Many states exhibit high degrees of capacity without having the fiscal resources necessary to fund a modern bureaucracy. In this paper, we argue that they achieve this by exploiting the social structure of the societies they govern. We develop the concept of the ``Embedded state’‘ and illustrate how it functions using a unique survey of British urban government from 1835. Since local authorities had few resources, only a third of their functionaries were paid. Instead, people were motivated by prestige and career concerns. We show that jobs where these incentives dominated attracted elites and people with higher ability. We also show that, as a consequence, unpaid officials were significantly more productive than paid ones. While the Embedded State was successful in providing public goods at low monetary costs, it also featured corruption and nepotism, and could not motivate unpaid bureaucrats to implement onerous tasks.