I. Introduction
Two issues have dominated the historiography of the Lancashire textile industry in recent decades. These are whether entrepreneurs were rational or not in the light of the constraints they faced and, related to that issue, the causes of the industry's decline.1 It is not the purpose of this article to review the intricacies of these debates. However, it does seek to comment upon them in the light of new evidence from recent research into the ownership of the industry and its financial performance.2 Broadly, the argument that arises from these studies is that ownership and governance structures placed financial constraints on decision-makers. Also, the governance structure of the Lancashire cotton textile industry that developed during the nineteenth century had far-reaching consequences for its performance in the twentieth century.
This interpretation has some similarity with others that have contributed to the current state of the debates. For example, it acknowledges the importance of major variations in demand and that in other respects the cotton industry of Lancashire evolved in a path-dependent, incremental, fashion. However, there are several important differences. First, it is not the case that the type of firm structure which evolved in the nineteenth century was inimical to progress and competitiveness in the twentieth century.3 Indeed, an earlier paper demonstrated that the choice of structure was rational in the light of the profitability of alternatives.4 Second, the pattern of firm structure did not restrict the range of profitable or feasible technological options available to firms in the twentieth century.5 Third, although Lazonick was correct to identify the managerial/entrepreneurial split as being at the crux of debate,6 he did not directly examine the changing impact of governance structures on the evolution of the industry and its consequences for capital structure and business strategy.7 However, as will be demonstrated in this analysis, governance structures and their associated financial constraints, were the crucial legacies of the nineteenth century.
Collapse in demand in export markets after 1920 and the emergence of excess capacity are well-acknowledged aspects of the problems facing the industry. In addition, as shown below, the new owners of the industry placed demands on cash flow in the form of repayments of loan finance, and other capital, dividend and interest payments. After 1945, these problems were compounded by unhelpful taxation rules. When problems in export markets and over-capacity are combined with these governance-imposed constraints, the interpretation presented here provides new insight into the inability of entrepreneurs to formulate responses to external threats and industry decline. This interpretation is also a variant of the ‘early start’ thesis that has been used to explain poor competitiveness for the British economy as a whole.8 Unlike the standard ‘early start’ thesis, the explanation here is based on the use of capacity created in the nineteenth century and its associated system of finance. These then formed a basis for a series of re-orderings in financial claims as the industry staggered from one crisis to another in the twentieth.9 Previous studies have recognised the extent of this financial crisis and as a result have concentrated on its most prominent aspect, the intervention of the Bank of England and the formation of the Lancashire Cotton Corporation (hereafter, LCC) during the period 1929–31.10 The empirical aspect of the present study, which focuses on financing and dividend policies of typical firms (Tables 1, 2 and 3) concentrates on other major firms whose strategies have been neglected to a certain extent, especially in the interwar period. These firms were also selected for comparability through time and whose records were consistently available from comparable sources during the major sub-periods of the study.11
The remainder of the paper is organised as follows. Section two examines the changes in governance structures and ownership that emerged in the industry during the pre-1914 period and analyses how this led to an over-commitment of financial and physical resources in the industry. Section three evaluates the impact of pre-war governance structures on the ability of entrepreneurs to formulate recovery strategies after the onset of crisis in the 1920s and 1930s. Particular attention is paid to explaining how financial constraints limited the opportunities for increasingly urgent re-equipment. Section four re-examines this relationship in the period from the end of the Second World War to the 1960s, and shows that entrepreneurs remained subject to a similar set of financially induced constraints. Section five reassesses the current state of the debates on Lancashire textiles in light of the preceding discussion.
II. Capital Markets and Governance Before 1914
The boom-slump cycle and continued underlying growth of the industry before 1914 led to important and decisive changes in corporate governance. There were several important aspects to this. First, capital market inefficiency followed directly from the vicissitudes of the trade cycle. Second, market imperfections enabled promotional speculators to engage in systematic wealth transfers. Third, as a consequence of the first two aspects, capital was misallocated in promotional booms and as a result there was always latent excess capacity. Finally, the new owners of the industry shunned corporate saving and instead accumulated wealth privately. Each of these aspects is discussed in more detail below. The discussion relies on evidence from previous studies and also evidence on the financial policies of typical Lancashire companies. Table 1 summarises the dividend and borrowing policies for a sample of these firms.
Table 1 Financial Policies of Lancashire Firms, 1884–1914 Company | Period | Debt/Equity Ratioa Average for period | DPRb Average for period |
Ashton Brothers | 1899–1913 | 0.86 | 0.72 |
Barlow & Jones | 1900–1913 | 1.77 | 0.73 |
Elkanah Armitage | 1891–1913 | 0.13 | 0.70 |
FCSDAc | 1899–1913 | 1.66 | 0.58 |
Horrocksesd | 1887–1914 | 0.85 | 0.57 |
Rylands | 1884–1913 | 0.21 | 0.87 |
Tootal | 1888–1914 | 1.48 | 0.49 |
Sample average | | 0.99 | 0.67 |
| Notes Debt is defined as all borrowing falling due in 12 months. Equity is defined as called up share capital plus reserves. Sources: Ashton Bros, Barlow and Jones, Elkanah Armitage, Fine Cotton Spinners & Doublers, Rylands, London Guildhall Library, Commercial Reports, Half Yearly Balance Sheets, 1899–1913. Horrockses, Coats Viyella Records (held by the company), Detailed Accounts, Half Yearly Balance Sheets and Profit and Loss Accounts, November 1887 – October 1905 and Lancashire County Record Office, DDHs/53, Balance Sheets, Half Yearly Balance Sheets and Profit and Loss Accounts, October 1905 – April 1914. Tootal, Manchester Central Reference Library, M. 461, Board Minutes, Yearly Balance Sheets and Profit and Loss Accounts, July 1888 –July 1914. |
For many modern economists, financial markets can only become more efficient as information flows faster and entry barriers break down.12 Whether or not Britain had established efficient capital markets before 1914 has been the source of some debate although research into this question is underdeveloped empirically.13 As far as the capital markets of Lancashire were concerned some clear evidence has recently emerged. This evidence suggests that market efficiency declined during the period.14 Centred on Oldham, the Lancashire stock market began in the early 1870s on the back of a flotation boom of dozens of companies underpinned by the mass participation of the local factory-based population.15 In the first half of the 1890s, the system met with a crisis. Depressed demand was a function of the loss of the Indian and other Eastern markets, which followed from the depreciation of silver relative to gold on the world market.16 Capital market efficiency declined following this slump. A survey of annual returns has shown that whilst the typical company of the 1880s had hundreds of transactions in its shares, by the early 1890s the number of transa...
