Cheap borrowing saves lives: how falling interest rates expedited Britain’s mortality decline

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Broadsheet: Cholera and Water, 1866

Ensuring universal access to clean water and basic sanitation by 2030 is a key part of the United Nations Sustainable Development Goals. Considerable progress is required to meet this target: in 2020, more than 2 billion people lacked access to clean water, and 1.7 billion required improved sanitation. Achieving the target will require substantial increases in financing in infrastructure projects, with countries potentially needing a fourfold increase in their investment in the water and sanitation sector (see here). Similar issues plagued the roll out of sanitation infrastructure in modern-day developed economies during the nineteenth century. This post summarizes a recent paper where I investigate the role of cheap borrowing in encouraging investment in sanitation infrastructure in nineteenth-century England—and the importance of that investment in reducing infant mortality. 

Cheap loans and investment in sanitation in nineteenth-century Britain

Rapid urbanization following the industrial revolution overwhelmed sanitary systems in British cities, and deteriorating health environments were followed by high mortality (see other posts on this topic published in this blog here or here). In Liverpool and Manchester life expectancy was under 35 in 1850. A growing sanitary movement pushed for government to tackle this problem through new investments in sanitation infrastructure, with some success—Chapman (2019; see here) finds that investment in sanitation infrastructure made a major contribution to decline from both waterborne and airborne disease. Yet even at the end of the nineteenth century there was considerable variation in the quality and quantity of health investments across the country, reflecting a combination of technical, political, and financial issues. 

My paper shows that the cost of borrowing was a significant determinant of towns’ willingness to invest in sanitation infrastructure, using a dataset of the annual financial accounts of more than 800 town councils. To build infrastructure town councils had to borrow considerable sums—the value of loans borrowed has thus frequently been used as a measure of infrastructure development during this period. The ability to raise cheap funds thus became an important factor in the development of clean water and sewer systems.

In the last quarter of the century interest rates plunged, and town investment—and hence borrowing—rapidly increased, as we can see in figure 1 below. The “consol rate” measures the interest rate paid by the national government on government bonds, and so provides a measure of the overall cost of borrowing in the economy. As this rate declined due to macroeconomic factors, town councils were able to borrow more cheaply leading to higher aggregate debt (left hand panel), more towns borrowing, and higher average loans (right hand panel). 

Interest rates on municipal debt varied considerably across towns

This general pattern masks considerable variation in the interest rates different towns paid on their borrowing, as we can see in Figure 2 below. Throughout the period, towns with the highest interest rates paid approximately 2 percentage points—or 40%—more than those paying cheaper loans. In principle, all councils could borrow from both private lenders—generally through the stock market, from insurance companies and banks, or from wealthy individuals—or the government. However, some found it easier to access private capital than others—due to town wealth, size, local government quality, or the depth of local credit markets. Consequently, some municipalities had access to cheaper borrowing, and were able to invest more cheaply in sanitation at an earlier date.

Town borrowing grew as national interest rates fell

Statistical analysis demonstrates that lower interest rates stimulated investment in sanitation public goods, and consequently expedited Britain’s mortality decline. Regression estimates suggest that around 8% of sanitation investment in 1903 was a consequence of falling interest rates between 1887 and 1903 alone. In smaller towns, most affected by declining rates at this time, falling interest rates explain more than 20% of infrastructure investment. Furthermore, the analysis shows that more sanitation investment translated into lower infant mortality: cheaper borrowing allowed town councils to improve sanitary environments, and hence prevent deaths from diseases such as typhoid and infant diarrhoea. Moreover, data limitations means that the effect of low interest rates on borrowing by the large towns is largely excluded from this analysis—as such the estimates likely under-estimate the contribution of low borrowing costs to the overall development of Britain’s sanitation infrastructure.

These results raise the question of whether policymakers in Westminster could have done more to stimulate borrowing and hence improve public health. There was a recognition of the importance of cheap funds, and central government sought to overcome barriers to town investment by providing loan facilities through the Public Works Loan Board (PWLB). This authority offered loans for sanitary purposes to urban councils from the 1860s onward, funding almost half of local spending on health on water and sewers between 1872 and 1876. As we can see in the right-hand panel of Figure 2, at the start of our period even the larger towns were paying higher interest rates than the middle of the range offered by the PWLB and as a result, even major cities, including Manchester and Birmingham, took out government loans. PWLB loans were attractive at this point both because of the difficulty in raising funds elsewhere and the fact that interest rates offered by the PWLB were below the market rate. 

The high rate of borrowing from the PWLB led to intense debate within Westminster as to whether such loans should be subsidized. On one hand, public health reformers pushed for cheap finance to encourage investment while, on the other, the “Treasury view” worried that low rates would lead to over indebtedness. Consequently, while PWLB loans were initially cheap—even for the largest towns—by the 1890s they were prohibitively expensive, and towns sought to use private borrowing to repay these loans where possible. In fact, borrowing from the PWLB inhibited further investment in the 1890s as private lenders feared the government would be prioritized in the event of a default. The unwillingness to subsidize loans thus came at the cost of higher infant mortality.

Conclusion

The need to finance investment in sanitation infrastructure was a pressing concern for town councils in nineteenth-century Britain, as it is in developing countries today. Demands for unprecedented levels of investment went hand-in-hand with technological uncertainty and hence ambiguity about the potential costs of new projects. Towns that were able to access cheap finance were more able to overcome these barriers, benefit public health, and reduce infant mortality. Greater willingness by Parliament to subsidize borrowing could thus have expedited Britain’s mortality decline.

Further information:

  • This post is based on the research article “Interest rates, sanitation infrastructure, and mortality decline in nineteenth-century England and Wales.” Published in The Journal of Economic History 82.1 (2022): 175-210. DOI: https://doi.org/10.1017/S0022050721000589
  • The project received financial support from NSF grant 1357995 and the History Project of the Institute of New Economic Thinking. 
  • The associated image of this post can be found here.


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Assistant Professor of Economics (University of Bologna)

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