support in the streets all over the country by citizens emboldened by these developments led to the reconstitution of the Assembly as the National Constituent Assembly on July 9.
Meanwhile, the mood in the country, and especially in Paris, was becoming more radical. In reaction, the conservative circles around Louis XVI persuaded him to sack Necker, the reformist finance minister. This led to further radicalization in the streets. The outcome was the famous storming of the Bastille on July 14, 1789. From this point onward, the revolution started in earnest. Necker was reinstated, and the revolutionary Marquis de Lafayette was put in charge of the National Guard of Paris.
Even more remarkable than the storming of the Bastille were the dynamics of the National Constituent Assembly, which on August 4, 1789, with its newfound confidence, passed the new constitution, abolishing feudalism and the special privileges of the First and Second Estates. But this radicalization led to fractionalization within the Assembly, since there were many conflicting views about the shape that society should take. The first step was the formation of local clubs, most notably the radical Jacobin Club, which would later take control of the revolution. At the same time, the nobles were fleeing the country in great numbers—the so-called émigrés. Many were also encouraging the king to break with the Assembly and take action, either by himself or with the help of foreign powers, such as Austria, the native country of Queen Marie Antoinette and where most of the émigrés had fled. As many in the streets started to see an imminent threat against the achievements of the revolution over the past two years, radicalization gathered pace. The National Constituent Assembly passed the final version of the constitution on September 29, 1791, turning France into a constitutional monarchy, with equality of rights for all men, no feudal obligations or dues, and an end to all trading restrictions imposed by guilds. France was still a monarchy, but the king now had little role and, in fact, not even his freedom.
But the dynamics of the revolution were then irreversibly altered by the war that broke out in 1792 between France and the “first coalition,” led by Austria. The war increased the resolve and radicalism of the revolutionaries and of the masses (the so-called sans-culottes, which translates as “without knee breeches,” because they could not afford to wear the style of trousers then fashionable). The outcome of this process was the period known as the Terror, under the command of the Jacobin faction led by Robespierre and Saint-Just, unleashed after the executions of Louis XVI and Marie Antoinette. It led to the executions of not only scores of aristocrats and counterrevolutionaries but also several major figures of the revolution, including the former popular leaders Brissot, Danton, and Desmoulins.
But the Terror soon spun out of control and ultimately came to an end in July 1794 with the execution of its own leaders, including Robespierre and Saint-Just. There followed a phase of relative stability, first under the somewhat ineffective Directory, between 1795 and 1799, and then with more concentrated power in the form of a three-person Consulate, consisting of Ducos, Sieyès, and Napoleon Bonaparte. Already during the Directory, the young general Napoleon Bonaparte had become famous for his military successes, and his influence was only to grow after 1799. The Consulate soon became Napoleon’s personal rule.
The years between 1799 and the end of Napoleon’s reign, 1815, witnessed a series of great military victories for France, including those at Austerlitz, Jena-Auerstadt, and Wagram, bringing continental Europe to its knees. They also allowed Napoleon to impose his will, his reforms, and his legal code across a wide swath of territory. The fall of Napoleon after his final defeat in 1815 would also bring a period of retrenchment, more restricted political rights, and the restoration of the French monarchy under Louis XVII. But all these were simply slowing the ultimate emergence of inclusive political institutions.
The forces unleashed by the revolution of 1789 ended French absolutism and would inevitably, even if slowly, lead to the emergence of inclusive institutions. France, and those parts of Europe where the revolutionary reforms had been exported, would thus take part in the industrialization process already under way in the nineteenth century.
EXPORTING THE REVOLUTION
On the eve of the French Revolution in 1789, there were severe restrictions placed on Jews throughout Europe. In the German city of Frankfurt, for example, their lives were regulated by orders set out in a statute dating from the Middle Ages. There could be no more than five hundred Jewish families in Frankfurt, and they all had to live in a small, walled part of town, the Judengasse, the Jewish ghetto. They could not leave the ghetto at night, on Sundays, or during any Christian festival.
The Judengasse was incredibly cramped. It was a quarter of a mile long but no more than twelve feet wide and in some places less than ten feet wide. Jews lived under constant repression and regulation. Each year, at most two new families could be admitted to the ghetto, and at most twelve Jewish couples could get married, and only if they were both above the age of twenty-five. Jews could not farm; they could also not trade in weapons, spices, wine, or grain. Until 1726 they had to wear specific markers, two concentric yellow rings for men and a striped veil for women. All Jews had to pay a special poll tax.
As the French Revolution erupted, a successful young businessman, Mayer Amschel Rothschild, lived
in the Frankfurt Judengasse. By the early 1780s, Rothschild had established himself as the leading dealer in coins, metals, and antiques in Frankfurt. But like all Jews in the city, he could not open a business outside the ghetto or even live outside it.
This was all to change soon. In 1791 the French National Assembly emancipated French Jewry. The French armies were now also occupying the Rhineland and emancipating the Jews of Western Germany. In Frankfurt their effect would be more abrupt and perhaps somewhat unintentional. In 1796 the French bombarded Frankfurt, demolishing half of the Judengasse in the process. Around two thousand Jews were left homeless and had to move outside the ghetto. The Rothschilds were among them. Once outside the ghetto, and now freed from the myriad regulations barring them from entrepreneurship, they could seize new business opportunities. This included a contract to supply grain to the Austrian army, something they would previously not have been allowed to do.
By the end of the decade, Rothschild was one of the richest Jews in Frankfurt and already a well-established businessman. Full emancipation had to wait until 1811; it was finally implemented by Karl von Dalberg, who had been made Grand Duke of Frankfurt in Napoleon’s 1806 reorganization of Germany. Mayer Amschel told his son, “[Y]ou are now a citizen.”
Such events did not end the struggle for Jewish emancipation, since there were subsequent reverses, particularly at the Congress of Vienna of 1815, which formed the post-Napoleonic political settlement. But there was no going back to the ghetto for the Rothschilds. Mayer Amschel and his sons would soon have the largest bank in nineteenth-century Europe, with branches in Frankfurt, London, Paris, Naples, and Vienna.