Web Summaries of ECO 303Y Lectures/TITLE> Professor John Munro passed away on December 23, 2013. This site is maintained and kept online as an archive. For more infomation please visit the Centre for Medieval Studies

(1) English Business Organization: 1550 to 1720:

a) Functions: to provide both the lubricant (medium of exchange) and fuel (capital: both working and fixed capita) for the economy

b) Private Partnerships: the predominance form of business organization

i) an ancient form of business, dating to Greco-Roman times (in a European context)

ii) Unusual English feature: that a partnership was limited, by Common Law, to 6 members

iii) other basic features:

(1) partnership contract valid only so long as all partners participate in the common business venture: dissolution of the partnership on the withdrawal (sale of partnership share) or death of any partner

(2) profits and losses shared proportionally: in ratio of capital invested

(3) unlimited liability for debts, law suits, claims, etc: for all partners: collectively and severally (individually – that each individual liable for all debts, if others default)

c) Joint Stock Companies: an English innovation dating from the 1550s

i) ability to raise far larger capitals: than could any 6-member partnership: through the sales of stock or shares of ownership

ii) collective business venture operating with a common capital that was permanent: unaffected by death or withdrawal of any stockholders

iii) negotiability of stock: i.e., the right of stockholders to sell or transfer their shares to third parties

iv) attractive features of negotiable stock:

(1) to reap capital gains if the stock value rose

(2) in the meantime, to receive dividends, as proportional share of disbursed profits

iv) Board of Directors: elected by the stockholders: one vote per share owned

(1) Directors responsible for management and organization of the company

(2) declared dividends to stockholders: disbursement of profits (partial or total)

d) Historical Origins of the English Joint -Stock Companies:

i) crisis of the English cloth trade on the Antwerp market in the 1550s: collapse of cloth exports led to widespread unemployment

ii) government response: to promote immediate overseas commercial diversification to lessen dependence on both cloth exports (accounting for 90% of total export values) and on Antwerp (accounting for 90% of cloths exported)

iii) New Overseas Joint-Stock Trading Companies: which required vastly larger initial capitals for long-term long distance trade (ventures lasting 2- 3 years), requiring capital in ships, warehouses, inventory

(1) Muscovy Company: to Russia (1553)

(2) The Levant Company: to the Ottoman Turkish Empire (1581)

(3) The East India Company: to India and South Asia (1600)

(4) the Royal African Company: for the African slave trades (1662)

(5) the Hudson’s Bay Company: for North American (1670)

iv) Other companies: from the 1690s (next day)

c) Problems or Limitations of the New Joint Stock Companies:

i) Liability: those lacking a charter of incorporation, making the company a corporate entity separate from its shareholders, were subject to partnership law, and thus to unlimited liability

(1) All of the new overseas trading companies had such parliamentary charters of incorporation, and thus limited liability for investors, along with charters of monopoly rights in trad

(2) But all the new companies from the 1690s, for domestic trade, finance, and industry, did not (except the new Bank of England, in 1694)

ii) Markets for Shares: lack of an organized secondary market for shares

(1) hindered the ability of shareholders to sell their shares to third parties, without a broker having connections

(2) solution: formation of the London Stock Exchange (by such brokers) in 1695

(3) followed by a proliferation of new joint stock companies

VII: Week 7: Lecture topic no. 7, part b: 27 October 2010

Banking and Finance before and during the Industrial Revolution

2. The Rise of Private Banking in England: the 17th century Goldsmiths:

a) The twin foundations of modern banking: kept separate before the Goldsmiths banks

i) Bills of Exchange banking: the creation and province of merchants in long-distance trade:

(1) bill of exchange: a command by a principal to a banking agent abroad to make payment on his behalf

– European financial instrument designed to finance international trade (or remit funds abroad)

– four-party letter: two principals in city A: the borrower and the lender

– and their two agents abroad, in city B: the payer (acting for the borrower) and the payee (acting for the lender)

– Principal 1 borrows money (or buys good) from principal 2 in city A

– uses those funds to finance his trade: shipping goods to city B, where his agent arranges the sale of the goods and deposits the proceeds in his bank account

– Principal 1 (borrower) ‘draws a bill of exchange’, or writes a letter commanding his agent in city B (the payer, or drawee) to accept the bill and make payment to the payee on a specified date, using the funds in his bank account

– Principal 2 (lender) similarly instructs his agent in city B, with a copy of the bill, to receive payment on the maturity date; and then to remit the funds to him in city A, by drawing another bill

– obviated the necessity of transporting precious metals over long distance: payments made in the local currency of each city

– also a means of evading the usury doctrine (the universal prohibition against lending money at interest): by disguising the interest in the exchange rate

– Most important European financial innovation in medieval & early-modern Europe: had no antecedents in the ancient world, and was not borrowed from the Arabs or Chinese (etc).

– Later called the ‘acceptance’ bill: because of the crucial role of the drawee or payer, in ‘accepting’ the bill and thus being obligated to make payment

(2) deposit and transfer banking: the creation and province of money-changers

– note: each prince, ruler of state or principality issued his/her own coins, usually denying legal-tender status to foreign coins

– thus a money-changer was necessary to exchange foreign coins for domestic coins, delivering the foreign coins to the ruler’s mints

– From ancient Greek times (4th century BCE) money-changers became bankers, because they had to safeguard their inventory of coins and precious metals: so that others left their coins and precious metals, etc. with them for safe-keeping as bankers, these money changers soon realized that they could safely lent out a proportion of the coins placed with them on deposit: hence, fractional-reserve system of leading

– these money-changer-bankers also allowed depositors to pay other bank clients by making book account transfers: by which the debtor client instructed the bank to debit his account and credit the account of the creditor client with the agreed-upon sum.

– in medieval Europe, such book-account transfers were effected (as today) by using cheques

– after dying out in late Imperial Rome, such deposit-transfer banking was revived by money-changers in 12th century Genoa and Lombardy (Italy): and spread to Catalonia (Spain), France, Flanders – but not England

– Why did medieval and early-modern England not have deposit bankers: because money-changing was a royal monopoly (Royal Exchanger), whereas elsewhere money changing & deposit banking was a private enterprise, though licenced by the state

b) The 17th-century Goldsmiths and the beginnings of English deposit banking;

i) The London Goldsmiths became the first real English bankers: after the Civil War era (1642-60)

– they were originally a 14th-century London guild of jewellers and precious-metal artisans, i.e. goldsmiths

– but subsequently, many (or most) goldsmiths found it more profitable to trade in precious metals, even though trading in bullion, and especially exporting bullion (without a licence) was illegal

– So long as the Royal Exchanger exercised a crown monopoly on money-changing (and so long as the bans on exporting both bullion & coin remained in force), the Goldsmiths could not function as deposit bankers, as private money-changers had long done on the continent

– I have found documents as late as 1626 prosecuting goldsmiths for exporting bullion and for engaging in money-changing against the monopoly privileges of the Royal Exchanger

ii) The Goldsmith Banks in The Restoration era: from 1660

– Civil War era, from 1642 to the Restoration of the Monarchy (Charles II) in 1660: the office of the Royal Exchanger was evidently abandoned, since the crown could not enforce the monopoly (not after the execution of Charles I in 1649), and Parliament had no reason to uphold it

– The Goldsmiths, or family firms and private partnerships of Goldsmiths, were now free to engage in money-changing

– and thus in deposit-and-transfer banking, as had long been practised on the continent

iii) Banking functions developed by the Goldsmiths, 1660 – 1700:

– deposit and transfer banking: with current (non interest) chequing accounts and time-deposit savings accounts (paying interest), without cheques

– lending: on the fractional reserve system, which meant a three-fold potential expansion in the credit money supply, with a reserve ratio of one-third (reciprocal of the reserve ratio)

– discounting: commercial paper – by far the most important function

– note issue: the issue of paper bank notes, which not immediately but later became printed bank notes for rounded sums (£20, £10), made out to bearer – and fully negotiable

iv) Discounting commercial paper: bills of exchange, inland bills, promissory notes, etc.

– discounting is the sale or ‘cashing’ of a commercial bill before its stated date of maturity

– therefore, the amount of the redemption, ‘the amount cashed’, is discounted: the face value less the amount of interest due between being cashed and is maturity or redemption value

– The medieval usury ban had prevented discounting: which thus became legal only when interest payments became legal – in England, from 1571 (Elizabeth I – up to 10%).

– In the example given in the handout: a cotton spinner (factory owner) sells 1000 yds of cotton yarn in a forward-sales contract with 90 days delivery, receiving in payment a promissory note for £100

– the cotton-spinner immediately sells or cashes the note with his local banker, for £97

– he uses these funds for the working capital needs of his spinning mill (raw materials, wages, rent, heat, administrative costs) – but not for machinery (fixed capital)

– the banker collects the full £100 owing on the note’s maturity from the issuer: thus earning 12.5% interest for the 90 days

v) Negotiable (and thus transferable) credit instrument developed by the Goldsmith bankers, by 1700: serving as acceptable substitutes for coined money, though not legal tender, so long as those holding these instruments were confident that they could be exchanged for real money, in the form of coin

– the cheque (negotiated by endorsement)

– discounted bills: bills of exchange, inland bills, promissory notes (IOUs)

– bank notes: finally in printed form, made out to bearer, for rounded sums

– discounted bills: inland bills, bills of exchange, promissory notes

– paper bank notes

3. The Bank of England: 1694 – 1797: its role in the English Economy

a) Major Factors in the Formation of the Bank of England, in 1694:

i) Financing Warfare: with France, 1689-1715

(1) Glorious Revolution of 1688: brought to the throne Mary II (daughter of deposed James II0 and her Dutch husband Prince William of Orange, as William III (1688-1702)

(2) He thus involved England in his ongoing war with Louis XIV

(3) Problem: crown’s credit rating was so poor that it had to pay up to 14% to borrow money

(4) Parliament had asserted, with the Glorious Revolution, that it controlled ‘the purse strings’ – crown finances

ii) Creation and Management of Permanent National Debt: beginning with million pound loan of 1693

iii) monetary scarcity (for reasons explained earlier): requirement that a new bank print legal-tender banknotes

b) Formation of Bank of England in 1694:

i) William Paterson, a Scottish entrepreneur, his London banking associates, and Sir Charles Montagu, Chancellor the Exchequer provided the government with a permanent loan of £1.2 million, at 8% interest

ii) in return: received a dual monopoly: on government banking and on joint-stock banking (i.e., as the only legal joint-stock company bank allowed in England, so that all others were partnerships/family firms.)

iii) How the loan was made:

– in theory, the loan was to be raised by the sale of stock in the Bank of England

– but stock sales were initially at 10% down, on margin: took years to complete

– so the Bank immediately furnished the £1.2 million in the form of its own legal tender notes

– ‘monetizing the debt’: did cause some temporary inflation in the later 1690s

iii) Bank Act of 1707: Parliament closed loop-holes to confirm its monopoly on joint-stock banking

c) Functions of the Bank of England: nothing succeeds like success:

i) as the government’s sole bank: accounting for 7% of its business incomes

– handling all gov’t banking and financial operations, at home and abroad

– supplying bullion to the royal mints

– discounting Exchequer Bills (like Canadian Treasury Bills): allowing gov’t to buy goods and services on credit, and allowing creditors to discount these bill

ii) as a private commercial bank:

– performing the same functions as the London Goldsmith banks, in competition with them: for lending and discounting

– most of the Bank’s clients were, however, other banks and financial/commercial institutions

iii) as a Lender of Last Resort: embryonic role as a Central Bank

– The Dutch financial crises of 1763, 1773, 1783, 1793: revealed the impotence of its chief rival, the Wisselbank van Amsterdam (Exchange Bank of Amsterdam), which was not a credit bank

– in these crises, the Bank of England rescued its Dutch as well as English clients

– thus a movement of banking and finance from Amsterdam to London

– 1793 French invasions of the Dutch Republic ended role of Wisselbank

– 1797: threatened French invasion (Napoleon) and liquidity crisis led Bank of England to extent rediscounting privileges to all British banks and financial institutions, while also suspending convertibility of bank notes into gold ==> ‘era of the paper pound’ (to 1820)

d) Strengths of the Bank of England:

i) steady flow of government interest income on Bank’s loans:

– 1694 – 1709: 8%

– 1709 – 1742: 6%

– 1742 on: 3% plus annual management fee of £4,000 = 3.75%

ii) payments for various government financial services

iii) earnings from discounting Exchequer and other bills

iii) sole right to issue legal tender banknotes

iv) public trust and confidence, from its tripartite functions: as the government’s bank, as Parliament’s bank, and as a private joint-stock company bank, with full support of London financial community

4. The National Debt and the Bank of England: 1693- 1757

a) 1693: the creation of a permanent, funded, national debt:

– national debt: the responsibility of Parliament, not the personal liability of the monarch

– funded debt: in that Parliament voted the taxes to pay the annual charges (interest) on the debt: chiefly in the form of excise (consumption) taxes and import duties

– permanent: in that the government had no obligation ever to redeem (pay off) the national debt, which were issued in the form of perpetual but negotiable annuities – sold on the Stock Exchange

– known as the ‘English Financial Revolution’: but with strong continental antecedents, immediately via the Dutch Republic, which inherited this institution from medieval Flanders

b) annuities: known on the continent as ‘rentes’ (rents)

– 13trh century French & Flemish origins: to permit governments to evade the usury prohibition (against all forms of interest) by selling rentes or annuities: for fixed capital sums, in return for an annual stream of income

– either for life annuities (extinguished on death of investor) or perpetual annuities, which could be sold to others, or passed on by inheritance

– rentes or annuities came to be traded on European stock exchanges from the 1530s: Antwerp, Amsterdam, and then London (from 1695)

c) chief stages in the creation of the English permanent funded national debt:

– 1693: the Million Pound Loan: not a loan but a lifetime annuity paying 14%

– 1694: Bank of England loan, at 8% interest

– 1698: Parliament’s creation of the New East India Company, as a rival joint-stock trading company to Asia, for a loan of £2.000 million, again at 8%

– 1709: Parliament allows the original East India Company to take over its rival, for another loan, of £1.200 million (interest rate unknown)

– From 1704 to 1710: series of 99 and 32 year annuities sold by the Exchequer

– 1711: formation of the South Sea Company

d) The South Sea Company and the Bubble Crisis of 1720:

i) formation of the South Sea Company in 1711: its nominal and actual purposes

(1) chartered joint stock company: with charter of incorporation, with limited liability

(2) ostensible purpose: to exercise a commercial monopoly on English trade with the South Pacific, a trad controlled by Spain, with its lucrative Mexico=>Philippines=>China links, based on silver and silks

(3) actual purpose: to take over all of the outstanding national debt, not held by the Bank of England and the East India Company: both in terms of short term loans and the 32-year and 99-year annuities

(4) 1711: South Sea Company bought up or took over £9.471 million in short term debts and debentures

ii) method of conversion: holders of short term gov’t debt, earning interest at rates from 65.25% to 9.0%, were asked to convert those debts into South Sea Stock, paying a preferred interest of 5%

iv) rationale for the conversion:

(1) investors were converting a short term asset (or callable debentures) into a long-term, permanent asset

(2) South Sea Stock was negotiable: tradable on the London Stock Exchange, offering prospects of capital gains (from higher stock prices), as well as 5% dividends (so long as the stock was held).

(3) South Sea Stock for this reason proved to be good collateral for borrowing (loans)

v) The Onset of Crisis: the National Debt project of 1719-20

(1) proposal: to convert a total of £31.58 million in national debt issues into South Sea Stock (for same reasons as given above)

– £16.55 million: in short term debts + redeemable debentures

– £15.03 million: in 32-year and 99-year annuities (see above)

(2) ‘Boiler-Room’ activities:

– South Sea Company directors engaged in illegal activities to churn the market and drive up the value of shares: which in the speculative bubble rose from par at £100 to almost £1000 a share

– object: to ensure that fewer shares were traded for any given nominal or face value of debt, since conversion was based on share values

(3) But also, in order to raise new capital for this project, including purchasing national debt from those who did not want to convert, South Sea Company sought to sell new share issues

(4) To limit competition for new-issue sales, South Sea Co. asked for (and paid for) new statute limiting competition, in the form of:

vi) The Bubble Act of 1720 and its consequences:

(1) Bubble Act (as later named): restricted trade in shares of joint-stock companies (on the LSE) to those companies having charters of incorporation (and were acting according to their charter)

(2) While all the great overseas trading companies had such charters, almost all of the new, and land-based companies did not

(3) South Sea Company sparked the crisis by having three companies prosecuted for violations of the Act

(6) Result: severe stock crash (see graphs and stables), with all stock prices tumbling, but those of South Sea Company fell the most: since value of stocks in unchartered companies (or those not acting by the charter) would become without any trading law, by the Bubble Act

vii) Leverage and Liquidity: the nature of all such financial crises, pricking bubbles and causing crashes

(1) Leverage: using a small amount of cash to buy an asset, on credit

– buying on 10% margin, with the remaining 90% financed by the broker’s call loan: the stock instead was held by the broker as collateral for the loan

– if stock price rose from £100 to £110, the investor would double his investment (the £10 down payment) by his sale of the stock

– so long as stock prices rose, the broker was happy to hold it as collateral

– once stock prices fell, the stock lost its collateral value ==> so that the broker called his loans, for immediate redemption or repayment

(2) The Liquidity Crisis:

– once brokers called their margin loans, and sold (dumped) the stock, investors were forced to liquidate all or most of their assets: i.e., good stocks, such as Bank of England, East India Co

– form of Gresham’s Law (bad money drives out good): here bad stocks drive out good stocks, by forcing their rapid liquidation to raise cash to pay off loans

viii) Consequences: the Bubble Restriction Era of 1720 – 1825:

(1) The South Sea Company effectively ceased to exist, except as a holding company for the government debt it either held or managed

(2) Parliament henceforth used the Bubble Act to restrict, indeed prevent the formation of any new joint stock companies, for just over a century (to its Repeal in 1825)

– any joint stock company seeking a charter of incorporation had to pay for a private act of Parliament, with high administrative and legal costs

– had to put up the capital in escrow with the Bank of England before charter was granted

(3) Result of these very onerous restrictions: there were no joint-stock companies available to finance capital formation in the new industries of the Industrial Revolution, not before 1825 (4)

Canal companies: were the major and important exceptions,

-if only because canal companies had to acquire authorization (for eminent domain, etc) by private and acts of Parliament, to which incorporation charters cost little to add

-canals also obviously served the public good and entire nation

-canals were so expensive that joint-stock companies were the only possible solution

(5) The Industrial Revolution had to finance alternative financial solutions: to be seen next day

e) Pelham’s Conversion of 1749 – 1757: the completion of the Financial Revolution

i) 1749: Sir Henry Pelham, Chancellor of the Exchequer (Finance Minister): announced proposal to convert all of the outstanding national debt into one consolidated stock issue, paying 3% annually

ii) Structure of the National Debt in 1749: in summary: total of £70.441 million

– £19.6 million in debt held directly by the Three Sisters: Bank of England (£11.7), East India Company, and the South Sea Company == 27.8% of the total national debt

-£49.2 million in government ‘stock’: debt managed by the Bank of England (£25.6 million) and the South Sea Company (£23.6 million: from its conversions of 1711 and 1719) = 69.9%

-£1.6 million managed directly by the Exchequer = 2.3%

ii) May 1750:

-£50.751 million in 4% debts converted into 3.5% Consolidated Stock: 87.95% of total debts of £57.703 million

-major holdout: the South Sea Company holders of annuities

iii) Christmas 1757:

-all of the national debt (including South Sea Company 4% annuities) converted from 3.5% to 3.0% Consols

-key issue of persuasion for conversion: government promise not to redeem Consols for 30 years

-in fact, they were not redeemed until 1888

iv) Consols: Consolidated Stock of the Nation: perpetual annuities or ‘government stock’ traded on the London Stock Exchange

v) summary and future changes in the rate:

-1757: conversion of 3.5% and 4.0% stock into 3.0% Consols

-1888: Goschen’s Conversion of the National Debt into 2.75% Consols

-1903: an agreed upon conversion into 2.5% Consols

-1923: first year in which government was allowed to redeem 2.5% Consols

– 2010: the same 2.5% coupon or rate is still maintained: and this week, Consols have traded on the London Stock Exchange at £56.80, to provide a yield of 4.40%

vi) Role of Consols in later 18th & 19th centuries:

– major stock traded on the LSE, until the Repeal of the Bubble Act in 1825, and coming of the railways (financed as joint-stock companies)

– as perpetual annuities, with a guaranteed annual coupon: the most attractive long-term investment (the longer the term, the lower the interest rate), especially for investors predicting a continuing fall in interest rates.

– provided the safest of all possible savings and investments, with their stock-exchange values determined only market changes in the real rate of interest (determining yield and thus price)

– very important form of collateral for loans, as noted earlier

– provided chief mechanism for low cost public borrowing (with new issues of Consols: e.g. the New 3% Annuities of 1855)

VIII: Week no. 8: Lecture no. 7, part C: 3 November 2010

4. Importance of the Bank of England in the 18th and early 19th centuries:

a) positive contributions of the Bank of England:

i) management of national debt ==> reducing the national interest rate: in creating a low cost, permanent funded, national debt, most of it during wartime,

(1) thereby in reducing the interest rate on government borrowing from 14% in 1694 to 3% from 1757

(2) that also greatly reduced the ‘crowding out effect’, hence lowering the general rate of interest, and providing relatively more and cheaper capital for private enterprise and industrialization.

ii) providing stable legal-tender paper bank notes

iii) acting as a ‘lender of last resort’: from 1797

iv) providing the gov’t with credit: discounting Exchequer Bills

v) lowering the transaction costs of gov’t: in handling all gov’t financial services

b) negative features of the Bank of England (before 1826)

i) monopoly of joint-stock banking: meant that all other English banks (before 1826) were restricted to being 6-member partnerships or family firms

ii) reluctance to assistance non-client banks before 1797

iii) high denomination bank notes before 1797

iv) refusal to establish branches outside London: before 1833 : hindered B of E note circulation

5. The “Country Banks”: private commercial deposit banking outside London

a) rise of the country banks in England:

i) 1716: first such bank established was in Bristol (major commercial port); only 20 on eve of the Industrial Revolution, in 1760s

ii) by 1780 – 100 banks; by 1825: over 600 banks

iii) many were created by participants in the Industrial Revolution: canal companies, grain companies, industrial entrepreneurs, etc.

b) functions: same as those of the London Goldsmith banks: to provide the lubricant (bank notes) and fuel (working capital financing) for the Industrial Revolution

i) deposit and transfer banking (cheques)

ii) lending on fractional reserve system (1/3 reserves)

iii) discounting promissory notes: most important function: as seen in last lecture

iv) issuing banknotes: important because Bank of England notes did not circulate outside of London (no br branches in which to cash B of E notes)

c) Role of the London banks: acted to transfer savings surpluses (received on loan) from rural agricultural banks by relending them to country banks in industrial areas where those funds were needed for lending

d) Faults and Weaknesses of the English Country Banks

i) Bank of England monopoly on joint-stock banking: restricted them to being 6-member partnerships

ii) result: most were small, undercapitalized banks (while London banks had had a century to grow by profit-reinvestment and amalgamation: only 25% of capitalization of London banks

iii) frequent bankruptcies, bank failures, and ‘runs on the bank’ became common: Gresham Law of finance: ‘bad banks drive out good banks’ by causing panics

iv) had no access to a Lender of Last Resort (i.e., Bank of England) before 1797 (see above).

6. Banking in Scotland to 1825:

a) Scotland’s Advantages

i) no restrictions on bank sizes: no limitations on number of partners

ii) Joint-Stock banking had no restrictions: Scotland had three large chartered joint-stock banks in 18th century and two more in early 19th century: all with limited liability

b) development of the branch banking system:

i) so that the highly competitive joint stock-company banks created branches in all the major towns and cities of Scotland (as did some large partnership banks)

ii) if one branch encountered difficulties in discounting or bad loans, it received an infusion of funds to shore up reserves from the head office

iii) Only one bank failure during the Industrial Revolution: Ayr Bank (1772), which had no branches

c) England in 1825: Commercial Crisis and bank failures of 1824-25 forced Parliament to remove restrictions on English banking and permit adoption of the Scottish model: to be seen in a later lecture

7. Financing the Industrial Revolution:

a) joint-stock companies: were largely unavailable for financing capital formation: except for the canal companies (whose formation required private acts of Parliament)

b) commercial banks: largely restricted to financing working capital, chiefly by discounting commercial paper, but also by lending (fractional-reserve system)

c) mortgage and insurance companies: played a major role in financing fixed capital formation

d) The Private Business Firm: Self-financing the Industrial Revolution

i) family members and partners pooled capital

ii) borrowing: from mortgages and personal loans

iii) profit reinvestment: i.e., profits not consumed by reinvested: see the Weber-Tawney thesis

e) Low levels of capital formation during the Industrial Revolution:

i) does this reflect institutional impediments to capital investment?

ii) or the relatively low-cost capital needs of early industrialization: especially in textiles?

iii) Phyllis Deane: from 1760-80: only 5% -6% of NNI invested in Net Domestic Capital Formation, rising to 8% by 1830, and surpassing 10% only from the 1830s, with railroads

iv) Finestone: higher estimates, but include housing stock and gross capital formation: not really comparable

Coal and Steam Power in the Industrial Revolution:

1. Vital Importance of Coal for Modern Industrialization: its essential ingredient:

a) “An Industrial map of Europe in the 19th century was essentially a map of its coal-fields”: i.e., urban industrialization was almost everywhere concentrated around coal fields

b) Anthony Wrigley: importance of a shift from an organic to a mineral based-economy

i) England’s shift from an industrial economy based on wood and water to one based on coal: was the first stage of modern industrialization:

ii) beginning in the 16th century: thus giving England a two-century head-start over the rest of the world

iii) importance of coal in 18th-19th century industrialization:

(1) coal to produce steam power

(2) coal purified into coke: to permit the revolution in iron-making and later steel-making

(3) coal and steam for the 19th century transportation revolution: in iron built steam powered railways and steam shipping (iron, then steel ships)

(4) coal-fired steam turbines: for both shipping and generation of electrical power

(5) the chemicals revolution: thousands of new chemicals extracted from coal-tars

c) what steam power replaced (ultimately): animal power (horses and oxen); water-power; wind-power (in both wind-mills, and for sails on sailing ships).

2. The Development of Steam Power

a) key motivations to develop steam powered engines:

i) fuel crisis: high prices for wood led to increased demand for coal

ii) problem: increased coal mining meant deeper mine shafts ==> encountering flooding

iii) solution: more efficient pumps to pump water out of mine shafts (see lecture notes)

b) key innovations in steam power: in England (based on continental experiments)

i) Thomas Savery: 1698: steam-powered pump: did not work, but important for next innovation

ii) Thomas Newcomen: 1697-1712: steam-powered atmospheric engine:

(1) proved highly practical for coal-mines, to operate water-pumps: using cheap pit-head coal

(2) but too costly and inefficient to be used elsewhere): involved alternate heating and cooling of the piston cylinder (to produce the vacuum)

iii) James Watt: inventor of the successful steam engine

(1) 1763: working for Dr. Black at University of Glasgow: given a Newcomen engine to repair

(2) 1776: perfected an efficient practical steam engine (using a separate condenser to create the vacuum, while the piston cylinder kept permanently hot)

(3) In partnership with Matthew Boulton and Wilkinson: first used in their coal mines in Staffordshire and his Blast Furnace (iron smelter) in Shropshire

(4) 1781-82: double acting steam engine: using both steam power and atmospheric pressure (against vacuum)

(5) 1782: rotary steam engine, using flywheel and crank

(6) 1795: Soho Foundry (with Boulton), in Birmingham, to produce commercial steam engines

c) economic importance:

i) economized on all three physical factors of production: labour, land, and capital (see notes)

ii) essential for urban industrialization: in providing a far more mobile and elastic source of mechanical power that was not tied to water (river) or other sites

iii) not the founder of the factory system, because original cotton mills were based on water-mills: but did become, from 1820s, essential source of efficient power in urban factories

iv) applications: to be seen in next lectures on metallurgy (iron), textiles (cotton), railroads and steam shipping

The Industrial Revolution in Iron Manufacturing (to 1830): a Revolution in a Capital Goods Industry

1. Introduction

a) The twin spearheads of modern industrialization, everywhere in the world: (beginning with the British Industrial Revolution: (1) Metallurgy — iron, and then steel; (2) Textiles: chiefly cottons, then woollens and linens

b) Importance of iron for modern industrialization:

(1) as the chief building blocks of modern industrialization – for machinery, plants, buildings, bridges, railways, steam-ships, etc:

(2) and thus as a capital-goods manufacturing industry — in contrast to cottons, as a consumer-goods industry

(3) difference reflected in export statistics: iron exports were minimal before the Railway Age of the 1820s (and after), while cotton became Great Britain’s overwhelmingly dominant export

c) the chief forms of iron: as indicated by carbon contents

(1) wrought iron: with about 0.1% carbon (almost pure): as the oldest and most widely used form of iron

(2) cast iron: with a high carbon content – 3% – 5%: product of the late-medieval introduction of the blast furnace (see below)

(3) steel: purified iron with 1% carbon added: the ideal form of iron, but extremely costly before the mid 19th century – and thus a luxury metal (reserved for miliary and medical needs).

d) the importance of both coal and steam power for both the metallurgical and textile industries:

i) purified coal in the form of coke: as the essential fuel to produce iron (and then steel)

ii) coal-fired steam engines: to power the machinery in both industrial revolution

iii) thus continuing the Wrigley theme: of the shift from an organic (wood) to a mineral (coal) economy.

2. Iron manufacturing before the Industrial Revolution:

a) the ancient ‘direct’ process of iron-making: iron-winning

i) the essential process involved the use of a carbon fuel:

(1) to effect a chemical reaction to liberate iron from its natural form of iron oxide (Fe2O3): using wood charcoal as the purest form of carbon fuels

(2) the carbon combined with the oxygen to produce carbon dioxide (CO2) to liberate the iron (Fe)

ii) iron forges (Bloomery forges, Catalan hearths, etc.): using wood-charcoal and water power

(1) The iron ore was heated in charcoal furnace or heath to welding heat

(2) water-powered tilt-hammers, from the 13th century (displacing human labour), pounded the near molten metal to bring the carbon (from the fuel) and other impurities to the surface, to be burned off

(3) final product, very costly, was purified wrought iron (see above)

(4) very small scale production: no more than 20 tons a year

b) The Late-medieval ‘indirect process’: a preliminary industrial revolution with the Blast Furnace

i) Blast furnace: probably a German innovation, first found in eastern Low Countries in 1380s; but not introduced into England until the 1390s

ii) An immense, 30-ft high, brick-kiln furnace, using wood-charcoal fuels and water-powered bellows to create the blast of air, to achieve a high level of combustion ==> producing molten iron

iii) smelting: term given for the process of reducing iron-ore to its first usable stage, known as:

(1) pig iron – if the iron was to be further refined, into wrought iron

(2) cast iron – if used directly as a consumer product, by being poured molten into pre-shaped casts: for pipes, cannon barrels, pans, rods, etc.

(3) military: first major use, for producing cannons (but inferior to, but less costly than, bronze cannons)

iii) refining – the second stage: in finery forges:

(1) using wood-charcoal fuel and water-powered bellows and tilt hammers (as in the ‘direct process’, described above).

(2) to decarburize the iron (carbon from smelting) and purify it into wrought iron

(3) much smaller scale than blast furnaces, though became larger than the earlier iron forges

iv) economic significance of the blast furnace

(1) vastly reduced cost of smelting iron ore into basic iron, with large scale production

(2) created a truly capitalist iron industry: in which a capitalist had the resources to invest in or create a blast furnace (with hydraulic machinery), to acquire the raw materials (iron, charcoal), hire the labour, and market the finished products

(3) the earlier direct process using small forges were non-capitalist artisan industries in which the skilled craftsmen owned the blast-furnace, the tools, and raw materials but also performed essential labour.

c) The Tyranny of Wood and Power: limitations to growth and incentives for innovation

i) the initially impressive expansion of the English iron industry: from the 1490s, could not be sustained after the later 16th century, when industrial growth rates slowed down, and industry reached a plateau, b y the Civil War era of the 1640s

ii) Dual problems of the tyranny of wood and water: both Ashton and Nef (read lecture notes)

(1) dependence on ever costly wood-charcoal fuels for both smelting and refining,

(2) dependence on water power for powering the bellows in both the blast furnace and the forge, and the tilt-hammers in the refining forges.

iii) The wood-charcoal problem:

(1) evidence shown in graphs and tables (lecture notes) for soaring wood and charcoal prices

(2) but Nef and Ashton wrong in contending that it occurred in the century 1540-1640: instead new evidence shows that a fuel crisis emerged only after the 1640s, and then became truly severe, with a widening gap between wood-charcoal and coal fuels

(3) Statistics of smelting costs: that over 70% of the costs were in the wood-charcoal fuels

(4) ‘friable’ nature of charcoal: that charcoal cannot be transported, because it will crumble into useless dust if agitated or shaken during transport ==> so that the charcoal had to be created at the forest site

(5) that meant that the iron industry had to be small scale, dispersed and scattered through the countryside where woodlands were more readily accessible

(6) The coal-fired reverberatory furnace, invented (Italy) c. 1540, could not be used with coal fuels,

– the coal problem: a very dirty fuel, with many contaminants that would corrupt and degrade any products being manufactured from it (i.e., from its combustion gasses)

– solution: the reverberatory furnace, which isolated combustion gases, while reflecting the heat on to the product being manufactured, as used in many other 16th- and 17th-century industries: brewing, soap-making, dye-making, brick and paper making, gunpowder, brass and metal finishing, etc.

– reason: because the carbon in the fuel had to be in direct contact with the iron ore in order to liberate the iron from the oxygen in the Ferric oxide compound

iv) the water-power problem:

(1) water-power sites also had to be scattered and rural where opportunity costs of locating water-mills were lower (far lower than in urban areas)

(2) water-power discontinuous: with winter freezing and summer droughts, often available only for 35 weeks a year

v) dual tyranny dictating rural dispersion and small scale units:

(1) rarely were there to be found industrial sites (close to iron deposits) that had sufficient supplies of both wood-charcoal and water power to justify side-by-side location of both furnaces and forges

(2) therefore another reason why the 17th century industry was scattered with small scale units in the countryside

vi) Increasing dependence on imported Swedish and Russian iron:

(1) by early 18th century, these imports accounted for over half of domestic English consumption

(2) Swedish and Russian advantages: no tyranny of wood and water: ample supplies of both in sparsely populated iron-making regions of both countries (with higher grade ores)

(3) English problem: danger that these foreign supplies, coming via the Baltic, could be cut off in times of war.

3. The Industrial Revolution in Iron Manufacture: the use of coal throughout

a) The revolution in smelting: coke-fired blast furnaces: Abraham Darby (1709)

i) the ultimate answer to the fuel problem was to use coal in its purified form, known as coke (coal that is burned to a carbon residue in an airless furnace)

ii) Abraham Darby succeeded where many had failed, in previous decades, around 1709: a coke-fired smelter to produce pig or cast iron

iii) problems: why no revolution followed: why no one else built coke-smelters before the 1760s

(1) because initially still higher cost than wood-charcoal blast furnaces

(2) because the process did not remover the silicon from the iron, thus adding an extra refining costs

iv) the subsequent victory of coke-fired blast furnaces (smelters)

(1) continued fall in coal prices (thanks to Newcomen’s steam-powered drainage pumps), while wood charcoal prices continued to soar

(2) technological innovations in producing the blast: vastly cutting fuel costs (all by Scottish inventors)

iv) John Smeaton: 1760: developed water-powered piston air pumps to replace bellows

v) James Watt: 1776: application of his steam engine to John Wilkinson’s blast-furnace with piston air pumps: the decisive breakthrough producing the real revolution in producing pig iron

vi) James Nielsen: the hot blast, in pre-heating the air before entering the blast furnace.

vii) the victory of cast iron: Darby’s process, while not revolutionizing iron production, did produce far superior forms of cast iron because of the silicon residues, which acted as sealants to prevent fissures.

b) the revolution in iron refining

i) victory of coke-fired blast furnaces (smelters) created a severe imbalance: too much pig iron to be refined by current small-scale refineries (finery forges): hence one incentive for innovation

ii) military incentive: offered by the British navy: sponsored a competition, with large prize, to those who could produce good quality, low-cost bar iron, to remove England’s dependency on imported iron

ii) Wood Brothers: the ‘Potting and Stamping’ process invented in the 1760s (read the lecture notes): did reduce refining costs, but enough to produce a revolution

iii) Henry Cort and Peter Onions: in 1783, independently produced a viable solution in response to the British Navy’s competition: known as the Puddling and Rolling Process

(1) Puddling: pig iron was heated in coke-fired reverberatory furnace (no direct contact with carbon need – the reverse was true: the elimination of carbon), provide reflected heat to burn out the carbon (decarburize) and other impurities, leaving a semi-liquid or jelly-like form of iron in puddles at the bottom of the furnace

(2) Rolling: the semi-liquid iron was forced through water-powered rollers to squeeze out all remaining impurities

iv) James Watt’s rotary steam engine: in 1788, was applied to Wilkinson’s rolling mills

v) Richard Crawshay: in 1790s, introduced many improvement in Puddling & Rolling process in the Cyfarthfa iron-works in South Wales: increasing the scale of output to 13 ,000 tons a year.

c) Economic Consequences of the Industrial Revolution in Iron Making with coal throughout:

i) in general: enormous increase in industrial scale, industrial concentration, and geographic concentration around Britain’s major coal fields (ratio of 10 tons coal to 1 ton of iron)

ii) Vertical Integration:

(1) capital: as wealthy capitalists acquired coal mines, iron mines, blast furnaces (smelters), refineries, slitting mills (for finished iron)

(2) physical integration: of smelting and refining together, so that smelted pig iron be delivered directly to the refineries without having to expend extra fuel in reheating the iron

iii) horizontal integration: from amalgamation of iron firms into a few giant firms (15 firms controlled majority of iron production by 1815)

iv) geographic concentration: around major coal fields of South Wales, West Midlands (Shropshire, Staffordshire), Lancashire, Northumberland, and then (from 1830s), also Scotland

v) industrial organization consequence: oligopolistic competition,

(1) with a few large producers, enjoying high barriers to entry (and thus competition) producing a homogenous product (i.e., bar iron same by all producers)

(2) highly unstable, cut-throat competition ==> leads to cartel organization

vi) enormous increase in output (as measured in tons of pig iron): from 37,000 tons in 1760s to 3,106,000 in the 1850s

vii) But iron was only a very small, marginal export until the coming of the railways in the 1830s: with exports of railway iron

The Industrial Revolution in Cotton-Manufacturing: a Consumer Goods Industry (first part)

1. Importance of Textiles (Clothing) in Human History:

a) textiles are consumed to meet one of the three basic human needs, as necessities: food, clothing, and shelter

i) protection against the elements: cold, heat, rain, snow, ice, sand storms, the sun (melanomas)

ii) protection against physical abrasions

iii) protection against a sense of shame: nudity as a social taboo in most (not all) societies

b) luxury needs provided by textiles: assertion of personal social status (social ranks) and social worth

c) major types of textiles in human societies, past and present:

i) wool-based textiles: woollens (many costly) and worsteds (most relatively cheap): predominant in medieval and pre-Industrial Revolution Europe (now rare, in 21st century)

ii) silks: the most luxurious of all fabrics (though rivalled by some luxury woollens)

iii) linens: from cheap to costly luxury fabrics

iv) fustians: a hybrid mixture of linen (warp) and cotton (weft): originating in 10th-century Egypt

v) cottons: an industry in which Asians excelled, but in Europeans gained mastery (temporary) thanks only to the technology of the Industrial Revolution

d) Contrast with the Iron Industry of the Industrial Revolution era:

i) Iron Industry: a capital-goods industry

(1) metamorphosis (transformation) from an artisan handicraft industry into a capitalist industry took place (in England) in the 16th century with the introduction of the Blast Furnace: no fundamental change in Industrial Revolution era except for very large scale increases

(2) chiefly chemical processes of innovation in using coal fuels, in the form of coke throughout, for both smelting and refining

(3) coal-fired steam power to operate machinery of smelting and refining: same as in cottons

(4) Industrial concentration around coal fields, with both vertical and horizontal integration

(5) Very large-scale production with oligopolistic competition: price-makers

(6) only marginal role in English foreign trade before the 1830s

ii) cotton industry: a consumer-goods industry

(1) capitalist metamorphosis took place in the Industrial Revolution era: from a rural, small-scale handicraft industry with production scattered across the countryside to an urban factory-based system of production using steam engines to power many and different machines

(2) But still smaller scale than found in the iron industry, with spinning and weaving mills or factories often kept separate

(3) pure competition (only industrial example): firms were price-takers

(4) major role in British foreign trade, accounting for 46% of exports by 1820s (maximum share, with relative decline, but not absolute, thereafter)

2. Origins of the British Cotton Industry of the Industrial Revolution era:

a) a fustians industry: (Egyptian origins: 10th century) that had spread to Italy, Germany, and the Low Countries during the medieval and early modern eras

i) One of the New Draperies that Flemish Protestant Refugees fleeing Spanish conquest and Catholic persecutions brought into East Anglia (Norfolk, Suffolk) from the late 1560s (Revolt of the Netherlands)

ii) industry had migrated NE to Lancashire and Scotland: in search of cheaper labour

iii) nature of the fustian textiles

(1) warp (foundation yarn on the loom): made from linen fibres (extracted from flax): strong

(2) weft (the yarn woven between the separated warps): made from soft cotton fibres (weak – too weak to be used for warp yarns)

iv) South-Asian (Indian) supremacy in cotton textiles

(1) based on continued use of the millennia-old drop spindle and distaff: which had always produced the strongest and finest yarns, whether woollen or cotton: read the lecture notes

(2) but drop-spindle spinning was very labour-costly: 18th-century Indian hand spinners took over 50,000 hours to produce 100 lb of cotton compared to 135 hours for Robert’s self-actor steam mule of 1825

(3) European spinning wheels: introduced (from Muslim cotton industries) in late 12th & 13th centuries

– vastly increased labour productivity

– but produced much weaker and lower quality yarns

– originally used only for wefts in woollen industry

(4) Saxony Wheel: major improvement in 15th century, for spinning woollen/worsted warps – but not cotton.

b) manufacture of fustian cloths: processes

i) flax: retted and combed to produce linen fibres for spinning

ii) cotton: carded (brush-like multi-pronged instruments) the fibres for spinning

iii) spinning linen warps

iv) spinning cotton weft

v) weavers: used linen warp and cotton wefts to weave the cloth (see notes and diagrams)

c) Industrial Production by the Putting-Out or Domestic System of Production: a hybrid of mercantile capitalism and artisan handicraft manufacturing

i) Merchant clothier: the mercantile-financial capitalist entrepreneur who supplied the raw materials (linen and cotton), the working capital needs, and the marketing of the finished fustian cloths:

ii) The Master Weaver: the industrial entrepreneur or sub-contractor employed by the clothier

(1) he received or ‘bought’ the raw materials on credit from the clothier

(2) he ‘put out’ the raw materials to the various artisans, chiefly female, who worked in their own homes or cottages in the surrounding countryside: the flax retters and comber, the cotton carders, the flax spinners (warps) and the cotton spinners (wefts)

(3) the weaver and his family or hired employees then wove the warps and wefts into fustian cloths

(4) the finished product was sold to the clothier

iii) incomes earned in this putting-out or domestic system:

(1)the weaver’s income was in the form of profits, not wages,

(2) those whom he employed received piece-work wages, thus according to their output, since they were unsupervised

iii) note that the capital costs of production : are largely born by the artisans themselves, working in their own homes

iv) this putting-out system, in cotton-fustian textiles, was almost entirely rural: though ‘putting out’ systems can also be found in early-modern urban craft industries as well

v) the metamorphosis from a rural putting-out system:, using no powered machinery, to an urban-based factory system of production using steam-engines as a central source of power: the product of the two, separate industrial revolutions in spinning and weaving, to be seen in the next lecture.

X. Week 10: Lecture Topic no. 10: Part B: 17 November 2010

The Industrial Revolution in Cotton Textile Manufacturing: a Consumer Goods Industry (second part)

3. Domestic and Foreign Markets for the English Fustians Industry:

a) Role of English Mercantilism: the Calicoes Act of 1721:

i) British East India Company imports of South Asian calicoes and muslins provoked strongly hostile reaction from the established textile industries: woollens and worsteds (though calicoes were a substitute only for worsteds – not woollens – as a cheap and light fabric)

ii) clamours for protection led to increasing restrictions on Asian textile imports and finally the Calicoes Act of 1721, which banned not only the imports but also wearing of foreign calicoes (but did not affect the re-export trade in calicoes and muslins)

iii) chief beneficiary was the new English fustians industry, whose products were the closest substitute for imported calicoes: so it gained control over the domestic market

iv) but the fustians industry was not competitive abroad, in either quality or price: not unless it changed its technology to produce an all cotton cloth

b) The role of India and Africa: for foreign trade in textiles

i) Calicoes Act had not prohibited import of Indian yarn, which could have been used to weave substitute calico products within England

ii) But disintegration of the Muslim Mughal Empire after death of Emperor Aurangzeb in 1707 and ensuing civil wars with Hindus and Sikhs seriously disrupted trade in both calico textiles and cotton yarns

iii) Royal African Company:

(1) had been re-exporting large quantities of calicoes to West African (in purchasing slaves)

(2) with a lack of calicoes, had commissioned English fustian producers to produce all-cotton imitations of calicoes and muslins, but they were so inferior that they could not be sold

iv) hence incentive for technological change in the English fustians industry – all the more so when relative peace in India, by 1740s, restored re-export trade in calicoes and muslins

4. The Revolution in Spinning

a) Wyatt and Paul: 1738: the first attempts to mechanize spinning

i) after a decade of experimentation, developed the water-powered Spinning Roller to spin cotton yarn, and set up a factory

ii) proved to be a failure, but provided a key source for future successful innovation

iii) note that their experiments took place during the disruptions of trade in both calicoes and cotton yams

b) Hargreaves Spinning Jenny: of 1764 to 1770 (when patented)

i) vast improvement on the traditional spinning wheel to operate not one but up to 100 spindles

ii) moving carriage, with the driving wheel: when moved further away from the spindles, it attenuated the cotton yarns, and thus made them finer

iii) produced a cotton yarn as fine as any made in South Asia, but a weak yarn suitable only for the weft

iv) quickly displaced traditional spinning wheels in making weft yarns

iv) used no mechanical power and required little capital: fitted in well with the rural putting-out system, with female spinsters working in their own homes.

c) Arkwright’s Water Frame of 1769:

i) Arkwright not the inventor: stole the idea from John Highes

ii) used the basis of the Wyatt-Paul spinning rollers to have water-powered rotating ‘throstles’ spin the yarn

iii) result a cotton warp yarn could now be spun, one with sufficient strength, but lacking fineness to compete with Indian yarns: so that all cotton textiles were made from Water-Frame warps and Jenny wefts

iv) Arkwright also established first successful water-powered factory in cotton textiles

v) He also invented a water-powered carding machine to prepare raw cotton for spinning

d) Crompton’s Mule of 1774-1779

i) a hybrid of the Spinning Jenny and the Water Frame: using the multiple spindles and moving carriage of the Jenny (to provide fineness) and the water-powered throstles (to provide strength

ii) England could now produce both warps and wefts of sufficient fineness and strength to be woven into all-cotton cloths rivalling the best South Asian textiles

iii) productivity gains: when Indian hand-spinners (drop spindles) took over 50,000 hours to produce 100 lb of spun cotton yarn, Crompton’s original 1779 mule took only 2,000 hours, which he reduced to just 300 hours with his water-powered mule of 1800

e) Robert’s Steam-Powered ‘Self-Actor’ Mule of 1825:

i) replaced water-power with effective, smooth running steam engines

ii)reduced time to spin 100 lb of cotton to 135 hours (40 hours today)

f) Thorp’s Ring-Spinning of 1830:

(1) an American innovation that superseded the mule everywhere but in Great Britain, before World War I (and in Britain after World War I).

(2) much lower cost, but not able to compete with mules in very fine (high count) yarns

f) consequences of the victory of steam-powered mules in Great Britain

i) reduced cost of cotton yarn by over 90% by 1830s

ii) principal factor in making the cotton textile industry an urban industry based on coal-fired steam powered factories

iii) democratic revolution: so reduced costs and prices of cotton textiles that they became cheaply available for mass consumption by even the lower strata of the working classes of Great Britain

iv) gender change: mule-spinners were exclusively male, who totally displaced female wheel and jenny spinners

v) also destroyed the cottage industry in spinning, at least

5. The Revolution in Weaving: a much longer process.

a) the revolution in spinning: created a severe imbalance in the production process since cotton cloth manufacture obviously required the combination of spinning and weaving

b) Cartwright’s Power Loom of 1785-87:

i) first attempt to resolve this problem: with a water-powered mechanized loom, and a weaving factory

ii) but the machinery was a failure: in causing damage to the yarns while weaving

iii) Cartwright went bankrupt when his factory failed: but provided the core solution

iv) the problems of mechanizing weaving were not fully resolved until the 1830s

v) Robert’s Self-Actor Steam Power Loom of 1822-30: was the key break through (perfected by Kenworthy and Bullough in 1842)

c) Why did weaving take so long to mechanize?

i) very elastic supply of rural hand-loom weavers, because of Enclosures: number tripled from 1790s to the 1830s

ii) relative costs: weaving labour became cheaper while the machinery was far more expensive than in spinning factories

iii) trade cycles:

(1) meant that factories were often underemployed and not economic to run

(2) by 1840s, British exports and market power created sufficient stability to justify factories

iii) bitter opposition of male handloom weavers to factory employment and factory discipline

(1) burning factories to the ground was another disincentive to investing in power looms

(2) not a problem in spinning factories: because well-paid mule spinners had displaced females

6. The Cotton Gin of Eli Whitney

a) Eli Whitney: a Connecticut Yankee: invented the cotton gin in 1792

i) machine to extract the short-fibred cotton from its boll, which had previously been prohibitively expensive

ii) but short-staple cotton was the only type that could grow in the US South (apart from some long-stapled Sea Cotton, grown in islands off the Carolina coasts)

iii) created a vast plantation economy and a vast expansion in African slave labour: as the major economic mainstay of the southern American states to the Civil War

b) American exports:

i) previously Great Britain had obtained its cotton from the eastern Mediterranean (Palestine-Syria) and India

ii) Now the U.S. became Britain’s chief cotton supplier: exports rose from 0.5 million lb in 1793 to 120.0 million lb in 1820

iii) Note that Britain supported the South during the American civil war

7. Economics of the Factory System of Production in Cotton Textiles: potential gains

a) technology: a central source of mechanical power

i) originally water-power (hence cotton ‘mills’) and then steam-power

ii) shift to steam power meant a shift from rural to urban locations

iii) steam power to drive many machines of the same kind and also different machines: in spinning, carding, and weaving (though not always)

b) increasing returns to scale: economics of large-scale production, in comparing urban factories with the rural putting-out or ‘cottage’ system of production

c) savings in transaction costs: by concentrating production in urban locations, near centres of finance and marketing

d) labour economies from factory supervision discipline: impossible in rural putting-out system

e) substituting relatively cheap capital for expensive labour:

i) low wages do not mean low labour costs: have to be measured in terms of productivity

ii) rural putting out an inelastic system of production, in which costs rose sharply as clothiers ranged further afield to find carders, combers, and spinners

ii) enormous productivity gains from capital investment in steam-powered machinery

f) Questions of Industrial Integration and Industrial Scale: pure competition

i) unlike the iron industry, the cotton industry did not experience complete industrial integration

(1) 1856 statistics for Lancashire: 41% of factories were for spinning only, 24% were for weaving only and thus only 35% had integrated spinning and weaving within one factory

(2) reflects in part the long-delayed mechanization of weaving, before which many spinning factories had been established

(3) also reflects fact that many spinning factories specialized in very high-count fine yarns for export

ii) therefore, while the Industrial Revolution in cottons had created a metamorphosis from rural handicraft to urban capitalistic production, it did not produce the same scale changes as in the iron industry

iii) very large number of relatively smaller scale factories: with a total of 1,451 firms in Lancashire alone in 1856

iv) hence the essence of pure competition in the cotton industry

(1) producers selling homogenous, interchangeable products (at least in terms of fineness categories_)

(2) so many sellers and so many buyers that none could influence the price

(3) sales by weekly auctions.

8. Why did the Industrial Revolution take place first in cottons, before woollens:d the lecture notes

X. Week no. 10: Lecture Topic No. 11: 17 November 2010

Prices, Economic Trends, and Business Cycles in the British Economy, 1815 – 1873

This lecture was not given in class, but is available online

X. Week no. 10: Lecture Topic No. 12: 17 November 2010

British Banking, Finance, and Business Organization: 1815 – 1873: Part A (Banking)

1. Problems of English Banking to the 1820s:

a) small size and thus small capitalizations:

i) The Bank of England’s monopoly on joint-stock banking, reinforced by the 1720 Bubble Act (ban on joint-stock companies without charters): meant that all other English banks were restricted in size to either family firms or six-member partnerships

ii) Problem not severe for London banks, which had a full century to grow and amalgamate – from the 1660s to the 1760s

iii) But the Country Banks – those outside London – had sprung up like mushrooms during the Industrial Revolution era, all of them with small capitals, on average only 20% of those of London banks

iv) Small capitalizations meant dangerously small reserves to back deposit and note issues

v) Gresham’s Law of banking: the failure of one ‘bad’ bank – in discounting bad commercial papers and/or in making bad loans – could cause a panic and thus a ‘run on the banks’: ruining all the good banks as well, none of whom had reserves to cover all deposits and notes (nature of fractional reserve lending)

vi) Contrary Example of Scotland: which, not bound by English law, had five chartered joint-stock banks and many large partnerships banks

(1) large size and capitals permitted branch banking: so that the mother bank could bail out any of its branches encountering difficulties by replenishing its cash reserves

(2) In this era, only one Scottish bank failed (Ayr bank of 1772): with no branches

vii) Overseas Commercial crisis produced a financial crisis in England: so that 93 of England’s 715 small banks (13%) failed, while none failed in Scotland

b) the problem of uncontrolled note issues:

i) Crisis of 1797, as seen before, led to the era of the ‘Paper Pound’: when the gov’t allowed the Bank of England and indeed all other banks to suspend convertibility of notes into gold (and vice versa).

ii) B of E and other banks also lowered their bank-note denominations from the £5 minimum to £1 (or even less, in Scotland)

iii) That led to a horrendous proliferation of bank notes, especially pound notes, which was blamed for the severe inflation that lasted until the end of the Napoleonic Wars

iv) Ricardo’s bullion report of 1820: that the gov’t must restore full convertibility and raise the note issues

2. The Bank Act of 1826: to resolve both of these problems and the financial crisis of 1824

a) Repeal of the Bubble Act in 1825:

i) was actually the first step, in permitting the free formation of new joint-stock companies without the requirement of incorporation charters

ii) but that had no effect on banking, because of the Bank of England’s ongoing monopoly

b) Bank Act of 1826:

i) thus abolished the Bank of England’s monopoly to allow the same free formation of joint-stock banks, though initially only outside of London

ii) also required the Bank of England to establish branches outside of London – in major English cities

iii) restricted the issue of bank notes to a minimum denomination of £5 (as before 1797) – except in Scotland

c) Bank Act of 1833: permitted London banks also to organize as joint-stock company banks

d) Results:

i) sharp rise in the number of English joint-stock banks, and a relative decline in partnerships banks (many of whom were taken over by joint-stock banks): number of joint-stock banks rose to 99 by 1850, with a peak of 122 by 1875 (thereafter dwindling to 41, by 1913)

ii) number of branches rose to 576 by 1850, with a continuous rise thereafter to 6426 in 1913 (thus from a ratio of 3.67 per joint-stock company in 1850 to 97.84 in 1913)

iii) sharp drop in number of bank failures, though bank failures were not eliminated.

3. The Bank Charter Act of 1844: most important banking legislation of the 19th century

a) philosophical and theoretical background: the Quantity Theory of Money, though then called the Currency School

i) basic assumptions that governed Classical Economic in the 19th century:

(1) that the quantity of money directly and immediately determined the price level and interest rates, which in turn determined, or was determined in turn, by relationship of exports and imports in foreign trade

(2) that money was should be only gold-backed bank notes – and thus that the only bank notes to be permitted to circulate were Bank of England notes fully backed by its gold reserves

ii) the trade-money supply price – trade model:

(1) If England experience a trade surplus, if export revenues exceeded import expenditures, gold would flow into the country, and be exchanged for Bank of England notes

(2) If the money supply therefore rose by 10%, prices would soon rise correspondingly by 10%

(3) Export prices would rise, thus curbing exports, while imports became relatively cheaper: so that, as imports exceeded exports in value, gold would flow out, the money supply would contract, prices would fall, thus restoring exports and equilibrium

b) Provisions of the Bank Charter Act: based on these assumptions

i) to split the Bank of England into two separate and autonomous units: the Issue Department and the Banking Department

ii) The Issue Department: with one sole responsibility

(1) to control the note issue: so that at any given time the total note issue of Bank of England notes in circulation was to equal and never exceed the gold bullion reserves + the Bank’s capital stock of£14 million

(2) the note issue and foreign trade:

– if England experienced a trade surplus and influx of gold, that gold, sold to the Bank of England, would be exchanged for new Bank of England notes, thus expanding the money supply

– if England experienced a trade deficit, and gold outflow, merchants who purchased gold would surrender to the Bank the B of E notes, which would be burned, thus contracting the money supply

(3) Then Bank of England was to take over the note issue of all other banks, and no new banks would be allowed to issue any bank notes

iii) The Banking Department:

(1) was instructed to act as a normal competitive commercial bank, in lending and discounting, and to follow, not lead the market

(2) In essence, the Bank was now forbidden ever to act as Lender of Last Resort

(3) The Bank quickly did so and reduced the discount rate to attract business

c) Faults of the Monetary Provisions of the Bank Charter Act:

i) Fallacious nature of the 19th century Quantity Theory of Money

(1) The modernized version is more useful: M.V = P.y – in which M is the stock of money, V is the income Velocity of Money, P is the Consumer Price Index and ‘y’ is Net National Income (real, or deflated)

(2) Thus an increase in M could be offset by a reduction in M and a rise in ‘y’ (especially if M ==> a fall in interest rates and expanded demand)

(3) But also ignores factor-price stickiness, so that such price do not fall with a decline in M

ii) that gold and Bank of England notes were by no means the only forms of money: in fact, one consequence was a marked increase in the use of cheques and deposit-transfers and the use of other forms of near money

(4) gold supplies were not static: the 1840s in fact marked major gold mining booms in both California and Australia, producing gold flows that ended up, partly, in London

d) Major Faults: the Bank Charter Act exacerbated instead of relieving economic crises

i) The crisis of 1846-47: the catastrophe of the Irish Potato Famine and grain harvest failures

(1) large amounts of gold flowed out to purchase foreign grains at high prices

(2) the gold outflow was not matched by a fall in prices

(3) If the act had been followed, the ensuing monetary and thus credit contraction would had led to economic catastrophe

(4) Instead, the gov’t suspended the act and directed the B of E to lend freely, to shore up cash reserves of financial institutions: the exact opposite of the act

ii) the same scenario ensued in the financial crises of 1857, 1866, and 1873

iii) Walter Bagehot: in 1873, the year of that latest crisis, he published his classic Lombard Street, in which he contended that the major duty of the Bank of England was (again) to act as a Lender of Last Resort in times of economic crisis, and thus contrary to the Bank Charter Act

iv) 1878: the Bank of England officially sets its own discount rate, instead of following market rates

v) 1890: Bank of England successfully intervenes in the severe financial crisis to bail out the Baring Brothers Bank (which was not bailed out again, when it failed a few years ago).

vi) Still the record is mixed, because many directors still insisted that the Bank of England’s chief duty was to its shareholders, as a private joint-stock bank

vii) the Bank of England’s full evolution into a modern central bank had to wait until after World War II (when it was nationalized).

Business Organization in 19th Century Britain: the Limited Liability Corporation

4. The Origins of the Modern Limited Liability Corporation:

a) The Repeal of the Bubble Act in 1720: as seen last day (for banking)

i) permitted the formation of joint-stock companies, without parliamentary approval, and without a charter of incorporation

ii) charters of incorporation, with provisions for limited liability (limited the investor’s liability to the amount of capital subscribed, in buying shares – usually on margin, so that full amount was due), were still difficult and costly to obtain

iii) just as canal companies had been the only exception, in receiving limited-liability charters of incorporation before the repeal of Bubble, so railway companies (next topic) were the major exception before the Limited Liability legislation of the 1850s

iv) So most joint stock companies lacked such charters: and therefore their shareholders were treated as partners under Partnership Law, bearing full and unlimited liability for debts and legal obligations of the company

(4) only those with connections and knowledge of the firm, and with wealth, were likely to buy shares

b) Why the opposition to allowing limited liability?:

i) moral hazard (according to the modern concept): the belief that if shareholders were protected by limited liability then those running the business firm would be far mor likely to undertake dangerous risks, engage in dangerous speculation, or even fraud: the heritage of the Bubble Crisis

ii) adverse selection: that if share-holders were protected by limited liability, then risk would be transferred to lenders and bondholders, who would likely demand higher interest rates. Note that risks always have to be shared between different types of investors

c) The continental Société en commandite (began in French law, later 17th century): offered an ideal compromise that would have dealt with both moral hazard and adverse-selection problems

i) limited liability offered to all silent partners or investors who took no active role in the firm

ii) unlimited liability therefore for directors and those investors managing the firm

iii) but the British never, ever considered this continental model. Why?

d) Why Parliament finally accepted limited liability in the 1850s:

i) major changes in technologies that required vastly greater sums of capital to make enterprise viable

ii) international competition encouraged increases in scale economies to be competitive

iii) realization that firms with large-scale capital requirements could not raise such capitals by attracting savings of the risk-adverse majority of the middle classes

e) Limited Liability of Legislation of 1856 – 1862:

i) 1856: Joint Stock Companies Act: any seven persons registering a joint-stock company, with a list of directors (names and addresses) and supplying an annual balance sheet, was given a charter of incorporation, offering limited liability to shareholders, without private acts of Parliament or any other costs

ii) 1857: These provisions applied to joint-stock banks, initially excluded

iii) 1862: provisions were extended to cover liability for bank notes (but only Bank of England issued bank notes in England, though two Scottish banks continued to do so).

iv) Subsequently, some 5,000 joint stock companies received such charters – and some failed.

v) By no means all British firms wanted to be incorporated: many family firms and partnerships refused for losing control and identity to shareholders.

The 19th-century Transportation Revolutions: in steam-powered railroads and steam shipping:

1. The Revolution in Steam-Powered Railroads: the second transport revolution:

a importance for Great Britain:

i) completed first phase and introduced second phase of modern industrialization: with far larger scale forms of industrial capital investments

ii) completed Britain’s national market integration: only partially achieved by canals

iii) but did NOT alter the industrial urban map of England: previously established by the combination of coal-fields and canals

iv) made the iron (later steel)industry a major export industry: in the export of railway iron, locomotives, rolling stock (railway cars), etc.

v) also the major factor in transmitting modern industrialization to the continent and the rest of the world

b) importance for continental Europe, the Americas, and Asia:

i) relatively much more important than for Britain: since

(1) continental transport facilities were far more primitive – with fewer canals

(2) distances between industrial resources, cities, and ports were much greater

ii) created not only integrated national but also continental market economies

iii) In essence railways for the first time made possible and feasible modern industrialization elsewhere

b) Origins of the Railroad in Great Britain:

i) canals: first stage of the modern transportation revolution provided key problem: as natural monopolies they had become slow, inefficient, and costly (in exacting market rents)

ii) George Stephenson: completed others’ experiments to achieve first cost-effective steam powered locomotive:

(1) 1825: the Stockton-Darlington Railway: competition proved that locomotive was superior to a stationary steam-engine pulling cars by a cable- but both with iron cars with wheels on flanged wrought-iron rails

(2) 1829-30: the success of the ‘Rocket’: the Liverpool-Manchester railway

iii) railway building booms followed in 1830-36, 1842-52, and 1860-72

c) initial problems with British railways:

i) no standard gauge: Stephenson used the traditional coal-mine gauge of 4 ft 8 in, while Brunel used the wider and far more efficient 7 ft gauge, to carry larger cars at faster speeds

ii) Parliament in 1846: made the Stephenson gauge the national standard (but other gauges lasted to 1890s)

iii) lack of state control and state planning or direction

iv) result: over 1100 railway companies were formed

v) market forces, with amalgamations, and bankruptcies reduced this number to 128 by 1900 (when four large companies dominated the national railway system)

d) economic importance of railways in Great Britain:

i) capital formation:

(1) major aspect and form of large-scale capital formation from the 1830s: £630 million invested by 1870

(2) In 1840s: railways accounted for 2/3 of all capital investments (7.5% NNI

(3) debate between Phyllis Deane and Charles Feinstein on levels of capital formation: read lecture notes

ii) financial institutions: shares of railway corporations, with limited liability provisions, opened up the London Stock Exchange and also the new provincial exchanges of Manchester and Birmingham to trading in industrial shares

iii) Market Expansion and Industrial Scale:

(1) by lowering both transportation and communications costs and time-periods (1838: the electric telegraph)

(2) by eliminating local monopolies that had been protected by high transport costs from long-distance competition (‘tariff of bad roads’): so that far larger scale national firms could service the entire national market, eliminating such local, small-scale competitors

(3) by reducing the need for larger inventories of supplies, and hence saving on working capitals (to be used to enhance fixed capital formation)

iv) major impact of the coal and iron (later steel) industries:

(1) railway surveys: led to discovery of vast new coal and iron mines

(2) vast increases in coal consumption:

-coal, purified as coke, to produce iron

-coal-fired steam power in producing iron, operating locomotives

-coal for domestic consumption, as it became a much cheaper fuel to produce and transport

(3) vast increase in iron consumption:

-for railway tracks, locomotives, rolling stock, bridges and building

-export of railway iron for construction abroad

v) impact on agriculture:

(1) immensely beneficial for marketing perishable fruits and vegetables

(2) cost saving (and weight-saving) in transporting livestock

(3) vast increase in labour mobility, promoting urban industrialization, created labour scarcity in rural areas

vi) Note: not until the 1870s did railways profit more from commercial cargoes than passengers:

(1) from 1830s, canals responded by becoming far more efficient and competitive in transporting bulk cargoes

(2) narrow railway gauge and imperfections in technologies did not make cargo transports economically viable until improvements in and from the 1870s

(3) railway milage more than doubled, as did capital investments, from 1870 to 1914

2. Steam Powered Oceanic Shipping:

a) importance: created for the first time (though in combination with overseas railways) a truly integrated global economy: one that fostered or forced an international division of labour, and the operation of the law of comparative advantage – to the extent that Free Trade prevailed in the 19th century.

b) particular advantages for Great Britain: but chiefly only from the 1870s

i) allowed Britain finally to gain world supremacy in shipbuilding: from New England

ii) allowed Britain to gain world supremacy in international shipping, trade, banking, maritime insurance, and finance (especially in acceptance bills – bills of exchange):

iii) allowed Britain to import far more merchandise than she exported: from these revenues from shipping, banking, finance, and insurance

iv) allowed Britain similarly to gain naval supremacy: so necessary to protect international shipping lanes

v) forced Britain, but only in conjunction with Free Trade and the Gold Standard (next day’s lecture) to obey the Law of Comparative Advantage: to shift from agriculture to industry, trade, and banking – by importing foodstuffs far more cheaply than they could be produced at home.

c) origins of the Transportation Revolution in Steam Shipping:

i) when the Dutch lost their supremacy in shipbuilding, in later 18th century, they lost it not to England, but to New England (the US), with comparative advantages in timber and ship-building skills: as seen in the 19th century supremacy of the Yankee Clipper Sailing Ships

ii) 1783: French experiment on the Saone river, near Lyon: but did not succeed

ii) 1788-89: first successful use of steam power in Great Britain, for primitive paddle wheelers, in Scotland

iii) 1807: an American, Robert Fulton credited with perfecting the steam-powered paddle-wheeler for commercial use on rivers and for coastal shipping

iv) problems with paddle-wheelers for 0trans-oceanic shipping

(1) wooden ship hulls and iron machinery could be damaged or destroyed in ocean storms

(2) machinery and immense amounts of coal fuel required left too little space for cargoes & passenger

(3) inefficient: required far superior form of steam-powered machinery and also needed iron

d) Coming of Iron Built Ships: advantage

i) far greater strength and resistance to high powered stress from more powerful machinery

ii) lower weight: an iron built ship cost 25% less than a comparable sized wooden (oak) ship

iii) far more durable, and less likely to suffer leaks or storm damages

iv) by 1840s, iron-built ships cost 15% less to build than oak-built sailing ships

v) iron construction permitted and promoted far, far large scale ships

vi) first uses of iron-build ships, from the 1840s and 1850s: the British Navy, the East India Company, and the Trans-Atlantic Inman and Cunard Lines

e) Brunel and Steam-Powered Ships:

i) 1836: Isambard Brunel (owner of the Great Western Railway, with the 7 ft gauge): invented the steam-powered screw propeller (as with all modern ships): but needed more powerful steam engines, and iron

ii) 1854: first practical compound steam engine for ocean shipping: followed by tripl and quadruple maritime steam engines in the 1860s and early 1870s

iii) 1884: Charles Parsons invented the steam-turbine for maritime shipping

iv) results: 10-fold increase in power, with 90% reduction in fuel costs, and 60% reduction in freight rates, by 1900

f) Trans-Atlantic commercial shipping:

i) Inman and Cunard Line: offered far superior passenger shipping, compared to ‘steerage’ offered on sailing ships

(1) individual staterooms, beds, linen, soap, etc

(2) three cooked meals a day, with fruits and vegetables (against scurvy)

(3) on board doctors and nurses

ii) cut passenger fatalities by over 90% from what had been common on sailing ships: at double the price

iii) vast global importance: in promoting cheap international migrations, especially to the Americas and Australia-New Zealand

ii) comparisons of the Sirius in 1838 (wood: with sail and paddle wheel) vs. Mauritania in 1907 (steel, with steam turbines:

(1) tonnage: Sirius – 700 tons, vs. Mauritania – 31,938 tons

(2) horsepower: Sirius – 320 HP, vs. Mauritania – 70,000

Great Britain and the Age of Free Trade: Finance, Foreign Trade, Capital Exports, and Imperialism in the 19th Century (1815 – 1914):

1. British Foreign Trade and the Free Trade Movement:

a) follows logical from last day’s lecture on the two steam-powered transportation revolutions: in railroads (national & continental economies) and oceanic shipping (global): the Free Trade Movement made possible a more globalized economy made physical possible by these transport revolutions

b) British foreign trade in the 18th century involved following economic transformation:

i) an almost exponential, 25-fold expansion in the real value of world trade from the 1840s, for which Britain was a major beneficiary, especially in world shipping

ii) the British-born philosophy of Free Trade: from the Classical School of Economics

iii) British, European, and American capita exports to the rest of the world

iv) The adoption of the Gold Standard internationally: necessary component of Free Trade

v) Transformation of the British economy by Law of Comparative Advantage: forcing a contraction of the agricultural sector and shift to industry, commerce, and finance ==> marked improvement in living standards

vi) European imperialism: both the ‘Imperialism of Free Trade’ (1840-1870) and the ‘Era of Capitalist Imperialism’ (1870- 1914): who benefited (not the victims of Imperialism)

2. The Classical School of Economics and the Free-Trade Movement

a) Adam Smith and Classical School of Economics:

i) a full-scale assault on the principles and policies of Mercantilism: i.e. Protectionism, Navigation Laws, etc. (during which era Industrial Revolution took place)

ii) therefore an attack on Colonialism and thus Imperialism

b) Basic principles of Classical School Economics:

i) Laissez-Faire: from the French, ‘to leave alone, to let be, without hindrance’

(1) that the government must refrain from any interference with the market economy, and allow the market economy function by the profit-maximizing ‘laws’ of the ‘Invisible Hand’

(2) that the government must restrict itself to law and order, national defence, and ensuring that principles of fair competition prevail (i.e., no monopolies, special licences, etc.)

ii) Law of Comparative Advantage: that countries prosper best with the optimum national and international welfare gains if each country specializes in pursuing those economic activities (plural, not singular) in which it enjoys a comparative advantage, allowing other countries freely to do the same, while freely-trading with all other countries: i.e., exchanging surpluses efficiently produced

c) Free Trade (and total anti-Mercantilism) was thus the logical outcome of both policies:

i) Eden Treaty with France, in 1786: showed the impact of Free Trade principles (when France was influenced by a similarly anti-Mercantilist movement: the Physiocrats)

ii) but that ended with the French Revolution

3. Hindrances to the Coming of Free Trade, until the 1840s:

a) the French Revolutionary and Napoleonic Wars, 1792 – 1815:

i) higher taxes on trade, by all combatants, to finance warfare

ii) other war-time impediments to international trade: blockades, embargoes

b) Mercantilism of British Businessmen: when the Industrial Revolution had developed and prospered under Mercantilist, protectionist umbrella: ‘if it ain’t broke, don’t fix it’

c) Foreign tariff barriers against British goods: rising trade barriers both during and after the Napoleonic Wars, to protec. European industries against lower-cost British competition

d) The British Corn Laws: proved to be the chief barriers

i) Protection of English/British farmers goes back to the 1690s, with various Corn Laws (Corn = grain)

ii) War and Population growth had caused wheat prices to soar from 1790s to 1815, encouraging British farmers to add high-cost marginal lands that proved unprofitable at the end of the war

iii) Sharp fall in post-Napoleonic War grain prices ==> protectionist clamour

iv) New Corn Laws:

(1)1815 Corn Law: total ban on grain imports unless grain prices rose above the war-time average of 80s a quarter; but proved to be unworkable

(2) 1828 Corn Law: permitted grain imports with a sliding scale of protective duties: the higher the domestic grain price, the lower was the duty; the lower the price, the higher the import duty

iv) The Corn Law were the central, overriding issue in British politics, and the chief barrier to the adoption of Free Trade, with two rival political parties

(1) Tories: or Conservatives: who were chiefly (not entirely) supported by land owners, who believed that their economic welfare depended on maintaining the Corn Laws (protection)

(2) Whigs: or Tories: who were chiefly (not entirely) supported by urban voters, especially merchants, bankers, industrialists, professionals, academics, who were increasingly supportive of Free Trade, while many Whigs supported Free Trade just to punish the Tories

e) Fiscal Problems: how to replace the important government revenues from import duties and other trade taxes if Free Trade were adopted (meaning the end of such taxes)?

4. Factors Promoting the Free Trade Movement from the 1830s:

a) conversion of more and more British businessmen to Free Trade:

i) Those business who supported the Whigs came to support Free Trade if only to oppose the Tories

ii) Growing belief that to prosper form exports Britain had to allow imports – to allow foreigners the purchasing power to buy British goods

iii) demand for tariff free imports of industrial inputs, including agricultural goods

iv) Ricardo’s Wages Fund Theory: that wages determined by the cost of living (i.e., cheaper imported food)

v) belief that British industrial supremacy removed any fear of foreign imports

b) Political Reforms favouring the Whigs:

i) 1832 Reform Bill: redistributing parliamentary seats by population, thus giving far many more seats (ridings) to urban centres, where Whig support was the strongest

ii) 1839: Anti-Corn Law League: formed to combat the ongoing 1836-42 depression with working class support

c) Tax Reforms: to resolve the Free Trade fiscal problem

i) 1840: Royal Commission on Taxation: recommended drastic revision of import duties, most of which were shown to be too costly to administer

ii) 1841 Election: victory of (ironically) the Tory regime of Robert Peel on Tax Reform

iii) 1842 Budget: sharply reduced many import duties, removed other restrictions, and made up for the lost revenue by imposing the old income tax: 7d in the pound

iv) 1845 Budget: more reductions in import duties, especially reductions and changes in the Corn Law, and a further increase in the income tax (undermining Conservative support for Peel)

5. The Repeal of the Corn Laws and the Aftermath:

a) 1845-46: combined agricultural disasters:

i) disastrous harvests across Europe led to sky-high famine prices, and gold outflows (see lecture on Banking: Bank Charter Act)

ii) Ireland: also suffered from ruin of its potato crops (disease) bringing famine and economic penury: half a million died and two million emigrated

iii) Robert Peel was forced to repeal the Corn Laws to permit free imports of foodstuffs, but depended on Whig support to do so.

iv) After the repeal, the Whigs combined with anti-Peel Tories to bring down his government.

b) New Whig or Liberal Regime: brought in almost complete Free Trade by 1849, when the Navigation Laws were also repealed (but really by then a dead-letter)

c) Free Trade Movement expanded in Britain and Europe with evangelical fervor:

i) 1860: Cobden-Chevalier Treaty with France: serving as a model:

(1) Britain had retained some high duties, up to 20%, on silks and wines (not protectionist, since Britain produced neither silks nor wines – though duties did protect beer and spirits)

(2) used as bargaining chips to have the French reduce duties against British goods

ii) This treaty was used by Britain, France, and other countries (e.g., German Zollverein) to negotiate a series of bilateral free trade treaties throughout Europe

d) The 1873 ‘Great Depression’ and the end of the international Free Trade Movement

i) Fruits of the international transportation revolutions proved to be crucial issue: ==> produced a flood very cheap foreign grain imports (from the Americas, India, Latin America, Australia, etc) into Europe ==> threatened ruin of European farmers

ii) The 187s crisis also produced industrial depressions ==> industrial clamour for protection

iii) The ‘union of pork and iron’: united agricultural and industrial interests to restore tariff barriers and then to increase them steadily throughout Europe and Americas

iv) Only Great Britain remained staunchly true to Free Trade (until 1916).

v) Result in Great Britain: severe contraction of its agricultural sector, to be seen in first lecture in January: but with increased national welfare in rising living standards

vi) Law of Comparative Advantage thus transformed Britain more than any other country.

6. The Importance of the International Gold Standard for Free Trade:

a) Free Trade cannot work without fixed exchange rates:

i) for otherwise countries can defeat the purpose of tariff-free, tax-free Free Trade by devaluing their currencies: to make exports cheaper abroad and imports from abroad more expensive

ii) that was the cruel lesson of the Great Depression in the 1930s, when countries abandoned gold

b) The Provisions of the Gold Standard:

i) that each country values its currency in a fixed number of grams of fine gold: and does not alter that rate

ii) each country allows free and perfect conversion of paper bank notes into gold, and gold into notes

iii) therefore, all countries on the gold standard necessarily permit the free exchange of their currencies with gold and thus with each other at fixed rates

iv) exchange rates can vary only by the ‘gold shipping points’: i.e., the cost of shipping gold rather than paying by acceptance bills (bills of exchange)

c) benefits: for all countries

i) free flow of goods, services, and capital – without exchange rate impediments

ii) large savings on transaction costs

iii) fosters foreign investments: by ensuring investors that they can receive their investment earnings (dividends and interest) and repatriate their capital in gold

e) costs for governments:

i) prevented them from engaging in fiscal and monetary policies to stimulate and benefit their own economies – especially to combat unemployment

ii) thus required balanced budgets (no deficit financing)

iii) impossible to maintain such a gold standard in times of war: and thus this system collapsed with World War I

iv) question: how is the gold standard regime related to the use of the euro in the European Economic Community today – and how can the problems of Ireland, Greece, Portugal, and Spain be resolved??

d) Heyday of the International Gold Standard: 1840 – 1914 :

i) Great Britain: effectively on the gold standard from 1721, and by law by legislation of 1816 and 1844 (Bank Charter Act) ii)

France, Germany, Italy, Spain, etc. followed, with Russia the last country, in 1897.

7. British and European Capital Exports, especially from the 1870s:

a) capital exports a major feature of European expansion of global trade in the 19th century:

b) major phases of British capital exports:

i) 1792-1815: Britain financed the anti-French alliance, displacing the Dutch as the chief capital exporters

ii) 1815-1836: Britain exported far more capital in financing new European governments and state governments in the U.S – until the American financial crisis of 1836 (when 9 state gov’ts defaulted, as did some European gov’ts) ==> producing severe industrial depression in Britain

iii) 1842-1873: Britain resumed its role as an even greater capital-exporter in financing and building railroads throughout Europe, the Americas, Latin America, and Asia

iv) 1873 – 1914: the Era of ‘New Imperialism’ or ‘Capitalist Imperialism’,

(1) when Britain became a ‘mature creditor nation’ engaging in a wide variety of international capital investments, thereby receiving substantial foreign incomes from interest and dividends on investments

(2) France, Germany, and the US also became major capital exporters

(3) Lenin: argued in Imperialism: the Highest Stage of Capitalism that:

-maturing capitalist nations had to export capital to survive in international competition

-that the very export of capital was imperialism subjecting recipient countries to control by the capital exporters

v) Note from the table in the lecture notes that Britain always:

(1) imported a greater value of goods than she exported (Commodity Account)

(2) more than made up that difference by ‘invisibles’ income: from shipping, banking, insurance, international finance, and foreign investments

(3) The resultant surplus on Current Account represents the growing positive value of overseas capital investments.

8. Capitalism, Imperialism, and Racism:

At the same time, we must ask how consistent was the doctrine of Free Trade with the actualities of expanded British Imperialism in the 19th century, all the more so since the rejection of Mercantilism should have also meant the abandonment of overseas colonies — not the aquisiiton of even more colonies, as did happen in Asia and Africa, especially, in the 19th century. We must therefore deal with two related debates about this paradox: The Imperialism of Free Trade, to the 1870s; and the era of New or Capitalist Imperialism, and the major role of the export of capital overseas, from ca. 1870 to 1914 (i.e., to World War I). Finally, in this final lecture for the first semester, I provided a short lecture on Imperialism and Racism: a non-Marxist interpretation. In essence, the concept of ‘races’ is pure fiction, but a very convenient fiction to justify Imperialism. Differences in skin pigmentation (presence or relative absence of melanin) in no way justify any concept of supposed ‘racial divisions’; and I presented (or tried out) my Darwinin ‘solar’ hypothesis to explain the emergence of these differences, hinging on the vital role of Vitamin D (according to very recent scientific discoveries).

(1)read the lecture notes and the Power Point presentation

(2)consider above all the ideological contradiction between Free Trade and Imperialism

(3) Core question: why is European Imperialism the source or foundation of modern racism, but one going back to the Portuguese and other European countries’ engagement in the African slave trade, from the mid 15th century?

(4) So, finally, in this last lecture for the first semester, I provided a short lecture on Imperialism and Racism: a non-Marxist interpretation. In essence, the concept of ‘races’ is pure fiction, but a very convenient fiction to justify Imperialism. Differences in skin pigmentation (presence or relative absence of melanin) in no way justify any concept of supposed ‘racial divisions’; and I presented (or tried out) my Darwinian ‘solar’ hypothesis to explain the emergence of these differences, hinging on the vital role of Vitamin D (according to very recent scientific discoveries).

See also my last year’s lecture in ECO 301Y: Imperialism, Racism, Darwin, and Vitamin D: a ‘Solar’ Hypothesis: presented in Power Point .

XIIIa. Week no. 13: on 12 January 2011:

Lecture Topic no. 15: British Agriculture and Agrarian Changes, 1815 – 1914.

A . Lecture no. 15 on British agriculture combined elements of both lectures 13, on the Transportation Revolutions, 14, on Free Trade and Foreign Trade

1) to examine the particular impact on Britain’s agrarian economy:

a) to see how both of these major factors (combined with the economics of the Gold Standard) forced Britain to obey the Law of Comparative Advantage:

b) so that Britain radically contracted its agriculture sector, especially for grains, in order, finally, to import almost 90% of its foodstuffs, by the eve of World War I,

c) thereby releasing resources and factors of production to be invested and engaged more effectively elsewhere in its export-oriented economy.

2) We saw how the two transformations worked together:

a) a radical reduction in the agricultural sector, overall;

b) and a shift within that sector away from grain towards the production of other arable products- especially perishable fruits and vegetables – but especially to livestock products.

3) I will argue at the end of the course that these developments together explain how Great Britain ended up with having by far the highest standard of living in Europe, up to World War I (though not as high as that in North America).

B. The history of English/British Agriculture underwent four phases from 1792 to 1914:

1. 1792 – 1815: the era of the French Revolutionary and Napoleonic Wars, marked by very high agricultural and especially grains prices, from a combination of:

a) dramatic population growth that outstripped Britain’s capacity to feed herself, so that Britain became forever more a net importer of grains and then of other foodstuffs

b) war-time disruptions that severely limited grain imports

c) paper-money inflation, during the era of the ‘paper pound’, when the currency was no longer backed by gold (1797-1821)

1815 – 1846: The era of the Corn Laws, with sharply falling prices, once peace and imports were restored.

a) With falling prices, forcing marginal lands out of production, both land owners and tenant farmers clamored for protection in the form of two new Corn Laws: of 1815 – 1828. They were discussed in the previous lecture on Free Trade

b) Despite some technological advances, with the completion of enclosures and the spread of the New Husbandry, overall progress was hindered by the projectionist of the Corn Laws

c) low wages also discouraged mechanization

1846 – 1873: the Era of Free Trade and ‘High Farming’

a) Despite the repeal of the Corn Laws and then end of protective tariffs, British agriculture experienced a surprisingly era of prosperity

b) While grain prices fell, they continued the same trend of falling prices, without a sharp change in prices

c) falling grain prices, and thus cheaper bread, liberated consumer income to be spend on superior goods: especially meat, dairy products, leather goods, perishable fruits and vegetables

d) British agriculture also experienced significant gains from the development of railways during the 1840s to 1870s: sharply reducing most agricultural costs and expanding urban markets, especially for livestock and non-grain arable crops

e) This was also the period of extensive mechanization, using steam powered machinery, so that British agriculture was over 50% mechanized by 1900 (vs. under 10% in France)

i) increased steam-powered mechanization was a response to a growing scarcity of labour (not the reverse) as railroad building and urban industrialization drew agricultural labour away from the countryside

ii)The spread of chemical fertilizers was an equally important advance related to mechanization

f) The advent of chemical fertilizers

i)That was related to steam-powered mechanization: because the horses and oxen so displaced no longer consumed so much fodder crops and thus did not produce as much manure

ii)furthermore, most fodder crops had been nitrogen-fixing legumes

iii) hence the need for nitrogen-based chemicals to replace these natural fertilizers

iv) but this topic will be left to the lectures on Germany, which gained world leadership in chemical and chemical agriculture

1873 – 1914: the era of the ‘Agricultural Depression’, with sudden and sharply falling grain prices

a) the sudden, sharp fall in grains prices from the early 1870s to the late 1890s: was chiefly the result of the aforementioned combination of the dual transportation revolutions (world-wide railway building and steam shipping) and of Free Trade (with the Gold Standard – to prevent protection via currency manipulation – i.e., devaluations)

b) Britain alone in this era remained completely faithful to Free Trade, while most other countries restored protectionist tariffs to save their farming communities

c) the result in Britain was a dramatic shift away from grain growing, as indicated, to livestock raising

i) but overall a major contraction of the agricultural sector: from 25% to just 7% of the GNP by 1914

ii) part of the fall in grain prices was due to monetary deflation and thus the post-1896 recovery in grain prices was partly due to monetary inflation, to be discussed in later lectures

d) the overall gains for Britain were the shift of resources (capital, labour, land): from agriculture to be more productively employed in industry, commerce, and finance

e) and also a marked rise in British living standards: by far the highest in Europe by 1914

XIIIb. Week no. 13: on 12 January 2011:

Lecture Topic no. 16: Great Britain and the Revolution in Steel-Making, 1856 – 1914:

1. Lecture no. 16 was devoted to the Revolution in Steel-Making, which Britain initiated and in which the British held industrial leadership — until the 1890s, when Germany and the US both surpassed Britain in steel-making, for reasons to be seen later.

2. Steel is the ideal form of iron, with the right amount of carbon (added to molten wrought iron): about 1.0% to 1.5% — to ensure that it is the strongest form of iron, with the best resistance to stress: in contrast to both cast iron (2.5% – 4.0% carbon), which is very hard, but also brittle, and subject to shattering; and to purified wrought iron (about 0.1% carbon), which will bend under stress.

3. As such, steel was the ideal and requisite metal for the so-called Second Industrial Revolution in mechanical power: involving the steam turbine (for both ocean shipping, as seen earlier, and electrical generation), electrical power, and the internal combustion engine; and to that we will later add the new chemical industries.

4. The initial major consumers of steel were the transportation industries (railways and stream shipping), the military, large-scale construction, and the engineering and machine-tool industries. World industrialization after 1860, with the tripartite revolution in steel making, would have been impossible without cheap and high quality steel, previously a luxury metal.

5. The three components of the Steel Revolution were:

a) the Bessemer Converter (1856): for the mass production of low cost bulk steels. Bessemer steel cost 75% more per ton than did wrought iron (Puddling and Rolling Processes), but steel rails lasted 22 times longer than did wrought iron rails.

b) the Siemens-Martin Open Hearth (1861-64): with a much smaller scale, for the production of far higher quality, precision steels

c) the Gilchrist-Thomas ‘Basic Process’: which allowed both types of furnaces to produce steel from phosphoric iron ores (‘minette’ ores), which otherwise fatally contaminated the metal. The chief beneficiary of this process was Germany with such large deposits of minette ores

4. Great Britain, as the pioneer, dominated the first Age of Steel, until the 1890s

a) when both Germany and the US overtook Britain in bulk steel production

b) the reasons will be examined when we come to the lecture topics on German industry

c) but we will see that German pre-eminence was limited to Bessmer steel, so that Free Trade forced the British to seek out their comparative advantage: in Siemens-Martin Open Hearth steels (high quality)

XIVa. Week no. 14: on 19 January 2011:

Lecture Topic no. 17:

IV: The Spread of Modern Industrialization: The ‘Slow Industrialization’ of France, 1789 – 1914.

1. Barriers to French Economic Development: for independent reading

2. The Debate about the Performance of the French Economy in the 19th century

a) The debate about the supposedly ‘slow industrialization’ of 19th-century Furnace is one that necessarily must be conducted at greater depth after the end of this set of lectures on France

b) We discussed two major but very common errors in this debate, about ‘homogenization;

i) treating France as a one geographic entity, ignoring the very considerable regional variations, especially those north and south of the Loire River

ii) treating the 19th century as one unified time period, ignoring the several phases of economic growth and decline

c) In summary, the preponderant opinion, but not universally accepted, is that

i) overall France did not experience the rate of economic growth and economic development especially that are to be found in Great Britain. Germany, and the United States.

ii) but French economic growth in the 19th century is still very impressive compared with French economic changes in previous centuries, and with much of the rest of the world in the 19th century.

d) read the full lecture notes for the other issues involved in this debate, to be more fully resolved at the end of the lectures on France.

3. The French Revolution, pro and con: We next dealt with the economic consequences of the French Revolution (1789-1792), whose most beneficial positive contribution was national unification and market integration, whose importance was highlighted by a survey of French political and economic history from the later 12th century.

4. French Railways: We continued that theme with the physical integration of the French national economy with the several railway booms of the 19th century, both before and after the Franco-Prussian War of 1870-71, so disastrous for Furnace. Wars were indeed the worst curse for the French economy, beginning with the many 18th century wars, but especially the French Revolutionary and Napoleonic Wars, 1792-1815.

5. Agriculture: The most important economic consequence, and probably the most negative consequence of the French Revolution, concerned Land Reform, Peasant Emancipation, and agrarian changes, which will be considered fully in the subsequent lecture no. 18, on 21 and the first half of 28 January 2009. This lecture will be vital for understanding the nature and consequences of agrarian changes in Germany, Poland, and Russia, from 1815 to 1914, in subsequent lectures.

. Week no. 14: on 19 January 2011:

Lecture Topic no. 18, part 1

The French Revolution and French Agriculture, 1789 – 1914:

1. These two lectures on French agriculture (concluding on 26 January) concern the most important economic consequence, and probably the most negative consequence, of the French Revolution (1789-1795).

2. These lectures will be vital for understanding the nature and consequences of agrarian changes for modern industrialization not only in 19th century Furnace, but also in Germany, Poland, and Russia, from 1815 to 1914, as analyzed in several subsequent lectures. Thus the French Revolutionary Land Reforms constitute a paradigm necessary for understanding the nature and forms of modern industrialization everywhere in 19th-century continental Europe. We shall later have to see how Germany, Russia, and Poland resembled or differed from the French Revolutionary model.

3. The first lecture of this set began with an analysis of the historic, geographic, and climatic nature of medieval and early modern French agriculture, both south and north of the Loire River, forming the major agricultural and economic boundary, historically, in France

a) South of the Loire:

(i) most of this region continued to practise Mediterranean ‘Dry Farming’, basically unchanged from Roman times. For arable grain agriculture, it meant basically a two field system: with winter wheat and fallow, and with very little livestock, because of inadequate pastures and fodder crops.

(ii) Having never been subjected to true feudalism and manorialism, there was virtually no Common Field (communal) farming; and grain agriculture was undertaken by individual small-scale peasants, most with inadequate resources and very low productivity.

(iii) But there three other forms of agriculture, practised separately from arable grain agriculture: viticulture (vineyards for wines), olive oil cultivation (olive groves), and livestock raising, which were all very capital intensive forms of farming.

(iv) Share-cropping, known as métayage, evolved in later medieval Italy and southern France to resolve the problem of how to supply both land and capital to poor landless peasants to engage in this form of agriculture.

– Through individual contracts (non-feudal), landowners — often urban merchants -leased land with such capital to poor peasants who supplied the landlord with half the harvest as payment of both rent and interest.- – Further details on its important functions will be found in the published online lecture, and in subsequent lectures.

b) France north of the Loire:

(i) in the zone of classic medieval feudalism, from the Loire to the Rhine Rivers — most peasants lived and worked their tenancy lands in a feudal-seigniorial regime of communal farming, with Open Fields (or Common Fields),

(ii) much like those already seen in England, with an integrated and symbiotic system of mixed farming: i.e., combining livestock raising with arable farming, generally with a three-field system. But while northern agriculture, especially in having so much more livestock, was more productive than most of southern agriculture, it was historically less productive (generally) than that founds in the Midlands of England.

4. The various classes of French peasantry: in the 17th and 18th centuries (to the French Revolution of 1789)

a) villeins: dependent peasant tenants of French manorial or seigneurial estates:

– with the continuation of Common Field farming,

-and hence the virtual absence of both enclosures and Convertible Husbandry in northern France until the Revolution,

– descendents of former serfs, who, with the virtual extinction of serfdom by the 15th or 16th centuries had the securest property rights of any peasants in France

– role of the Parlement de Paris in guaranteeing such property rights to undermine the feudal aristocracy (in favour of the king) was explained

b) leasehold peasants:

– peasants who rented or leased lands, on fixed written contracts, from landlords, feudal and non-feudal:

– lands that were leased out from the lord’s domains (and thus not a permanent loss), held by both free and villeins

c) métayers or share-croppers, chiefly found in France south of the Loire River:

– free landless peasants who received land, capital (working and fixed), and protection from landowners (often urban landlowners) in return for half of their harvest: as both rent and interest

– non feudal: freely engaged written contracts

– explanation of why the scattered nature of share-cropping holdings prevented enclosures

d) allodial or freehold peasants: very few, and not considered in this lecture

5. From Grundherrschaft to Gutsherrschaft, 1480 – 1789: Reconstitution of the large domains

a) To set the consequences of the French Revolution in proper historic perspective, the lecture then concerned the remarkable changes in French agriculture from the 1480s to the 1780s, which witnessed the reconstitution of large centralized estates in many parts of France, estates left largely unimpaired by the Revolution.

b) To facilitate this analysis, comparisons were made between two types of feudal estate regimes, using the German terms: Gutsherrschaft (estates based on the sale of agricultural commodities, using servile labour) and Grundherrschaft (estates based on rental incomes from free peasant tenants).

XV. Week no. 15: on 26 January 2011:

Lecture Topic no. 18, part 2

The French Revolution and French Agriculture, 1789 – 1914:

1) The concluding part of lecture 18 examined the consequence of the French Revolutionary Land Reforms (“peasant emancipation”), with the supposed abolition of Feudalism, Manorialism (Seignioralism), and Serfdom (virtually extinct by the Revolution):

a) and such changes pertained chiefly only to northern France, and pertained chiefly only to the villein peasant tenants under former seigneurieal regimes.

b) Because métayage (share-cropping) was non-feudal, it was left untouched by the first Revolution, and abolished only in the second Revolution of 1848.

c) consequences of the Inheritance Act of 1795: as the final major aspect of the French Revolutionary land reforms: the equal subdivision of peasant land holdings by inheritance – lands to be divided equally amongst all sons (all male heirs).

i) This and the failure of the National Assemby to abolish communal farming and to promote or impose enclosures: were examined as factors that explain low productivity in French agriculture, the continued dominance of peasant agriculture in the economy, slow population growth, the slow and imperfect rate of industrial urbanization, the low rate of savings and capita investment.

ii) various tables demonstrating low birth rates, low rates of population growth, far less urbanization than in Britain and Germany, far lower levels of agricultural productivity.

iii) government survey of French farming in 1881:

(1) demonstrating that 87.5% of the 3,504,000 French farms were under 20 hectares (50 acres).

(2) On the other while large estates, those over 40 hectares (100 acres) constituted only 4.1% of the number of farms, they accounted for 45.9% of the total area. As March Bloch had observed, the reconstitution of large estates, from the 1480s to the 1780s, though only piecemeal and scattered, was left largely unchanged by the French revolution

2) 1789 – 1914: The final part of the lecture outlined the major changes, by time periods, in French agriculture from the French Revolution to World War I, noting alternating cycles of growth and stagnation

a) This lecture concluded with evidence for an explanation of why outputs and productivity in French agriculture were so much lower than in either Great Britain or Germany

b) although the comparison with Britain is skewed by Britain’s abandonment of much of its agriculture, as it obeyed the Law of Comparative Advantage after the adoption of Free Trade and Agriculture, while Freance and Germany resorted to higher tariff protection to insulate their farmers from the flood of cheap foreign grains, that resulted from the post-1870 transportation revolutions.

c) In summary, the British advantages over the French: lay in having more than twice as much land and three times as much capital per farmer.

i) In that same context, we discussed Patrick O’Brien’s thesis of ‘path dependency’: to explain why Great Britain became an industrialized and urbanized economy, reducing its agricultural sector so dramatically, long before France.

ii) The essence of the ‘path dependency’ thesis, to explain the French failure to transform its agricultural sector, lay in

(1) France’s natural resource endowments, climate, and topography,

(2) and the legal-institutional inheritance that explained the strengths and continuity of communal farming, i.e., the failure to achieve enclosures before the Revolution. But that thesis logically pertains only to northern France and we brought forth other reasons for southern France, involving the institution of métayage or share-cropping.

3. The Fundamental Questions Posed in Lecture Topic no. 18 on French Agriculture:

a) Were the perceived faults of French agriculture in the 19th century the product of:

i) ill-advised features of the French Revolutionary Land Reforms, in particular:

(1) guaranteeing the property rights of French peasants to the extent of preventing Enclosures, and thus the adoption of Convertible Husbandry, scale-economies, mechanization, etc.

(2) The 1795 Inheritance Law: requiring equal subdivision of peasant holdings by inheritance, thus leading to continual ‘morcellement’: or piece-meal, small-scale holdings

ii) or the ‘Path Dependency’: Patrick O’Brien’s thesis that France was the victim of:

(1) a combination of climate, topography and natural resource endowment inferior to those of Britain (and Germany)

(2) the deeply imbedded survival of institutional features of French feudal-manorial agriculture: those that were the product of the pro-royalist anti-aristocratic legal decisions of the French Parlement guaranteeing th property rights of French peasants (but in fact only of the feudal villein peasants in the North

iii) How does the O’Brien thesis deal with French agriculture south of the Loire and the problem of non-feudal métayage (and how did I deal with the problem?)

b) Did the faults of 19th century French agriculture provide the principal impediments to the economic growth and industrialization of 19th-century France: in particular its slow rate of population growth and urbanization

c) To what extent did the French Revolutionary Land Reforms provide the model for land reforms and agrarian changes elsewhere in 19th century continental Europe: especially in Germany and Russia

XVI: Week no. 16: on 2 February 2011: lecture topics no. 19 and 20

Lecture Topic 20: French Banking and Financial Institutions in the 18th & 19th century: to 1914

1. French financial institutions: the Bank of France

a)This lecture began with another aspect of historical path-dependency: to explain why the heritage of French financial disasters, especially those of the 18th century, help to explain why the Bank of France, founded by Napoleon in 1800, pursued such ultra-conservative monetary policies, which they imposed on the private banking sector.

b) The policies of the Bank of France were examined, dealing with the criticism that they unduly restricted the supply of money and of credit: making each too inelastic

c) The evidence comparing central-bank interests rates in 19th century France, Germany, and Russia do not vindicate that negative view, since French rates were always the lowest

d) A fair conclusion may be that financial conservatism served the French economy well, even though the Bank of France was reluctant to act as a central bank, as a lender of last resort

2. Investment Banking: the era of the ‘New Bank’:

a) The ‘Haute Bank’:

i) we began by examining the structure of French private banking, centred on Paris, in the early 19th century: dominated by Protestants (Huguenots) and Jews

ii) the reasons why these two minorities, subjects of considerable social and economic discrimination, dominated French private banking were discussed

iii) a principal factor was the international nature of their commercial banking (linked to foreign trade) and the importance of international connections with co-religionists.

b) The ‘New Bank:

i) The central part of the lecture dealt with the rise of a very radically new form of banking in continental Europe: investment banking, which first arose in the post-1815 new Kingdom of the Netherlands and then in France.

ii) With a virtual vacuum in capital markets, in contrast to well developed capital markets to be found in Britain, and with far larger initial capital costs of industrialization, the British type of deposit banking offering only short-term credit, chiefly for financing working capital needs, would hardly suffice.

iii) The new investment banks – the first of which was founded in Brussels in 1822 (then part of the Kingdom of the Netherlands) provided long-term financing for large-scale fixed capital requirement,

iv) raising the investment capitals from the sale of stocks in their banks, but also by organizing syndicates to market Initial Public Offerings (IPO) in stocks and bonds.

c) Credit Moblier: 1852 – 1867

i) The next part of the lecture was a case study of the most prominent and indeed only true investment bank in 19th-century France: Credit Mobilier, which had a dazzling 15-year career (1852-1867),

ii) until it collapsed in a liquidity crisis, one in which the Bank of France refused to act as Lender of Last Resort.

iii) The collapse was due largely to the enmity of the Bank of France and the Rothschilds

iv) But following the collapse of Credit Mobilier, the Rothschilds took up investment banking, though restricting their investment banking large to other parts of Europe

v) Whether or not France’s banking and financial structure was a factor that either promoted or retarded 19th-century industrialization is an unresolved debate.

d) patterns of French savings and investments:

i) What is not debated is the fact that collectively the French came to invest almost 50% of their savings abroad, by 1914: for both institutional and political reasons (financing Russia as a counterpart to Imperial Germany).

ii) Was this a result of ‘path dependency;” given the dominance of Protestant (Huguenot) and Jewish banking firms whose success had been based on their international connections with co-religionists and on international commercial and financial transactions?

iii) or was it the result of traditional French business antipathy to banks and the reluctant of small French firms – family firms and partnerships – to subject themselves to the control of banks?

: Week no. 16: on 2 February 2011: lecture topics no. 19 and 20

Lecture no. 20: The Debates about French Industrialization and Economic Growth in the 19th century (or 1815 – 1914):

1. Natural Resource Endowments and the Coal Problem:

a) Coal: We began with the natural resource endowment problems: in particular, the scarcity and high cost of coal for French industry.

i) As a noted economic geographer once contended, ‘an industrial map of Europe in the 19th century was essentially a map of its coal fields’.

(1) Remember the crucial importance of coal as the essential ingredient of modern industrialization: for the iron and steel industry; for steam power and steam engineering, and thus for the transportation revolutions in railroads and ocean shipping;

(2) and also for the Second Industrial Revolution in electrical power (coal-fired steam turbines) and the new coal-based chemicals industry.

ii) Because smelting one ton of iron ore required about ten tons of coal, economic logical dictated that metallurgical industries be located near coal fields, not iron ore fields.

iii) But for both political and economic reasons, France had one major exception in her steel industry located near the Lorraine iron ore fields (that part of Lorraine left to France after the 1870 Franco-Prussian war).

iv) Even afer the coming of the railroads in the 1850s, transporting coal remained high cost. Since France had to import about 35% of its coal needs in the late 19th century, the problems involved not just high transport costs, but also high import tariffs, and high cartel-price imposed on the sales of German coal from the nearby Rhineland (to be explained more fully in the lectures on German industrialization).

b) The Iron and Steel Industries:

i) We then dealt with the iron and steel industries, noting how France coped with the coal problems, through large-scale, cartelized, and heavily capitalized steel firms (10 of which controlled over 80% of total output by the 1890s).

ii) A fuller explanation of the role of tariffs and cartels in explaining the success of both the French and German steel industries must await our subsequent lecture on German industries.

c) Other 19th-century Industries: Textiles, Foodstuffs, Automobiles:

i) Next we considered the two major industries in terms of employment, value of output, and capital investments: textiles (woollens, cotton, linens, silks) and foodstuffs, the more important of the two.

ii) We explained why French textile industries had little impact on France’s foreign trade.

iii) The great industrial successes in the late 19th, early 20th century lay in hydro-electric power and especially automobiles.

iv) automobiles: an industry in which France gained European predominance up to 1914, but then lost that predominance to Great Britain in the inter-war period (1919-1939).

2. French Industrial Growth and growth rates, 1815 – 1914:

a) the family firm and the question of industrial scale:

i) We also dealt with the thorny issue of industrial scale, in particular responding to David Landes’ famous thesis that small-scale family firms proved to be the curse of 19th century French industrialization.

ii) In contrast, I provided evidence of very significant large-scale industries, of recent econometric evidence indicating the French industries had achieved optimal scales by the 1860s, in terms of product choice, capital requirement, and market conditions.

iii) I also argued that, since France’s historic comparative advantage had been in luxury manufactures, small scale production was in fact desirable for many reasons, especially concerning quality-controls and market reputations.

b) the debate about French industrial and economic growth in the 19th century: especially 1860 to 1914.

i) The final session dealt with the debate about French economic growth in the 91th century: in aggregate terms, in which France compares badly; but in per capita terms, it fares well.

ii) I argued, however, that per capita evaluations that do not take full account of demographic changes, and the relationships between population and economic growth, can be very misleading.

iii) In any event, the crucial statistic to be noted is that in 1900, as measured on constant 1970 US dollars, per capita output in France, at $883.00, was only 67.8% of that for Great Britain, at $1,302.00.

iv) Indeed of the five major countries compared, France fared the least well, in 1900.

v) Other statistical comparisons can be found in the online lectures, including the subsequent lectures on Germany, Russia, and Great Britain (1870 – 1914).

For Section V: the Rapid Industrialization of Germany, 1815 – 1914:

The common, unifying theme of all these lectures is the increased role of the state in German economic development and industrialization.

XVII: Part I:

A. Lecture no. 21, part A: German Market Unification: the Zollverein and the Reich.

1) This lecture began with the historical explanation of the feudal fragmentation of Germany, in the old Habsburg Empire (from 1272 to 1789):

a) then followed the changes produced by both the Napoleonic Wars and the Congress of Vienna (1815):

b) producing the German confederation of 39 separate states.

c) The story of German unification begins with the territorial acquisitions of the Kingdom of Prussia, in the west (Rhineland), after 1815: beginning with Prussia’s Maassen tariff of 1818, designed to integrate the new western territories into Prussia, with a common free trade zone and common fiscal system, and weights and measures (metric).

2) Fears of Prussian economic domination led, in the 1820s, to the formation of rival customs unions under Saxony and Bavaria: and then to the creation of the pan-German Zollverein

a) In turn, that led to the unification of the three, under Prussian domination, in the German Zollverein (Customs Union) of 1834,

b) whose consequences up to and beyond the creation of the German Reich or Empire in 1871, were explored in this lecture.

c) post Imperial German foreign trade policies: the shift from Free Trade to Protectionism were also explored.

B. Lecture no. 21, part B: German market unification with the new railroads:

1) The Zollverein soon led to extensive railway building in all the major German states, with military and political considerations often overriding economic rationale.

a) In all states, the French model of state leadership: and state guarantee of railway bonds was followed.

b) After 1871, German unification with the new Reich, under Prussian domination, led to Prussia domination of all the German railroads, and state ownership of many.

c) the railways were never fully nationalized : because the other state and kingdoms in the Empire were still fearful of Prussian domination.

2. The most notable feature was Prussian government policy of railway fares to foster industrialization: to use the railway fare structures in a Mercantilist fashion to promote industrial exports and curb industrial imports into Germany.

a) the Prussian government, in either owning or controlling most of the key railways, used its economic power to imposed a centralized system of fares:

b) low fares on the transport of imported raw materials and on the transport of finished manufactured goods to the leading seaports for export

c) with) higher fares on the transport of manufactures for internal consumption within Germany

Germany: Peasant Emancipation and Agricultural Modernization to 1914:.

1) The agricultural and agricultural geography of Germany:

a) While in France, the two chief agrarian zones were north and south of the Loire, in Germany the two major zones were those west and east of the Elbe river.

b) Our chief focus is chiefly on East Elbia, the chiefly Prussian lands east of the Elbe river.

c) The historical origins of the key differences were given in terms of the Germanic Drang Nach Osten, from the 1180s to the 1320s:

i) the Germanic conquest, colonization, and settlement of chiefly Slavic lands east of the Elbe,

ii) which were settled by western colonists who were given personal freedom and virtual ownership of their lands.

2. The major problem of East German Serfdom:

a) from the late 15th and 16th centuries emerged the so-called ‘Second Serfdom’:

i) by which formerly free peasant communities were absorbed into large feudal estates, which subjected most of the peasants to a form of serfdom much harsher and more pervasive than any experienced in the West.

ii) By the 16th century, a mirror-image dichotomy emerged, and one that largely explains the growing gulf between East and West, in terms of both economic growth and freedom.

b) A four part model was presented to explain the rise of the Second Serfdom:

i) the Domar Model: a demographic model of population decline, in the 17th century, in which serfdom was imposed to prevent peasants, now enjoying a more favourable land:labour ratio, from gaining and exercising market power to lower rents and raise wages: very similar to Marc Bloch’s model for explaining early-medieval serfdom

ii) the Hobsbawm model: a commercial model, more applicable to the prior century, the 16th, with rapid population growth, commercial expansion, and Dutch commerce, which together led to the formation of large commercial grain estates in East Elbia, especially along the Vistula River, worked by servile labour.

iii) Munro’s monetary model: I offered a variant explanation of this commercial model in terms of an inflation-based model to explain the shift from Grundherrschaft — a manorial economy chiefly based on land-rents of peasant tenants – to Gutsherrschaft — a manorial economy chiefly based on commercial exploitation of large demesne estates — exporting grain, livestock products, lumber etc — and worked by servile peasants, who paid their rent in labour services (when the value of money-rents had sharply fallen); iv) the Blum – Brenner institutional model (class relations between lords and serfs): to explain how militarily powerful lords were able to displace monarchical and urban powers in order to oppress their pleasantries.

3. German ‘peasant emancipation’ or ‘land reform;

a) the basic theme is state emancipation from above: in order prevent or avoid revolution from below,

i) as with the French revolution, which French Revolutionary and Napoleonic armies had exported into Germany.Of those by the kingdoms of Saxony, Bavaria, and Prussia,

ii) the most important were the Prussian Stein-Hardenberg Reforms of 1807 to 1821.

b) In essence, together they allowed German serfs — principally those in East Elbia – to gain both personal freedom and landownership: by surrendering a portion of their previous tenancies to landlord ownership:

i) For the richer peasants (with plough teams): from one third to one half of their lands were surrendered, depending on their status.

ii) Poor peasants, lacking plough teams and hereditary claims to land, were excluded to provide a continuing labour force for the large landlord (Junker) estates in East Elbia

c) But the 1848 Revolution led to the 1850 Emancipation law freed all remaining serfs: under far more liberal conditions.

d) My thesis was that this ’emancipation’ in East Elbia chiefly benefited the large Junker landlords in East Elbia, chiefly by allowing them now freely

i) to separate their domain lands from peasant Open or Common Fields, and thus to enclose them; and

ii) to acquire much a large quantity of lands from former serfs (including those freed serfs who decided to sell their lands and emigrate with capital to industrial area)..

e) Germany west of the Elbe underwent far less dramatic changes, and experienced changes similar to post-Revolutionary France, with preponderance of owner-occupied small peasant farms, with little enclosure before the coming of the railroads.

3. Rapid Agricultural Progress in post -1860 German:

a) The final part of lecture 22 analyzed the very impressive agricultural progress in 19th-century Germany, but especially on the great enclosed estates in East Elbia,

b) There are four major aspects of productivity gains and both agricultural and economic progress:

i) the introduction and widespread diffusion of nitrogen-fixing leguminous crops (as seen in England), which also served as fodder crops for livestock;

ii) the cultivation of various root crops — sugar beets and potatoes especially — which had great industrial importance (sugar refining, alcohol), while also supplying fodder for livestock;

iii) the introduction of various chemical fertilizers, in which Germany gained world supremacy;

iv) mechanization, with steam-powered agricultural machinery, which, in so far as they displace livestock, thus required a greater use of chemical fertilizers.

c) Several statistical tables on agricultural outputs, productivity gains, population growth, urbanization, and labour mobility serve :

i) to demonstrate the very great contributions that German agriculture made to industrialization, especially from the 1870s.

ii) Please do look at these tables, comparing especially the German data with the French data, to justify the conclusion that post-1850 agrarian changes were far more conducive to economic and demographic growth and especially to industrialization than in 19th-century France (or Russia)

Section V: the Rapid Industrialization of Germany, 1815 – 1914 . A common theme of all these lectures is the increased role of the state in German economic development and industrialization.

Lecture no. 23: German Banking and Financial Organization, 1815 to 1914.

1.The Importance of banking and financial institutions for German industrialization in the 19th and early 20th centuries:

a) This lecture analyses the significance and great success of German banks: most especially the Investment Banks or ‘universal banks’ or Kreditbanken in financing German industrialization from the 1850s, and especially from the 1870s.

b) As we saw with banks in the British Industrial Revolution, they proved to be vitally important in providing both the lubricant and the fuel for the industrial machine:

i) the lubricant in the form of paper money, credit, financial intermediation, etc.;

ii) the fuel, in the form of financing the working capital needs of the Industrial Revolution with short term credit.

iii) The radically new difference was the role of banks in financing long-term, fixed capital formation.

c) These financial aspects of modern banking provide the veritable life blood of any modern economy, in terms of both Leverage and Liquidity: for which a proper and feasible balance is the requisite for economic stability and growth

i) Leverage: in financing asset accumulation by borrowing: so that a ten-percent loan can finance the acquisition of assets with ten times the market value – but not to extend leverage so much that readily pricked asset bubbles are created

ii) Liquidity: to ensure an adequate supply of short term credit and an adequate supply of money and financial intermediaries to permit the economy to function efficiently

d) most economic crises are caused by financial crises: which inevitably lead to de-leverage and consequent lack of liquidity:

i) so that firms cannot borrow and lack funds to meet their financial obligations

ii) 19th and early 20th century Germany largely escaped these dual problems of leverage and liquidity, thanks especially to the successful and almost always profitable functioning of its new investment banks.

2. The Gershenkron Thesis and Banking-State model of financing industrialization:

a) The focus or our financial analysis in the Gerschenkron model: it stipulates that 19th-century ‘Late Starters’ or ‘backward countries’, such as Germany (or Prussia and eastern Germany) and Russia, simply could not follow the British model:

i) it was not only impractical, was impossible to rely merely on market forces and laissez-faire economics.

ii) Instead, a strongly interventionist role of the state was required, in all sectors;

iii) in industry, and alliance of the state with the radically new joint-stock investment or universal banks was necessary for industrialization to grow and succeed

b) Universal banks is now the most common term for the new investment banks:

i) because they provided all of the traditional functions of banking; i.e.,

(1) traditional, British-style deposit and transfer banking, with extensive discounting facilities,

(2) combined with financing fixed capital formation: in the form of long-term loans and in terms of underwriting IPOs – in stock and bond issues.

ii ) The focus of the lecture is on Gerschenkron’s particular thesis for Germany.

c) The first part of the thesis explains why the Investment Banks were necessary:

i) to fill a large vacuum in the capital markets, i.e., in the absence of those long-developing British financial institutions that had made investment banks unnecessary in 19th century Great Britain;

ii) to finance a take off into rapid industrialization in large-scale heavy industries, now dominated by metallurgy, for which current technology and scale requirements, in international competition, meant far larger-scale initial capital investments than were required for the British Industrial Revolution;

iii) to accommodate a socially and culturally different society,

(1) one dominated still by conservative, wealthy landowners — those with the most income and savings for investments — who were far more inclined to invest in land, mortgages, and government bonds than in business and commercial enterprises.

(2) Thus if investment banks could attract their savings deposits, or investments in the banks, they could channel those savings into direct industrial investments (in terms of both short-term and long-term credit, and underwriting).

(3) The crucial historical fact that none of these investment banks failed and that generally they remained highly profitable – paying dividends or interest returns of 6% to 8% – explains why and how they succeeded in attracting the savings and investments of the wealthy landowners;

d) The second part of the Gerschenkron thesis concerns his views on the outcomes:

i) The eight great investment banks (Kreditbanken, D-Banken, universal banks, etc.) successfully financed the rapid development and growth of large scale German industries by filling the pre-existing vacuum in German capital markets:

(1)in particular in mining and metallurgy (coal, iron, steel); transport (railways and steam shipping); and the new electrical industries.

(2) In providing a surrogate stock market – selling both IPOs and marketing existing stocks and bonds – before the final and complete formation of the Berlin, Frankfurt, and Hamburg stock exchanges.

ii) Growing Investment Bank control over the major industries that they financed: especially by holding shares in the industrial firms that they financed in selling IPOs

iii) Investment banks promoted the development of German cartels: especially those engaging in Oligopolistic Competition (to be elaborated in the next lecture, on German industrialization)

iv) Investment banks promoted far more and far better industrial research (technology) and market research

e) We then dealt with the subsequent critics of the Gerschenkron thesis, focusing on four:

i) Neuberger and Stokes (1974); Edwards and Ogilvie (1996); Fohlen (1999, 2003, 2006); Burhop (2006): read the full lecture notes analysing, discussing, and critiquing their views, accompanied by many tables (to sustain their and my own conclusions.

ii) In essence the critics contend that:

(1) the Gross Banken misallocated resources and misdirected economic growth by favouring and subsidizing their specific clients,

(2) That they discouraged the formation and progress of alternative or rival financial institutions that could have provided a more competitive and less biased approach to industrialization.

(3) That their role, being restricted to only a few major industries, was far less important than is traditionally assumed (an argument that contradicts the other criticism)

(4) for other criticisms: see the ful lecture notes

(3) Carsten Burhop, the latest, is the most balanced: agreeing with Gershenkron on their importance up to the mid or late 1880s, and partially agreeing with the critics for the period thereafter, up to 1914

iii) I concluded by quoting Charles Kindleberger: ‘The great investment banks constituted less than a tenth of the total assets of financial assets, but were found at the critical margin affecting economic growth.’

iv) My only qualification was that in fact these banks accounted for over a quarter of such total financial assets by 1914 – and even more if we take account of their cooperation in financial syndicates with other German banking institutions

3. German Imperial State or Central Banking:

a) The last and very brief part of the lecture dealt with the role of the new German Central Bank:

i) the Deutsche Reichsbank, formed in 1875, from the former joint-stock bank, the Royal Bank of Prussia,

ii) with a monetary unification under the gold standard and a bank monopoly on the money supply.

b) In essence, its historical significance is one of positive neutrality: it did what was required of a central bank, without being responsible directly for economic growth but without being responsible for any economic disasters or even liabilities.

Section V: the Rapid Industrialization of Germany, 1815 – 1914. A common theme of all these lectures is the increased role of the state in German economic development and industrialization.

The Rapid Industrialization of Germany in the 19th and early 20th centuries:

1. An overview of 19th century German industrialization:

a) Relatively slow economic growth of the various German states (not yet united) in the 18th and early 19th century: up to about the 1850s: well behind France and the Netherlands, as well as Great Britain.

b) The initial ‘take-off’ period, from the 1850s to the 1870s: key features

(1) The German Zollverein, of 1834: political forces for market unification.

(2) German Railroads: for the physical integration of the Germany economy

(3) the Prussian Emancipation Law of 1851, and agricultural modernization thereafter;

(4) the role of the Investment Banks or Universal Banks.

c) From the 1870s to World War I:

i) the period of most rapid and complete industrialization was from the 1870s to World War I: in steel, chemicals, and the electrical industries, all ‘new’ industries from the 1860s.

ii) In steel, Germany gained European mastery by the 1890s;

iii) and in the other two — chemicals and the electrical industries — Germany gained world mastery (i.e., ahead of both Britain and the US) also by the 1890s.

iv) Was Germany a victim of the so-called ‘Great Depression’ of 1873-1896, a deflationary era:

(1) no evidence of any such depression, though the trade statistics indicate a slower rate of export growth

(2) but the evidence also indicates faster growth rates and the final achievements of industrial supremacy in the following inflationary era: 1896 – 1914.

2. The German Steel Industry, from the 1870s:

a) We used the Webb thesis (1980): to explain how Germany gained European mastery in steel production (or in many aspect of steel production).

i) Contrary to expectations of traditional economic theory, the explanation lies basically in the combination of protective tariffs, industrial cartels, investment banks, and state support for those cartels.

ii) Tariffs and cauterization soon led to almost complete vertical and horizontal integrations, with large increases in scale economies, involving extensive mechanization.

iii) Vertical integration and extensive mechanization led to significant productivity gains, especially in fuel economies, by producing steel ‘in one heat’ — converting pig iron into steel while still semi-molten, by savings on transportation and transaction costs, and by economies of scale.

iv) Steel cartels, owning iron and coal mines, and railroads, subsidized inputs, especially coking coal, while charging much prices to those outside the cartel, especially to foreign buyers (chiefly France); and offered discounts to ensure compliance with cartel pricing and market sharing.

b) The ongoing debates about supremacy in the post-1870 steel industry:

i) David Landes had made many of Webb’s points earlier, in 1979, stating that ‘The Germans put big and bit together, while the British kept small and small apart.’

ii) Those views were challenged by Donald McClosky, whose reply in turn provoked further responses.

iii) Thus we discussed the Landes-McCloskey-Allen debates, in which McCloskey (1981) had contended that the British steel industry was at least on a par with the American and German steel industries, if not superior in some aspects.

iv) The statistical evidence presented led us (or me) to conclude that the British steel industry, by the 1890s, was inferior in productivity and pricing to both the American and German steel industries.

v) Indeed 70% of German rolled steel went to British and Imperial markets.

vi) Price evidence shows that while German cartels exported steel at somewhat lower prices than those charge in the domestic markets, nevertheless, German steel export prices were still lower than British domestic prices, for comparable steel products.

c) How did the British respond and survive in the international steel markets?

i) With Britain’s steady resolve to maintain complete free trade and the Gold Standard, how did the British steel industry survive?

ii) The answer lies in Comparative Advantage: the Germans had a distinct absolute and comparative advantage in Bessemer steel, while the British conversely had a comparative advantage in Siemens-Martin Open Hearth Production: producing higher cost but far higher quality steel, with smaller scale economies.

ii) Both industries in fact shifted over the long run to Siemens-Martin, but the British maintained a lead until World War II.

3. The New Chemical and Electrical Industries, both of which were coal-based.

a) Germany’s natural resource endowment, with ample supplies of coal (and also potassium and sulphur) provides one explanation, but hardly a compelling one since Britain had even more ample supplies of coal.

b) The difference, we argued, lies in Germany superiority in science: with scientific, engineering, and technical education, with far stronger links to the new industries than found anywhere else; and the evidence was presented in much detail, summarized in one table.

c) The new chemicals industry had two key branches, both linked to coal, from which all these chemicals were extracted or synthesized:

i) aniline dyestuffs and alkali or soda based chemicals, exemplified in the name of a leading German chemicals firm, then and now: BASF, located in Baden Baden, Wurtemberg: Badische Anilin und Soda Fabrik.

ii) for both, the world’s textiles industries – by far the largest global industry – provided the major consumers

iii) but from coal tars, these new chemical industries produced many thousands of different products: dyestuffs, medicinal products (e.g., Bayer aspirin), pharmaceuticals, perfumes, soaps and bleaching products, explosive, etc: see the lecture notes

d) German world mastery in the international chemicals markets:

i) By 1900, Gerrmany was producing 90% of the world’s dyestuffs, so vital for all textile industries

ii) and 50% of all the world’s chemicals, in all forms.

iii) In the early 20th century, to World WAr II, the leading German chemicals cartel was I.G. Farbenindustrie (guilty of war crimes in WW II — in supply the chemicals for the mass murder of Jews, Slavs, Roma (gypsies), and others.

d) The new electrical industries were also coal-based:

i) since coal-fired steam turbine (invented by the British scientist Charles Parsons in 1884) generated almost all the electrical power.

ii) Germany, unlike France, Switzerland, and Italy, did not use much if any hydro-electric power.

iii) For this industry the German investment banks played a far greater role than in chemicals, since the industry involved very large-scale, heavily capital-intensive units, based on mass markets, with mass consumption in terms of:

(1) electric urban transport (trams, streetcars, underground trains),

(2) mass urban electrical lighting (while the British still used coal gas);

(3) telephones, and finally, by the 1890s

(4) industrial machinery, including electric furnaces for steel-making.

e) German world mastery in the new electric industry, producing both capital goods (producers’ goods) an and consumer goods:

i) By 1910, Germany was the leading exporter of electrical goods, from small appliances to giant dynamos and generators,

ii) accounting for 50% of world exports,

(1) 2.5 times greater than those of the US or Great Britain.

(2) Siemens-Schukert became the major German cartel in this industry.

4. Cartels: provided the final topic on German industrialization

a) important because so much of Germany industry was engaged in cartel or syndicate organizations (lists given in the online lecture notes).

b) the key features are:

(1) the role of protective tariffs,

(2) the strong legal support from the German government and Supreme Court (in contrast to Britain and the US, where cartels were illegal — but not in France and Russia),

(3) both support and direction from the investment banks.

c) Cartels achieved their greatest importance in industries subject to unstable oligopolistic competition:

i) competition between a vew very large scale firms, with major impediments to entry (high capital costs), producing homogenous or undifferentiated products (though in a wide variety of such products:

ii) each required its own separate cartel structure).

iii) Such competition was often cutthroat and highly unstable: so that investments banks, anxious to preserve their investments and equity stakes, promoted cartels to ensure stability.

d) Certainly cartels, usually condemned in traditional microeconomic theory courses, provided Germany with enormous benefits:

i) the usual charges against cartels — that they misallocated resources, became inefficient, robbing domestic consumers of the ‘consumer surplus’, etc — are in no way vindicated by the history of, say, the German steel industry; nor of the chemicals industries.

ii) instead, they provided relative industrial and employment security.

iii) investment in research and marketing was undoubtedly the chief benefit, especially from those cartels backed by the great investment banks:

(1) the large-scale investments in industrial and market research, responsible for thousands of innovations directly benefitting world consumers.

(2) consider that far-smaller scale business units engaged in more direct competition lacked both the will and the resources to engage in such research: so costly, risky, with no guarantees of payoff

(3) But cartels, in promising stability and more guaranteed profits and market shares, could thus better undertake such risky investments in research

iv) why would cartels, as monopolistic organizations designed to control or set prices and market shares, be interested in industrial product innovations?

(1) because such controls affected only their domestic German markets, while they still had to compete, often fiercely for international market shares with other national competitors

(2) because, for both domestic and foreign markets, often the greatest profits lay in being the first to produce totally new products, for which – though only in the short run – there were no competitors, and for which their investments in marketing research and expertise could create consumer demands, and thus high profits.

(3) Think of the case of modern computer and related electronic products, and observe their price histories: from very high prices with the original product and thereafter steeply falling prices with international competition (attracted by monopoly rents).