The Dynamics of Consumption and Investment in the Victorian Economy

In the late 19th century Britain accumulated substantial overseas assets. It has been generally accepted that overseas investment displaced domestic investment. This paper questions this assumption by pointing to the rise in the savings ratio, which enabled high capital exports to be combined without reducing the rate of domestic investment. The determinants of consumption and savings are examined and it is argued that the rise in savings can be attributed to the fall in the dependency ratio. This phenomenon is familiar from modern studies of economic development and also from US experience in the 19th century. The determinants of business investment are analysed and the results indicate the importance of both real profits and accelerator effects for investment, but there is no evidence of crowding out of home investment by overseas issues. House building then is examined and demographic factors are found to be important. Crowding out effects may have been present, but this is not the only hypothesis, which is consistent with the data. The collapse in house building could also be attributed to the massive boom and bust in the property market in the period 1890-1914.