FROM EMPIRE TO EUROPE

The Decline and Revival of British Industry

Since the Second World War

GEOFFREY OWEN

Copyright

William Collins

An imprint of HarperCollinsPublishers Ltd.

1 London Bridge Street

London SE1 9GF

www.harpercollins.co.uk

First published in Great Britain by HarperCollinsPublishers 1999

Copyright © Geoffrey Owen 1999

Geoffrey Owen asserts the moral right to

be identified as the author of this work

A catalogue record for this book is available from the British Library

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Contents

Cover

Title Page

Copyright

1 Falling Behind and Catching up

PART I

Historical Background

2 The Consequences of Coming First

3 Britain, Germany and France after the Second World War

PART II

Industries and Firms

4 Textiles: Misdirected Modernisation

5 Shipbuilding: Imprisoned by History

6 Steel: The Thatcher Effect

7 The Globalisation of the Paper Industry

8 Engineering: From World Leader to Niche Player

9 The Motor Industry: An Avoidable Disaster

10 Electronics: A Shared European Failure

11 Aerospace: Partnership with Government

12 Chemicals: The Birth, growth and Break-up of a National Champion

13 Pharmaceuticals: A Winning Formula

PART III

Institutions and Policies

14 The Financial System

15 Training, Education and Culture

16 Trade Unions and Labour Relations

17 The Role of Government: From Consensus to Competition

18 Conclusion

Afterword

Notes

Select Bibliography

Index

Acknowledgements

About the Author

About the Publisher

ONE
Falling Behind and Catching Up

In the summer of 1995, a ceremony was held at the Aylesford paper mill in Kent, one of Britain’s largest paper-making sites, to mark the successful commissioning of a newsprint machine. In forest-rich countries such as Canada or Finland, this would have been an unremarkable event. But for Britain the Aylesford project had a special significance. It was the first new machine to be built at the mill for more than thirty years. Based on recycled paper, it produced newsprint which was competitive in cost and quality with imports. The project was financed by two non-British companies, one from Sweden and the other from South Africa. By investing £250m at Aylesford, they were contributing to the revival of an industry which twenty years earlier had seemed in the grip of irreversible decline.

What happened in paper-making during the 1980s and 1990s illustrates the central theme of this book – the delayed modernisation of British industry. For the first decade after the war British paper-makers led a comfortable existence. Domestic demand was strong, and import competition was restrained by tariffs and quotas. These easy conditions came to an abrupt end in 1959 when the Conservative government under Harold Macmillan decided to participate in the European Free Trade Association (EFTA). This was a grouping of countries outside the six-nation Common Market, and it included Sweden and Finland, both of which had large, efficient paper industries based on cheap electricity and ample supplies of wood.¹

As tariffs among the EFTA countries came down, the Nordic paper producers used their cost advantage to increase their exports to Britain. British firms strove to come to terms with a difficult trading environment. Mills and machines were closed down, and some of the leading British companies lost faith in the industry’s future. But the economics of paper-making in Britain were not as unfavourable as the pessimists supposed. For some grades of paper, being near to the market turned out to be more important than being near to the forests. In addition, Britain had a man-made ‘forest’ of its own: improvements in recycling technology created new opportunities for using waste paper instead of imported woodpulp as the feedstock for paper production. The gloom began to lift in the early 1980s, and over the next fifteen years a remarkable transformation of the industry took place, involving new investment and changes of ownership. Some of the new projects, like the Aylesford newsprint machine, were undertaken by foreign companies. But there was also a new spirit of confidence among the surviving British-owned firms, targeting sectors of the market where a UK-based producer could compete successfully against imports.

A similar chain of events took place in other industries: profitable growth in the first few years after the war, a struggle to cope with increasing international competition in the 1960s and 1970s, and, finally, integration into the world market. The form which integration took varied according to the circumstances of each industry and the amount of ground that had been lost in earlier years. The revival of the British motor industry, for example, which had almost been given up for dead at the end of the 1970s, owed a great deal to the decision by three Japanese companies – Toyota, Honda and Nissan – to choose Britain as the site of their first European assembly plants. By the end of the 1990s, after Jaguar had been bought by Ford, Rover by BMW and Rolls-Royce Motors by Volkswagen, virtually the whole of the British motor industry had passed into foreign control. While this was a blow to national pride, the willingness of these companies to invest on a large scale in British car factories was an indication of how much had changed since the dark days of the 1970s.

With or without the involvement of foreign companies, the 1980s saw a vigorous effort throughout British industry to correct past mistakes and to build defensible positions in the world market. Guest Keen and Nettlefolds (GKN) was an old-established company which had diversified in the inter-war years from its original base in steel-making into a wide range of steel-using businesses, and it continued to do so in the 1950s and 1960s. Most of its sales were to customers in Britain and the Commonwealth. In the second half of the 1970s, when competition increased and profits came under pressure, a new approach was necessary. As Trevor Holdsworth, chairman of the company from 1979 to 1986, put it later: ‘We were drifting uncertainly into the future without a clear strategy. A new generation of senior executives was emerging and we set about trying to make sense of our inheritance. We had to find new products, new technology and we had to spread internationally.’² The chosen path for expansion was in vehicle components, and over the next decade GKN converted itself into a leading supplier to the world motor industry, with a strong market position in Continental Europe and the US. Other companies went through similar upheavals. The common elements were specialisation and internationalisation, and a drive to raise manufacturing efficiency closer to the best world standards.

What precipitated these changes? Why did they occur in the 1980s, and not thirty years earlier?

During the 1970s a series of shocks – Britain’s entry into the Common Market, the rise of Japan and the newly industrialising countries, the slowdown in the world economy after the first oil crisis – exposed weaknesses in British industry which had been partially obscured and more easily tolerated in the earlier post-war years. By the end of the decade companies such as GKN were forced to take a more critical look at themselves, and decide which of their businesses, if any, could compete on the world stage.

These external pressures coincided with a change in the political climate within Britain. The election of a Conservative government under Margaret Thatcher in May 1979 heralded a break with the past in the management of the economy. A fierce determination to defeat inflation through strict monetary and fiscal policies was combined with a greater emphasis on competition and deregulation. Virtually all the industries which had been nationalised since 1945 – and some, like the telephone network, which had been in government hands for much longer – were transferred to the private sector. The labour relations system, which had been partly responsible for Britain’s reputation as the sick man of Europe, was drastically reformed.

A third ingredient was the phenomenon which came to be known as globalisation. During the 1980s increasing cross-border investment altered the structure of several major industries, paper and cars being two notable examples. Many of the world’s leading companies built or acquired factories in their major markets, and organised their manufacturing and distribution on an international basis. Britain benefited from this process because, thanks to Margaret Thatcher, it had become a more attractive location for investment. The Conservative government was also more relaxed than its predecessors about allowing former ‘national champions’ to be acquired by foreign companies; no objection was raised when BMW bought Rover, or when ICL, the computer manufacturer, was sold to Fujitsu of Japan.

The combined effect of international competition, domestic policy reform and foreign investment brought to an end a long period in which productivity in British manufacturing had grown more slowly than in other European countries (TABLE 1.1). After years of falling behind, Britain was catching up.

This book describes how the transition came about. It focuses on firms and the people who ran them, and on the domestic and international environment in which they were operating. The aim is to identify the reasons for Britain’s poor industrial performance, compared to other European countries, in the first thirty years after the war, and to assess the significance of the changes that occurred in the 1980s and 1990s.

TABLE 1.1 Labour productivity in manufacturing 1960–95

What firms can do in international competition is constrained by the economics of the industry they are competing in and by the conditions which they face in their home base: countries provide a better ‘global platform’ for some industries than for others.³ In some cases companies may derive a competitive advantage from the size and character of domestic demand for their products. In others the crucial factor may be ease of access to essential raw materials. But the most important influence on the international competitiveness of companies, especially in manufacturing, is the extent to which they are helped or hindered by national institutions and policies. To take one example, the US has developed since the Second World War a large and sophisticated community of venture capitalists, who have supported the growth of start-up firms in high-technology industries such as electronics and biotechnology. While access to venture capital is not the only reason for the success of American companies in these industries, it is an institutional asset which other countries do not possess.

Institutions and policies have been central to the long-running controversy about British industrial decline. Three culprits which have figured prominently in the debate – the financial system, the training and education system and the labour relations system – are given special attention in this book. The financial system is accused of failing to provide manufacturing companies with the constructive, long-term support which is available in other countries. The education system has been criticised for being too detached from the world of industry, leading to an inadequate supply of technical and managerial skills. The labour relations system is held responsible for the collapse of strike-prone industries such as shipbuilding and cars, and more generally for the slow growth of productivity in British industry as a whole between the 1950s and the 1970s. These institutional weaknesses have been aggravated, some commentators believe, by policy errors on the part of post-war governments. The management of the economy has been erratic, while micro-economic or ‘supply-side’ policies, ranging from nationalisation to the promotion of mergers, have often been ill-considered and counter-productive.

Opinions differ about the relative importance of these factors, and about the extent to which some of the alleged weaknesses – for example, the ‘short-termism’ of British financial markets – continue to put British firms at a disadvantage today. This book seeks to shed light on these issues by making comparisons across countries and across industries. It examines how British firms in a number of major industries responded to international competition after the Second World War, and compares their response with that of their counterparts in other European countries, principally Germany and France; the list of industries covered is set out in TABLE 1.2.

Some British industries did better than others, and the same was true in the two Continental countries. At the end of the 1990s British-owned firms ranked among the world leaders in chemicals and pharmaceuticals, but not in cars. German companies were outstandingly successful in mechanical engineering, but not in computers or television sets. French manufacturers out-performed their British counterparts in cars, but not in machine tools. The purpose of the industry case studies contained in later chapters is to explore the reasons for these national strengths and weaknesses, and thus to illuminate the larger question of how institutions and policies have affected industrial performance.

In studying the interaction between firms, industries and nations, history matters at all three levels. Although the book is primarily concerned with events after 1945, each of the case studies begins by examining the earlier history of the firms and industries concerned. Did British industry enter the post-war period with managerial and technical weaknesses inherited from the past, or was its poor performance after 1945 due to the things that were done or not done in the post-war period itself?

This is a book about British manufacturing, not about the British economy. The focus on manufacturing is not meant to imply that making things is a more important activity than providing services. The proportion of the workforce employed in manufacturing has been declining for many years in Britain, as it has in other industrial countries, and the trend is certain to continue. A nation’s economic strength cannot be considered in terms of manufacturing alone, and some might argue that, by excluding non-manufacturing sectors such as the media and financial services, this book is underplaying the things which British firms are good at. Nevertheless, the post-war history of British manufacturing is a large and complex subject in its own right, and the focus on this part of the economy seems justified in view of the many unresolved controversies which surround it.

TABLE 1.2 The case study industries in 1988

PART I

TWO
The Consequences of Coming First

There is a widely held view that British industrial decline began in the closing decades of the nineteenth century and has continued remorselessly ever since. According to this account, British entrepreneurs, having led the world in the first industrial revolution, failed to adapt to competition from the two late-industrialising countries, Germany and the US. British industry was locked into a set of institutions and management practices which had become obsolete. The financial system was not well organised to supply risk capital for the new industries of the second industrial revolution; the education system did not produce enough scientists and engineers; and the labour relations system slowed down the introduction of new manufacturing methods.

It is certainly true that Britain was caught up by the US and Germany between 1870 and 1914. It is also true that the institutions and capabilities which the two late-comers developed were different from those on which the British industrial revolution had been based. One well-known example is the emergence in Germany of the big universal banks, led by Deutsche Bank, which made long-term loans to their industrial clients and organised stock market flotations for them, while British banks concentrated almost entirely on short-term lending. Another is the creation in the US towards the end of the nineteenth century of large, professionally managed corporations, while British businessmen still clung to what Alfred Chandler, the American business historian, has called personal capitalism – a structure of small, family-controlled firms, lacking the economies of scale enjoyed by their US counterparts.¹

A much-debated issue is whether Britain’s inability to match these and other innovations constitutes an entrepreneurial failure, and, if so, whether the failure was sufficiently serious and long-lasting to be relevant to what happened after 1945. Was it a disadvantage to have come first?

The Growth of British Industry from 1750 to 1870

Britain’s industrial revolution, which began in the second half of the eighteenth century, was driven by technological change in three sectors. The pace-setter was cotton textiles. The substitution of machines for human effort in the spinning and weaving of cotton generated a huge domestic and international demand for a fabric which had previously been too expensive to capture a mass market. Second, new iron-making techniques – the replacement of charcoal by coke in the smelting of iron ore and the ‘puddling’ process for refining pig iron – increased the supply and lowered the price of wrought iron, which became the building block of the industrial revolution.² The third breakthrough was the steam engine, first used for pumping water out of coal-mines and later replacing water power in driving machinery of all kinds.

Why did this burst of technological progress occur in Britain and not elsewhere? France was arguably a richer economy at the start of the eighteenth century and more advanced in science. But Britain had several advantages which, taken together, made the industrial revolution possible.³ One was an ample supply of cheap and accessible coal. Another was an endowment of mechanical skills which had been built up in old-established trades such as clock-making and the manufacture of ship’s instruments. The great inventors and engineers of the industrial revolution were predominantly craftsmen, trained in the workshop, and their skills were practical rather than theoretical. Some of them worked closely with scientists, and their lack of formal education did not preclude ‘a rational faith in the orderliness and predictability of natural phenomena, even if the actual laws underlying physics and chemistry were not fully understood.’⁴ To describe them as tinkerers hardly does justice to their achievements, but they relied on experience and intuition, not on scientific knowledge.

The initial stimulus for exploiting these innovations came from domestic demand. Although society was organised hierarchically with the aristocrats at the top and the labouring poor at the bottom, differences in spending patterns were less extreme than in other parts of Europe. Britain was also a more unified economy than its European neighbours, with an efficient transport system, so that regions could specialise in particular industries, as Lancashire did in cotton textiles, and serve a national market.

The provision of education for the mass of the population was poor, but the technologies which were being introduced did not depend on a highly educated labour force. Most of the necessary skills could be learned on the job. Where craftsmanship was called for, as in the metal-working industries, apprenticeship was the principal means of acquiring and transmitting skills. This system, adapted from the medieval guilds, suited employers because it was a cheap and efficient form of training which could be administered largely by the craftsmen themselves. It suited the craftsmen because it preserved their status as a highly paid group set apart from the growing mass of semi-skilled and unskilled workers. A distinctive feature of factory organisation in the first phase of the industrial revolution was the use of skilled workers as ‘internal contractors’, responsible for organising the work of less skilled employees.⁵

The political and economic environment was highly conducive to entrepreneurship and the pursuit of wealth. Since the Glorious Revolution of 1688 Britain had been a peaceful, orderly society. The old conflicts between King and Parliament been resolved without the upheaval which engulfed France at the end of the eighteenth century. The King could not borrow or tax without the consent of the country’s wealth-holders, and, unlike France, Britain developed financial institutions which provided a secure basis for private commercial activity.⁶ The ruling élite was a landowning aristocracy which, far from resisting industrialisation, saw it as an opportunity for making themselves richer. Although the landowners were rarely entrepreneurs in their own right, they supported new businesses with patronage and money, and were eager to exploit the coal and iron ore that lay under their estates. Success in business was seen as a way in which ‘middling’ people from non-aristocratic backgrounds could lift themselves into a higher social category. A business career was particularly attractive for religious dissenters who were barred from politics and public service. But while this group supplied a large number of well-known industrialists, there was no special merit in being an outsider. Entrepreneurial talent came from a variety of sources, including foreign immigrants as well as the younger sons of the aristocracy.

Industrialisation took place without direction or control from the state. The role of the government was to ensure that no obstacles were put in its way. The authorities maintained public order, guaranteed the security of property, and upheld a legal system which was helpful to entrepreneurs. Laissez-faire was the guiding principle in most areas of public policy well before Adam Smith published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The major exception was in overseas trade, where Britain, like other European countries, had been committed since the seventeenth century to mercantilism. Under this doctrine domestic industry was protected by tariffs; trade with the colonies was reserved for British manufacturers and merchants; and the colonies produced only those commodities which the mother country wanted. These arrangements, providing secure markets for British-made goods, were helpful for British manufacturers in the seventeenth and early eighteenth centuries,⁷ but overseas trade was not the principal driver of the industrial revolution. It was not until the early decades of the nineteenth century that Britain’s leading industries came to depend on exports to maintain their rate of growth.

By this time there was a range of commodities – textiles, coal, iron, machinery – of which Britain was the world’s largest and lowest-cost producer. In these circumstances mercantilist policies were not only unnecessary, but positively harmful to the continuing prosperity of exporters. They needed access to a wider range of markets than the colonies could provide, but this was only possible if the importing countries were free to export their food and raw materials to Britain. As long as British agriculture was protected against import competition, exports of British manufactures were held back. This conflict of interests formed part of the battle between manufacturers and landowners over free trade, culminating in the repeal of the Corn Laws in 1846.

The free trade controversy marked the emergence of the urban middle class as a powerful force which had to be integrated into the political system. Henceforth the aristocrats, if they were to hold on to the reins of power, had to govern with the consent of the industrial bourgeoisie. Protection was abandoned because the ruling class accepted, or at least acquiesced in, ‘the middle-class view that one species of wealth, namely passive property in land, had no right to abuse its political power to exact a toll from another, namely active capital in industry and commerce’.⁸ Of the two main political parties, the Liberals were the vehicle through which manufacturers and merchants pursued their campaigns for free trade and parliamentary reform. But, once the argument over the Corn Laws issue had been settled, it was not long before the Conservatives, under Disraeli, came to terms with free trade.⁹ The principles on which the economy should be run were broadly accepted by both parties.

A more serious threat to political stability came from the working class. As the shift of labour to the factory gathered pace, there was sporadic resistance from handloom weavers and other workers whose skills were being made obsolete. After the end of the Napoleonic wars working-class resentment over working conditions and the lack of political representation took a more violent form. The Chartists, whose influence was at its peak in the 1830s and 1840s, contained a faction which believed in physical force as a means of changing society. But Britain never came close to revolution. Timely concessions to labour interests (including legislation to improve working conditions in factories), together with the prosperity of the mid-Victorian age, helped to bring about what Harold Perkin has called a ‘viable class society’.¹⁰ The radicalism of the Chartists gave way to ‘New Model’ trade unions, formed by craftsmen and other skilled workers who constituted the so-called aristocracy of labour. In the industries where these unions gained a firm hold, such as textiles, iron-making and engineering, most employers came to accept that well-organised trade unions could contribute to the stability of the workplace. While disputes over wages and working conditions continued, union leaders and employers shared many of the same assumptions, including a belief in free trade. Both of them saw the Liberals as their natural allies.

Thus, despite the social strains resulting from industrialisation, there was no political upheaval which might have halted the growth of British industry. Overseas, the long period of peace which followed the Battle of Waterloo allowed British manufacturers to consolidate their position in international trade. A rising proportion of British exports during this period went to the primary producing countries which supplied the food and raw materials that Britain needed. These links were strengthened by the financial, commercial and shipping services which Britain, through the merchants and traders of the City of London, was well equipped to provide. Britain was the world’s banker and clearing house as well as its workshop, and supplied most of the capital with which the primary producing countries built up their mines, their ports and their railways. Earnings from overseas investments and commercial services were essential to Britain’s prosperity, since they offset a growing deficit in goods.

As a free-trading country Britain was the natural outlet for exports from other European countries, and to a lesser extent the US, as they built up their industries. For Richard Cobden, chief architect of the repeal of the Corn Laws, free trade was in everyone’s interests, not just those of Britain, and he tried to persuade other governments that the abolition of tariffs would create the conditions for an era of peace and prosperity in Europe.¹¹ But protectionist pressures, aggravated by the economic depression which began to affect most parts of Europe in the 1870s, proved too strong. Germany’s decision to raise its tariffs in 1879 was part of a general retreat into protectionism throughout Western Europe, which continued up to and beyond the First World War.

In the 1870s Britain was still by far the largest exporter of industrial goods, accounting for about 40 per cent of world trade in manufactures, but competition was beginning to cause concern. The old rival, France, with its limited natural resources, slow-growing population, and predominantly agricultural economy, had slipped back, but a serious threat to British supremacy was coming from Germany and the US. A second industrial revolution was under way, and in some of the new fields – electricity, the internal combustion engine, organic chemistry – the newcomers, not Britain, were taking the lead.

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.

Britain, Germany and the US in the Inter-war Years

One of the consequences of the First World War was to consolidate the position of the US as the world’s leading industrial power. American manufacturers were well placed to profit from the booming domestic demand of the 1920s and to exploit internationally the managerial advances which they had made before the war. Their most spectacular success was in the mass-production industries; US manufacturers accounted for three-quarters of the world’s car exports in the inter-war years. But there was also a push forward in science-based industries as large American firms began to adopt the German approach to company-financed research. The discovery of nylon by Du Pont in 1930 was the direct result of this company’s decision to build up a team of first-class scientists and engineers and give them the same facilities which they would have enjoyed in an academic environment.⁴⁰ American Telephone and Telegraph created in Bell Laboratories what was to become America’s foremost industrial research institution.⁴¹

The broadening of American industrial capabilities was reinforced by new managerial techniques. Alfred Sloan at General Motors, which overtook Ford as America’s largest car manufacturer during the 1920s, showed how economies of scale in large, multi-product companies could be combined with efficient central coordination. The General Motors multi-divisional structure, which separated the day-to-day management of the car businesses – Chevrolet, Pontiac, Cadillac and so on – from the supervisory role of the head office, was widely imitated in the US and later in Europe. Sloan was an example of the kind of professional manager who filled many of the top executive posts in American industry. The separation of ownership and control, which had been a distinctive feature of American capitalism before the war, was taken further as companies increased in size through mergers and acquisitions.

The rise of American industry provoked a mixture of admiration and fear in Europe. Businessmen made pilgrimages to Detroit and tried to learn how the Americans were able to combine high productivity, high wages and high standards of living.⁴² Of the leading European countries, Germany was the most influenced by American ideas, but its ability to maintain its pre-war momentum of growth, let alone catch up with the US, was constrained by the legacy of the war. The establishment of the Weimar Republic in 1919, and the integration of the working class into the political and economic system, left unresolved many of the political tensions which had existed under the Kaiser. Employers, especially the coal and steel magnates of the Ruhr, resented the new-found power of organised labour, and sought to roll back the concessions they had been forced to make at the end of the war.

The economy was damaged by the onerous terms of the Versailles peace settlement, compounded by the sluggish growth of world trade. Between 1919 and 1924 industrial production was running at between a half and three-quarters of the 1913 level.⁴³ The situation improved in the second half of the 1920s after inflation had been brought under control and capital began to flow in from the US. But most of these funds were withdrawn when the world depression began to bite. With the banking system in crisis and the political parties unable to reconcile their differences, Germany was plunged into a period of political turbulence which culminated in the appointment of Hitler as Chancellor in 1933. Within the confines of a command economy a partial recovery took place in the second half of the decade, but economic efficiency took second place to the two overriding national objectives: military supremacy and industrial autarky.

The response of German industry to these events was defensive. The first priority after the war was to rebuild the industrial base. In heavy industries rationalisation through merger was seen as a means of cutting costs and reducing competition. Thyssen was the prime mover in the formation, in 1926, of a giant steel-making group, Vereinigte Stahlwerke (Vestag), which accounted for about half the industry’s output. This merger, partly financed by US capital, facilitated plant closures and led to some improvement in productivity, but Vestag was an unwieldy creature and difficult to manage effectively.⁴⁴ In the chemical industry a process of consolidation, which had started before the war, led in 1925 to the creation of IG Farben, embracing all the leading dyestuffs companies. But rationalisation did little to improve the efficiency of German industry; one historian has described it as ‘simply a vogue-word used to describe the mistaken investments made in the 1920s’.⁴⁵ It was accompanied by a further proliferation of cartels, some of which, as in steel, were extended internationally.

The stagnation of the inter-war years did not erase what had been achieved in Germany before 1914. Investment in skills through technical schools and universities was maintained, and the apprenticeship system was strengthened by the Nazis, albeit for political rather than economic reasons; factory-based training, part of a programme for building ‘works communities’, was a way of detaching workers from their loyalty to trade unions. While German engineering firms lost ground to the Americans in mass-produced lines – the Solingen cutlery-makers, for example, had nothing with which to counter the Gillette safety razor – they continued to be highly competitive in skill-intensive capital goods such as machine tools. IG Farben was the undisputed leader in the world chemical industry, spending more on research than its American and British competitors. But German manufacturers tended to continue along lines which had been set before the war, rather than develop new activities. There was a particular weakness, partly due to the instability of the economy, in consumer products.⁴⁶ The electrical industry was slow to invest in the large-scale production of domestic appliances, and the motor industry, most of which was still attached to craft production methods, performed poorly until the second half of the 1930s.

For Britain the inter-war period was not as politically traumatic as in Germany, and the social strains arising from high unemployment were handled more successfully. But the war and its aftermath undermined many of the assumptions which had guided governments and entrepreneurs since the middle of the nineteenth century. The 1920s saw the collapse of the liberal world economic order on which British hegemony had been based. The attempt to restore the old order was responsible for what is often seen as a serious error – the return to the gold standard in 1925 at sterling’s pre-war exchange rate. Although this decision could be defended as a contribution to the revival of international trade, it weakened the competitiveness of British exporters at a time when overseas markets were contracting. Yet, whatever the merits of the return to gold, the British government on its own could have done little to halt the spread of protectionism. The one country which might have done so, the US, maintained its high tariff policy; the Hawley–Smoot Tariff of 1930 has been widely blamed for exacerbating the world depression. Britain’s own attachment to free trade finally gave way with the abandonment of the gold standard in 1931 and the introduction of a general tariff in the following year.

The collapse of world trade had a disastrous effect on Britain’s staple industries which had traditionally exported a large proportion of their production. After the brief post-war boom had faded, the cotton textile industry was faced with a huge surplus of capacity which persisted throughout the inter-war period. Some of its important Asian markets were invaded by Japanese textile exporters, and India was building up its own textile production. Cost reduction was the order of the day, but the one major attempt at reorganisation – the concentration of more than a hundred spinning mills in the Lancashire Cotton Corporation – did little to improve the industry’s competitiveness. The situation in shipbuilding was much the same. A surge in orders after the war, as owners replaced tonnage that had been damaged or destroyed, was followed by a prolonged slump. Some yards were closed in the 1930s as part of a capacity reduction programme co-ordinated by the Bank of England, but the adjustment was far from complete by the time of the Second World War.

The positive feature of the inter-war period was the progress made in newer industries. The four-way merger which created Imperial Chemical Industries (ICI) in 1926 was in part a defensive response to the formation of IG Farben in the previous year, but the new company was strongly committed to research. ICI’s invention of polythene in 1933 was the counterpart to Du Pont’s nylon, showing that in the new technology of polymer chemistry German firms no longer had the field to themselves. There was a partial recovery in electrical engineering and a promising start in the new field of electronics; television and radar were two innovations for which British engineers could claim most of the credit. In the motor industry British manufacturers were no match for Ford and General Motors in exports, but by European standards the two leading firms, Morris and Austin, did well, skilfully adapting Fordist techniques to the conditions of a much smaller home market.

There were improvements, too, in management and organisation. The formation of ICI was one of several large-scale mergers which took place in the inter-war period, and although not all of them were successful, these structural changes had a positive effect on managerial efficiency.⁴⁷ The merger movement, and the increasing trend for large companies to raise capital on the London Stock Exchange, created opportunities for the merchant banks in the City of London (which were facing a dearth of overseas business) to strengthen their links with domestic industry. As companies got bigger and family control was diluted, more professional managers were appointed to senior executive posts. Some of them came into industry via the accountancy profession; the accountancy firms, in their role as auditors, provided their staff with a training in management which was a partial substitute for a business school education of the American type.⁴⁸

TABLE 2.2 Manufacturing output per person employed 1899–1935

(Britain = 100)

| US/Britain | Germany/Britain
1899 | 195.4 | 94.7
1913 | 212.9 | 119.0
1925 | 234.2 | 95.2
1935 | 207.8 | 102.0

Source: S. N. Broadberry, The Productivity Race, Cambridge, 1997. p. 36.

Given the difficult international environment, British industrial performance in the inter-war years was creditable, at least in comparison with other European countries.⁴⁹ As TABLE 2.2 shows, Germany and Britain were roughly on a par in terms of manufacturing productivity at the end of the 1930s, as they had been just before the First World War, and not far apart in their share of world manufacturing production (TABLE 2.3). The failure, if there was one, was in relation to the US, where productivity was more than double the European level. The American lead was based on a large, tariff-free home market, an abundance of raw materials, and institutions and policies which encouraged entrepreneurship and innovation.

TABLE 2.3 Shares of world manufacturing output, 1913 and 1938

(per centage of total)

| 1913 | 1938
US | 32.0 | 31.4
Germany | 14.8 | 12.7
Britain | 13.6 | 10.7
Japan | 2.7 | 5.2
France | 6.1 | 4.4
Italy | 2.4 | 2.8
Others | 28.4 | 32.8

Source: Paul Bairoch, ‘International Industrialisation Levels from 1750 to 1980’, Journal of European Economic History, vol. 11, no. 2, Fall 1982.

Britain’s early start in the industrial revolution had left some lasting legacies, some of which would prove troublesome after the Second World War. One was a large commitment to older industries, such as cotton textiles and shipbuilding, which had been built up during the nineteenth century. Another was a pattern of trade originating from the days when Britain exchanged the products of the first industrial revolution – textiles, coal, iron – for food and raw materials from the primary producing countries. The bias towards non-European markets was reinforced by the protectionism of the inter-war years. The newer industries, in particular, became increasingly dependent on the dominions and colonies; in 1938 three-quarters of Britain’s electrical machinery and car exports went to imperial markets. This was to a large extent the inevitable result of high tariffs in other European countries, but it encouraged the view that overseas trade should be based on complementarity rather than competition. Trade with developing countries, inside and outside the Empire, seemed more natural than trade between industrial countries which had similar industrial structures and produced similar goods.

Britain’s distinctive industrial history had left its mark on the three institutions which were referred to in the first chapter – the financial system, the education system and the labour relations system. But in all three fields a process of evolution had taken place before and after the First World War, and none of them can be seen as a fatal disability which condemned British industry to decline after 1945. The labour relations system, for example, had stabilised after the drama of the 1926 General Strike. If attitudes on the part of unions and employers were adversarial, there was a pragmatic recognition that a modus vivendi had to be worked out, and that orderly procedures for dealing with disputes were in everyone’s interests. It can hardly be said that this was a worse preparation for the post-war period than the bitterness which characterised German labour relations during the 1920s and early 1930s, leading to the extinction of the trade union movement under the Nazis.

A damaging consequence of the inter-war depression was the retreat from liberalism in British economic and industrial policy. The abandonment of free trade in 1932 was accompanied by the spread of price-fixing and market-sharing arrangements, condoned and even encouraged by the government in the hope that they would encourage rationalisation. The lack of internal competition, together with protection against imports, created an environment which was not conducive to industrial efficiency. But these policies were not confined to Britain; the cartel habit was even more deeply entrenched in Germany.

Britain was not the only country with awkward legacies from the past, and British industry was not obviously less well equipped than its European competitors to benefit from the more favourable international environment that prevailed after the Second World War. Explanations for what went wrong after 1945 have to be found in the post-war period itself.

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