WEBVTT NOTE An Investigation into Great Britain's Commercial Crisis of 1857 and the Preceding Business Cycle 1 00:00:00.000 --> 00:00:30.000 I'm going to be talking about Great Britain's commercial crisis of 1857. Now, by 1857, the crises were really nothing new to the British economy. They seemed to recur about every 10 years or so. There had been a crisis in 1825, 36, 47, and then another crisis in 1857. But what was new and unique about the crisis of 57 was that it seemed to really come out of nowhere. It really 2 00:00:30.000 --> 00:00:33.920 caught the contemporaries at the time completely off guard. 3 00:00:33.920 --> 00:00:35.400 In previous crises, there had always 4 00:00:35.400 --> 00:00:39.520 been some conspicuous, outsized disturbance 5 00:00:39.520 --> 00:00:42.720 that attended the crisis, like a mania or a bubble. 6 00:00:42.720 --> 00:00:47.400 But in 1857, by and large, there was really no such thing. 7 00:00:47.400 --> 00:00:50.480 So they were justifiably confounded. 8 00:00:50.480 --> 00:00:53.720 In fact, according to one economist of the period, 9 00:00:53.720 --> 00:00:56.720 he wrote, quote, it was considered a marvel by most 10 00:00:56.720 --> 00:00:59.680 people that the approach of the usual 10 years 11 00:00:59.680 --> 00:01:02.980 had not been accompanied by some of those premonitory symptoms 12 00:01:02.980 --> 00:01:06.080 which indicated the presence of an unhealthy state of things. 13 00:01:06.080 --> 00:01:08.280 So eventually, most of the contemporaries 14 00:01:08.280 --> 00:01:11.920 just chalk this up to excessive speculation 15 00:01:11.920 --> 00:01:13.820 and fraudulent activity. 16 00:01:13.820 --> 00:01:22.640 So what I try to demonstrate is that the primary cause 17 00:01:22.640 --> 00:01:25.480 of the crisis had been interest rates 18 00:01:25.480 --> 00:01:29.280 or had been a very accommodating banking system 19 00:01:29.280 --> 00:01:33.560 that lowered interest rates well below the natural level 20 00:01:33.560 --> 00:01:37.800 so that interest rates no longer accurately reflected 21 00:01:37.800 --> 00:01:41.960 the availability of capital, the availability of labor, land, 22 00:01:41.960 --> 00:01:43.520 raw materials. 23 00:01:43.520 --> 00:01:50.280 And an investment boom, really a system-wide investment boom 24 00:01:50.280 --> 00:01:53.920 took place for which the availability of, 25 00:01:53.920 --> 00:01:58.320 or for which the necessary capital to see these investment 26 00:01:58.320 --> 00:02:00.400 projects through did not exist. 27 00:02:00.400 --> 00:02:04.240 So therefore, costs begin to rise. 28 00:02:04.240 --> 00:02:07.080 Profit margins begin to shrink. 29 00:02:07.080 --> 00:02:10.560 And there are other discoordinating effects of this. 30 00:02:10.560 --> 00:02:14.000 And ultimately, the boom proves unsustainable, 31 00:02:14.000 --> 00:02:16.480 and it requires a correction. 32 00:02:16.480 --> 00:02:18.400 Now, my approach in doing this was really 33 00:02:18.400 --> 00:02:22.040 a microeconomic approach. 34 00:02:22.040 --> 00:02:25.080 I tried to sort of recreate from the ground level 35 00:02:25.080 --> 00:02:31.480 up the entrepreneur's experience through the course of this 10-year business cycle. 36 00:02:31.480 --> 00:02:35.400 Now I focus primarily on the textile industries. 37 00:02:35.400 --> 00:02:40.280 So there is some room for further research. 38 00:02:40.280 --> 00:02:46.080 Now I do touch tangentially on other industries like the iron industry, agriculture, coal, 39 00:02:46.080 --> 00:02:47.080 et cetera. 40 00:02:47.080 --> 00:02:49.880 And I'll talk about them very briefly today. 41 00:02:49.880 --> 00:02:54.740 But as I said, my primary focus was on the textile industries. 42 00:02:54.740 --> 00:02:59.220 What I want to do now for the remainder of the talk is we're just going to move chronologically 43 00:02:59.220 --> 00:03:03.940 through this business cycle, focusing on the entrepreneur's experience, as I said, primarily 44 00:03:03.940 --> 00:03:08.700 in the textile industries, but I'll also talk about some other industries as well. 45 00:03:08.700 --> 00:03:12.700 I've broken this 10-year period down into three periods. 46 00:03:12.700 --> 00:03:18.020 The first one is 1848 through 1851, and the first industries we're going to look at are 47 00:03:18.020 --> 00:03:20.800 the woolen and the worsted industries. 48 00:03:20.800 --> 00:03:25.040 Now worsteds, for those of you who don't know, they're basically a woolen product, but they 49 00:03:25.040 --> 00:03:31.160 incorporate some other materials like cotton or silk into their cloth. Some of your jackets 50 00:03:31.160 --> 00:03:38.520 actually could be a worsted if you don't even know it. So both the woolens and the worsteds 51 00:03:38.520 --> 00:03:45.120 experience a very large extension of capital in this period here. Following the crisis 52 00:03:45.120 --> 00:04:15.120 The fact that it had taken place in 1847, commodity prices had dropped very precipitously, wool was no exception, wool had fallen in price by 33% and with cheap raw material, relatively cheap labor, low interest rates, all of the factors to warrant a boom in investments were in place and a very large boom is undertaken, particularly in the worsted 53 00:04:15.120 --> 00:04:20.800 According to the Chief Factory Inspector of Yorkshire, which is the hub of the worsted 54 00:04:20.800 --> 00:04:25.840 and woolen trades, he estimated that the output in the worsted department had increased by 55 00:04:25.840 --> 00:04:31.360 40% in 1849 and in 1850 he said that they were increasing at the same rate. 56 00:04:31.360 --> 00:04:35.960 So this really is a very large extension of capital, very large boom. 57 00:04:35.960 --> 00:04:42.480 So through the course of this boom period, cost of production start to rise. 58 00:04:42.480 --> 00:04:47.040 The cost of wool increases by 35% by 1851. 59 00:04:47.040 --> 00:04:49.920 Wages are also on the increase. 60 00:04:49.920 --> 00:04:53.160 And really, by the end of 1851, both industries 61 00:04:53.160 --> 00:04:55.640 are amid a depression. 62 00:04:55.640 --> 00:04:57.560 And according to one report talking 63 00:04:57.560 --> 00:05:01.680 about the worsted trade at the end of 1851, 64 00:05:01.680 --> 00:05:05.120 it reads, quote, new mills had sprung up in abundance. 65 00:05:05.120 --> 00:05:07.920 And for the next three years, the manufacturers 66 00:05:07.920 --> 00:05:10.680 paid the penalty of overproducing. 67 00:05:10.680 --> 00:05:14.640 At no time, even in the worst periods of 1847, 68 00:05:14.640 --> 00:05:18.200 had the difference been wider between the cost of wool 69 00:05:18.200 --> 00:05:21.320 added to the price of labor and the prices realized 70 00:05:21.320 --> 00:05:23.640 for the manufactured article. 71 00:05:23.640 --> 00:05:25.220 And as I said, both industries are 72 00:05:25.220 --> 00:05:28.240 in a relatively depressed state by the end of 1851. 73 00:05:28.240 --> 00:05:31.120 Now, it should be noted, and I just 74 00:05:31.120 --> 00:05:34.280 want to be clear that I'm not saying 75 00:05:34.280 --> 00:05:37.160 that artificially reduced interest rates are 76 00:05:37.160 --> 00:05:40.200 the cause of everything that goes wrong in an economy. 77 00:05:40.200 --> 00:05:45.720 I mean, for example, had the British economy been on a, say, 100% reserve standard, no 78 00:05:45.720 --> 00:05:52.440 central bank, it's still entirely possible that these industries could have been overdone. 79 00:05:52.440 --> 00:05:57.600 I mean, markets and investors are very myopic, you know, investments have a tendency of being 80 00:05:57.600 --> 00:05:58.600 overdone. 81 00:05:58.600 --> 00:06:02.700 But the point is that had the economy, you know, not had fractional reserve banking, 82 00:06:02.700 --> 00:06:07.960 no central bank, we would have seen upward pressure on interest rates. 83 00:06:07.960 --> 00:06:23.960 This is what Friedrich Hayek refers to as the interest rate break, or interest break, he calls it, which is just sort of a salutary check on an economy, as interest rates rise to more accurately reflect the scarcity of capital. 84 00:06:23.960 --> 00:06:32.960 But we don't see this. In fact, interest rates continue to fall through this period, and they fall into 1853 before they start to rise. 85 00:06:32.960 --> 00:06:55.960 So our other industries, the cotton and the silk industry, there are no significant investments taking place in these industries, cost of production were just too high, there were raw material shortages or cotton failures in America, silk failures in cotton in Europe, so cost of production were just too high to warrant any significant extension of capital. 86 00:06:55.960 --> 00:07:04.960 But in our next period, 1852 through 1855, both of these industries undergo very large increase in output. 87 00:07:04.960 --> 00:07:08.960 The cotton industry, we'll start off by looking at the cotton industry. 88 00:07:08.960 --> 00:07:16.960 Imports for cotton in 1852 had increased by 23% and the cotton price falls by 27%. 89 00:07:16.960 --> 00:07:23.960 And just as we saw in the woolen and the worsteds, with cheap raw material, cheap labor, low interest rates, 90 00:07:23.960 --> 00:07:28.760 rates, all the factors are in place to warrant an extension of capital, a large extension 91 00:07:28.760 --> 00:07:29.760 of capital. 92 00:07:29.760 --> 00:07:32.320 And that's exactly what we see. 93 00:07:32.320 --> 00:07:36.120 According to the Chief Factory Inspector of Lancashire, which is the center of the cotton 94 00:07:36.120 --> 00:07:41.640 trade, he writes, quote, at no period during the last 17 years that I have been officially 95 00:07:41.640 --> 00:07:47.200 acquainted with the manufacturing district in Lancashire have I known such general prosperity. 96 00:07:47.200 --> 00:07:52.460 The activity in every branch is extraordinary, for new mills are going up everywhere. 97 00:07:52.460 --> 00:07:55.420 And as a result, costs of production begin to rise. 98 00:07:55.420 --> 00:08:03.300 The cost of cotton between 1852 and 1855 increases by 15%, whereas the price of cloth actually 99 00:08:03.300 --> 00:08:05.180 falls by 5%. 100 00:08:05.180 --> 00:08:08.900 Wages during this period increase by 12.5%. 101 00:08:08.900 --> 00:08:14.820 And by the end of 1853, the cotton industry is in a relatively depressed state. 102 00:08:14.820 --> 00:08:19.700 And the same factory inspector who I just quoted, he writes at the end of 1853, quote, 103 00:08:19.700 --> 00:08:25.820 I observe a growing impression among the occupiers of cotton mills that the fall of prices and 104 00:08:25.820 --> 00:08:31.020 the diminished sales are to be accounted for in no small degree by the very great increase 105 00:08:31.020 --> 00:08:37.000 in the number of mills. It is self-evident that so great an increase must on the one 106 00:08:37.000 --> 00:08:43.420 hand tend to keep up or enhance the price of the raw material and of machinery and to 107 00:08:43.420 --> 00:08:47.100 to raise wages unless there be a proportionate increase 108 00:08:47.100 --> 00:08:51.020 of cotton, of machinery, and of laborers, 109 00:08:51.020 --> 00:08:53.380 and thus increases the cost of production. 110 00:08:53.380 --> 00:08:56.820 While on the other hand, the competition to affect sales 111 00:08:56.820 --> 00:08:59.500 must still further tend to lower profits. 112 00:08:59.500 --> 00:09:01.100 And so the cotton industry just remains 113 00:09:01.100 --> 00:09:04.580 in a depressed state through the end of 1855. 114 00:09:04.580 --> 00:09:10.500 Silk industry, supplies of silk in 1852 increased by 26%. 115 00:09:10.500 --> 00:09:20.500 And again, just as we've seen before, with low cost of raw material, cheap labor, low interest rates, a very large boom ensues. 116 00:09:20.500 --> 00:09:25.500 And again, by the end of 1854, the silk industry has emitted depression. 117 00:09:25.500 --> 00:09:29.500 Things have gotten so bad that according to a report by the Times newspaper, 118 00:09:29.500 --> 00:09:33.500 quote, none of our manufacturers can be induced to review with us the operations of the past year. 119 00:09:33.500 --> 00:09:49.500 The crisis comes in November of 1857. The last period that we're going to look at is 1856 and 1857. Now the British economy is thrown very active actually in 1856. There had been a war fought, the Crimean War, over 1854, 1855, and it comes to a close in 1857. 120 00:09:49.500 --> 00:09:58.500 The crisis comes in November of 1857. The crisis comes in November of 1857. The crisis comes in November of 1857. The crisis comes in November of 1857. The crisis comes in November of 1857. 121 00:09:58.500 --> 00:10:03.980 and War over 1854, 1855, and it comes to a close in 1856. 122 00:10:03.980 --> 00:10:10.200 So as markets open up, an export boom ensues, and the economy is thrown very active. 123 00:10:10.200 --> 00:10:17.240 But while the economy is very active, really the underlying economy grows increasingly 124 00:10:17.240 --> 00:10:18.240 ill. 125 00:10:18.240 --> 00:10:22.820 And through 1857, most of the major industries are in a depressed state. 126 00:10:22.820 --> 00:10:26.100 The iron trade, for example, in some districts was very depressed. 127 00:10:26.100 --> 00:10:31.300 In Glasgow, according to one report in July of 1857, quote, 128 00:10:31.300 --> 00:10:34.180 the district has not been so dull for many years. 129 00:10:34.180 --> 00:10:38.140 Wages of miners had increased 100%. 130 00:10:38.140 --> 00:10:40.900 Many blast furnaces were brought into operation, 131 00:10:40.900 --> 00:10:43.820 according to the government's mining expert Robert Hunt. 132 00:10:43.820 --> 00:10:47.540 He writes, quote, of the months leading up to the crisis, 133 00:10:47.540 --> 00:10:50.780 quote, at that time, the effects of over-manufacturing 134 00:10:50.780 --> 00:10:54.420 were producing unhealthy symptoms in all branches of trade. 135 00:10:54.420 --> 00:10:56.420 Construction industry was also depressed. 136 00:10:56.420 --> 00:10:58.620 They were struggling under high wages, 137 00:10:58.620 --> 00:11:00.900 according to one report by the Times newspaper. 138 00:11:00.900 --> 00:11:03.140 Quote, the labor is so costly that it keeps up 139 00:11:03.140 --> 00:11:06.060 the price of production above the market value, 140 00:11:06.060 --> 00:11:09.060 so that builders, if they yield to these large wages, 141 00:11:09.060 --> 00:11:12.060 can make no profit for their heavy outlay on labor. 142 00:11:12.060 --> 00:11:15.560 Railroad industry, similarly, they're 143 00:11:15.560 --> 00:11:18.340 struggling to pay high wages. 144 00:11:18.340 --> 00:11:21.880 According to a former parliament member named Sir Morton 145 00:11:21.880 --> 00:11:26.040 Peter Pepto, in a letter to the Times, he writes, quote, 146 00:11:26.040 --> 00:11:30.080 The prices of harvest labor has risen until the farmers outbid 147 00:11:30.080 --> 00:11:31.760 railway contractors. 148 00:11:31.760 --> 00:11:35.480 And we find ourselves compelled to suspend for the present 149 00:11:35.480 --> 00:11:39.840 the execution of all but very pressing public works. 150 00:11:39.840 --> 00:11:43.480 Textile industries, they participate 151 00:11:43.480 --> 00:11:46.800 in the general export boom, but they grow increasingly 152 00:11:46.800 --> 00:11:48.680 unprofitable, just as these other industries. 153 00:11:48.680 --> 00:11:51.180 Cotton had increased by 59 percent. 154 00:11:51.180 --> 00:11:55.640 The price of cotton increases by 59 percent between 55 and 57. 155 00:11:55.640 --> 00:11:58.880 And in May of 1857, according to one report, 156 00:11:58.880 --> 00:12:01.880 for some months there is hardly past a week in which failures 157 00:12:01.880 --> 00:12:04.780 of more or less consequence have not occurred. 158 00:12:04.780 --> 00:12:07.580 Wool in the worst industry is the same thing. 159 00:12:07.580 --> 00:12:11.640 Wool increases by 51 percent between 55 and 57. 160 00:12:11.640 --> 00:12:14.220 And their finished goods actually fall in price. 161 00:12:14.220 --> 00:12:19.100 silk industry, silk increases by fifty percent between fifty five and fifty seven 162 00:12:19.100 --> 00:12:22.420 their finished goods fall in price 163 00:12:22.420 --> 00:12:25.340 so just to conclude here and just to sort of tie this back in with what we're trying to 164 00:12:25.340 --> 00:12:28.300 explain which is the cause of the crisis of fifty seven 165 00:12:28.300 --> 00:12:30.700 we see that most of the major industries 166 00:12:30.700 --> 00:12:31.860 in Great Britain 167 00:12:31.860 --> 00:12:35.620 are in a depressed state leading up to the crisis 168 00:12:35.620 --> 00:12:36.980 this results in 169 00:12:36.980 --> 00:12:39.700 reduced output, reduced production 170 00:12:39.700 --> 00:12:43.420 this puts downward pressure on commodity prices 171 00:12:43.420 --> 00:12:49.060 and puts a tremendous amount of pressure on the mercantile community. 172 00:12:49.060 --> 00:12:54.620 And the 1857 crisis was marked chiefly by mercantile failures. 173 00:12:54.620 --> 00:13:00.020 In fact, some of the contemporaries even referred to it as a mercantile crisis. 174 00:13:00.020 --> 00:13:06.020 So I find it convincing, I find the evidence convincing that the primary cause 175 00:13:06.020 --> 00:13:13.060 of this crisis had been the slow, embrittling effects of interest rates that were pushed 176 00:13:13.060 --> 00:13:43.060 are pushed down by a very accommodating banking system, well below their natural rates, so that interest rates no longer accurately reflected the scarcity of real capital, labor, land, raw materials, so that competition to acquire that capital pushed their prices up, we saw profit margins shrink, there are other discoordinations in the economy that were brought about by this that I didn't have time to talk about, but I just want to thank you all very much. 177 00:13:43.060 --> 00:13:45.060 Thank you all very much for your time. I really appreciate it.