Foreign capital flows in the century of Britain's industrial revolution: new estimates, controlled conjectures 1

In the traditional history of the British industrial revolution, much emphasis has been placed on the role of saving in capital formation. The theories emphasizing the role of saving are based on the premise that saving was the only way to finance investment; the literature has omitted foreign sources of investment. Therefore, many controversies regarding the industrial revolution omit the role of capital flows: the arguments about Rostow's take-off are based on the rise in the domestic saving rate;2 the debate on constraints on the rate of capital accumulation is linked to the relation between saving and investment; and Williamson's argument on crowding out is based on asserting that 'saving significantly constrained British accumulation'.3 However, in an open economy, net flows of capital provide finance for investment in addition to domestic saving. Crafts has emphasized that this way of financing capital formation during the first stages of industrial development is unique: 'countries with the same per capita income as Britain in the eighteenth century were experiencing a considerable inflow of capital'.4 Indeed, development economists have long shown the importance of foreign capital in the industrialization and development process: 'external borrowing is a normal feature of the development strategies of many countries' 5 Britain's unique way of financing its capital formation was assumed rather than proved. The assumption that domestic saving was equated with domestic investment is puzzling since the flow of capital from Holland to Great Britain, particularly in the second half of the eighteenth century, is