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Credit Rationing and Crowding-Out During the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862

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  • Temin, Peter
  • Voth, Hans-Joachim

Abstract

Crowding-out during the British Industrial Revolution has long been one of the leading explanations for slow growth during the Industrial Revolution, but little empirical evidence exists to support it. We argue that examinations of interest rates are fundamentally misguided, and that the eighteenth- and early nineteenth-century private loan market balanced through quantity rationing. Over 90% of all loans were made at the maximum permissible lending rate, as set by the usury rate. Hence, earlier investigations such as the one by Mirowski et al. could not undertake a valid examination of the crowding-out hypothesis. Using a unique set of observations on lending volume at a London goldsmith bank, Hoare’s, we document the impact of wartime financing on private credit markets. Whenever public borrowing rose above trend, private lending declined markedly. We conclude that there is considerable evidence that government borrowing, especially during wartime, crowded out private credit, and that the magnitude of the effect is important enough to explain at least partly why British growth during the period 1750-1850 was relatively slow.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4453.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4453

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Keywords: british industrial revolution; credit rationing; crowding-out; finance; growth;

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  1. N. F. R. Crafts & C. K. Harley, 1992. "Output growth and the British industrial revolution: a restatement of the Crafts-Harley view," Economic History Review, Economic History Society, Economic History Society, vol. 45(4), pages 703-730, November.
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  3. Peter L. Rousseau & Richard Sylla, 2003. "Financial Systems, Economic Growth, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 373-416 National Bureau of Economic Research, Inc.
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  5. Mokyr, Joel, 1987. "Has the industrial revolution been crowded out? Some reflections on Crafts and Williamson," Explorations in Economic History, Elsevier, Elsevier, vol. 24(3), pages 293-319, July.
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  9. Quinn, Stephen, 1997. "Goldsmith-Banking: Mutual Acceptance and Interbanker Clearing in Restoration London," Explorations in Economic History, Elsevier, Elsevier, vol. 34(4), pages 411-432, October.
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  12. Peter Temin & Hans-Joachim Voth, 2004. "Riding the South Sea Bubble," American Economic Review, American Economic Association, vol. 94(5), pages 1654-1668, December.
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  21. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
  22. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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Citations

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Cited by:
  1. David R Stead, . "Fixed Rent Contracts in English Agriculture, 1750-1850: A Conjecture," Discussion Papers, Department of Economics, University of York 05/01, Department of Economics, University of York.
  2. Efraim Benmelech & Tobias J. Moskowitz, 2007. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," NBER Working Papers 12851, National Bureau of Economic Research, Inc.
  3. Kiril Danailov Kossev, 2008. "The Banking Sector and the Great Depression in Bulgaria, 1924 - 1938: Interlocking and Financial Sector Profitability," Working Papers 76, Bank of Greece.
  4. Mauricio Drelichman & Hans-Joachim Voth, 2008. "Debt Sustainability in Historical Perspective: The Role of Fiscal Repression," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 657-667, 04-05.
  5. Maria Alejandra Irigoin & Regina Grafe, 2012. "Bounded Leviathan: or why North and Weingast are only right on the right half," Economic History Working Papers, London School of Economics and Political Science, Department of Economic History 44492, London School of Economics and Political Science, Department of Economic History.

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