The Industrial Revolutionby Capital Prior to industrialization in England, land was the primary source of wealth. The landed aristocracy held enormous powers the feudal system. However, a new source of great wealth grew from the Industrial Revolution, that which was derived from the ownership of factories and machinery. Those who invested in factories and machinery cannot be identified as belonging to any single class of people (landed aristocracy, industrialists, merchants). Their backgrounds were quite diverse, yet they had one thing in common: the daring to seize the opportunity to invest in new ventures. It was these capitalists who gave the necessary impetus to the speedy growth of the Industrial Revolution. In
the early years of this period we find most investments being made in a
field closely related to one’s original source of capital.
Manufacturers took a substantial portion of their profits to “plough
back” into their business, or they invested capital in ventures that
were related to their primary business. Eventually, as opportunities to
realize great profits proliferated, it was not uncommon to find these
entrepreneurs investing substantially in concerns about which they knew
very little. Two
kinds of capital were needed by these industrialists; long-term capital
to expand present operations, and short-term capital to purchase raw
materials, maintain inventories and to pay wages to their employees.
The long-term capital needs were met by mortgaging factory buildings
and machinery. It was the need for short-term capital which presented
some problems. The need for short-term capital for raw materials and
maintaining stock was accommodated by extending credit to the
manufacturers by the producers or dealers. Often, a supplier of raw
materials waited from 6 to 12 months for payment of his goods, after
the manufacturer was paid for the finished product. The
payment of wages was not an easily solved problem, one which taxed the
creativity of employers. The problem was in finding a sufficient amount
of small value legal tender to pay the wages. Some employers staggered
the days on which they paid their employees, while others paid them in
script. Some paid a portion of their work force early in the day,
allowing them to shop for household needs. When the money had
circulated through the shopkeepers back to the employer, another
portion of the work force was paid. All of these methods proved to be
unacceptable. The
root of the problem was the lack.of
an adequate banking system in these remote industrial centers. The Bank
of England, established in the late 1690s, did not accommodate the
needs of the manufacturers. It concentrated its interest on the
financial affairs of state and those of the trading companies and
merchants of London. The
early 1700s brought with it the first country banks. These private
banks were founded by those who were involved in a variety of endeavors
(goldsmith, merchant, manufacturer).
Many industrialists favored establishing their own banks as an outlet
for the capital accumulated by their business and as a means for
obtaining cash for wages. When the Bank of England tightened credit
because of government demands, many of these banks failed. A great
number of them had a large proportion of their assets tied up in
long-term mortgages, thus leaving them vulnerable when demands for cash
were presented by their depositors. From 1772 to 1825, a large number
of these banks failed. Their limited resources were inadequate to meet
the demands of the factory economy. A banking system was eventually set
up to distribute capital to areas where it was needed, drawing it from
areas where there was a surplus. |