The Cotton Market in 19th Century Liverpool

London’s ports, exchanges, merchants, and bankers may have been the most numerous and active across most areas of Britain’s commercial life, particularly in international trade and finance. But there was one city that specialized in an increasingly important niche in which London was far less dominant. Liverpool became the primary port for the import of cotton into Britain. This cotton was distributed by brokers and dealers to the textile manufacturers that led the early-to-middle stages of British industrialization. Liverpool’s cotton market largely served practical needs but interruptions in trade did set off speculative episodes in the city from time to time.

Introduction

Liverpool was a leading port city in Britain and the primary port of entry for cotton into the country since at least the late-18th century. It is sensible that this port, and not the London ports, specialized in cotton since Liverpool was far closer to textile towns like Bolton and Manchester. The first imports of cotton, then at a small scale, began in the early-18th century. From the late-18th century onward, the cotton textile industry of Lancashire, then including Manchester, grew rapidly. Imported cotton came first from the West Indies, South America, and French Réunion in the 18th century. However, starting from small volumes in the 1790-1795 period, product from the United States was soon predominant.

A specialized group of cotton brokers emerged in Liverpool; they acted as intermediaries between importers and manufacturers. Compared to general merchants, they possessed specialized knowledge of the needs of textile manufacturers. Early cotton brokers had links with the cotton spinning firms of Manchester. One early broker, Nicholas Waterhouse, had apprenticed under a textile manufacturer and worked in a cotton warehouse before becoming a broker sometime in or before 1800.

There were more than one hundred such brokers in Liverpool by the early 1840s. Much is known about the conditions and workings of the Liverpool cotton market through the letters circulated by brokers to cotton buyers detailing import and purchase volumes and sharing price information. The market was subject to severe periodic disruptions in Atlantic trade.

Workings

Liverpool cotton brokers at the start of the 19th century charged a typical fee of 10 shillings per £100 to the buyer, usually a manufacturer or dealer in cotton, and also to the seller, usually an importing firm. Thus, the combined commission made on each sale was just around 1%. Yet, this was enough to deliver large profits. Nicholas Waterhouse’s firm made a profit of over £6,000 in 1800 and again in 1801; this was at a time when the annual pay of a mason, carpenter, or butler in England might have been £40-50 and a professional’s income would have started at just £150. Volume was key but supply was tough to source. As textile demand was strong, a broker’s entire consignment might often be sold to a single buyer. To make more money, brokers won more business by securing a larger supply of cotton.

The cotton brokers provided credit to importers in order to lock in supplies of the commodity. In the early 19th century, a practice was already established whereby the cotton broker would agree to advance money to the importer to cover the cost of freight shipping, import duties, and insurance. This amount would be recouped by the cotton broker upon sale of the consignment given to him and withheld from the final payment to the importer. This credit was extended by means of the reinvested profits of cotton brokers, which like in the case of Waterhouse’s firm, could be considerable.

Cotton brokers also granted more flexible credit to importers, secured by future imports, often at an interest rate of 5% at the start of the 19th century. Of Waterhouse’s £6,548 profit in 1800, net interest income made up £863 of this. Other services by which brokers courted importers was by assisting in the sale of an importer’s damaged cotton. By such means, brokers obtained a supply of the commodity to sell.

The Dukes Dock and Warehouse, Liverpool, engraved by Thomas Higham, 1829

Interruptions

Imperiling brokers, the import of American cotton was interrupted in the 19th century, most notably during the U.S. Civil War but also in the lead up to, and during, the War of 1812. Trade was interrupted starting from 1808; the Embargo Act, enacted by the United States during the Napoleonic Wars, banned all foreign trade by the U.S.. This was replaced by the Non-Intercourse Act which permitted trade with countries that were not Britain or France. Still, legal trade with Britain remained suspended.

Between 1806 and 1807, imports of American cotton in Liverpool had grown from 100,000 bags to 144,000 but this collapsed to just 25,000 in 1808, much of it likely from ships that had set sail just before the ban was implemented. Even the flow of information between American planters and British merchant firms broke down. Still, it’s clear that substantial trade was skirting the rules or entering Britain during brief periods of opening up. Indeed, by 1809, imports had grown to 131,000 bags and by 1810 they stood at 199,000.

A deeper drop in trade came with the War of 1812 though. That year, Liverpool imports of American cotton were just 19,000 bags. The failure of the American government to renew the charter of the First Bank of the United States in 1811 also caused a money market crisis in the U.S. which made trade difficult.

During these interruptions, the price of cotton was usually low in America where the crop accumulated unsold, and remained high, or rose, in England. The profit to be made by connecting these markets was high. So, during the period of the Non-Intercourse Act, American cotton was exported to Britain by means of transshipment via Spanish and Portuguese territories, most notably Amelia Island in Spanish Florida. To supplement what it could get by one route or another from the U.S., Liverpool sourced cotton from another market, Brazil. From just 3,520 bags in 1808, Brazilian cotton exports to Liverpool reached 103,248 bags in 1814.

Speculative Episodes

Volatility in a market can often encourage speculation but cotton brokers initially avoided speculation by only selling on consignment, that is to say on behalf of the importer, rather than for their own account. Nonetheless there was tremendous uncertainty in the market at times, particularly during the American embargo and War of 1812. In late-1809, for example, the prices reported by different brokers for high-quality ‘sea island’ cotton often ranged by just one or two pence per pound. But, from December 1813 through December 1814, prices reported by brokers for the same month often varied by six pence per pound or more.

By now, speculation was rife in the market. In their letters to clients, brokers sometimes could attribute a price movement to nothing more than gambling by others. Further, merchants were trading in cotton that had not yet arrived in the city, an early example of futures trading in cotton.

There was a particularly sizable speculative episode in the mid-1820s. Then, a group of merchants, including the Liverpool cotton broker Cooke & Comer, began buying and storing large volumes of cotton in 1824. The group believed that demand would outpace supply and that inventories would dwindle.

Indeed, British imports of raw cotton fell from 188 million pounds weight in 1823 to 144 million the following year. Inventories in Liverpool more than halved in 1824. Between the end of October and the end of December 1824, the upper end of the price range for United States ‘bowed’ or ‘upland’ cotton, a particular grade of the product, had risen from 9 to 10.25 pence per pound. Prices crossed one shilling, or twelve pence, by February 1825 and the upper end of the range was 19.25 pence by April 23.

Other speculators were joining the mania and it’s been estimated that speculative purchases of Liverpool cotton in these months summed to £6 million, a staggering sum at the time. It’s worth noting that this episode occurred alongside a wider financial bubble in Britain that year, one that is better known for London’s speculations in Latin American government bonds and shares in overseas mining companies rather than in cotton.

However, at these higher prices, non-speculative industrial buyers of cotton reduced purchases and market activity thinned. Starting from April, monthly cotton imports were regularly much higher than for the same months the prior year. Egypt was emerging as a new producing region and the artificially high prices also sent a signal to merchants to send cotton to Liverpool, so new product was sourced from Brazil and India too.

Prices began to slide from mid-June onward, and by August had returned to one shilling per pound. Then, from late-August 1825, prices fell further as speculators were forced to sell to make good on their obligations. These were speculators smaller than Cooke & Comer who had tagged along in the frenzy but which possessed less reliable financing for their purchases. By early September, prices had returned to 10.25 pence per pound. Through all this, brokers who did not speculate for their own account but only made a fee to act as an intermediary between buyer and seller did well from the emergence of speculators as an enlarged group of buyers and the new imports from abroad. Meanwhile, some speculators were no doubt ruined.

During the American Civil War

Still, decades later, on the eve of the American Civil War, 90% of cotton imported into Britain arrived at Liverpool and largely from America. With the war, cotton imports fell from 1.39 billion pounds to 524 million pounds between 1860 and 1862; over the same time, prices rose from 6.25 pence per pound to 17.25 pence. Market activity in the first half of this period was muted though; it was only from late-summer 1861 that fears began to set in that the American cotton crop would fail to arrive.

The effectiveness of the Union blockade of Southern ports astounded merchants in the city; most had assumed that the cotton would be smuggled into Britain one way or another. Yet, it did not. The example of the embargo and war of 1808-1815, when cotton did nonetheless arrive in Liverpool, proved irrelevant.

From 166,000 bales of cotton in July 1861, American imports were just 3,000 in August and just 35 bales in September. Stored inventories of cotton fell from over one million bales in the summer 1861 to under 600,000 by November 1. The activities of speculators, and buying by manufacturers looking to secure what supply of cotton they could, sent prices from 7.9 to 12 pence per pound for cotton of the ‘Middling Orleans’ grade. Speculators bought and sold depending on prospects as varied as the entry of Britain into the conflict to the end of the war altogether.

Yet, the American war went on. Inventories hit a low in 1862; they halved in the first half of that year from 567,000 bales to just 260,000. These were reduced to 85,000 by the end of September. Prices reached 27.75 pence per pound in October 1862 before falling back to 21.5 pence in November; such was the volatility which now characterized the market. With inventories so scarce, speculators took bets on futures trades, buying and selling cotton for future delivery, particularly after 1863. Back in the 1840s, the Liverpool cotton market became the first in Europe to develop futures trading and this trading grew in proportion of total market activity in times of scarcity and speculation.

By increasing prices, speculative trading crowded out genuine demand. At the high prices, textile firms cut production, so inventories actually rose again despite the ongoing war. From here, imports recovered to 670 million pounds in 1863 yet prices managed to reach as high as 31.5 pence per pound that July.

The increasing price despite the marginally improved availability of cotton may seem counterintuitive. However, war news was driving the market. Whereas back in early-1862, the actual situation as to the present supply of cotton was actually worse than it was in 1863-64, prices had been constrained by the prospect of peace which many thought was right around the corner. Later in 1862, and for a while after, the prospect of peace diminished – albeit with occasional exceptions – and now some were anticipating that the destruction of the war would imperil future cotton harvests even when it eventually ended.

The speculation did slow slightly. In 1863, the Bank of England lifted its bank rate from 4% to 6% in November; the following year, it was set as high as 9% and there were rumors that the Bank would even set an interest rate in the double digits. In the credit crunch, banks, manufacturers, and cotton speculators were bankrupted. This deflated some of the speculation in cotton and prices fell to 22 pence per pound.

Then, in 1864, imports recovered further to 894 million pounds yet prices returned to 27.5 pence per pound that same year. Though the war was in its waning days by November 1864, when prices peaked for the year, many failed to see this. Eventually, the war came to an end; cotton prices nearly halved by April 1865. Soon after, cotton came rushing back to Liverpool. By 1866, imports stood at 1.38 billion, almost exactly the same level as six years earlier.

Lesson

In periods of stable prices and when the supply chain for cotton operated smoothly, the business of a cotton broker was lucrative yet conservative. Few brokers, or anyone else in the cotton market for that matter, had an incentive to make speculative gambles. When wars or embargoes disrupted trade in cotton, and even cut off reliable communication or otherwise introduced new uncertainties to the trade, the market for cotton became more speculative. Speculative purchasers competed with authentic users of the raw material for what little cotton supply there was. In these years, the market for cotton no doubt functioned less perfectly than before, yet it was these market imperfections which attracted new actors to the Liverpool cotton market.

More from the Tontine Coffee-House

Read about cotton bonds issued by the Confederacy, cotton production in 1860s Egypt and its fiscal consequences, and the Bank of England’s role in reorganizing the textile industry. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.