For the embryonic capitalist industrial system to grow, it needed a banking system to channel investment, while employers needed banks in order to pay their workers. But even on the most basic level of supplying coinage and notes the banking system was, before the mid-eighteenth century, wholly inadequate. The Bank of England was charged with issuing coins and banknotes and was required to hold enough gold to redeem all the notes it issued; this remained insufficient for the country’s needs until the end of the eighteenth century.
Lack of small-value coinage bedevilled the burgeoning retailers, who had to operate by continually extending credit, while industrialists taking on workers in Birmingham, Staffordshire or Lancashire were condemned to spend their time in search of shillings to pay wages, or operating the infamous truck system, where wages were paid in goods from the factory shop. Some, such as John Wilkinson and a few Northumberland mine-owners, even resorted to minting their own coins or tokens.
In the early to mid-eighteenth century merchants in country towns, exasperated at the lack of circulating currency, began to accept bills of exchange bearing the name of a reputable London banking house in return for small currency, while taking commission along the way. A de facto national banking system thereby began to develop. By the 1760s private banks of this type became widespread, emerging not from financiers venturing out from London, but through local enterprises such as goldsmiths, cloth-makers, associations of cattle drovers and wool-traders offering a banking service to fellow traders. Taylors and Lloyds, Quaker iron-makers of Dale End in Birmingham, moved into banking and by 1765 were paying interest to depositors while taking interest on loans; the Miner’s Bank of Truro was established in 1759 followed by Praed’s Cornish bank in 1774. Scores of others began taking deposits, issuing currency and paying interest while taking commission and making loans. According to Bailey’s British Directory the number of banks outside London grew from 119 in 1784, to 230 in 1797, rising to 800 by 1808.10
Country banks helped the concentration of industry in the north and Midlands by getting funds to the places and enterprises where they were needed. Banks in rural areas would receive cash deposits from farmers following the summer harvests; this was then sent to their correspondent bank in London, and then recycled to industrial centres hungry for funds to settle their accounts at the year’s end. All this was feasible because market towns in Britain had, over the previous centuries, developed into effective commercial centres with an infrastructure of markets, notaries, merchants and middlemen in place. Industrialisation wrenched the country into a different era, but many of its citizens were already commercially astute.
The increase in the number and spread of banks eased the problems of currency circulation and allowed businesses to pay large sums to each other via banker’s drafts. At the same time banker’s bills were issued to depositors by country banks and were passed around as a kind of ersatz currency, being redeemable for coins and notes at any time. This system worked well as long as the Bank of England kept enough money in circulation to redeem any demands. That didn’t always happen and bankers who had tied up their money in long-term investments occasionally faced demands for cash that they could not meet. In 1772, 1793 and in 1814–16 many small banks were forced under, taking their clients with them. It was only in 1826, following another banking collapse, that Parliament approved the setting up of joint-stock banks owned by shareholders with limited liability. Large-scale banks with big capital reserves could then emerge in the industrial cities, for example the Manchester and Liverpool District Banking Company. The culmination of the process came in 1854 when joint-stock banks came into the Clearing House, which allowed cheques to be exchanged between banks. The shoe was then on the other foot and the ‘new’ industrial-based banks like Lloyds took over ‘old’ London banks, creating national organisations.
The effects of the Industrial Revolution spread far beyond technology and industry: industrialists adopted capitalism as their method of finance and organisation; they forced the financial system to change to accommodate their needs; they built the banking system that they needed; and they integrated these different elements into a system of industrial and commercial finance that spread to the rest of the world.
22. Adam Smith and the Industrial Economy
THE INDUSTRIAL REVOLUTION came about in the real world, created by practical men with no formal training beyond apprenticeships. They wanted to make money and had little interest in economic theory. But the same changes that set the stage for the Industrial Revolution – new attitudes to work, innovation, prosperity, the improvement of one’s lot – also created the need for an understanding of the economic forces at work in society. The resulting theory may not have impinged on the early phases of the Industrial Revolution, but by the early nineteenth century economic theory was steering the hand of government, helping it to set the framework for a sustainable industrial society.
Economic theory emerged in late eighteenth-century Britain because, for the first time, human beings were acting as independent economic agents. This new situation has been described by the leading economic historian Robert Heilbroner as ‘The Economic Revolution’. Increasing prosperity, specialisation and novelty in work, widespread disposable income and, above all, a revolution in social attitudes meant that people were, for the first time, making decisions based on economic choices.1
For most of human history, societies had followed customs that enabled them to share resources and responsibilities, jobs and rewards, while maintaining social cohesion. This sounds a little high-flown, but in practical terms communities came together in order to develop ways of dealing with a potentially hostile world. Societies were held in place through a combination of inherited customs and coercion from above. In medieval Europe it was important that the daughters of spinners became spinners too, and the sons of weavers became weavers. Custom and coercion also applied to ways of working; anyone stepping outside their customary role by making a different type of cloth, or using more efficient machinery, for example, would face severe punishment.
By the eighteenth century the social and economic changes that swept through Britain brought about a new kind of society and a new kind of economic actor. British people became free to work as they chose, to buy and sell goods, and to invest in the hope of return. This was a liberating but also worrying prospect. How, after all, would society function, how would it hold itself together, how would it prosper and increase, if everyone could do as they pleased? As the eighteenth century progressed, these abstract questions began to need practical answers. Would it, for example, benefit the nation to maintain punitive tariffs on imports of cotton, or keep restrictions on the number of apprentices, or the price of bread or wheat? There was no real explanation of how the economic system worked, of how a nation’s wealth could be gained and sustained in a world no longer ruled by custom or enforced authority.2
This was the heyday of the Enlightenment when scholars all over Europe looked for patterns and meanings in every part of the natural world and in every area of human existence and endeavour. The way was open for someone to investigate and codify the laws underlying economic behaviour and to explain their implications for national economies. Adam Smith took the first giant strides; in 1776 he published The Wealth of Nations, which effectively gave economics its terms of reference and its language as well as making it an essential subject for every thinking person.
Adam Smith was born in Kirkcaldy in Fife in 1723; at seventeen he won a scholarship to the University of Oxford and in 1751, aged just twenty-eight, he was appointed professor of logic and then of moral philosophy at the University of Glasgow. By 1757 he was dean of the university and a leading figure in the so-called Scottish Enlightenment. The first question Smith addressed was: if everyone can do as they like, what will hold society together; without a central force in place, how will society ensure that all the things that must be done are done? His answer came in the shape of his most famous and lasting idea, the invisible ha
nd. Here is how he introduced the concept:
By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.3
The end that is promoted is the situation ‘that is most agreeable to the whole of society’. In this way commercial capitalism is seen as a kind of being of ‘perfect liberty’ in which everyone is free to do as they wish and in the process they bring about a situation that is the best for all. But Smith also realised that this situation is not a final fixed end; society is ever-changing.
Before we look at the other side of this coin, we should pause to take in the full force of this new vision of society. For most of human existence people believed in life as a cycle of existence anchored in a world in which little changed. Christians in Europe had long believed that the world would continue as it was until God brought it to an end.4 But just as Isaac Newton had shown that while the rules that governed the universe were constant the universe itself was continually changing, so Adam Smith presented a vision of society in which constant economic laws brought about continual change.
However, if the invisible hand meant that individual actions inevitably brought about a good society, then at the same time a series of laws acted as restraints on these actions. While butchers and bakers were free in theory to produce as much as they could and charge any price, the market itself automatically dictated both quantity and price. Produce too much and you overfill demand and the price drops; charge too much and someone else will produce the same for less and undercut you. According to Smith these were the inviolable laws of the market and they brought society the right amount of goods at a fair price. The market also regulated the incomes of the producers since they could only earn such profits as the market deemed fair, while if incomes were driven down producers and investors would leave the sector, forcing a shortage and a consequent rise in prices.
But the market was not simply a regulator of a static situation; it promoted the growth in productive capacity that Smith witnessed in eighteenth-century Britain. How did it do this? Smith argued that, like pieces of cloth or ingots of iron, people too could be produced to order. At the time, most children died in infancy, and Smith believed this was due to poverty; he also believed that it was the natural desire of people to increase their wages in order to accumulate wealth. So, as the wealth of society in general increased, the number of children surviving into adulthood would also increase; this would then bring more people into each industry. This would tend to hold wages down but the overall effect would be an ever-increasing number of productive people and therefore an ever-growing economy.
Smith’s vision was optimistic; he believed that if these market mechanisms were allowed to operate the result would be beneficial for the whole of society, including the poorest. This was a self-evident good because: ‘No society can surely be flourishing and happy, of which the greater part of the numbers are poor and miserable.’5 However, Smith also saw a limiting factor to economic growth. This was to be dramatically expounded by Thomas Malthus who argued in 1798 that population would grow exponentially, while resources grew arithmetically, and that therefore humanity would always tend to find itself in shortage.6 Both men believed that as the population grew and the economy expanded, it would nevertheless eventually come up against the natural limits of the economy, which were dictated by the productive capacity of the land. At this point, if population continued to grow, then the living conditions of individuals and profitability of enterprises would stagnate or even fall. As Smith wrote: ‘In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low.’7
In other words Smith understood the limits of the existing organic economy; what he did not foresee was the coming transition to a coal-based economy that would blow away the limits to growth that he described. In the same year in which his masterpiece was published, his fellow Scot James Watt was busy erecting his first two improved steam engines; the economic world was about to change again.
In fact Smith’s prescription was soon undercut in other ways by industrialisation; in the 1770s iron and cloth producers met regularly to fix prices and rig the market, and within a few decades some individual enterprises became big enough to influence the market in their own favour – self-interest no longer automatically fed the common interest. Government intervention against price fixing, for example, was necessary and the market, therefore, was not a natural phenomenon but a construct held in place by continual adjustment of rules and regulations. The ‘free’ market was anything but; in fact it was a reflection of the society of the times. Nevertheless, while some of Smith’s extrapolations may look misguided his genius lay in showing how the market could be understood. And while he was set against interference with the market, he saw the chief danger coming from the industrialists themselves.
David Ricardo, who was Smith’s successor as the most influential economic thinker of the time, saw economic society as sets of interest groups each doing battle with the other.8 In Ricardo’s time the dominant groups were not labour and capital, but landowners and industrialists, whose different interests were highlighted by the passing of the 1815 Corn Law. The law restricted imports of corn until home-grown corn reached a price of £4 per quarter-ton; this protected the landowners’ market, but raised prices of bread for ordinary people. The consequence was profound as charging people more for staple foods reduced demand for manufactured goods. The issue remained at the forefront of British economic politics until the laws were finally repealed in 1846. The arguments for and against the Corn Laws showed that, in the new world of self-interested economic actors operating in an industrial economy, it was incumbent on the government to intervene in order to construct a suitable legal and fiscal framework, to regulate imports and exports, and above all to be alert to changing economic circumstances. The new world was one of rapid change.
Smith, Malthus and Ricardo were all writing in the midst of the greatest economic revolution in history and yet none of them could sense the earthquake beneath their feet. All three were extremely perceptive about the economic conditions that had existed for most of human history and about the economic developments in Britain. They all saw a society in danger of stretching its natural resources to the limit – what none of them saw was that those limits were about to be blown open for the first time in human history.9 In fact the coming of industrialisation enabled the economy to enter an entirely new phase that overthrew the predictions of Smith and Malthus. How was this possible? As we have seen, the essential answer is that in an organic economy humans must gain all their needs through growing crops and rearing animals and through sources of energy such as timber. The land can produce only so much food and fuel and this places limits on economic growth. Industrialisation, however, gave humans access to another source of energy in the form of coal. Food still had to be derived from the land’s resources but these did not need to be used for heating, cooking, clothing or building. Indeed the conversion of natural resources into food could be made much more efficient through fertilisation and through improved transport and distribution systems, all fuelled by coal. This left increasingly large parts of the economy available to produce goods, again using fossil energy. The productive capacity of the economy is hugely increased by using energy beyond the natural resources of human and animal muscle.
Once the invention of the steam engine allowed coal
to be used to produce mechanical energy, the total amount of energy available to the economy was vastly increased, while the amount of energy available to industrial production was also immensely greater than in an organic economy. A natural organic economy requires a delicate balance to be maintained if it is to be sustainable, otherwise it enters a cycle of a system of negative feedback – the greater the productivity, the nearer the economy gets to the natural limits of the land. In an industrial or mineral-based economy, on the other hand, there is positive feedback – each step that brings greater productivity opens the way for more innovation and makes the next step easier to take. Though this vast change took some time to work through, once people began to use coal to produce usable energy, the limits of economic growth imposed by the organic economy were blown away.
VIII. Work
‘The workshop may, without any great feat of imagination, be considered as an engine, the parts of which are men.’
ADAM FERGUSON, 1767
23. The Nature of Work and the Rise of the Factory
INDUSTRIALISATION UTTERLY CHANGED the nature and meaning of work. Timekeeping, the factory system, regular hours, fixed holidays and large work-based organisations, as well as the separation of ownership, management and labour all came into being. Industrialisation was not just about the mechanisation of industrial production; it placed human beings in a totally different relation to their work, which became a central element in their social and cultural identity. The consequences were profound and long-lasting and have been felt well beyond the workplace. Family life, for example, was profoundly altered as mature women and children, while initially used in factories, were increasingly driven out of formal work.
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