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Debt into Growth: How Sovereign Debt Accelerated the First Industrial Revolution

University of Zurich, Department of Economics, Working Paper No. 194

30 Pages Posted: 29 May 2015  

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

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Date Written: May 2015

Abstract

Why did the country that borrowed the most industrialize first? Earlier research has viewed the explosion of debt in 18th century Britain as either detrimental, or as neutral for economic growth. In this paper, we argue instead that Britain’s borrowing boom was beneficial. The massive issuance of liquidly traded bonds allowed the nobility to switch out of low-return investments such as agricultural improvements. This switch lowered factor demand by old sectors and increased profits in new, rising ones such as textiles and iron. Because external financing contributed little to the Industrial Revolution, this boost in profits in new industries accelerated structural change, making Britain more industrial more quickly. The absence of an effective transfer of financial resources from old to new sectors also helps to explain why the Industrial Revolution led to massive social change – because the rich nobility did not lend to or invest in the revolutionizing industries, it failed to capture the high returns to capital in these sectors, leading to relative economic decline.

Keywords: Crowding out, debt crises, Industrial Revolution, Ricardian equivalence, misallocation, financial repression, structural change, productivity

JEL Classification: E22, E25, E62, H56, H60, N13, N23

Suggested Citation

Ventura, Jaume and Voth, Hans-Joachim, Debt into Growth: How Sovereign Debt Accelerated the First Industrial Revolution (May 2015). University of Zurich, Department of Economics, Working Paper No. 194. Available at SSRN: https://ssrn.com/abstract=2611159 or http://dx.doi.org/10.2139/ssrn.2611159

Jaume Ventura (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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