Capital Meets Democracy: Representative Institutions and the Rise of Mass Suffrage in Sovereign Bond Markets

Abstract

How compatible is mass democracy with financial capitalism? We examine this classic debate through the reaction of sovereign bond markets to the rise of mass suffrage in Europe and the Americas during the nineteenth century, which represented both the “first wave of democracy” and “age of capital”. Utilizing detailed panel data (1800-1920) on suffrage reforms and sovereign bond yields, we identify two distinct trajectories. In countries with strong pre-existing representative institutions, measured in terms of the frequency of meetings by representative assemblies during the eighteenth century, suffrage expansion had little impact on sovereign bond yields. In countries with weak pre-existing representative institutions, however, suffrage expansion contributed to large long-term increases in the premium that investors demanded to hold sovereign debt. The findings reveal how the strength of historically inherited representative institutions structured the threat of political uncertainty, instability, and expropriation posed by suffrage expansion, with important consequences for sovereign credibility in capital markets.