UBS Professor of Macroeconomics and Financial Markets
Economics Department, University of Zurich
Schönberggasse 1, CH-8001 Zurich
email voth [at] econ.uzh.ch
phone +41-44 634 55 47
- Debt into Growth [with Jaume Ventura], May 2015,
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. 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 revolutionarizing industries, it failed to capture the high returns to capital in these sectors, leading to relative economic decline.
- Highway to Hitler [with Nico Voigtländer], July 2014, NBER wp.
Can infrastructure investment win "hearts and minds"? We analyze a famous case in the early stages of dictatorship – the building of the motorway network in Nazi Germany. The Autobahn was one of the most important projects of the Hitler government. It was intended to reduce unemployment, and was widely used for propaganda purposes. We examine its role in increasing support for the NS regime by analyzing new data on motorway construction and the 1934 plebiscite, which gave Hitler great powers as head of state. Our results suggest that road building was highly effective, reducing opposition to the nascent Nazi regime.
- Recreating the South Sea Bubble: Lessons from an Experiment in Financial History [with Giovanni Giusti, Charles Noussair], July 2013, CEPR wp.
Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debt-equity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.
Main published papers and books
- Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending [with Peter Koudijs], forthcoming, American Economic Review.
What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly – they lent with much higher haircuts. The rest continued as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.
- Bowling for Fascism [with Shanker Satyanath, Nico Voigtländer], forthcoming, Journal of Political Economy.
Social capital is often associated with desirable political and economic outcomes. This paper contributes to a growing literature on its "dark side". We examine the role of social capital in the downfall of democracy in interwar Germany. We analyze Nazi Party entry in a cross-section of cities, and show that dense networks of civic associations such as bowling clubs, choirs, and animal breeders went hand-in-hand with a rapid rise of the Nazi Party. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. Party membership, in turn, predicts electoral success. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital were more important in the starting phase of the Nazi movement, and in towns less sympathetic to its message.
- Taught to Hate: Nazi Indoctrination and Anti-Semitic Beliefs in Germany [with Nico Voigtländer], 2015, Proceedings of the National Academy of Sciences (PNAS).
Attempts at modifying public opinions, attitudes, and beliefs range from advertising and schooling to "brainwashing". Their effectiveness is highly controversial. In this paper, we use survey data on anti-Semitic beliefs and attitudes in a representative sample of Germans surveyed in 1996 and 2006 to show that Nazi indoctrination - with its singular focus on fostering racial hatred - was highly effective. Between 1933 and 1945, young Germans were exposed to anti-Semitic ideology in schools, in the (extracurricular) Hitler Youth, and through radio, print, and film. As a result, Germans who grew up under the Nazi regime are much more anti-Semitic than those born before or after that period: The share of committed anti-Semites, who answer a host of questions about attitudes towards Jews in an extreme fashion, is 2-3 times higher than in the population as a whole. Results also hold for average beliefs, and not just the share of extremists - average views of Jews are much more negative among those born in the 1920s and 1930s. Nazi indoctrination was most effective where it could tap into pre-existing prejudices - those born in districts that supported anti-Semitic parties before 1914 show the greatest increases in anti-Jewish attitudes. These findings demonstrate the extent to which beliefs can be modified through policy intervention. We can also identify parameters that amplify the effectiveness of such measures - such as pre-existing prejudices.
- State Capacity and Military Conflict [with Nicola Gennaioli] Review of Economic Studies. 82 (2015): 1409-48.
In 1500, Europe was composed of hundreds of statelets and principalities, with weak central authority, no monopoly over the legitimate use of violence, and multiple, overlapping levels of jurisdiction. By 1800, Europe had consolidated into a handful of powerful, centralized nation states. We build a model that simultaneously explains both the emergence of capable states and growing divergence between European powers. In our model, the impact of war on the European state system depends on: i) the importance of money for determining the war outcome, and ii) a country's initial level of domestic political fragmentation. We emphasize the role of the "Military Revolution", which raised the cost of war. Initially, this caused more internally cohesive states to invest more in state capacity, while other (more divided) states rationally dropped out of the competition. This mechanism leads to both increasing divergence between European states, and greater average investments in state building on the continent overall.
- Numeracy and the Impact of High Food Prices in Industrializing Britain, 1780-1850' [with Jörg Baten, Dorothee Crayen], Review of Economics and Statistics 96 (2014): 418-30.
Using census-based data on the ability to recall one’s age, we show that low levels of nutrition impaired numeracy in industrializing England, 1780 to 1850: cognitive ability declined among those born during the Napoleonic wars. The effect was stronger in areas where grain was expensive and relief for the poor, an early form of welfare support was limited. Nutritional shortages had a nonlinear effect on numeracy, with, severe shortages impairing numeracy more. Nutrition during childhood also mattered for labor market outcomes: individuals born in periods or counties with low numeracy typically worked in occupations with lower earnings.
- Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II [with Mauricio Drelichman], Princeton: Princeton University Press 2014.
Why do lenders extend credit to sovereigns – despite many defaults in the past, often by the same borrowers? In this book, we examine one famous historical case – the debts and defaults of Philip II of Spain. He ruled over one of the largest empires in history. Philip also defaulted four times during his long reign. We first examine his fiscal position. We present the earliest reconstruction of full fiscal accounts in history, and show that Philip’s debts were sustainable. We also show that lending to him – despite the defaults – was profitable. What made lending to a powerful monarch possible was a particular network structure amongst lenders – effectively a coalition of Genoese bankers who imposed moratoria on the king whenever he defaulted.
- 'How the West 'Invented' Fertility Restriction' [with Nico Voigtländer], American Economic Review 103 (2013): 2227-64.
We analyze the rise of the first socio-economic institution in history that limited fertility – long before the Demographic Transition. The "European Marriage Pattern" (EMP) raised the marriage age of women and ensured that many remained celibate, thereby reducing childbirths by up to one third between the 14th and 18th century. To explain the rise of EMP we build a two-sector model of agricultural production – grain and livestock. Women have a comparative advantage in the latter because plow agriculture requires physical strength. After the Black Death in 1348-50, land abundance triggered a shift towards the land-intensive pastoral sector, improving female employment prospects. Because women working in animal husbandry had to remain unmarried, more farm service spelled later marriages. The resulting reduction in fertility led to a new Malthusian steady state with lower population pressure and higher wages. The model can thus help to explain the divergence in income per capita between Europe and Asia long before the Industrial Revolution. Using detailed data from England after 1290, we provide strong evidence for our mechanism. Where pastoral agriculture dominated, more women worked as servants, and marriage occurred markedly later. Overall, we estimate that pastoral farming raised female ages at first marriage by more than 4 years.
- 'The Three Horsemen of Riches: Plague, War and Urbanization in Early Modern Europe' [with Nico Voigtländer], Review of Economic Studies 80 (2013): 774-811.
How did Europe escape the “Iron Law of Wages?” We construct a simple Malthusian model with two sectors and multiple steady states, and use it to explain why European per capita incomes and urbanization rates increased during the period 1350–1700. Productivity growth can only explain a small fraction of the rise in output per capita. Population dynamics—changes of the birth and death schedules—were far more important determinants of steady states. We show how a major shock to population can trigger a transition to a new steady state with higher per-capita income. The Black Death was such a shock, raising wages substantially. Because of Engel's Law, demand for urban products increased, and urban centers grew in size. European cities were unhealthy, and rising urbanization pushed up aggregate death rates. This effect was reinforced by diseases spread through war, financed by higher tax revenues. In addition, rising trade also spread diseases. In this way higher wages themselves reduced population pressure. We show in a calibration exercise that our model can account for the sustained rise in European urbanization as well as permanently higher per capita incomes in 1700, without technological change. Wars contributed importantly to the “Rise of Europe”, even if they had negative short-run effects. We thus trace Europe's precocious rise to economic riches to interactions of the plague shock with the belligerent political environment and the nature of cities.
- Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1700 [with Peter Temin], Oxford/New York: Oxford University Press. 2013
Between 1700 and 1830, the British economy was transformed. It became markedly more industrial, and new industries grew in the North. A famous body of work in economic history attributes the rise of the first industrial nation to the Glorious Revolution of 1688 and associated institutional improvements. In this book, we examine the joint effects of two other factors that characterized the British state – fiscal repression and war finance. In combination, these made it impossible for the financial system to perform its most basic function – to transfer resources from people with funds to those with ideas. Very far from boosting growth, tight rules on banking and the demands of financing numerous expensive wars did much to stifle growth in the UK. We document how government intervention in financial markets slowed down the Industrial Revolution using evidence from the Hoare’s Bank archive, demonstrating the effects of the usury laws, partnership limitations, and the demands of war finance.
- 'Persecution Perpetuated: The Medieval Origins of Anti-Semitic Violence in Nazi Germany' [with Nico Voigtländer], Quarterly Journal of Economics 127 (2012): 1339-1392.
How persistent are cultural traits? Using data on anti-Semitism in Germany, we find local continuity over 600 years. Jews were often blamed when the Black Death killed at least a third of Europe’s population during 1348–50. We use plague-era pogroms as an indicator for medieval anti-Semitism. They reliably predict violence against Jews in the 1920s, votes for the Nazi Party, deportations after 1933, attacks on synagogues, and letters to Der Stürmer. We also identify areas where persistence was lower: cities with high levels of trade or immigration. Finally, we show that our results are not driven by political extremism or by different attitudes toward violence.
- 'Lending to the Borrower from Hell: Debt and Default in the Age of Philip II, 1556-1598' [with Mauricio Drelichman], Economic Journal 121 (2011): 1205-1227 (lead article).
What sustained borrowing without third-party enforcement in the early days of sovereign lending? Philip II of Spain accumulated towering debts while stopping all payments to his lenders four times. How could the sovereign borrow much and default often? We argue that bankers’ ability to cut off Philip II’s access to smoothing services was key. A form of syndicated lending created cohesion among his Genoese bankers. As a result, lending moratoria were sustained through a ‘cheat-the-cheater’ mechanism. Our article thus lends empirical support to a recent literature that emphasizes the role of bankers’ incentives for continued sovereign borrowing.
- 'Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain , 1566-1600' [with Mauricio Drelichman], Explorations in Economic History 48 (2011): 1-19 (lead article).
Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods.
- 'The Sustainable Debts of Philip II: A Reconstruction of Castile's Fiscal Position, 1566-1596' [with Mauricio Drelichman], Journal of Economic History 70 (2010): 813-42.
The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. We reassess the fiscal position of Habsburg Castile, deriving comprehensive estimates of revenue, debt, and expenditure from new archival data. The king's debts were sustainable. Primary surpluses were large and rising. Debt-to-revenue ratios remained broadly unchanged during Philip's reign. Castilian finances in the sixteenth century compare favorably with those of other early modern fiscal states at the height of their imperial ambitions, including Britain. The defaults of Philip II therefore reflected short-term liquidity crises, and were not a sign of unsustainable debts.
- 'Betting on Hitler: The Value of Political Connections in Nazi Germany' [with Thomas Ferguson], Quarterly Journal of Economics 123 (2008): 101-137.
This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of seven firms, and a large proportion of the biggest companies, had substantive links with the National Socialist German Workers' Party. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5% to 8% between January and March 1933. These results are not driven by sectoral composition and are robust to alternative estimators and definitions of affiliation.
- 'Interest Rate Restrictions in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714' [with Peter Temin], Economic Journal 118 (2008): 743-58.
This article studies the effects of interest rate restrictions on loan allocation. The British government tightened the usury laws in 1714, reducing the maximum permissible interest rate from 6% to 5%. A sample of individual loan transactions reveals that average loan size and minimum loan size increased strongly, while access to credit worsened for those with little ‘social capital’. Collateralised credits, which had accounted for a declining share of total lending, returned to their former role of prominence. Our results suggest that the usury laws distorted credit markets significantly; we find no evidence that they offered a form of Pareto-improving social insurance.
- 2006 'Why England? Demographic Factors, Structural Change and Physical Capital Accumulation during the Industrial Revolution' [with Nico Voigtlaender], Journal of Economic Growth 11 (2006): 319-61.
Why did England industrialize first? And why was Europe ahead of the rest of the world? Unified growth theory in the tradition of Galor and Weil (2000, American Economic Review, 89, 806–828) and Galor and Moav (2002, Quarterly Journal of Economics, 177(4), 1133–1191) captures the key features of the transition from stagnation to growth over time. Yet we know remarkably little about why industrialization occurred much earlier in some parts of the world than in others. To answer this question, we present a probabilistic two-sector model where the initial escape from Malthusian constraints depends on the demographic regime, capital deepening and the use of more differentiated capital equipment. Weather-induced shocks to agricultural productivity cause changes in prices and quantities, and affect wages. In a standard model with capital externalities, these fluctuations interact with the demographic regime and affect the speed of growth. Our model is calibrated to match the main characteristics of the English economy in 1700 and the observed transition until 1850. We capture one of the key features of the British Industrial Revolution emphasized by economic historians — slow growth of output and productivity. Fertility limitation is responsible for higher per capita incomes, and these in turn increase industrialization probabilities. The paper also explores the availability of nutrition for poorer segments of society. We examine the influence of redistributive institutions such as the Old Poor Law, and find they were not decisive in fostering industrialization. Simulations using parameter values for other countries show that Britain’s early escape was only partly due to chance. France could have moved out of agriculture and into manufacturing faster than Britain, but the probability was less than 25%.Contrary to recent claims in the literature, 18th century China had only a minimal chance to escape from Malthusian constraints.
- 'Riding the South Sea Bubble' [with Peter Temin], American Economic Review 94 (2004): 1654-68.
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may attack only when some coordinating event promotes joint action.
- 'With a Bang, Not a Whimper: Pricking Germany's "Stockmarket Bubble" in 1927 and the Slide into Depression' , Journal of Economic History 63 (2003): 65-99.
In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany’s relative stabilization 1924-28. This paper examines the factors that lead to the intervention as well as its consequences. We argue that genuine concern about the ‘exuberant’ level of the stock market, in addition to worries about an inflow of foreign funds, tipped the scales in favour of intervention. The evidence strongly suggests that the German central bank under Hjalmar Schacht was wrong to be concerned about stockprices-there was no bubble. Also, the Reichsbank was mistaken in its belief that a fall in the market would reduce the importance of short-term foreign borrowing, and help to ease conditions in the money market. The misguided intervention had important real effects. Investment suffered, helping to tip Germany into depression.
- 'Factor Prices and Productivity Growth during the British Industrial Revolution' [with Pol Antràs], Explorations in Economic History 40 (2003): 52-77.
This paper presents new estimates of total factor productivity growth in Britain for the period 1770–1860. We use the dual technique and argue that the estimates we derive from factor prices are of similar quality to quantity-based calculations. Our results provide further evidence, calculated on the basis of an independent set of sources, that productivity growth during the British Industrial Revolution was relatively slow. The Crafts–Harley view of the Industrial Revolution is thus reinforced. Our preferred estimates suggest a modest acceleration after 1800.
- Time and Work in England, 1750-1830, Oxford: Oxford University Press. 2001.
Did working hours increase during the Industrial Revolution? Many critics of capitalism believed that long workng hours were one of the main form of exploitation. In this book, I assemble new evidence on working patterns, derived from witnesses’ accounts in the Old Bailey Session papers. I find that hours worked increased substantially, both because old holidays fell into disuse and because “Blue Monday” largely disappeared. One important implication is that growth after 1770 was driven by rising labor input – the role of productivity growth in explaining overall output performance is correspondingly lower.
- 'Human Capital, Equipment Investment, and Industrialization' [with Jon Temple], European Economic Review 42 (1998): 1343-62.
This paper constructs simple models in which industrialization is driven by human capital accumulation. Industrialization can explain the robust correlation between equipment investment and growth in developing countries. We show that government intervention is justified within our stylized model, and indicate that a subsidy to equipment investment is likely to be dominated by other policies. In the final section of the paper, we examine the correlation between equipment investment and growth, and find that it is strongest in economies on the brink of industrialization. We also show that this result is not easily explained by diminishing returns.
- 'Time and Work in Eighteenth Century London' , Journal of Economic History 58 (1998): 29-58.
Witnesses' accounts are used to analyze changes in working hours between 1750 and 1800. Two findings stand out. The article demonstrates that the information contained in witnesses' accounts allows us to reconstruct historical time-budgets and provides extensive tests of the new method. Estimates of annual labor input in 1749/63 and 1799/1803 are presented. It emerges that the number of annual working hours changed rapidly between the middle and the end of the eighteenth century. These findings have important implications for the issue of total factor productivity during the Industrial Revolution.