Debt into Growth

Over the course of a century, a country accumulates towering debts, mainly to finance foreign wars – it is fighting abroad in two years out of three. Could such a country transition from centuries of stagnation to sustained growth? Surprisingly, the answer is yes – the Industrial Revolution in Britain occurred under such circumstances. But 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.

How Britain’s debt accumulation accelerated industrialization

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.

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Program area
Crowding out, debt crises, Industrial Revolution, Ricardian equivalence, misallocation, financial repression, structural change, productivity
European Research Council, Swiss National Science Foundation, Spanish Ministry of Science and Innovation, Generalitat de Catalunya, Barcelona GSE Research Network.
Study type
Data analysis (historical data)
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Jaume Ventura
Universitat Pompeu Fabra
Joachim Voth

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