Fiscal fragmentation and absolutism characterized the Old Regime. Fundamental political transformations resolved weak- and strong-state fiscal problems: European states gained tax force through fiscal centralization, and restricted executive power through limited government. The final result was institutional balance. By the eve of World War I in 1913, states could gather large tax revenues, and rulers faced parliamentary spending constraints. This claim guides the rest of the inquiry, which the book now pursues through a rigorous examination of the new database, using a combination of descriptive, case-study, and statistical methods.

The empirical investigation of the effects of political transformations on public finances starts with sovereign credit. The ability of governments to tap the resources of society to fund expenditures through borrowing is important in its own right. Furthermore, like an electrocardiogram, which documents the activity of the human heart, we may think of free-market long-term rates of interest on government bonds as vital signs of the fiscal health of nations. When these rates are charted as time series, the impacts of political reforms, wars, revolutions, defaults, and other events are evident. This chapter first characterizes the theoretical links between political change and credit risk. It then describes the yield data and examines the times series for select Group 1 countries. In turn, we gain a basic understanding of the fiscal effects of political transformations.