Rent-Seeking and the Organization of the Fiscal-Military State: Central Banking in England and the United States, 1694-1834

Date Published:

Jan 1, 1994


How do very large groups of self–interested and free–riding individuals arrive at cooperative outcomes and establish institutional public goods that govern their behavior? The argument of this paper is that a broad and heterogeneous group of individuals who share interests in certain public goods may, paradoxically, benefit from the rent–seeking activities of a narrow segment of the society. The logic is that legalized monopoly privileges are worthless in the absence of a functioning market, and a functioning market requires mechanisms to protect individual rights to property. Since property rights must exist before a predatory group can benefit from government–imposed exemptions from market forces, there is a self–interested rationale for rent–seekers to organize and lobby for stable property rights. Paradoxically, property rights that benefit an entire community may arise as a function of the predatory actions of a few who seek to establish market forces only to get the government to limit them in their favor. The theory is applied to the origins and early evolution of central banking in England and the United States.


Working Paper 94–01, Weatherhead Center for International Affairs, Harvard University, 1994.