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

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.