Thursday, 1 March 2012

One Monster Slain

“Writing a book is an adventure. To begin with, it is a toy and an amusement; then it becomes a mistress, and then it becomes a master, and then a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster, and fling him out to the public.”
- Winston Churchill

Peter Temin and I have just flung our monster into the waiting arms of Oxford University Press -- the manuscript of our book Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700. We even made it by the contractual deadline, which cannot be that common for an academic book. After a great book conference in Yale in October last year (generously funded by an anonymous donor, approached through the good offices of Will Goetzmann at the IFC at Yale School of Management), we revised things thoroughly. As they say, your friends stab you in the front... 

What's the argument? That growth in England during the Industrial Revolution was "slow" (as established by a generation's worth of research) in part because private financial intermediation didn't work very well. We look at data from goldsmith banks to show how dysfunctional bank lending was in channeling money towards productive uses. Why was it thus? Why did the "financial revolution" after 1688 lead to cheaper public credit, but less private intermediation? Because of financial repression, is our argument - the government stepped in and made it hard for banks to do their job. Usury laws limited interest rates and skewed lending decisions towards established borrowers; the Bubble Act made incorporation impossible so that no new companies could be founded; and the six-partner rule kept English banks too small to be of much use. On top of that, there was massive "crowding out" as a result of many wars after 1700. A look at the American mirror - where all these restrictions quickly disappeared after independence - shows how stifling English financial regulation was. You can read an earlier draft here scribd) and here (pageflip view).

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