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The Rise of American Industry

In the US, as in Britain, the first factory-based industry was cotton textiles, based on water power and located mainly in New England. The use of steam power increased after the Pennsylvania coal fields were opened up in the 1830s, but it was not until the construction of the railway and telegraph networks in the 1840s and 1850s that America’s two great advantages as a manufacturing country, the wealth of its raw materials and its huge home market, could be exploited on a larger scale. The railway boom gave a boost to the growth of the iron industry, and encouraged the exploitation of more distant natural resources, notably the Mesabi iron ore mines of Minnesota. The US was richly endowed with other minerals, including oil; the first oil strike was made at Titusville, Pennsylvania, in 1859.

To make full use of these assets the US needed a combination of rising demand, entrepreneurial skill, and supportive policies and institutions.¹² The population, swollen by immigration, rose much more rapidly than Britain’s between 1870 and 1913 (TABLE 2.1). But the difference with Britain was not just a matter of size. Incomes in the US were more equal and consumer tastes more similar. These conditions favoured the manufacture of standardised goods for a mass market, and entrepreneurs had an incentive to design machinery which would permit low-cost, high-volume production. A well-known example was the Bonsack cigarette-making machine, introduced in 1884, which could turn out 125,000 cigarettes a day; the best that a skilled worker could do was 3,000 cigarettes a day.¹³ Manufacturers of branded consumer goods like tobacco and soap were among the first to build sales networks throughout the US. Some of the metal-working industries adopted what became known as the American system of manufactures, a way of making standard machinery from interchangeable components. Pioneered in government armouries for the production of small arms, it was taken up by manufacturers of sewing machines, typewriters and other products for which there was a large, homogeneous demand. The greatest triumph of the American system, achieved by Henry Ford shortly before the First World War, was the mass-produced automobile.¹⁴

TABLE 2.1 Population growth 1870–1913

(in millions)

	1870	1913
US	39.9	97.2
Britain	31.4	45.6
Germany	39.2	67.0
France	38.4	39.8

Source: Angus Maddison, Dynamic forces in Capitalist Development, Oxford, 1991, pp. 228–31.

Another distinctive feature of industrialisation in the US was the scarcity of skilled labour. The British apprenticeship system was transplanted to North America in colonial times, but it never established deep roots.¹⁵ The US was a dynamic, settler society in which labour was more mobile than in Britain. Opportunities for self-employment were greater, and the restrictions on personal freedom which apprenticeship entailed were less acceptable. Hence employers had difficulty in retaining the apprentices they had trained. Attempts to impose sanctions on runaway apprentices were unsuccessful and, except in a few trades such as printing, the system had virtually died out by the end of the nineteenth century. Since American manufacturers did not have access to the pool of skilled workers which was available in Britain, they looked for manufacturing methods which economised on the use of craft skills.

In the early stages of industrialisation American employers used the British internal contracting system, but as the volume of production rose and expensive investments were made in high-output machinery, these informal arrangements were no longer adequate. Tighter discipline and closer supervision were needed. In the 1890s Frederick W. Taylor, a production engineer at a leading steel company, worked out new ways of organising and motivating shop floor employees in order to ensure that machinery was used productively. Taylor’s approach, which was set out in his Principles of Scientific Management, published in 1911, was to establish scientifically how much time and effort a particular task required, and to reward workers who consistently achieved those standards. The ‘Taylorist’ style of management, giving workers less control over the pace and organisation of work, was resisted by the American trade unions, which, like their British counterparts, were organised on craft lines. But American employers were not prepared to compromise on the principle of managerial control. ‘British employers generally chose to accommodate the craft workers; US employers, to confront them.’¹⁶

The increasing scale of manufacturing operations brought with it the need for well-trained, technically competent managers. The Morrill Land Grant Act of 1862, providing federal support for the creation of new universities, led to an expansion of engineering education. One of the new institutions was the Massachusetts Institute of Technology, which formed close links with the electrical engineering industry. The first business school – the Wharton School of Finance and Commerce at the University of Pennsylvania – was opened in 1881. The expansion of commercial education put pressure on the older, classical universities to make their teaching more relevant to the needs of industry.¹⁷ Harvard’s Graduate School of Business Administration, modelled on the Harvard Law School, was founded in 1908.

The professionalisation of management was accelerated by the wave of mergers which took place around the turn of the century. Entrepreneurs in industries making high-volume, standardised goods invested heavily in machinery and equipment, and profitability depended on keeping this expensive plant fully employed, and on avoiding destructive price wars. When cartels were prohibited by the Sherman Antitrust Act of 1890, mergers were seen as a more secure means of keeping competition under control. Several industries acquired an oligopolistic structure, which was to persist with little fundamental change until after the Second World War. An extreme case was United States Steel Corporation, which at the time of its creation in 1901 accounted for 65 per cent of America’s steel-making capacity. Most of the big mergers which took place around the turn of the century involved the transfer of ownership from the original founders or their descendants to outside investors, and the appointment of salaried executives to senior posts.

Industrialisation in the US was characterised by scale, organisation and raw-material intensity. The US did not have any great reputation at this stage for scientific originality. As in Britain, American technology was oriented to the shop floor and built on practical experience.¹⁸ American entrepreneurs were good at taking inventions made elsewhere, like the internal combustion engine, and adapting them to local conditions. Even in electrical engineering, which was an outstanding American success, Thomas Edison was a brilliant experimenter, not a trained scientist, although he recognised the need for scientifically trained colleagues to translate his ideas into practice. The growth of the US electrical industry rested on organisational skills – the construction of an integrated system for generating, transmitting and distributing electricity – and on the recognition that, once the system was in place, a mass market was waiting to be tapped.

The Rise of German Industry

At the start of the nineteenth century the German states lagged behind France and Britain in economic development, but the pace quickened in the 1840s. A powerful boost came from railway construction, and heavy industry played a more central role in German industrialisation than it did in Britain. One of Europe’s largest concentrations of coking coal was in the Ruhr valley in Westphalia, and within the space of thirty years this previously agricultural region was transformed into the powerhouse of German industry. Alfred Krupp built his first iron-works in Essen in 1836; by 1873 this firm’s labour force had increased to 16,000.¹⁹ The engineering industry also benefited from the railway boom. In the 1840s most of Germany’s locomotives were imported from Britain, but Borsig in Berlin and other German manufacturers gradually reduced their dependence on British technology and developed their own designs. By the 1860s import substitution was complete and Borsig was competing with British manufacturers in export markets.

The rapid growth of the iron and steel industry paralleled what had happened in the US, but in other respects Germany followed a different path. The division of the country into separate states meant that a unified market was slow to emerge. Even after the formation of the customs union in 1834 and the unification of the country under Prussian leadership in 1871, the domestic market was more fragmented than that of the US, and there was little scope for mass production. Since Germany was also poor in natural resources, apart from coal, entrepreneurs had to find other ways of catching up. They did so through skill rather than scale. Instead of tackling their British and American competitors head-on, they looked for market niches and sought to tailor their products to the needs of specific customers. In cotton textiles, for example, while the British were supplying large quantities of yarn and cloth to India and other distant countries, German mills concentrated on higher-income European customers who were willing to pay a premium for quality and variety.²⁰ In engineering the focus was on custom-designed machinery produced in small batches.²¹

This strategy was crucially dependent on the skills of the workforce. Like Britain, Germany relied on apprenticeship as the principal means of skill formation, but, in contrast to Britain, it was supplemented by government-financed vocational schools at which apprentices received part of their training. In addition, most states established technical high schools, later upgraded to universities, for the training of engineers. The classical universities were reformed, and, although their mission was strictly non-vocational, the systematic pursuit of knowledge for its own sake contributed to the scientific advances – notably in chemistry – which underpinned the success of German entrepreneurs in the second industrial revolution.

Scientific and technical education was one of the means by which German industry made up for its late start. Another was a financial innovation, the universal bank, which had no counterpart in Britain or the US. Local financial networks were less highly developed than in Britain, and heavy industry needed large amounts of initial capital.²² From the middle of the nineteenth century, and more extensively after 1870, the gap was filled by the universal banks, which combined commercial and investment banking under the same roof. The three leading Grossbanken – Deutsche Bank, Dresdner Bank and Commerzbank – formed a continuing relationship with their industrial clients, often becoming shareholders and taking seats on their boards of directors.

The influence of the Grossbanken was largely confined to heavy industry. In states such as Baden and Württemberg, which had a long pre-industrial tradition of skilled craftsmanship, the typical manufacturing enterprise was the family-owned firm, specialising in a narrow range of products.²³ Operating in such industries as textiles and mechanical engineering, they formed networks in which firms sub-contracted to each other the responsibility for particular components or manufacturing processes. The cutlery industry in Solingen, in the lower Rhineland, was a well-known example. These firms did not need large amounts of capital, and their financial requirements were met by local savings and cooperative banks.²⁴ Despite the rise of a few large companies, such as Krupp and Siemens, industry in Germany was much less concentrated than in the US at the time of the First World War.

Another difference from the US was that German manufacturers depended to a greater extent on exports. Trade policy was a contentious issue in German politics, as it was in Britain. But whereas British manufacturers favoured free trade and the landowners protection, in Germany the opposite was the case. Manufacturers wanted to keep imports out so that they could build up their industries. The landowners were large exporters of grain and feared that the imposition of a tariff would provoke retaliation, putting their overseas business at risk. The fall in grain prices in the 1870s, together with growing competition from American grain exporters, brought a change of heart, and tariffs were introduced in 1879. This represented a shift away from British-style liberalism towards the more nationalistic economic policy advocated by such thinkers as Friedrich List. List’s National System of Political Economy, published in the 1840s, was intended as a riposte to Adam Smith, and called for a national effort to resist Britain’s industrial expansion.²⁵

The lack of enthusiasm for free markets was also reflected in a tolerant attitude on the part of the German authorities towards cartels. Price-fixing and market-sharing agreements spread widely in German industry in the closing decades of the nineteenth century. In 1897, seven years after the Sherman Act was passed in the US, the German supreme court confirmed the legality of cartels.²⁶

The abandonment of free trade was the product of a pragmatic alliance between two previously hostile interest groups, the landowners and the industrialists. Their common enemy was an increasingly assertive working class. Trade unions began to organise themselves in the 1870s and the political arm of the labour movement, the Social Democratic Party, won nearly 500,000 votes in the Reichstag elections of 1877. The reaction of the ruling oligarchy was repression, balanced by attempts to de-politicise the working class through social insurance and other welfare measures. In contrast to Britain, no ‘viable class society’ emerged in Germany before the First World War, and there was no scope for the compromise between unions and employers which took place in Britain between 1850 and 1870. This had important consequences for the character of the German trade union movement. Although union membership was at first largely confined to skilled workers, the driving force was not, as in Britain, the desire to protect craft jobs against incursions from semi-skilled and unskilled workers, but the need for a common front against employers and the state. The German trade union movement was more class-based than craft-based.

The constitution of the German Reich, as devised by Bismarck at the time of unification, has been described as ‘an autocratic monarchy with a few parliamentary trimmings’.²⁷ This archaic political system perpetuated social strains which were to have catastrophic consequences in the inter-war years, but it did not prevent the rapid build-up of manufacturing industry. The distinctive features of German industrialisation were the commitment to technical education and workforce skills, the close links between heavy industry and the big banks, the special importance of small, craft-based firms, and the reliance on cartels and protection.

The British Response to Competition

American and German competition affected different British industries in different ways. As far as the older industries are concerned, there was no obvious sign of entrepreneurial failure before 1914. The cotton textile industry, for example, continued to dominate the world market. Although export growth slowed down after 1870, this was due, not to a loss of competitiveness, but to the build-up of production behind tariff walls in countries which had previously imported from Britain. Similarly the shipbuilders faced no serious challenge from the US or Germany. Even in steel, where production in Britain fell behind that of Germany and the US soon after the turn of the century, this was largely for reasons outside the control of British steel-makers. Germany and the US were still in their catch-up phase, and steel consumption was rising more rapidly than in Britain. Both countries also protected their steel industries with tariffs. Thus British steel-makers were restricted from selling to the two most dynamic overseas markets, while their own home market was fully exposed to imports. In these circumstances a fall in Britain’s share of world steel production and exports was unavoidable.²⁸

The situation in the newer industries was more worrying. In electrical engineering, for example, none of the British entrepreneurs who came into the industry in the 1880s, following the invention of the incandescent lamp, built companies to match the size and technical strength of General Electric in the US, or Siemens and AEG in Germany. This has been blamed by historians on a variety of factors, including lack of support from the capital markets²⁹ and a distinctively British inability to create and manage large companies.³⁰ But a more important factor was a domestic environment which slowed down the growth of demand for electricity. In Britain, unlike the US and Germany, urbanisation was well advanced by the time electricity became available, and an extensive network of gas lighting was in place. The existence of this network was a disincentive to the rapid introduction of electricity, and it was reinforced by regulations designed to protect the interests of the gas-lighting suppliers.³¹

The other celebrated British failure was in the chemical industry, above all in dyestuffs, where German firms pioneered the new technique of synthetic organic chemistry and established a virtual world monopoly. But it was not a uniquely British failure. The American chemical industry was as far behind in this field as its British counterpart; up to the First World War the US market for synthetic dyestuffs was supplied mainly from Germany and Switzerland. There were, moreover, other branches of the industry where British entrepreneurs did well. One was soap-making, where William Lever built up what was to become one of Britain’s leading multinational companies. Another was rayon or artificial silk. The viscose process for making rayon yarn was patented by two British scientists, C. F. Cross and E. J. Bevan, in 1892, and brilliantly exploited by Courtaulds, the textile company. Courtaulds became the world’s largest rayon manufacturer, with a profitable subsidiary in the US.³²

At the level of individual industries, old and new, the British response to American and German competition between 1870 and 1914 was patchy but by no means disastrous.³³ World trade in manufactures had become a three-horse race, and the early leader could hardly have been expected to remain dominant on all fronts. Were there, nevertheless, institutional weaknesses, inherited from the first industrial revolution, which were holding industry in Britain back?

One obvious gap, especially compared with Germany, was in the field of technical education. In 1870 British universities were not well equipped to serve the new, science-based industries. Oxford and Cambridge had played no part in the industrial revolution, and had no interest in the world of industry. Nevertheless, although Britain started late in this field, it recovered well. New universities with a strongly technical bent were established in several provincial cities during the last years of the nineteenth century, and the Imperial College of Science and Technology was founded in London in 1908. There was also an expansion of part-time technical education below the university level. The British approach was more decentralised, less systematic and more market-led than in Germany, but by 1914 the gap between the two countries was narrowing. Sidney Pollard, the economic historian, has suggested that Germany’s investment in technical education and the role of the state in it ‘may not imply German superiority, simply a different tradition and a different place in the sequence of world industrialisation’.³⁴

Some historians believe that the creation of the universal bank gave German entrepreneurs a competitive advantage because it provided access to long-term capital on terms which were not available in Britain.³⁵ British commercial banks, even after the mergers that took place towards the end of the century, generally steered clear of long-term lending to industry, while the merchant banks in the City – Barings, Rothschilds and the rest – were preoccupied with raising capital for foreign borrowers. There were flaws in the financial system during this period, but financial markets were sufficiently well-developed to ensure that few creditworthy entrepreneurs were starved of finance. There is no clear evidence that the outflow of capital to support railway construction and other infrastructure projects overseas diverted funds from investment in domestic industry.³⁶ The German universal bank was a response to a particular set of circumstances – a late-developing country undergoing a very rapid process of industrialisation – that did not exist in Britain.

As for the impact of trade unions on industrial performance, labour relations in Britain went through a stormy period around the turn of the century, and again in the years immediately preceding the First World War. This was due partly to a change in the character of trade-unionism, arising from the emergence of more militant ‘general’ unions which represented semi-skilled and unskilled workers. Labour relations became more adversarial, and in industries such as engineering, where craft unions were strong, the number of disputes over working practices and demarcation increased. But the employers generally came out on the winning side in these disputes, and the labour relations system was probably not a significant brake on efficiency and technical progress in manufacturing before 1914.

The late Victorian and Edwardian entrepreneur has been criticised by some historians for his reluctance to break away from craft control – the practice of delegating to skilled workers part of the responsibility for the organisation of work. The argument is that this practice delayed the introduction of ‘Taylorist’ techniques, which called for tighter supervision of shop floor labour.³⁷ But for most British employers craft control was not a competitive disadvantage in the conditions which they faced before the First World War. In shipbuilding, for example, where craft control was solidly entrenched, productivity in Britain was higher than in the US and Germany, and there was no reason to abandon a well-tried production system which was working satisfactorily. This point is also relevant to Alfred Chandler’s strictures about personal capitalism. The main reason for the creation of giant companies in the US towards the end of the nineteenth century was the nature of the domestic market. Firms which were manufacturing on a large scale needed to take direct control over the procurement of raw materials and the distribution of finished products. In Britain, with a smaller home market and more highly developed networks of merchants and other intermediaries, there was less need for manufacturers to integrate backward into raw material purchasing or forward into marketing and distribution.³⁸ Lancashire cotton was the classic case of a successful industry which was both horizontally and vertically disintegrated, with most firms specialising in one part of the production chain.

The comparison with Germany is less clear-cut. In industries where German companies were bigger than their British counterparts, this, too, was mainly due to the character and timing of German industrialisation. The iron-masters of the Ruhr were building a new industry from scratch in an undeveloped region. They needed to do more things for themselves than was necessary in Britain, and to integrate more operations on the same site. Some German companies, of which Thyssen and Siemens are examples, did adopt organisation methods similar to those of the big American corporations.³⁹ But many of Germany’s industries, such as mechanical engineering, were as fragmented, and as dominated by family-owned concerns, as in Britain.