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CHAPTER V.

SOME FEATURES OF MODERN INDUSTRY.

IN the last chapter we studied the forces which helped to overthrow the old domestic system. Let us now examine some of the chief features of the new order.

The Organization of Capital. As we saw in Chapter I, the employment of large sums of capital was not unknown before the Industrial Revolution. But now capital assumed a far greater importance. Every advance in invention and discovery made bigger amounts of money essential. Even the early machines cost more than many small master-manufacturers could afford. In places a number of these small men pooled their resources, and established mills in which to do some of their work, while carrying on the remaining processes in their own homes as before. But, generally speaking, the new capital was supplied by merchants who had accumulated wealth in home or foreign trade, by financiers, or by wealthy manufacturers. The last class frequently comprised men who by dint of hard work and strenuous saving had been able to procure the necessary money for buying a machine or two. From such small beginnings the business grew larger, and eventually its owner became a very wealthy man. In many cases these self-made men were harsh employers, and the conditions in their factories were often very bad.

Many firms were established by the formation of partnerships, with two or three (or more) men putting their money together. The weakness of the partnership system was that in the event of failure each partner was liable to be called upon to the extent of all his wealth, say £10,000, to pay the firm's debts, even though his share in the business might be only £1,000. This unlimited liability rendered the partner's position insecure and impeded investment. In 1837 a proposal was made that "limited partnership'' should be recognized, so that any person who put money into a partnership but took no part in its management should have his liability limited to the amount he had invested. This arrangement worked well in France, but the proposal was rejected in Britain. Another weakness of the partnership firm was its lack of continuity. If one of its members died, or wished to withdraw, the whole concern had to be dissolved. Nevertheless, in spite of these difficulties, men pooled their funds and took the risk. Money was wanted for railways, shipping, metal, and other industries, more money than three or four men could provide. The obvious method of raising that money was joint stock, but the Bubble Act of 1720 was not repealed till 1825, and until 1855 joint stock companies with limited liability could be formed only under the authority of a private act of parliament (e.g., railway and canal companies), a charter, or letters patent. Hence most industrial companies which were established were technically partnerships. They grew rapidly in number, and in boom times many bogus concerns with high-sounding names sprang up. These latter used the names of famous or non-existing persons, Issued false prospectuses, published accounts of enthusiastic meetings which were never held, and in other ways induced old people, governesses, servants, and other too-trusting people to invest their scanty savings. In 1844 the

British government recognized the need for putting business organizations on a better footing, and in that year registration of companies was provided for and the publication of periodical financial statements demanded. In 1855 some kinds of companies were allowed limited liability, and in 1862 this right was given to all companies. Henceforth any seven persons associated for a lawful purpose could, by subscribing to a memorandum of association, be registered as a company with limited liability. The company must publish an audited annual statement, and thus let its shareholders, present or prospective, know how it stood.

Between the partnership with its privacy of accounts and unlimited liability on the one hand, and the limited liability company with its publicity of accounts on the other hand, two other types of organization exist. In France and Germany we find companies in which the directors alone bear unlimited liability, though the number is diminishing relatively. In England and Australia we have the private or proprietary company. This is really a big partnership with limited liability. The number of shareholders, exclusive of cmployees, is limited to fifty, the shares cannot be sold or floated on the public market, and no balance-sheet need be filed or published. The enjoyment of this privacy is a boon which all companies would like. In law, the ordinary joint stock company is deprived of it, but in practice it gets much of it by establishing secret reserves, of which no one except the directors knows anything. In this way it is able to conceal its real financial position from its rivals and from those members of the public who are prone to accuse it of "profiteering.''

The joint stock method is liable to great abuses, such as company promoting, etc., and many innocent, ignorant people fall victims to bogus schemes now as in 1844. But in spite of such dangers the adoption of the limited liability joint stock plan has made possible such a development of the world's resources as could not have beer accomplished in any other way. One important feature of the growth of big companies has been the disappearance of any personal connection between employer and employee. The modern wage-earner seldom knows his employer. He knows only a foreman, a manager, or board of directors, whose business it is to earn as large dividends as possible for the thousands of shareholders scattered possibly over the face of the earth. These shareholders often know nothing of the business in which their money is invested. They may never have seen the works or even the country. Their interest in the condition of their employees is usually nil. Their only concern is the annual balance-sheet. Such conditions lie at the root of much modern labour unrest.

The growth of widespread shareholding and the flotation of companies and public loans gave added importance to the work of the stock exchanges. The London Stock Exchange, dating from the early 18th century, grew to large dimensions as a market for the buying and selling of shares, and similar institutions arose in Berlin, New York, Paris, and elsewhere. Like the joint stock company, the stock exchanges opened the way to sharp practices and questionable methods of money-making, but nevertheless they served an important purpose in facilitating the raising, buying, and selling of capital.

Banking and Credit. The growth of large-scale industry and commerce necessitated big developments in banking and credit facilities. On the one hand were men who wished to deposit their savings; on the other were men desirous of borrowing money with which to carry out some scheme.

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The banker, therefore, rose to power as a middleman, a money merchant. bought the use of money by paying a small interest to those who deposited their savings with him, kept those deposits in safety for their owners, and gave them back when required. Then, knowing that not all his depositors would want their money at the same time, he began to make bold to sell the use of some of the money to such as wished to buy. These sales might be of many kinds. Loans were made for long or short periods to manufacturers, merchants, or farmers, provided good security was given. Bills of exchange were discounted, and so movements of commodities from country to country were made possible. The growing use of bills of exchange allowed the Australian wool-seller, the Argentine wheat-grower, the Cardiff coal merchant, and the Yorkshire cloth-maker to receive payment for their goods almost immediately upon delivery. In Germany especially, the banks made considerable investments in industrial and commercial concerns, and helped materially the economic expansion of that country. The chief method of the banks was to work by the creation of paper money. At first credit was created by giving the borrower bank notes. When the banks were deprived of the right of note issue, they granted credit by allowing the borrower to draw cheques on them. Payment by cheque became common; in 1910, £48,000,000 of cheques passed daily through the London Clearing House; in 1918 clearing house transactions in U.S.A. amounted to $332,350,000,000; and in 1919 £1,440,000,000 of cheques, bills, etc., passed through the clearing houses of the five mainland Australian capitals. The bill of exchange became the staple medium for international trade, while in every big country the issue of notes by private banks or the government added to the amount of currency. Bankers have learned their lessons by much bitter experience, which alone could show what proportion of reserve must be kept in hand. Further, governments have recognized the need for regulating and restricting banking affairs, especially in the issue of notes. In 1844, after frequent blunders by the private banks, the Bank of England was given the virtual monopoly of note issue in Great Britain; the Bank of France, founded in 1800 by Napoleon, obtained the same privilege in 1848, both banks being subjected however to legal restriction on their note issue. Until 1914 Britain had no government paper money, but the exigencies of August, 1914, and the subsequent need for money, made necessary the issue of some hundreds of millions worth of Treasury Notes, supported by only a small gold reserve.

Banking began in Australia with the foundation of the Bank of New South Wales in 1817, and grew steadily. Most of the private banks had the right to issue notes, and over-issue had something to do with the financial collapse of 1893. In that year the Queensland Government took to itself the sole right of note issue in that state. In 1910 the Commonwealth Government took over entirely the work of issuing notes in Australia, and since that time has issued over £50,000,000, while at the same time the private bank note has been driven out of circulation. Until late in 1920 the Australian issue differed from that of pre-war England and France, in that it was a Treasury note, issued by a government department, while the English and French notes came from banks which, although owned by private shareholders, enjoy a large measure of official recognition and patronage. The Commonwealth Bank, founded by an Act of 1911, was in 1920 given almost complete control over the Australian note issue, with what result remains to be seen.

The net result of these manifold monetary developments has been that the world has gradually become covered with what a recent writer called gossamer threads of finance, which make production and international exchange possible, but which may be broken by the breath of droughts, floods, bad seasons, over-speculation, or war.

The Big Unit. As the Industrial Revolution worked out its changes men began to realize the advantages which accrued from increasing the size of the industrial unit and the benefits of large-scale production. These benefits were many, but the chief were as follows:-(1) The big firm can purchase its raw materials in big bulk, and therefore procure them more cheaply than the small man. This advantage is pushed further when the big firm owns its sources of supply and means of communication. For instance, the United States Steel Corporation has its own iron ore and coal deposits, its own ships, railway tracks, and rolling-stock, and its own coke ovens. It is thus independent of outside sources of supply, and free from the middleman. Lord Northcliffe has his own paper-making factories, Lord Leverhulme his own oil and copra areas and steamships. This all means cheaper supplies of the necessary raw materials. (2) The big firm can have a special machine for each process. The units of the modern motor car are each made by a machine constructed for its particular task and so devised as to be automatic in its adjustment and operation. (3) Specialization in machinery means a high degree of division of labour; instead of a man doing many jobs, he specializes on one detailed task-the cutting of boot soles, the fitting of a mudguard, or the making of a particular screw. This division of labour extends to clerical work and management also, and we find men deputed to control some special aspect of buying, production, or sale. Division of labour means the rule of the expert in every walk of industry. (4) Division of labour goes even farther, and results in the employment of a staff of scientists, who devote their time to devising better machines, discovering new processes, improving the quality or cheapening the cost of the product, and finding new uses for waste materials. In this respect alone the big firm has scored great triumphs. The scientists in the employ of the Standard Oil Trust have discovered that over 200 different by-products can be made from the refuse extracted in refining crude oil. Many other instances could be given to show how the modern firm endeavours to eliminate waste and find a profitable use for every particle of its raw material. (5) The big firm can distribute its goods through its own shops or agents, can bid for large orders, and can attack systematically the foreign market.

These advantages gradually became more manifest during the 19th century, and resulted in a steady increase in the size of the industrial unit. The number of employees per firm in the United States iron and steel trade increased by 135 per cent. between 1880 and 1910. Throughout the worid small firms amalgamated, or were swallowed by bigger ones. In 1850 there were 44,000 brewing firms in Europe; in 1903 only 5,692. Lloyd's Bank in the course of the last 65 years has absorbed 40 other banks; Germany is practically in the hands of seven big banks, and controlled by a group of capitalists scarcely 50 in number. The iron and steel industry of America is dominated by the U.S. Steel Corporation, with a capital of well over £200,000,000, while the biggest of the English railways has a nominal capital of £204,000,000. Many firms employ thousands of wage-earners; one Russian textile unit had a town of 80,000 people dependent upon it in 1914. An

American tyre factory employs 18,000 workers, a steel corporation has 200,000 names on its pay-roll. In Australia, the Broken Hill Proprietary, Ltd., employs over 6,000 men at the Hill or at its steel works in Newcastic. Further, some concerns, such as the armament makers and thread manufacturers, have works in many lands, and are international in their scope. The firm of Vickers has workshops in Italy, and in 1914 was reorganizing the naval systems of Turkey and Greece. Revelations made in 1913-14 showed that German, Austrian, Russian, French, Italian, Japanese, Belgian, and English armament firms were all interrelated, while a steel company which died in 1913 had been managed by a directorate drawn from Italy, Britain, Germany, France, and America. The big firm has long ago overleaped all national boundaries, and in many cases is world-wide in its sphere of control.

The growth in the size of the unit has been accompanied by a concentration of industrial power into the hands of comparatively few men. This development is partly due to the growth of trusts, and will be explained fully in a later chapter. Its result has been to foster the growth of an economic autocracy, which is in strange contrast to the universal movement towards political equality and democracy. The power of big capital has expressed itself not merely in economic affairs, but also in political life. Here, either openly or in secret, capital has sought to protect and further its interests by subscribing to party funds, by influencing or owning newspapers, or by less scrupulous methods of bribery. In return it has expected favourable legislation, sought immunity from anti-trust and anti-monopolistic laws, or demanded the blocking of bills intended to curb its power. These measures have been most successful in the United States; Mr. Roosevelt admitted in 1915 that when in office he had refrained from authorizing legal proceedings against certain trusts because they had contributed heavily to his election funds. President Wilson in 1912 spoke in strong terms of "the control over the government exercised by big business'; he declared that the American Government had "been for the past few years under the control of heads of great allied corporations with special interests, and had submitted itself to their control; hence the troops of scandals, wrongs, indecencies, with which American politics have swarmed. This influence, which is powerful in every country except Russia to-day, has been especially great on foreign policy. Democracy tends to concentrate its attention on domestic reforms, and neglects international relations. Hence those interests which wish to obtain new sources of supply for raw materials, new markets, fields for investment, etc., exert pressure on the foreign offices. Foreign policy is thus often shaped by commercial and financial interests. The wars between England and China were fought to maintain British merchants' rights to import opium; rival claims for timber concessions had much to do with the Russo-Japanese war; commercial rivalries played no small part in causing the war of 1914, and commercial and financial interests took their share of the spoils in the peace settlement.

Labour Conditions in Modern Industry. Labour conditions are now determined chiefly by three things-the use of machinery, the increased division of labour, and the more scientific arrangement of production. The introduction of machinery had many results, the effects of which on the worker depended upon the rate at which the new machines were adopted. In some industries the rate was slow; the power loom was not in general use in the woollen industry until 70 years after its invention,

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