Direct subsidies and aids are only part of the story. The state’s hand lay everywhere, even where not directly manifest. Even in Britain, government supported and protected overseas trade: the country as a whole paid the associated security costs of private venturers and adventurers in distant seas. Such indirect subsidy, easy to overlook, was crucial.
In Britain again, as elsewhere, industrial promotion also took the form of defense against outside competition. The later record of British commitment to free trade (more or less mid-nineteenth century to 1930) has tended to obscure the earlier and much longer practice of economic nationalism, whether by tariff protection or discriminatory shipping rules (navigation acts). Economic theorists have argued forcibly, even passionately, that such interferences with the market hurt everyone. The fact remains that history’s strongest advocates of free trade—Victorian Britain, post-World War II United States—were strongly protectionist during their own growing stage. Don’t do as I did; do as I can afford to do now. The advice does not always sit well.
In France, the old monarchy assisted new industries and technologies—by subsidy and stipend, fiscal exemption and privilege, or so-called loans that remained unpaid. Because of these helps, ambitious businessmen had reason to court people of influence, and the court, like an overripe cheese, invited corruption. The only real constraint was the increasing penury of the French treasury; by the 1780s, the money had run out. Meanwhile, as in England, enterprise found a silent ally in tariff protection, against the world without and other parts of the kingdom within. (Commercial barriers reflected France’s history of piecemeal territorial accretion.) This long-standing policy stood inviolate until 1786, when a bureaucrats’ treaty traded easier access for French wines and silks to Britain for admission of British cottons, woolens, and iron into France.* Such an opening would have had drastic consequences for French industry, unprepared as yet for the new machine technologies. But revolution in 1789 and war with Britain in 1792 put an end to the experiment.
The French Revolution reinforced the role of the state. Authority was harder, more peremptory; control, more centralized. War needs made production an urgent priority. Yet the regime lacked resources (wars eat up money), and military orders only hardened old technologies. Aid to industry consisted primarily of transfers of wealth—Church properties, for example, confiscated by a militantly anticlerical regime and granted to industrial enterprises or sold on concessionary terms.
After the revolution (1798 on), the Bonapartist (later Napoleonic) regime undertook a modest program of economic development. Once again wealth (including fine art) changed hands, both within conquered territories and from conquered lands to France. The greatest contribution to industry, however—for better or worse—took the disguised form of an imperial market closed to British imports. Then, for a brief moment after 1815, defeated France went over to laissez-faire and free trade, if only by concession to the British victors and reaction against imperial authoritarianism. The protectionist wall fell. But very quickly a cold shower of foreign manufactures (textiles particularly) revived the national instinct. French manufacturers cried havoc, and the Chamber of Deputies promptly voted a series of tariffs, each higher than the one before. Import of key commodities such as cotton yarn and cloth was prohibited outright. Whether this kind of wall was good for French industry is a matter of debate. It raised prices for French consumers, reduced demand, and sheltered obsolete technologies. But it increased the rate of profit for those more efficient firms that flourished inside the price envelope.* There is more than one way to fatten enterprise.
Meanwhile French economists, inspired by their English counterparts, argued the advantages of liberalization. With the revolution of 1848, the political pendulum swung back, away from high protection and its Orléanist beneficiaries. No sooner had Louis Napoleon settled in than pressure increased for an end to prohibitions and an easing of duties. The economists at least were not afraid of Big Bad Britain. In the face of strenuous resistance by manufacturers, who wept tears for their employees, the imperial regime lowered tariff barriers significantly, first by opportunistic decrees, then by an Anglo-French commercial accord (Cobden-Chevalier Treaty, 1860) that was put to public discussion only after it was concluded. (That’s the best time, of course.) The testimony of witnesses was published in seven large quarto volumes and provides an extraordinary insight into a split French “establishment.” So finally ended the regime of prohibitions on key industrial products (cotton textiles, ships). If France, moreover, could afford to take on British competition, it could certainly compete with less developed countries. In subsequent years, the new low tariff regime was extended to others (thus the German Zollverein in 1865) on the most-favored-nation principle.9
Russia, poor Russia, was the epitome of state-driven development. The push, from the sixteenth century, was to catch up with the West by adoption of Western ways. The push was fitful, partly because it was motivated from above and not every tsar was so inclined, partly because each effort was so exhausting. Who paid the bill? The serf—who else? Modernization from above rested on forced labor. In the long run, however, the whole country paid. Serfdom fostered stupid arrogance above; greed and envy, resentment and gall below. Even after emancipation, these attitudes remained to pose the biggest obstacle to Russian development.
Just as the big banks in Germany preferred to put their money into the capital-intensive branches of heavy industry, so in Russia the state gave its support above all to mining and metallurgy, encouraging the formation of huge enterprises—the megalomaniac pursuit of giantism. Russian blast furnaces, we are told, were larger than the German (a few were), illustrating what for some was a law of backwardness: the later, the bigger and faster. (Economists today speak of leapfrogging—every generation needs its key words and jargon.) And once state-sponsored industrialization had made enough progress, the accumulated capital financed investment banks comparable in function and strategy to their German predecessors.
The result was considerable but fragile. Russian industrial product rose 5 to 6 percent a year between 1885 and 1900, and again between 1909 and 1912. Railroad mileage doubled between 1890 and 1904, and iron and steel output increased ten times from 1880 to 1900. Between 1860 and 1914, Russia went from the seventh to the fifth largest industrial power in the world. No small achievement, but long forgotten, because later, after the revolutions of 1917, Communist spokesmen and their foreign adulators rewrote history so as to blacken the reputation of the tsarist regime, while throwing favorable testimonies down the memory hole.
They need not have worked so hard at vilification. Tsarist Russia had an abundance of flaws. The country was schizophrenic in its contrasts and contradictions: a poorly educated, largely illiterate population with spots of intellectual and scientific brilliance; a privileged, self-indulgent aristocracy contemptuously resisting modernization; a rabidly radical revolutionary movement—sables and rags, vintage brandy and cheap vodka, broken crystal in the officers’ mess, broken earthenware in the isbas. The push to economic development awakened a sleeping giant, brought it into contact with more advanced countries, imported strange and disturbing technologies, poisoned it with alien dreams.
The dreams caught on faster than the technologies and wrenched the country out of sync. Three wars destroyed the regime by exposing the gap between east and west, backward and advanced, fantasy and reality. The first was the Crimean War (1854-56), which underlined the difference between citizen and servile armies; the emancipation of the serfs followed shortly thereafter. The second was the humiliating defeat by Japan (1904-05), the first time Russia had known a setback in its Drang nach Osten. This was followed by the installation of a parliament (the Duma) and popular elections—a good idea in principle but bad for autocracy. The third was World War I, the Great War, when millions of Russian peasants were ordered into clouds of bullets and shrapnel. With that, an incompetent government and military establishment deservedly lost legitimacy, and the regime was ov
erthrown. The whole sequence was a repeat in its way of Spain’s long decline: a great preindustrial power could not cope with the demands and pretensions of better-equipped nations. And like Spain, Russia knew what was happening, but responded with too little, too late.
The last of our four sources of funds was international capital flows. Here again, one sees the east-west gradient at work. England invested in French railways; France and Belgium in Prussian ironworks and Austrian banks; Germany in Italian banks and Balkan railways; everybody in Russian mining and industry. In general, money a-plenty followed opportunity a-plenty, with no lack of promoters and pied pipers.
Some students of economic development, specialists in Third World backwardness, seek to explain retardation by the unwillingness of rich countries to invest in the poor. The charge does not stand up in history or logic. Businessmen have always been “in it for the money” and will make it and take it where they can. To be sure, they have their preferences. They have always sought to minimize risk and maximize comfort; also have preferred kind climates to unkind, close places to far, familiar cultures to strange.
They sometimes make big mistakes. In spite of the greatest care and forethought, not every investment pays off. But this has not stopped businessmen and investors from trying again. It is not want of money that holds back development. The biggest impediment is social, cultural, and technological unreadiness—want of knowledge and know-how. In other words, want of the ability to use money.
Le Creusot: The Tales That Business History Can Tell
In the decades following the Peace of 1815, the French iron industry entered the world of modern technology. Three factors were decisive: (1) the backlog of technique waiting to be learned, in particular, the adoption of coke smelting and coal-fueled puddling-rolling, where France was more than half a century behind; (2) improvements in transportation, which made it profitable to bring coal to the iron ore or vice versa; and (3) a huge demand for wrought iron as a result of railway construction.
These circumstances changed the opportunity of Le Creusot, the enterprise that, largely owing to fortuitous natural advantages (coal and iron ore in proximity) and royal support, initiated coke smelting in France in the 1780s. But Le Creusot suffered from a variety of handicaps, most seriously its poor access to iron-using markets.* These, plus poor management and the perturbations of revolution and war, had brought it low. In 1835, it lay fallow in bankruptcy while much of its equipment rusted.
At this point a team of experienced technicians and merchants pooled knowledge, money, and connections to buy up the debris of earlier firms and relaunch the enterprise. The makeup of the team says a lot about the needs of business and the character of the French bourgeoisie.
The point men in the venture were the brothers Adolphe and Eugene Schneider, merchants, bankers, technicians, and forgemasters. Their father Antoine Schneider was a notary (something like an English solicitor) and local notable in Lorraine. A nephew was an early graduate of the Ecole Polytechnique and rose in the army to become a general and for a brief period minister of war—a useful career for cousins who would be making and selling iron and steel.
Of the two brothers, Adolphe married Valerie Aignan, stepdaughter of Louis Boigues, a wealthy Paris merchant specializing in metallurgical products—again a most useful industrial connection. Boigues had already invested in foundries and forges, most notably in a large plant at Fourchambault that was one of the pioneers of coke-blast smelting when the method was reintroduced in France in the 1820s.* The Boigues family, apparently of Catalan origin, had settled in central France in the seventeenth century and established a firm base in land ownership and strategic alliances. Their sons and daughters had married into the moneyed aristocracy—new but the more influential for that—people who bore titles of baron and count or at the least had names with the telltale particule de. Thus Louis Boigues’s sister Marie married the comte Hippolyte Jaubert, nephew and adopted son and heir of the rich and powerful comte Francois Jaubert, a regent of the Banque de France.
This Fourchambault ironworks was itself the product of a marriage between Boigues’s money and commercial connections (Louis Boigues was not a passive investor) and the technical knowledge of Georges Dufaud, son of an ironmaster of the Old Regime. Dufaud was one of the first graduates of the Ecole Polytechnique and a pioneer of the new coal-based iron technologies. He had gone through the fires of bankruptcy and returned—no mean feat in France, where bankruptcy was almost invariably a stain for life. Now he would be managing a multi-million-franc enterprise. His success in this task (to say nothing of personal relations) would bring him invitations to serve in high office and to take over other business enterprises, all of which he refused. His heart and head belonged to those forges and foundries and machine shops in the Nivernais.
His son Achille took over after him, while his daughters got married, the first to George Crawshay, descendant of one of the oldest and most important dynasties of British ironmasters, and the second to Emile Martin, metallurgical entrepreneur in his own right and later immortalized by his contribution to the Siemens-Martin process for making open-hearth steel. All of this paid off in valuable exchanges of knowledge and know-how. When Georges Dufaud made one of his prospecting trips to Britain in 1826 (almost two weeks to get from Fourchambault to London, but he may have stopped in Paris along the way), he took the occasion to order a steam engine and power bellows for Martin; recruited a top-notch British engineer, also for Martin; and visited numerous British plants and public works (Crawshay’s introduction presumably helped), bringing home all kinds of sample products that the British, unlike the French, were making of metal. So diligently did he buy that Dufaud had to freight a ship to haul his loot across the Channel.10
But back to Le Creusot. In 1821, aged only nineteen, Adolphe Schneider entered the Seillière bank. The Seillière had started as merchant-manufacturers of woolens, but like a number of such putters-out, had branched into related commercial transactions. From there they had gone into banking, moving from their ancestral Lorraine to Paris.11 They were among the few leading Catholic families in a field dominated in France by Protestant firms with strong connections to co-religionists in Switzerland. Among their special business interests were ironmaking and metallurgy. The Seillière were strong backers of their fellow Lorrain Ignace-François de Wendel, artillery officer turned ironmaster in the Wendel family tradition, probably the single most enterprising and influential pioneer of iron-cum-coal technology in the France of the Old Regime. When the Wendel lost their forge and foundry of Hayange as a result of the revolution, Florentin Seillière helped them buy the plant back in 1804, then again the nearby forge of Moyeuvre in 1811.12
In 1830, the Seillière bank won the contract to provide equipment for the French expeditionary force to Algiers (the start of French imperialism in North Africa). Adolphe Schneider was sent to be their agent on the scene and received a lucrative commission of 2 percent on the total value of the merchandise. Much enriched, he then set up on his own as a cloth merchant in Paris. It was in this capacity, we are told, that he entered into business relations with the current owners of Le Creusot, a pair of expatriate Englishmen, and became their creditor. This put him in a good position to bid for the enterprise when it failed shortly thereafter.
Meanwhile the younger brother, Eugene, was busily making his own way. He started as a clerk in Reims, a center of wool manufacture, and from there rejoined his brother in the Seillière bank. In 1827, however, all of twenty-two years old, he was engaged by the baron de Neuflize, descendant of an old Protestant wool dynasty of Sedan, the Poupart, to run a nearby forge for them. (One feels that all kinds of people, especially young people, were going into iron.)
Eugene ran the forge for almost a decade. Meanwhile Adolphe was pursuing the matter of Le Creusot, then languishing in bankruptcy. In 1835, the works was sold at auction for 1.85 million francs to an ironmaster of Chalon-sur-Saône named Coste; but Adolphe was determined to have it, and drawi
ng on his connections (Louis Boigues and François Seillière), he bought the firm for an additional million. Not bad for M. Coste. Not bad for Adolphe Schneider.
Adolphe brought his brother in to help him: he would handle trade and finances; Eugene would direct exploitation and production. Shortly thereafter Eugene married Constance Le Moine des Mares, granddaughter of the baron de Neuflize and daughter of a receveur des finances. (These were tax collectors who held and invested the proceeds for considerable periods before they had to turn them over to the state treasury. This made them in effect important private bankers.) To improve his technical knowledge, Eugene took courses at the Conservatoire des Arts et Metiers in Paris and in the time-honored French tradition visited England to learn what his competitors were up to. So, Catholic enterprise and money married Protestant enterprise and money, and all together built on ties to political power to make Le Creusot a major supplier of rails and forgings, a builder of steam engines, locomotives, steamboats, boilers, and presses, and eventually France’s greatest armsmaker.
Bread upon the waters. In 1848, a year of omnivorous crisis, Fourchambault got into deep financial trouble. The Wendel (Hayange) and Schneider (Le Creusot) saved it by co-signing a huge bank loan: we ironmasters have to stick together. And when, a century later, Maurice de Wendel had four daughters to marry (and no sons), one of them wedded a Seillière.
None of this was accidental, not even the romance.
Making a Virtue of Lateness
The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor Page 32