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Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700
After 1688, Britain underwent a revolution in public finance, and the cost of borrowing declined sharply. Leading scholars have argued that easier credit for the government, made possible by better property-rights protection, lead to a rapid expansion of private credit. The Industrial Revolution, according to this view, is the result of the preceding revolution in public finance.
In Prometheus Shackled , prominent economic historians Peter Temin and Hans-Joachim Voth examine this hypothesis using new, detailed archival data from 18th century banks. They conclude the the financial revolution led to an explosion of public debt, but it stifled private credit. This led to markedly slower growth in the English economy. Temin and Voth collected detailed data from several goldsmith Child's, Gosling's, Freame and Gould, Hoare's, and Duncombe and Kent. The excellent records from Hoare's, founded by Sir Richard Hoare in 1672, offer particular insight.
Numerous entrants into the banking business tried their hand at deposit-taking and lending in the early 17th century; few survived and fewer thrived. Hoare's and a small group of competitors did both. Temin and Voth chart the growth of the successful banks in the face of frequent wars and heavy-handed regulations. Their new data allows insights into the interaction between financial and economic development. Government regulations such as (a sharply lower) maximum interest rate caused severe misallocation of credit, and a misguided attempt to lighten the nation's debt burden led directly to the South Sea Bubble in 1720. Frequent wars caused banks to call in loans, resulting in a sharply slower economic growth rate. Based on detailed micro-data, the authors present conclusive evidence that wartime borrowing crowded out investment. Far from fostering economic development, England's financial revolution after 1688 did much to stifle it -- the Hanoverian "warfare state" was a key reason
for slow growth during Britain's Industrial Revolution. Prometheus Shackled is a revealing new take on one of the most important periods of economic and financial development.
In Prometheus Shackled , prominent economic historians Peter Temin and Hans-Joachim Voth examine this hypothesis using new, detailed archival data from 18th century banks. They conclude the the financial revolution led to an explosion of public debt, but it stifled private credit. This led to markedly slower growth in the English economy. Temin and Voth collected detailed data from several goldsmith Child's, Gosling's, Freame and Gould, Hoare's, and Duncombe and Kent. The excellent records from Hoare's, founded by Sir Richard Hoare in 1672, offer particular insight.
Numerous entrants into the banking business tried their hand at deposit-taking and lending in the early 17th century; few survived and fewer thrived. Hoare's and a small group of competitors did both. Temin and Voth chart the growth of the successful banks in the face of frequent wars and heavy-handed regulations. Their new data allows insights into the interaction between financial and economic development. Government regulations such as (a sharply lower) maximum interest rate caused severe misallocation of credit, and a misguided attempt to lighten the nation's debt burden led directly to the South Sea Bubble in 1720. Frequent wars caused banks to call in loans, resulting in a sharply slower economic growth rate. Based on detailed micro-data, the authors present conclusive evidence that wartime borrowing crowded out investment. Far from fostering economic development, England's financial revolution after 1688 did much to stifle it -- the Hanoverian "warfare state" was a key reason
for slow growth during Britain's Industrial Revolution. Prometheus Shackled is a revealing new take on one of the most important periods of economic and financial development.
224 pages, Hardcover
First published December 3, 2012
About the author
Peter Temin
41 books48 followersPeter Temin was an economist and economic historian, serving as the Gray Professor Emeritus of Economics at MIT, where he was formerly the head of the Economics Department.
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Displaying 1 - 2 of 2 reviews
June 10, 2024
I thoroughly enjoyed this book. It introduced me to the complex system of credit rationing that became commonplace due to the prevalence of usury laws in 17th and 18th century England and their negative effect on access to capital for industry. I also found the sections on the crowding out of capital by government borrowing as an explanation for limited economic growth during the industrial revolution quite interesting.
November 12, 2015
This book is a little bit of a mess. It's the result of an odd mash up of previous articles the authors Peter Temin and Hans-Joachim Voth published about the early years of the Hoares Bank in England, and it's not clear what they hoped to do in this book that they hadn't done earlier.
Admittedly, the records of Hoares Bank that Temin and Voth stumbled upon offer an unprecedented window on the birth of modern banking, and their previous articles have helped reshape our vision of how banking emerged. Fortunately for them, and us, the Hoares Bank has stayed in business for over 300 years, and it remained at the same location in downtown London for almost the entirety of that period. All the while it kept faultless care of its earliest ledgers and loans. In this book, the authors supplement that research with some work from Barclays and Childs & Co., but Hoares remains at the heart of the argument.
Some real revelations from that research are that goldsmiths, such as the Hoare family, transformed into bankers because they were best at valuing plate and jewelry that constituted most of the collateral for loans in the banks' early years. The book also shows that early credit was given to aristocrats and commoners alike, in amounts ranging from tens of thousands to dozens of pounds, and was increasingly loaned on mortgages and bonds as time went on.
There is one important caveat that the authors make in this story of broad-based financial deepening. They use the records to show that after the usury ceiling was lowered from 6% to 5% in 1713 (largely as a sop to indebted land-owners), loans were increasingly rationed, and increasingly went to the higher echelons of society. Instead of requiring less collateral, as they began doing in the earliest years of the 18th century, the bank began requiring more and more (a jump from about 20% collateralized loans to 60% in a few years) and shortening the length of loans. The authors convincingly show that the financial repression of the usury ceiling and limits on bank incorporation, as well as the crowd-out of investment by the national debt, prevented the economy from growing to its full potential and banks from giving credit to needy entrepreneurs. They even argue that this financial repression explains the failure of the Industrial Revolution to lead to an improved standard of living throughout the 18th century.
Whatever one thinks of that argument, one can only admire the work Temin and Voth have done to make it. Too bad its marred in this book by unnecessary asides about everything from Hogarth prints to the South Sea bubble.
Admittedly, the records of Hoares Bank that Temin and Voth stumbled upon offer an unprecedented window on the birth of modern banking, and their previous articles have helped reshape our vision of how banking emerged. Fortunately for them, and us, the Hoares Bank has stayed in business for over 300 years, and it remained at the same location in downtown London for almost the entirety of that period. All the while it kept faultless care of its earliest ledgers and loans. In this book, the authors supplement that research with some work from Barclays and Childs & Co., but Hoares remains at the heart of the argument.
Some real revelations from that research are that goldsmiths, such as the Hoare family, transformed into bankers because they were best at valuing plate and jewelry that constituted most of the collateral for loans in the banks' early years. The book also shows that early credit was given to aristocrats and commoners alike, in amounts ranging from tens of thousands to dozens of pounds, and was increasingly loaned on mortgages and bonds as time went on.
There is one important caveat that the authors make in this story of broad-based financial deepening. They use the records to show that after the usury ceiling was lowered from 6% to 5% in 1713 (largely as a sop to indebted land-owners), loans were increasingly rationed, and increasingly went to the higher echelons of society. Instead of requiring less collateral, as they began doing in the earliest years of the 18th century, the bank began requiring more and more (a jump from about 20% collateralized loans to 60% in a few years) and shortening the length of loans. The authors convincingly show that the financial repression of the usury ceiling and limits on bank incorporation, as well as the crowd-out of investment by the national debt, prevented the economy from growing to its full potential and banks from giving credit to needy entrepreneurs. They even argue that this financial repression explains the failure of the Industrial Revolution to lead to an improved standard of living throughout the 18th century.
Whatever one thinks of that argument, one can only admire the work Temin and Voth have done to make it. Too bad its marred in this book by unnecessary asides about everything from Hogarth prints to the South Sea bubble.
Displaying 1 - 2 of 2 reviews