While increased state involvement in industrial affairs in Europe is typically identified as a defining feature of economic reality in the years after the Second World War, this involvement was a continuation of economic policies pursued by pre-war governments. Further, it wasn’t only ministers and bureaucrats that increasingly organized industry, but central banks as well. In Britain, the Bank of England encouraged the restructuring of several industries that had little to do with finance. One of these industries was cotton spinning of all things. The Bank established and funded the Lancashire Cotton Corporation, a company established to restructure a struggling part of Britain’s once mammoth textile industry.
Cotton and Credit
While British banks had a reputation for avoiding long-term loans to industrial companies, the 19th century saw credit become more accessible to the cotton textile industry. There were many factors driving the increased availability of credit. Among these was reduced government borrowing after the end of the Napoleonic Wars and the accompanying reduction in interest rates. Further, new banks sprouted up when the Bank of England’s monopoly on joint-stock banking was curtailed in the 1820s. Many new joint-stock banks were formed in the 1830s, and several outside London. Between 1830 and 1837, the capital invested in Manchester-based banks alone had tripled.
Also serving the textile industry were ‘acceptance houses’ which began to finance exports of British textiles to markets abroad by extending credit to importers. Further, the Napoleonic War years were profitable ones for the industry and the accumulation of large profits earned by textile manufacturers were reinvested by their nouveau riche owners, adding to local capital in search of investment opportunities. That said, periodic crises did from time to time upset this growing abundance of capital.
Nonetheless, after a century of growth, British-made cotton textiles became a global staple. The spinning industry was oriented around exports with 86% of domestic production of cotton piece goods sent abroad. At the end of the First World War, there were hopes that, with the removal of wartime controls, the textile industry would prosper just as it had after the end of the Napoleonic Wars. Amidst the optimism, one firm from Lancashire in the north of England, the Amalgamated Cotton Mills Trust, accessed new capital in 1919 and the following year raised still more, tripling its equity capital. It would be for nothing though; the company failed to pay a dividend from then until 1937/38 when it underwent a financial restructuring.
Indeed, after the First World War, the prosperity of the 19th century cotton industry came to an end. The turn of fortunes was brought about by a tremendous reduction in overseas demand for British cotton textiles. In the 1920s, exports of cotton pieces fell to just 58% of their 1913 level, though exports of yarn fell by far less, to 80% of their pre-war level. Despite this, the number of spindles working in the English cotton textile trade remained more-or-less the same and the number of looms fell only modestly from 799,000 in 1922 to 755,000 in 1928.
The industry’s demise was not unthinkable. In the 1930s, exports of cotton pieces and yarn had fallen to just 29% and 66% of their pre-war levels respectively. However, while exports were, by the end of the decade, at a level only one-fifth of their earlier heights, production capacity had shrunk by only one-third. In Lancashire in particular, there was still simply far too much excess capacity.
The industry structure did not help matters. The Lancashire cotton spinning trade was comprised of a very large number of small, specialized firms competing on cost. During these years, competition from abroad was undercutting the prices required by English manufacturers.
Indian production was increasingly displacing British textiles in that market and Japanese competitors increased their market share both in India and outside of the British empire. Because it was a lack of foreign demand that plagued the industry, no amount of protectionism could help it since imports supplied only a low proportion of domestic consumption. The unabated fall in export demand meant reduced economies of scale as numerous small factories cut working hours and production.
It would stand to reason that this oversupply would only be temporary. Eventually, the industry would shrink to match falling demand, However, though closures could have reduced the surplus capacity as the industry consolidated around stronger survivors, banks were not so keen to see the bankruptcy and liquidation of their debtors. Instead, banks endeavored to recapitalize the firms, often sinking more capital into the sector and delaying its reorganization. Indeed, besides keeping ‘zombie firms’ afloat, recapitalized producers were more likely to engage in price cutting in order to win market share, further ravaging the industry.
There were efforts by some to reorganize the cotton trade. Banks collaborated to force their debtor companies to sell their product at no lower than a certain minimum price. An industry cartel, the Cotton Yarn Association, was formed in 1926, but with too few members, it was unable to control prices.
These attempts were unsuccessful in producing lasting improvements. Besides the lenders, shareholders also held on unwaveringly; resisting reorganizations while awaiting a change in the industry’s fortunes. If their firms went bankrupt, not only could they lose what they had invested but, in many cases, they could have been forced to pay in the remainder of any uncalled equity capital they had committed. By the late 1920s, the industry seemed unable to right itself, generating calls for outside intervention.
Lancashire Cotton Corporation
The challenges faced by the ailing textile industry may have attracted the attention of local politicians and trade unions but it was not them alone who demanded a solution. The Bank of England, the country’s monetary authority, became increasingly concerned about the exposure of some banks to the cotton spinning industry as the 1920s went on. Lancashire saw little market penetration by the larger national banks and instead was home to many smaller local banks which lacked geographic diversification. In the Bank’s view, the loans in arrears held by Lancashire banks threatened financial stability.
In response to this threat, in 1929, the Bank of England financed the formation of the Lancashire Cotton Corporation (LCC) through another new organization called the Bankers Industrial Development Corporation. The LCC would play a lead role in attempting a reorganization of Lancashire’s cotton textile industry. Under governor Montagu Norman, the central bank advanced £920,000 to the LCC until the company was able to raise more money, issuing £2 million in bonds in 1931. The Governor of the Bank of England also appointed the Chairman and half of the members of the LCC’s board.
The Bank of England did not attempt to force change directly; it instead encouraged banks to coerce their debtors to combine their operations under the LCC in exchange for LCC securities. It interacted with some creditors very closely, including a particularly exposed Lancashire bank named Williams Deacons. The Bank of England offered to guarantee up to £1 million in advances Williams Deacons had made to forty spinning firms; the guarantee was secured by the securities the small lender was issued by the LCC upon amalgamation of the bought-out debtor firms. The Bank of England later facilitated Williams Deacons’ merger with the Royal Bank of Scotland by purchasing the LCC securities at an inflated price; the central bank thus became a large direct shareholder in the LCC.
The LCC did get off to a strong start. Soon after launching, the company acquired over one hundred firms employing nearly ten million spindles. Creditors and shareholders of the acquired firms were issued ‘income debentures’ and shares in the LCC. To reduce the debt burden of the company, interest on the debentures could only be paid out of any profits. The goal was that the combination of firms would allow for a rationalization of production, new economies of scale, and encourage the reorganization of the entire industry. Competitors remaining outside the LCC would still be encouraged to merge to match the market power of the new company. There was also hope that the LCC would act as a price leader, able to move the price of textiles with its own production.
An Era of Interventions
It may seem strange for the country’s central bank to become so involved in a single industry. Nonetheless, the Bank of England was increasingly involved in industrial affairs after the First World War. It was perhaps encouraged by steadily more interventionist national governments but not in the way some would expect.
Rather than being directed to intervene, the actions of the Bank were to some extent a ploy to discourage even bolder state interventions or the nationalization of industries. In any case, the Bank served as a bridge between the state and the private economy. One of the Bank’s negotiators, Nigel Campbell, was a banker with reorganization experience and was able to act as a trusted intermediary between the industry and the government.
The Bank of England was active outside of cotton spinning as well. Besides the LCC, the Bank also backed a holding company called National Shipbuilders’ Security Ltd. which aimed to clear up excess capacity in the shipyard industry. The Bank had also intervened to rescue the steel and armaments firm Armstrong-Whitworth which had become indebted to the Bank in the preceding years. The Bank of England had even helped facilitate the company’s merger with Vickers, another armaments manufacturer. Other interventions by the Bank were explored in the wool textile and locomotive manufacturing industries.
In the end, the role of the Bank was assumed by the government. Legislation was passed by Parliament to regulate wages in the industry and reduce capacity. A new Spindles Board, created in 1936 by the Cotton Spinning Industry Act, was authorized to purchase surplus spindles and associated land and buildings. The Spindles Board could borrow up to £2 million which would be repaid by a new levy on each installed spindle in the industry. Through legislation such as this, politicians and civil servants gradually assumed the role the Bank of England had filled in solving the textile industry’s woes.
In any case, the LCC was said to have failed in realizing any economies of scale. Indeed, merging so many textile mills too quickly arguably made the management of the company less efficient. The project was largely judged as a failure; though the LCC did become profitable in the late 1930s, this was only after the Bank of England had covered large restructuring costs.
Further, few textile mergers took place outside of the LCC and capacity reduction through the 1930s was minimal in comparison to the still moribund market demand for British cotton textiles. Planned legislation that would have allowed for some coercion of recalcitrant producers, paving the way for further rationalization, was shelved by the start of the Second World War and was never implemented after the war. The long-awaited for and much worked towards recovery in the industry’s fortunes never came.
The stagnant economy of the interwar years and the politics of the day encouraged many government interventions in private industry. While these factors may have also influenced the Bank of England, its intervention in Lancashire’s cotton industry was allegedly prompted by genuine financial concerns, namely concerns with certain banks’ exposure to the sector. However, the response was of an entirely new kind. It is hard to believe that the 19th century Bank of England would have organized and funded a new industrial concern with the goal of reorganizing an industry so far removed from banking and financial markets. Nonetheless, when the spirit of the times called for modernization and reorganization, by novel means if necessary, the Bank of England was itself drawn in.
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