The Bear’s Lair: Regulatory blight can last three centuries!

This column has written fairly frequently about the blight of regulation, but it is always difficult to find concrete examples, while proving economic damage requires considering the counterfactual where the regulation did not exist. However, in my researches for “Forging Modernity,” a study of Britain’s Industrial Revolution, I have come across a modest-sized regulation whose damage is pretty clear, huge, and extending over three centuries. I refer to the Woollens etc. Manufactures Act, 1720.

First, some background. Woolen goods had been Britain’s principal export in the Middle Ages and remained a major and highly competitive industry into the 18th century. The industry’s main problem was that the areas where British commerce was expanding, India, the Caribbean and Africa, had a strange reluctance to purchase nice warm British woolies. Thus, the country had a balance of trade deficit with those areas, something that worried early 18th century statesmen.

As of 1720, on the other hand, Britain had no significant industry in cotton goods. Cotton did not grow domestically, so had to be imported, and Britain did not yet have the technology to spin cotton into yarn with a strength that could be made into fabrics. They could only produce only a hybrid heavy fabric “fustian”, with cotton warp and linen weft. However, with the growth of the East India Company, Indian patterned cotton “calicoes,” mostly from Bengal, had become very popular in England, reaching a wholesale volume of almost £1 million per annum in the 1680s. The East India Company descended after 1688 into a period of managerial incompetence, and its interests were also damaged by the first “Calico Act:” passed in 1700, which forbade the import of Indian patterned cottons; in practice this Act was evaded and by 1720, Indian “Calico” printed cotton imports were back up to their 1680s levels and threatening to expand further.

This was a serious concern to England’s woolen industry. Not only had it lost much of its European market through the incessant wars of 1689-1713 cutting off markets, but the popularity of printed “Calicoes” was cutting seriously into its domestic sales even though English temperatures were close to the Maunder minimum, with icy winters and chilly summers. However, the wool industry, not so much the manufacturers, who were mostly small, but the traders, who had marketing economies of scale, formed a powerful lobby. The wealthy traders had friends in the Whig governments which by 1720 had settled into almost permanent occupation of 10, Downing Street, having convinced the dozy Hanoverian monarch that Tories were all secret Jacobites (supporters of the Stuart claimant to the throne, James III, the Old Pretender).

Both political parties at this stage were protectionist, but the Whigs were more so, having made trade with France illegal in 1678 (even though the two countries were at peace) and never allowed it to resume, defeating a Tory trade agreement attempt in 1713-14 (of course, smugglers filled the market demand for French goods). Hence the Whig solution was the Woollen etc. Manufactures Act, 1720. By this Act, not only was the import of patterned cotton goods forbidden (plain cotton, or cotton fiber could still be imported), but it was also forbidden to manufacture such goods domestically – the combination of prohibitions made any patterned cotton goods seen in Britain illegal. The wool lobby had won a great victory, or thought it had.

The effect on the Indian textile industry was immediate and long-lasting. With printed “Calicoes” no longer allowed to be imported, the only Indian goods that could be sold to Britain were plain cotton goods and raw cotton. While the Calico Acts prohibition was lifted in 1774, by that time the British had acquired a capability to make cotton goods by machine processes, so Indian fabrics were no longer competitive. Then in 1793 Eli Whitney’s invention of the cotton gin made American slave-grown cotton more competitive than even Indian raw cotton on British and eventually world markets, reducing the Indian textile industry still further.

Even by 1776, when Adam Smith wrote The Wealth of Nations, he described Bengal as a country where “the funds destined for the maintenance of labour are sensibly decaying.” With the East India Company and then Britain controlling its destiny, and cotton textiles becoming Britain’s principal export industry, India’s economic fortunes, particularly in textiles, were destined to continue decaying until the early 20th century, reducing to poverty what had in 1700 been a wealthy economy, by the standards of the day.

The Indian results of the Calico Acts are well known, although Indian poverty cannot entirely be blamed on the Whigs of 1720 – the Mughal Empire was pretty self-destructive in its last decades. However, the 1720 Act’s effects in England were at least as significant. In the 1720s, the Lancashire textile industry began to expand, based on the “fustian” cotton/linen mix. It was given a massive boost in 1733, when John Kay’s Flying Shuttle potentially doubled the productivity of weaving operations. Thus in 1735, the interminably continued Whig government (under a new monarch, George II, with the same predilections for Whiggery as his father) passed a new Act, the Woollen etc. Manufacturers Act, 1735 (note the extra r). This Act continued to ban imports of Indian patterned cottons, but allowed for patterned fabrics to be manufactured, provided they were of a cotton/linen mix. Modest win for the Lancashire textile industry – the new patterned fustians were heavy, nothing like as attractive as Indian calicoes.

Then in 1738 came another technological breakthrough, the “spinning frame.” John Wyatt and Lewis Paul patented a spinning machine that used rollers to draw out the cotton thread, at last producing fine cotton thread sufficiently strong to be woven into fabric. They were very under-capitalized; their first factory which opened in 1741, in essence the first factory of the Industrial Revolution, was powered not by an expensive water wheel but by two donkeys. Being under-capitalized and under-scale, they went bankrupt. However, they licensed the technology to a better capitalized businessmen with a better track record: Edward Cave, publisher since 1731 of the best-selling Gentleman’s Magazine.

Cave set up a full-scale factory, complete with water wheel (steam engines at this period, being of the Newcomen type with a huge rocking beam and a painfully slow and irregular cycle, could not be used to power rotating machinery). Alas, he was restricted to plain fabrics only. He had no chance of getting the 1735 Act changed as the Whigs were still in their interminable Whig Supremacy and he was a notorious Tory editor, the first London employer of the even more notoriously Tory Dr. Samuel Johnson, who had spent the last four years as contributor to the Gentleman’s Magazine producing “Debates in the Senate of Lilliput” a (highly illegal) account of Parliamentary debates, suitably doctored by Johnson so that the “damned Whig dogs don’t get the better of it.” Not a good base for a lobbying effort to a Whig government!

Cave died in 1754 and his cotton mill closed in 1761, having been only modestly profitable. The Industrial Revolution slumbered, anesthetized by Whiggery. Then along came Richard Arkwright, whose only professional training had been in making periwigs, but who had probably seen the Cave mill before it closed. He decided a “spinning frame” was the way to go and hired a skilled clock-maker John Kay (same name as the Flying Shuttle man, no relation) to make one. Once it was completed to his satisfaction, possibly better than the Wyatt/Paul model, he patented it in 1769 (the Patent Office either not knowing or not caring that a similar machine had been patented 30 years before) and then in 1771 with some financial backers opened the Cromford Mill to take advantage of “his” new invention.

There was still the problem of the patterned fabrics ban. However, liberation from eternal Whiggery had come in 1762, after a new Patriot King George III had booted the Duke of Newcastle and now the economically intelligent Tory Lord North was prime minister. Arkwright didn’t come from a background that could get Bills passed through Parliament, but he knew a man who did: the local Tory magnate Granville Leveson-Gower, 2nd Earl Gower. Gower with James Brindley had already developed Britain’s brand new “Grand Cross” canal system, was himself a substantial industrialist and was also Lord Privy Seal in North’s small Cabinet. With Gower’s help, and that of his land-agent Thomas Gilbert, now an MP, who managed Gower’s interests in the Commons, getting the 1735 Act repealed was simple. Since both North and Gower were free-trading, Arkwright didn’t even object when they reopened the British market to Indian calicoes – he knew that with his new machinery and local presence he could out-compete India.

The Industrial Revolution finally got under way. Arkwright was knighted, became High Sheriff of Derbyshire and died worth £500,000. A lot of other textile barons rode on his coat-tails to equal or even greater wealth. Gower became Marquess of Stafford, was the mastermind behind Pitt’s accession to power in 1783, remained in the Cabinet another 11 years (with his Agent Thomas Gilbert as Chairman of the Ways and Means Committee of the House of Commons – leading the Commons, like digging canals, was a job for the lower orders) and died worth £2 million, alas only the fifth richest Briton. (His son, who regrettably became a Whig, grabbed the top spot and the Dukedom of Sutherland.)

However, without the Whig Acts of 1720 and 1735, the Industrial Revolution would have happened 30 years earlier, probably led by Edward Cave, and India would have been considerably richer at least through the late 20th Century. Regulation, like heresy and iconoclasm, can have evil effects that persist for centuries.

For more of my thoughts on regulation, you can preorder the upcoming “Against the Great Reset” where I wrote an essay titled “The Anti-Industrial Revolution”.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)