Financing Cotton

Industrial growth, dominance and eventual decay is a familiar pattern in most countries. But what happens to the finances – the profit and loss – behind these industries? How were profits made from the increasing automation and mechanisation of industry, and when did they begin to dry up? Professor Steven Toms gives us a brief introduction here but the full story is in his new book, Financing Cotton, the latest addition to the People, Markets, Goods: Economies and Societies in History series published with the Economic History Society.

Growing up in a Lancashire town in the 1970s, I could not help noticing how the cotton industry impacted the landscape. The mills were mostly silent: closed, converted, or left to decay. My grandmother was a weaver in one of the surviving mills. To the clatter of machinery, she kept up the tradition of using sign language. Previous generations, going back to 1841, all worked in the mills.

The question, explored in my book, is why did the mills close down, which begs the further question, why were they there in the first place? The answer, in short, is profit and loss. But how profitable were the mills of the industrial revolution, and which entrepreneurs pursued the most successful strategies? Once secured, what happened to those profits?

During the industrial revolution, entrepreneurs profited through incremental stages of mechanisation. In the early phase, only one process, spinning, was mechanised. Still, the increased output allowed entrepreneurs to extend control and generate profits from wider networks of domestic production and commercial credit. Subsequent developments brought larger spinning mills to house steam-powered spinning mules. Again, these investments created significant gains, although these were temporary as new firms contributed to flooded markets.  High fixed cost investments, and associated risks, led entrepreneurs to sweat their assets, and their workforce, including child labourers.

Unlike spinning, the much-delayed automation of weaving produced far fewer profit opportunities. The lower classes, excluded before 1850, responded by creating co-operative mills. These were efficient and successful. They dominated towns like Oldham and Rochdale.

Successful entrepreneurs used profits to create business empires built on networks of influence. Many were involved with and benefited directly from transport infrastructure development. They sat on boards of railway companies and influenced politics, as lobbyists and as MPS.

As the industry expanded up to 1914, entrepreneurs and firms performed venture capital style functions, recycling profits into new and larger mills. They relied on Manchester as their financial centre, shunning the City of London and built links between Lancashire and the cotton and thread industry in Scotland.

In the brief post-war boom, the same entrepreneurs recapitalised existing mills, sometimes grouping mills into larger conglomerates. Loss of markets then created a protracted depression, but firms were not equally affected. Those that extricated themselves from the post-war financial arrangements through demerger and consolidation were more successful. 

After 1945, enough firms were using modern technology and of the right scale to support a sustainable cotton manufacturing sector. However, these were steadily undermined by government foreign and trade policy, which now favoured commonwealth producers, resulting in further loss of markets. Redundant capacity was closed down with government assistance, paving the way for integration with the rest of the textile sector under conglomerate control. These new giants were successful for a while.

Britain’s entry into the European common market in 1973 led to further loss of markets to countries in Meditterean north Africa with associate status. The remaining conglomerates were dependent on the domestic market and hence retailers like Marks & Spencer. When retailers began to source manufacturing overseas with the trade liberalisations of the 1990s, there were few opportunities left for UK producers. For those remaining, advanced machinery can support profitable investment, and is efficient enough to render cheap labour competition irrelevant, provided they can ensure access to markets at sufficient scale.

This guest post was written by Steven Toms, Professor of Accounting at the Leeds University Business School.

Financing Cotton
by Steven Toms
9781783275090, Paperback, £13 or $16.87