Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700

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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...

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Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700

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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 opposite: 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 banks: 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.

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Editorial Reviews

From the Publisher
"A major contribution to economic history, business history, social history, and economics, Prometheus Shackled resolves a great enigma about the Industrial Revolution by explaining why economic growth was so slow despite massive technical change." —Philip T. Hoffman, California Institute of Technology

"Based on newly opened archival material, two economists have written a sparkling and provocative book on how banking worked in the past that will force all scholars working in the area to re-examine their notions about the economics of the British Industrial Revolution, the importance of banking and finance in economic development, and the role that government regulation has played in the process of capital accumulation and industrialization." —Joel Mokyr, Northwestern University; author of The Enlightened Economy

"Peter Temin and Joachim Voth have written a marvelous blend of business history and economic analysis. Their careful study of Hoares Bank documents the origins of modern banking and relates the story to the state's insatiable demand for credit to finance war. Prometheus Shackled is a pleasure to read and calls into question many grand narratives that seek to explain the rise of the West." —Bob Allen, University of Oxford; author of The British Industrial Revolution in Global Perspective

"In a world still hobbled by the unchecked excesses of modern finance, this timely study of Industrial Revolution banking reminds us that bankers are as important for growth as engineers. Indeed, the authors argue, too few bankers in eighteenth century London limited economic growth much more than too many in the untrammeled City of today." —Greg Clark, University of California, Davis; author of A Farewell to Alms

"This is an important work, and it is written in an engaging style. The authors integrate goldsmith banking operations with the history of the rise of the nation state's finances and military aspirations, the broader economic trends that gave rise to industrialization, the rise of the middle class and the changing distribution of wealth, and evolving societal attitudes that accompanied industrialization. The central thesis of the book—that England's constrained banking system served sovereign interests at the expense of private interests during the early industrial revolution (1760-1830)—is argued persuasively." —Charles Calomiris, Columbia University

"Prometheus Shackled solves a major puzzle: Why during the first Industrial Revolution was Britain's economic growth anemic? The authors show that financial and other policies diverted credit from the private economy to the government, making it easier for the British state to finance its numerous wars. With implications for both history and our own financially and economically troubled times, this is an important book." —Richard Sylla, New York University

"Anyone studying financial history will find this book an important contribution full of hard won facts, for collecting its data required substantial archival work. The book is highly accessible and written in an engaging style that avoids excessive formalization." —The Journal of Economic History

"The book will be welcome to anyone looking for a clearer picture of goldsmith banking. The authors have made good use of the archives of Hoare's Bank, supplemented with more fragmentary records of other institutions. Hoare's archives are bolstered by the happy fact that the bank has been in business in the same address since before 1700, meaning that no documents have been lost in a move to another location or through amalgamation with another institution... We can only hope that this book inspires even more archival-based research on this neglected era. In the meantime, this useful volume will provide a welcome starting point for future researchers." —

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Product Details

  • ISBN-13: 9780199944279
  • Publisher: Oxford University Press
  • Publication date: 1/2/2013
  • Pages: 224
  • Product dimensions: 6.20 (w) x 9.30 (h) x 0.90 (d)

Meet the Author

Peter Temin is Gray Professor Emeritus of Economics at MIT. He has written many books, including, Engines of Enterprise: An Economic History of New England, Lessons from the Great Depression, and Did Monetary Forces Cause the Great Depression?

Hans-Joachim Voth is ICREA Research Professor in the Economics Department at Universitat Pompeu in Fabra, Barcelona. He is the author of Time and Work in England 1750-1830.

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Table of Contents


Who are we?
Why did we team up to write this book?
What's the book about?
Who provided invaluable assistance on this project?

Chapter 1. HOW ARE WE TAXED?
The View from 30,000 Feet
Why is everyone always so worked up about taxation?
What is a tax?
What are the major kinds of taxes?
How are taxes like ducks?
Are there "hidden" taxes?
Are there ways to raise revenue other than taxes?
Why not just borrow the money instead of raising taxes?
How can taxes be like regulations?
How have taxes changed over time?
How do state and local taxes vary?
How does the composition of tax vary across among federal, state, and local governments?
How do tax burdens vary around the world?
Federal taxes in the United States have been at about 18 percent of GDP for 50 years. Does that mean that this is the natural rate of taxation?
Why is the long-term fiscal outlook so dire?
Can taxes be discussed without getting into government spending?

What's the difference between personal taxes and business taxes?
Taxing the "Rich" and Jobs
Who really bears the burden of tax?
Are there cases in practice where it does matter who writes the check?
Can taxes affect asset prices?
What is the personal income tax?
Isn't the income tax a fraud?
Box. How is federal income tax calculated in the US?
What are exclusions, deductions, exemptions, and credits?
Why are there itemized deductions? Isn't it unfair that most people don't benefit from them?
At what income level do people start owing income tax?
Is it true that half of households owe no income taxes?
Is this bad for democracy?
Do we tax capital income the same as labor income?
What is economic income?
Why do economists think my home earns me rent?
Why don't we tax economic income?
How do we tax capital gains and dividends?
What are the arguments for and against lower capital gains tax rates?
What is the "Angel of Death" loophole?
If we want to favor capital gains and dividends, does it make sense to do it via lower rates?
What is the AMT?
Where the heck did this turkey come from and why is it so hard to get rid of?
What is the AMT patch?
What is the "Buffett Rule?"
What are hidden tax brackets?
Does Uncle Sam really want you to live in sin?
How does inflation affect the income tax?
What are payroll taxes and how are they different from income taxes?
Aren't other taxes also dedicated to Medicare and Social Security?
Is it true that most taxpayers owe more payroll than income tax?
Notes to chapter 2

How do we tax corporations' income?
Why do economists say that we "double tax" corporation income?
What are the others ways business income is taxed?
Why tax corporations?
Which people bear the burden of the corporate income tax?
What are the impacts of double-taxing corporate income?
What would happen if we just eliminated the corporate income tax?
How can some companies get away with paying no income tax despite billions in profits?
Why is it troublesome that some companies view their tax departments as profit centers?
Income earned by corporations is double-taxed, and tax avoidance opportunities abound. Make up your mind-Is corporate income taxed too much, or too little?
What is depreciation?
What is "bonus depreciation?"
Are there implicit spending programs run through the corporate income tax too?
Are multinational corporations taxed differently than domestic companies?
What is a foreign tax credit?
Why do we try to tax corporations on their worldwide income? Why not follow the practice in most of Europe and simply exempt foreign income from tax?
What is transfer pricing? Why is it important to multinational corporations (and taxpayers)?
What is formulary apportionment? Would that be a better option than trying to enforce transfer pricing rules?
What are tax havens?
How does the U.S. corporate tax rate compare to the rate of other countries?
Does our relatively high corporate tax rate hurt our companies' competitiveness, and the country's competitiveness?
How do recent corporate tax reform proposals work?
Notes to chapter 3

What is a consumption tax?
Why tax consumption rather than income?
A consumption tax sounds great. What's the catch?
What is a retail sales tax?
What is a use tax?
What is a luxury tax?
The First Excise Tax and the Whiskey Rebellion
What is an excise tax?
What is a sin tax?
What is a Pigouvian tax?
What is a VAT?
The credit-invoice VAT sounds really complicated. Why do it that way?
Are small businesses subject to the VAT?
Why doesn't the US have a VAT?
How much money would a VAT raise?
What is the typical VAT rate in other countries?
How would a federal VAT interact with state and local sales taxes?
Streamlined Sales Tax
Does a VAT promote exports?
What is the flat tax?
Wouldn't a flat tax be super simple and fair?
There are flat taxes all over Eastern Europe. Are they the same as the flat tax advocated for the United States?
What is the X Tax?
What is a consumed income tax?
Are tax breaks for saving and retirement indirect steps toward a consumption tax?
Do these tax breaks actually encourage saving?
If the economy runs on consumption, why would we want to encourage saving?
What's the difference between Roth and traditional IRAs?
Box. Stupid tax tricks: Roth IRA conversions
Do consumption taxes disproportionately burden the old?
Notes to chapter 4

What is the estate tax?
How is estate tax liability calculated?
Why tax estates when the assets that went into them were already subject to plenty of tax?
What are the estate tax's effects on work and saving?
How does the estate tax affect small businesses and family farms?
What is the difference between an estate tax and an inheritance tax?
What is a financial transaction tax?
What is the property tax?
What is a lump-sum tax?
Do economists have other goofy ideas about ideal tax systems?
Do these ideas explain why people don't like economists?
Notes to chapter 5

How do taxes affect the economy?
Why do economists think that raising funds costs much more than the tax sticker price?
Do some taxes help the economy?
What is the Laffer Curve?
Which is a better economic stimulus, cutting taxes or spending more?
What kinds of taxes provide the most stimulus?
What are built-in stabilizers?
Why do smart, serious people disagree about optimal tax policy?
How do taxes affect prosperity and growth?
How do taxes affect working and saving?
How do taxes affect entrepreneurship?
How do taxes affect research and innovation?
What is "trickle-down" economics?
Why not run deficits forever?
If people care about their children, won't they just save more to make up for any deficits? I.e., do deficits matter at all?
Notes to chapter 6

Are a trillion dollars in middle class entitlement programs really hidden in the tax code?
What exactly is a tax expenditure?
Why do we call tax expenditures entitlement programs? They're tax cuts.
Who benefits from tax expenditures?
Why has the use of tax expenditures been growing in recent years?
How should policymakers decide whether to run a subsidy through the tax system?
How should tax expenditures be designed?
Are all tax expenditures run through the income tax?
A Tax Credit for People Who Don't Get Tax Credits?
Is the whole concept of tax expenditures based on the fallacious assumption that government owns all your money?
Notes to chapter 7

What makes a tax system fair?
What is the benefit principle?
Do special fairness concerns come into play when tax laws change?
How is the tax burden distributed?
What is the burden of deficits?
Is progressive taxation class warfare?

How much does it cost to run the U.S. tax system?
How does tax remittance and collection work?
Who gets audited, and why? What's the DIF?
What is information reporting?
What is tax withholding?
Why do people cheat on their taxes? Why do they comply?
How much cheating is there?
How much more tax could the IRS collect with better enforcement?
Why not audit everyone?
Are refundable tax credits especially prone to tax evasion?
Do most people get tax refunds? Should I?
How many people use tax preparers? Do they help or hinder compliance?
How should tax complexity be measured?
Do fewer tax brackets promote simplicity?
Why is there a trade-off between simplicity and other goals such as fairness?
Should states be able to tax Internet and mail-order sales from other states?
How fast are we moving toward e-filing?
If almost everyone uses tax software or paid preparers, should we stop worrying about complexity? Should we start worrying about democracy?
Could most taxpayers be spared any filing requirement (as in the UK)?
Could the IRS fill out our tax returns for us?
Would simplifying tax compliance be unfair to H&R Block and Intuit?
What is a data retrieval platform?

What does the public know about taxes?
What does the public think about taxes?
How are new taxes enacted?
What are regulations and why are they important?
How does the tax sausage get made? (House and Senate rules)
Who estimates the revenue cost of tax changes?
How do they do it? Do they ignore behavioral responses to taxation?
What is dynamic scoring?
Must taxes be raised?
Can we solve the problem by raising tax rates only on those with high incomes?
Notes to chapter 10

Chapter 11. SNAKE OIL
The FairTax sounds, well, fair. Is it?
Wouldn't a flat tax be super-simple and efficient?
How about offering a new tax system on an elective basis?
What is the "starve the beast" theory?
The taxpayer protection pledge sounds great. Is it?
What is the "two Santa Claus" theory?
Notes to chapter 11

Chapter 12. TAX REFORM
Tax reformers talk about a broad base and low rates. What does that mean?
Is the broadest base always the best base?
Does the framing of taxes matter?
What is a revenue-neutral tax change?
Should tax reform and deficit reduction be separated?
Are there some sensible tax reform ideas?
Notes to chapter 12


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