Capitalism  

The Role of Capital

Industrialization depends largely on capital – wealth available for investment in order to propel development and make more wealth. This capital was one of the leading reasons as to why the British industrial economy burgeoned.  

Phyllis Deane, in The First Industrial Revolution, begins to incorporate the role of capital in a developing economy by contrasting the differences between a pre-industrial and an industrial society. The industrialized society is the one where more is produced in the same amount of time and for the same amount of effort than the amount produced in a pre-industrial society. One of the reasons why the production flourishes is because of the greater availability and existence of capital. More capital opens up more resources.  

Also, Deane states that in an industrialized economy, a person can expect to "enjoy a rising standard of living because he, or some of his fellow citizens, have formed the habit of setting aside from the current consumption enough to add to the community's stock of producer's goods. There is enough annual saving, that is to say, not only to replace the capital which wears out in the process of production but also to acquire additional items."  

A common misconception about a pre-industrialized economy is that it has no existing capital. This is not always the case. There might be enough capital in a pre-industrial society. However, such a society, which might enjoy a high capital-to-output ratio, requires additional capital and must " continually add to its stock if its workers are to go on raising their levels of product per head and hence their levels of living." To achieve this, there must be some significant changes in the economic development and growth of a society.  

Professor W.A. Lewis suggested that a pre-industrialized nation saves 6 percent of its national income while an industrialized nation saves 12 per cent. Professor Rostow said that 5 percent of a pre-industrialized nation's income was invested, while 10 percent of an industrialized nation's income was invested.  

This invested money, 10 percent of the national income, was vital to the Industrialization and to the advancement of several industries. For example, equipment for ditching, drainage, and hedging were consequences of the enclosure movement. Urbanization and the growth of cities that came with the Industrial Revolution required investment in areas such as buildings, streets, and bridges.  

The increase in capital also dealt with the steep increase in the population (which consequently led to a stronger labor force), as Deane says, " The population of England and Wales increased by roughly 50 per cent between 1751 and 1801; the volume of overseas trade almost trebled: the real national income probably doubled." Most of the capital in England at this point, however, was the value of its land. After the railroads, however, this slowly changed, as the country slowly shifted to man-made capital.  

Most of the large-scale investment and capital, new to the British economy, was due to the railway boom. Railroads, however, were not the sole area of investment – the cotton industry received much interest and was invested in during this time period. This can be observed through the enlargement of the industry; for example, the number of spindles almost doubled and the number of power looms almost quadrupled in a short span of time during the Industrial Revolution. The rise in the use of these inventions depended on investment in the cotton industry. Additionally, investors supported the mines and the iron industry, but the most domineering industry was transportation, as developments in railroads and steamboats occurred. These investments and advancements took place largely in the middle of the nineteenth century. Shipping gained importance, as Deane states, " Of nearly 10 million pounds spent by the government on British harbors during the first three quarters of the nineteenth century, about a half was spent between 1850 and 1870," however the railway boom outweighed it largely. Although the railways were not new in the middle of the nineteenth century, steam powered locomotives were. Railways, before, were driven by horse-power or stationary engines, hence they were not very expansive and ran on little capital. Deane states, " By the end of 1825 there were between 200 and 400 miles of iron railroad in the United Kingdom , representing a total capital investment of probably under 2 million pounds." The longest railroad was only 25 miles long. The transportation industry was bolstered by several bursts – the first railway boom was in 1824-5 and led to the opening of 70 miles of railways. Later, in the 1830's, between 400 and 500 miles of railroad were opened. This steep increase in development of railroads is aptly shown by Phyllis Deane, " By the triennium 1838-40 expenditure on construction and rolling-stock was running at an average of more than 10 million pounds per annum, and by 1840 the value of capital invested in railways was nearly 50 million pounds, most of which represented the cost of the track and its installations." The railway industry hence slowly gathered steam as it went uphill, it's peaking in 1847, when, " The great railway construction peak was in 1847 when more than a quarter of a million men were employed in constructing 6455 miles of railways."

This large amount of capital usually came from local businessmen who held a special interest in the success of the line. Success of regional lines encouraged investors to invest in a broader spectrum of areas, which, although led to lots of capital available, also led to large amounts of speculation which could be perceived as a waste of capital. This idea led into the second major railway boom of 1845 when large amounts of speculation arose due, in large part, to the success and then seemingly optimistic future of the railway. Consequently, the amount of speculation in the British economy rose steeply, while gradually capital outflow also increased, " By 1870 it is estimated that nearly 700 million pounds had been invested abroad, more than two thirds of it in the two decades since 1850."  

A question that arises from these startling figures, however, about the state of working conditions and the rising divide between the haves and the have-nots. The rise of capital did not only equate to increases in factory which in turn led to increases in profit. It led to more unsanitary factories and unsatisfactory wages.  

The government began to include several provisions which addressed the conditions of the economy and the industrializing nation. For example, it passed the Rose Act of 1793 which prompted a rise in the development of friendly clubs. "By 1801, according to Eden 's estimates, there were over 7000 friendly clubs in England with a membership of 600,000." The government also consolidated and amended the Saving Banks Act in 1792 which led to the establishment of the first real savings bank, called the Charitable Bank, in 1804. This led to a slow growth of banks in England , a number which rose to approximately 70 in 1817. Through the next few decades, more banks were established as the railway and other booms occurred in the explosive English economy. " By 1830 there were roughly 378,000 depositors in England and Wales with deposits of over 12.5 million pounds, an average of 33 pounds per head. By 1845 the number of depositors (again in England and Wales ) and the volume of their deposits had more than doubled."  

Although the presence of available capital and investment is obvious in the industrializing English economy, the investors remain, for the most part, unknown. The proletariat or working class was obviously not rich enough to invest. Another unlikely possibility is foreign investment. Although the industrializing nation, at first, did borrow capital from the Dutch in eighteenth century England, the French Wars lost Amsterdam its global dominance, and it was replaced by London, as England quickly stepped up to be a leading and lending nation. The government, too, was slightly unattached – remaining an unlikely source of capital. "If anything government was concerned to disentangle from, rather than to embroil itself in, the economic system." An evident example of this was the usage of turnpikes in the development and expansion of roads instead of government-funded roads. Most railways, canals, and gas and water-supply companies were operated by private enterprise. The government actually deterred attention and interest from investment. "The Usury Laws made 5 per cent the legal upper limit to rate of interest chargeable on commercial loans, but government could, and at times did, raise loans on terms that were more attractive to lenders than this."  

Many industrializing nations also face chronic inflation and use it to their benefit. In these conditions, profits rise faster than prices which grow faster than wages. Due to this, industrialists produce more since they expect prices and profits to keep going up. This, although, benefited the corporations, did harm the normal public since the price of production didn't rise as much or as fast as the prices of goods. " In other words inflation, it is argued, provides both the means and the incentive for a higher rate of capital formation in industry." Britain however, did not entirely face this. The prices, surprisingly, rose for the agrarian economy while fell in the cotton and iron industries at some points. " The profits which British industrialists ploughed back into their businesses came out of the margin between their falling costs and their less-rapidly falling prices." There were pockets of wealthy people within industrializing Britain who often were financial backers  (although they were largely outnumbered by the poorer working class).  

Most inventors, however, were not wealthy; some could not even afford to register for patents and lost massive amounts in potential profits to competitors. For these inventors funding came mostly from those closest to them – friends and family. Initial investments from people of personal acquaintance often grew with the company's profits. " The success of a business depended, to a high degree then, on its master – upon his powers of managing and arranging his factors of production and his capacity to attract demand and make his own market. Hence only those who knew the borrower and his market would loan them capital." (Sidney J. Chapman, The Lancashire Cotton Industry (1904), p. 113. Many famous inventors began this way.

"Robert Owen, for example, began by borrowing 100 pounds from his brother and going into partnership with a mechanic who made looms. James watt borrowed into a small way from his friend Dr. Black and then went into partnership with Boulton, who had inherited the substance of family business. Arkwright began by borrowing from a publican friend and later went into partnership with Strutt, who was already an established hosiery manufacturer."  

Source (of information and all included quotations): 

Deane, Phyllis. The First Industrial Revolution . New York : Cambridge University Press, 1965.