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Supervision 2: State, Economic Policy and Capital Markets during the Industrial Revolution British Economic History, Paper 5, Part I Essay 2 How did the entrepreneurs finance their investments during the Industrial Revolution?
In the decades preceding the Industrial Revolution in Britain, a financial revolution has occurred. It included amongst others the introduction of new financial instruments, such as the bill of exchange, the transferable shares, the creation of the Bank of England and annuities issued by the government. These reforms were based on Dutch techniques introduced by William of Orange, who ascended the throne of England in 1688. De to these proceedings, the British financial system was highly developed compared to continental counterparts like France and Germany. However, British industrialization appeared to have largely taken place without relying too heavily on these financial innovations. It seems that the financial reforms and industrial development had little to do with each other.In order to assess question of finance more accurately, we have to take a closer look at how money was raised to finance investment during the Industrial Revolution. One of the new financial instruments was the bill of exchange. This was a convenient new method to make payments over long distances. It omitted the necessity of carrying large sums of cash and lowered the risk of default as the payment was carried out through intermediaries like banks. The bill of exchange works as follows: Instead of paying a good in cash, a buyer can draw up a bill of exchange, thereby becoming the drawee. This bill then contains the promise to pay the outstanding amount to the holder of the bill at a certain date. The supplier of the good (and payee of the bill) could then hold the bill until its maturity or pass it on to settle one of his own debts. The bill could be used a means of payment. Often, a bill of exchange was passed on several times until final payment. The bill of exchange facilitated trade between manufacturers and
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