Money and Modernization: Liquidity, Specialization, and Structural Change in Early Modern England

Abstract

Classic accounts of the English industrial revolution present a long period of stagnation followed by a fast take-off. This picture has been adopted by models of the unified growth theory school (Galor 2005, 2009) and seems to be confirmed by the real wage data of economic historians (Phelps-Brown 1956, Robert Allen 2001 and Gregory Clark 2005, 2007). However, recent GDP data (as well as earlier evidence from historians of material culture) suggest this is a historically inaccurate portrait of early modern England. Slow but steady per capita economic growth preceded the transition. The changes were in part driven by specialization and structural change accompanied by an increase in market participation at both the intensive and extensive levels. These, I suggest, were supported by the gradual increase in money supply made possible by the discovery and exploitation of rich mines of precious metals in America. They allowed for a substantial increase in the monetization and liquidity levels of the economy, hence decreasing transaction costs, increasing market “thickness”, changing the relative incentive for participating in the market, and allowing for agglomeration economies. By making trade with Asia possible, they also induced demand for new desirable goods, which in turn encouraged market participation at both the intensive and extensive levels. Finally, the increased monetization and market participation made it easier for governments to collect taxes, helping build up fiscal capacity and as a consequence provide for public goods. The structural change and market participation that ensued helped pave the way to modernization, hence transforming a level effect on a growth effect. The conclusion is that we need to pay closer attention to monetary developments and the avoidance of deflationary forces as critical preconditions for the emergence of modern economic growth.