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