By Jinlin Wei (University of Warwick)
This blog post reflects ongoing research supported by the EHS Research Fund for Graduate Students.
How does short-term credit from banks contribute to innovation? I study how the development of country banks supported increases in patenting in England between 1750 and 1825.
Country banks were small, private banks outside London. They could have at most six partners due to legal restrictions. Case studies show that some generous country bankers like James Backhouse of Darlington supported inventors and the spread of invention. However, there were also counterexamples like Richard Arkwright failing to get bank loans to build the first model water frame. These examples were recorded because the inventors finally became successful, less fortunate inventors might have failed to leave any record. In prospering towns with faster industrial growth, there might be higher growth in the numbers of bankers and patents as well. The selection in qualitative evidence and potential endogeneity make it important to use quantitative evidence to assess the question and provide credible causal inference.
English banks during this period generally provided short-term credit to their clients by bill discounting and overdrafts (Pressnell 1956, pp. 322-343). The usury law that placed an annual interest rate cap of 5% on private loans made long-term loans unprofitable for small country banks. The setting of England between 1750 and 1825 therefore isolates the impacts of short-term loans that were mainly provided for the working capital of firms.
I constructed panel data on patents and banks at the registration district level between 1750 and 1825. There were about six hundred registration districts across the country. It is possible that both banking access and patenting are correlated with unobserved variables like the number of traders, so I constructed an instrumental variable based on historical post towns in the 1670s. Increases in financial access led to more patents in the districts where banks were located. Event studies show that the entry of banks led to increases in patents. Both the entry of country banks and increases in banking access increased patenting.
To access the latest financial and political information and the London money market, country banks set up London agents. Country banks formed agency relationship with London agents, usually London bankers, or chose to send someone to London. Country banks were connected to each other through these London bankers (Pressnell 1956, pp. 75-84). By 1800, for example, Barclays served as the London agent of 14 country banks from Norfolk, Lancashire, Worcestershire, Kent, Suffolk, Cambridgeshire, and Hampshire. Therefore, London bankers could provide deposits of some country banks to other country banks that needed loans (Ackrill and Hannah, 2001). Entry and exit of connected banks in other districts created plausibly exogenous shocks to financial access in the local district.
By alleviating industrialists’ credit constraints, country banks increased patents in the manufacturing sector. Increases in patents in response to increases in country banks were mainly driven by patents acquired by individuals in the manufacturing sector. As the industrializing Northwest England was still subject to tight credit constraints as late as in 1837 (Joplin, 1837), I use agricultural suitability as a proxy for tightness of credit constraints and find that banks increased patents more in districts that lacked sufficient credit. It is likely that country banks provided local industrialists with access to the London money market and to banks in other districts across the country. The provision of short-term credit from banks enabled industrialists to allocate more funds to fixed-capital investments and innovation (Hudson, 1981).
During the war between Britain and France that started in 1793, John Marshall, a flax spinner in Leeds, was saved by an overdraft of £3,783 from a local banker, Beckett & Co. (Rimmer, 1960), during his hardest time in April 1793. In the balance sheet that Marshall made in this month, the firm only had £191 in its account. Without the overdraft, the partnership would have dissolved due to a deficit of £3,042. Marshall would never have the chance to see the new patent that his firm managed to get with the help of his engineer by the end of the year. Marshall used the new patent to attract new investors and made a fortune of two million pounds when he passed away half a century later.
The grant gained from the Economic History Society will be used to cover the costs of consulting patent specifications in the British Library. For this project, the texts of patent specifications will be used to analyse the assignees of patents in order to study who was benefiting from these patents. Next, patent specifications will shed some light on the textual similarity between patents and whether the first prototypes or updated practical patents were more likely to be affected by banks. In the long run, the digitization of patent specifications can be used to reveal the contents of patents and innovation during the British Industrial Revolution and how inventions were improved.
To contact the author:
Ackrill, M. and Hannah, L., Barclays: the business of banking 1690-1996 (Cambridge, 2001).
Hudson, P., ‘The Role of Banks in the Finance of the West Yorkshire Wool Textile Industry,
Joplin, T., An Examination of the Report of the Joint Stock Bank Committee, c. c. To Which is Added an Account of the Late Pressure in the Money Market and Embarrassment of the Northern and Central Bank of England, 35 (London, 1837).
Pressnell, L. S., Country Banking in the Industrial Revolution (Oxford, 1956).
Rimmer, W. G., Marshalls of Leeds, flax-spinners, 1788-1886 (Cambridge,1960).