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).

My next (academic) book

... is one step closer to completion. Peter Temin and I have been working away in the archives of Hoare's Bank for a some years now, producing a couple of articles along the way [for a "best off", click here or here]. We now have a book manuscript, entitled "Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1800", which we are circulating prior to a book conference at Yale in early October.

The argument? Over the last 30 years, economic historians have learned that growth was "slow" in Britain after 1750 (Crafts, Harley, Antras and Voth). At the same time, there is plenty of evidence that the "mechanical arts" progressed quickly (Mokyr, Temin) - a wave of useful gadgets found its way into the British workplace. How do we explain the disconnect? Our answer is - finance. Or, more precisely, the absence of it, as well as the wrong kind. Scholars have long talked about a "financial revolution" after 1700 in Britain (Dickson). This revolution was about public finance, not credit intermediation. Using detailed micro-evidence, we examine why, in Postan's words:

“the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of her wealth found its way into the new industrial enterprises …”

Our answer is that government regulations in the form of the usury laws and the Bubble Act stifled the development of private finance; government borrowing shocks - crowding out - in addition made financial intermediation much more difficult. In combination, this slowed things down a lot. Britain's industrial transformation after 1750 could have been a lot faster if private finance had played a bigger role. The fact that private capital did not find its way into enterprise readily, and that most financing took the form of retained profits, is a cause for the big rise in the capital share of output, as recently documented by Bob Allen (amongst others).

We document all these challenges through the lens of five goldsmith banks, whose records have survived to the present. The banking in industry in 1700 looked more like Silicon Valley today - lots of entry, lots of exit, little permanence. By 1750 or so, stability had become the norm -- this is what Peter and I call the "Triumph of Boring Banking". We show how these firms survived and eventually learned to prosper, despite stifling government regulations. We like to think it's an interesting exercise in "business history meets macro and financial history", but now it's time for advice from some of our readers.

You can have a peek here:


Temin-Voth book manuscript

If you really want to know

what is going on in the Spanish economy, read Edward Hugh [long post].

Spain keeps shrinking

Spain is much in the headlines these days. Markets worry about the PIGS (Portugal, Ireland, Greece, and Spain) not being able to meet their obligations. Paul Krugman has been pointing out that the cases are very different -- that Greece lied and cheated its way into EMU is well-known, as is the fact that its fiscal policies have been utterly irresponsible for as long as anyone can remember. Spain, on the other hand, had a surplus not that long ago, and its overall debt is still less than Germany's. The problem is not fiscal recklessness, but a massive real appreciation following EMU that left the economy largely uncompetitive on world markets. Institutions - labor market institutions in particular - are not up to dealing with this kind of problem, and the time-honored solution of the good old peseta days (devaluation) is no longer on the table. Now, news from the last quarter of 2009 shows that in contrast to almost all other OECD countries, Spain is still shrinking. I was particularly amused to see the folks over at Marketwatch reporting that

"Analysts at Capital Economics said Thursday's GDP data backs up the theory that a return to solid and unsustainable growth in Spain is unlikely anytime soon."

As typos go, this one is just wonderful. I am sure they meant sustainable, but... there is so much that was utterly unsustainable about the boom in the last 10 years that one doesn't even know where to start. Building houses that nobody wants to live in, at prices no-one is willing to pay, is my #1 on the list. It also sums up nicely the problem -- the old growth model post-1999 won't work, and there is not much of an alternative in sight. The government keeps saying R+D will pull Spain out of the crisis, but that is like Greece saying that a closer look at its national accounts show a massive surplus.
This relates to another of this week' highlights: Tim Kehoe was giving here on Tuesday, giving a talk at the Barcelona GSE about lessons from the Great Depressions of the 20th century for the Spanish financial crisis. He compared Chile to Mexico, and (not entirely surprisingly) blamed divergent fortunes on the ill tidings brought by wrong-footed government intervention in the latter. A case that is not in the book that he edited with Prescott, which I think could have provided a more appropriate analogy, is interwar Britain. Britain re-entered the gold standard in 1925 at an overvalued exchange rate, hoping that the currency regime would provide "discipline" for the last 10 percent of factor cost adjustment vis-a-vis the US. Instead, it got sub-par growth while everyone else enjoyed the roaring twenties... By Kehoe's reckoning, Spain's unit labor costs are now about 135% of their 2000 level, while Germany's are at 110%. While unions were powerful in interwar Britain, I am sure they are more powerful in Spain today. There is none of the grim determination to regain competitiveness that I saw in Germany over the last 20 years, after the reunification boom and debt orgy produced a sharp decline in competitiveness. My sense is that a lost decade or two for Spain are beginning to look more likely by the day. And who knows? When Tim Kehoe presents the Catalan edition of his book in a few years (he actually speaks Catalan), there may be a chapter in it on the Spanish depression of 2008-2018.