Institutions, law, and export markets: the Lancashire textile industry c.1880-c.1914

"A substantial literature exists on the growth and performance of the Lancashire textile industry during the nineteenth and twentieth centuries. However, literature on efficiency promoting institutions in the Lancashire industry is comparatively small. The received view among historians of this period is that the industry was characterised by increasing levels of specialisation: ‘Lancashire cotton industry remained vertically specialized almost beyond imagination’ (Leunig, 2003). Market based exchange dominated virtually all activity in this industrial region and the industry grew by adding more firms that remained small and benefitted from external economies due to agglomeration effects. Such Marshallian external economies are seen as a source of Lancashire’s high-productivity in cotton spinning despite the dominance of abundant labour using technology and vertically specialising small firms (Leunig, 2003; Broadberry and Marrison 2002). The intense competition between numerous small firms, located in close proximity and enjoying external economies and benefitting from rapidly growing export markets are considered to be the efficiency enhancing factors leading to Lancashire’s successful dominance of nineteenth-century textile industry. In this paper, we propose to study a hitherto unexplored source of Lancashire’s efficiency: transaction cost reducing institutions. Our aim is to explore how Lancashire firms sought institutional solutions to endemic contractual problems that confronted the industry in the late nineteenth century. We argue that the Lancashire firms were privy to various ‘public goods’ that eliminated efficiency-reducing market practices. ‘Rogue’ practices resulted from the industry’s extreme specialisation, potentially escalating transaction costs and threatening market based exchanges that were the source of the region’s external economies. Lancashire firms developed new institutional forms and organisations to make market based exchanges more efficient in the late-nineteenth century. We conclude that securing external economies was not only a matter of technological choice (vertical specialisation in the presence of labour-using technology), or agglomeration effects (clustering), but also dependent upon efficiency-enhancing commercial practices. We develop our arguments by studying the practice of ‘short-reeling’ of cotton yarn, a practice whereby yarn counts were systematically misrepresented. Yarn counts were a fundamental standard used to structure both labour and commercial contracts in the Lancashire cotton industry. Yarn counts are based on the proportion of length of yarn to weight – the greater the proportion, the finer is the yarn, and thus the better its quality. The practice of short-reeling (i.e. deliberately over-/mis-reporting the amount of yarn actually reeled in a hank), which we find to be endemic c1880, threatened the reliability of commercial contracting, especially in the export markets, potentially escalating the cost of market based exchanges. We show that attempts to remedy this problem via litigation were unsatisfactory, not least because of the division they caused within the Manchester Chamber of Commerce whose textile section was dominated by merchants. To overcome this problem we demonstrate how the industry developed two institutional solutions: the specification of a uniform yarn contract and the establishment of a Testing House to determine the degree of variation between the reported and actual length of yarn and piece-goods. Conversely, efforts to sustain the repute of Lancashire’s cotton exports were confounded by the ways in which the Indian customs authorities interpreted their statutes. Exacerbating matters, a fundamental impasse existed between ‘trade’ understanding of reported measurements and the exact stipulations of the law, both in the UK and India. "