The relationship between financial development and economic growth was extensively researched before the Global Crisis of 2007. After the crisis, attention naturally shifted to the risks involved in financial development (an example would be Reinhart and Rogoff 2009). Some economists have argued that there is too much finance (Arcand et al. 2015).
To account for the emergence of modern growth and the Industrial Revolution, research on the development of financial markets in England has focused on the period following the Glorious Revolution of 1688. North and Weingast (1989), a highly influential paper, argued that institutional reforms – establishing credible commitment – enacted after the Glorious Revolution contributed to financial development, and therefore to industrialisation and growth.
An overlooked episode of financial development in England during the 17th century, when financial development was still in its infancy,1 leads me to argue that significant financial development and growth occurred before the Glorious Revolution (Sussman 2019).
The Corporation of London was a chartered corporation that governed the City of London. It originated in the 12th century, and its governance structure included the Lord Mayor, the Court of Aldermen (executive branch), and the Court of Common Council (a deliberative institution). I have been able to extract individual debt contracts from the accounts of the Corporation of London, and so construct a continuous time series of interest rates paid by the Corporation to its lenders from 1638 to 1683.
The decline in English interest rates
These contracts show that significant financial development occurred in the 17th century, in particular after the Restoration in 1660. Figure 1 shows that, from the 1630s to the 1680s, interest rates in London co-moved with those in Amsterdam, the most developed financial centre at that time. The correlation coefficient between the two financial centres is 0.8. Less than a decade before the Glorious Revolution, the spread between them had declined to zero when London borrowing rates reached 4% in 1680.
Figure 1 Borrowing cost of the Corporation of London and Province of Holland, 1638-1683
Sources: London: COL/CHD/LA/01/001-002; COL/CHD/CT/01/002-017. Borrowing rates weighted by loan amount. Province of Holland: average cost of debt from Wantje Fritschy Gewestelijke Financiën ten tijde van de Republiek der Verenigde Nederlanden, 1572-1795. Province of Holland G-J: market prices communicated by Gelderbloom and Joonker.
Using these data, we can estimate the determinants of the decline in borrowing rates in London. Given the co-movement of the Dutch and English borrowing rates as shown in Figure 1, we can assume that the two markets were integrated, and estimate a simple interest rate parity equation between London and Amsterdam that includes a risk premium and a liquidity premium. The maturities of debts were about five years and the exchange rate between the two capitals was fixed, and so we can ignore exchange rate expectations. The estimation results show that the decline in borrowing rates in London was driven by Amsterdam’s financial development (55%), and a reduction in the liquidity premium in London’s financial market (45%).
Figure 2 shows that the liquidity of London’s debt market rose at this time. It plots the borrowing rate, the borrowing rate predicted by my econometric analysis, and the volume of debt. From the 1660s, debt levels increased significantly and interest rates declined and converged to Dutch levels. Consistent with accounts of the rise of the goldsmith-bankers (Quinn 1997), the rising debt volumes and declining interest rates are evidence for financial deepening.
Figure 2 Borrowing rates of the Corporation of London and stock of its debt, 1638-1683
Sources: COL/CHD/LA/01/001-002; COL/CHD/CT/01/002-017. Borrowing rates weighted by loan amount.
Using a censoring regression analysis (Tobit) to take account of the usury ceiling, we can see that for most of the period the Corporation of London borrowed at rates below the usury rate, as Figure 2 shows. The usury ceiling was binding in the 1650s when Parliament lowered it from 8% to 6%. The restoration of the Stuart monarchy in 1660 apparently ushered in a period of rapid financial development as borrowing rates dropped below the usury ceiling. The default of the crown in 1672, known as the ‘stop of the exchequer’ caused a financial crisis. Interest rates rose rapidly, and regression results show that in 1672 the usury ceiling was binding. But business returned to usual within a year, at least as far as the Corporation of London was concerned.
An increase in the supply of financial assets
Lenders to the Corporation of London were wealthy. The data included loans from 1,500 wealthy individuals: gentry, merchants, widows, and spinsters. The median loan was £200, probably £30,000 today (Table 1).
Table 1 Summary statistics of unsecured borrowing by the Corporation of London: 1638-1683
Sources: COL/CHD/CT/001 to 019; COL/CHD/LA/001 and 002. Loan duration based on a sample from 1662-6 and 1680-3.
Loans were unsecured, and the money was borrowed for the "City’s use on the City’s bond":
"Men may put their moneys, for the assurance whereof, and the payment of its use (which is five in the hundred per annum), they have the security of the Chamber, which is accounted the best this day in England.”
(Benbrigge 1646: 5)2
The debt of the Corporation of London was raised to finance public works and infrastructure after the Great London Fire of London, 1666 (D’maris et al. 2019). The large demand for capital offered wealthy individuals new financial investment opportunities. The fall in the rates at which they could borrow shows the demand for such assets. The default of the Crown in 1672, and the resulting financial difficulties of the goldsmith-bankers, only temporarily affected the rapid growth of the stock of financial assets held by the public.
Our findings support the view that the break from the Malthusian Trap and the Industrial Revolution in England began in the middle of the 17th century (as argued by Clark 2005, Kelly and Ó Gráda 2016, and Broadberry et al. 2015 among others). Figure 3 shows a strong correlation between financial deepening and increases in both real GDP per capita, and real GDP per capita growth.
Figure 3 Corporation of London Borrowing rates and GDP per capita, 1638-1683
a) Borrowing rates and real GDP per capita
b) Borrowing rates and GDP per capita growth
Source: Sussman (2019).
This implies a close association between financial development and economic growth. The short time series does not establish beyond doubt the direction of causation, but the two main factors that drove interest rates down were likely exogenous to British economic growth and institutional change: the decline in Dutch rates and financial deepening caused by the increase in the supply of financial assets following the Great Fire of London.
The end of the Corporation's influence
Our story ends in 1683. In that year the Corporation of London suspended interest payments on its unsecured debt. In Coffman et al. (2019), my co-authors and I suggest that the default was a result of heavier-than-expected commitments and insufficient cash flows related to the reconstruction of the infrastructure and public buildings of London after the Great Fire in 1666.
A few months after the default, in October 1683, the King suspended the privileges of the Corporation of London in what is known as the Quo Warranto act. Privileges were restored in 1688, immediately after the Glorious Revolution. But the Corporation of London was riddled with debt and did not resume its role as a financial intermediary. Financial development then continued along a path that has been extensively researched.
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Ashton, R (1960), The Crown and the Money Market, 1603-1640, Clarendon Press
Benbrigge, J (1646), Vsura accommodata, or A ready way to rectifie usury, in a briefe declaration how that evill which is so often found and justly complained to be sometimes in lending for gaine, may find a safe and certaine remedy, Nathaniel Brookes at the Angell in Cornhill below the Exchange.
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Carlton, C (1974), The Court of Orphans, Leicester University Press.
Clark, G (2005), “The Condition of the Working Class in England, 1209–2004”, Journal of Political Economy 113(6): 1307–1340.
Coffman, D, J Stephenson, and N Sussman (2019), "Financing the rebuilding of the City of London after the Great Fire of 1666", working paper.
Habakkuk, H J (1952), “The Long-Term Rate of Interest and the Price of Land in the Seventeenth Century”, The Economic History Review 5(1): 26–45.
Kelly, M, and C Ó Gráda (2016), “Adam Smith, Watch Prices, and the Industrial Revolution”, The Quarterly Journal of Economics 131(4): 1727–52.
North, D C, and B R Weingast (1989), “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England”, The Journal of Economic History 49(4): 803–832.
Quinn, S (1997), “Goldsmith-Banking: Mutual Acceptance and Interbanker Clearing in Restoration London”, Explorations in Economic History 34(4): 411–32.
Reinhart, C M, and K S Rogoff (2009), This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
Roseveare, H (1991), The Financial Revolution, 1660-1760, Longman.
Sussman, N (2019), "The Financial Development of London in the 17th Century Revisited: A View from the Accounts of the Corporation of London", CEPR discussion paper 13920.
 The early history of the financial intermediation by the Corporation of London was studied by Ashton (1960), who mainly looked at the forced loans imposed on the Corporation before the Civil War. Carlton (1974) studied the Corporation of London’s orphan’s fund.
 Quoted in Footnote 4 of Habbakuk (1952).