Finance in History: Labor Days

The Lowell Mills offer a lesson in the perils of focusing on labor costs at the expense of technology.

The building of Samuel Slater’s mill in Pawtucket, Rhode Island in 1793 marked a genuine paradigm shift: the transition of cloth-making from the home to the factory. A decade or so later, wealthy Bostonian Francis Cabot Lowell followed Slater’s example by surreptitiously copying English spinning and weaving technology. After visiting the cotton mills of Manchester, England and taking copious mental notes, he returned to Boston and raised $400,000 from wealthy friends and family to recreate what he had seen in Great Britain.

Thus began the American Industrial Revolution, and with it, another sort of shift. The new cloth-making business put both capital and labor to work on a scale that demanded not just new machines, but new management. Unfortunately, the accounting and financial technology of the day wasn’t up to the task. Financial managers of the time focused on the familiar — costs of labor and materials — but oddly enough, often ignored the potential challenges of maintenance, obsolescence and technological change that came with their new machines. Without a good understanding of the importance of depreciation and reserves, writes one historian, “The known expense of labor received more attention than the largely unknown problems of capital expense.”

Initially, however, a management focus on labor seemed a happy development. An idealist, Lowell did his utmost to improve upon the grim working conditions he had witnessed in England, where, in the early 1800s, English laborers had no minimum wage and generally worked twelve to fourteen hours a day, six days a week.

Lowell set about creating a worker’s utopia. He recruited girls and women, ages 15 to 35, from surrounding farming communities and promised their understandably wary families that they would live in chaperoned boardinghouses and have access to a church, a library, and healthy social activities. They would receive weekly wages, an unheard-of luxury for a farm girl, even if she did have to work six 10- to 12-hour days (almost as long as her English counterparts) to earn it.

Lowell’s five-story factories were a brilliant early construct of vertical manufacturing. Each mill had machines to clean the raw cotton, turn it into yarn and thread, weave it into cloth, and then print the finished cloth with colorful designs. The U.S. Congress helped matters considerably by imposing prohibitive tariffs on imported cloth, protecting the Massachusetts producers from their British competition.

If the water wheels powered these mills along the Merrimack, treasurers ran them. Sitting at the top of the largest early American companies, treasurers (not presidents) held shares in their organizations and conveyed the wishes of the shareholders in Boston to the agents who managed the mills in Lowell. Although flawed, the structure made sense. For agents, labor costs were paramount, while shareholders worried most about the cost of raw cotton and the price of cloth — the most important U.S. export of the early 19th century. Detailed accounting information provided essential communication between managers and investors separated by the miles between Boston and Lowell.

Discuss

Your email address will not be published. Required fields are marked *