When you think of the industrial revolution, what industry do you think of? My answer would have been the invention of the steam engine and the railroad industry. Recently read a book which changes the viewpoint, the book is Empire of Cotton – A Global History written by Sven Beckert, published Alfred A. Knopf, NY, 2015. The book examines cotton through global transformation – the movement of capital, people, goods, and raw materials.

Cotton manufacturing, even if engaged in on small scale was astonishingly profitable in the 1780s and 1790s. Firms had annual returns on their capital of 14% which allowed them to expand using retained profits.

The growth of cotton manufacturing made it the center of the British economy. In 1770 it was 2.6%, by 1801 it was 17% and 1831 it increased to 22.4%. By 1830 one in 6 workers worked in the cotton industry. Much of the cotton cloth was exported including to India whose cotton industry would go into decline.

The ability of merchants and manufacturers to access the export markets pointed to the importance of a peculiar and novel form of state, a state that would be the crucial ingredient for industrial capitalism. Cotton exports expanded on the strength of British trade networks and the institutions that were embedded – from a strong navy creating and protecting market access to bills of landing allowing for the transfer of capital over long distances.

As the British manufacturers grew more productive in producing yarn, the demand for cotton grew. With the demand increasing prices increased. Investors examined anywhere where cotton could grow and tried the countries out. It must be remember, for generations cotton was grown on small scale. The potential high profits had people looking at the West Indies. Sugar cane was the number one crop, but on islands with more uncultivated land and fewer sugar plantations, cotton production boomed.

The number one island for cotton production was Saint-Domingue (Haiti). Why the growth in the West Indies rather than elsewhere? Ottoman and Indian farmers have the same soil and climate advantages, but Caribbean planters faced few constraints on land and labor. On the capital side, the infusion of capital enabled the rapid reallocation of resources.

In 1791, there was a revolution on Saint-Domingue, the slaves beat the French and abolished slavery and changed the name to Haiti. Before the revolution it was supplying 24% of British cotton imports, afterwards it fell to 4.5%.

A new production source needed to be found and planters went to America. By 1785, the first cotton bale came into Liverpool from the US. The southern states are superbly suited for cotton production. The climate and soil of a wide swath of the American South met the conditions of rain, the right patterns of rainfall and the right number of days without frost.

Quick expansion was made easier because many had grown tobacco, there are substantial similarities between growing tobacco and cotton. Moreover, many of the planters moved from the West Indies to America and planted Sea Island cotton and it had long silky fiber which made it well suited to finer yarns and cloths much in demand by Manchester manufactures.

In 1793, Eli Whitney invented the cotton gin which was able to rapidly remove seeds from the cotton balls. This increased ginning productivity by a factor of 50. The gin was used by many planters and cotton production increased.

One of the problems with the cotton plant, is every few years it needs to be rotated, and legumes planted on it to revive the soil. The other alternative is to go west until you find better conditions. By the 1830’s the state of Mississippi produced more cotton than any other state. In 1790, the US produced 1.5 million pounds of cotton; in 1800 that grew to 36.5 and 1820 it exploded to 167.5 million pounds.

Why the US growth in cotton production? What distinguished the US was the planters’ command of nearly unlimited supplies of land, labor and capital and their unparallel political power.

America’s remarkably cheap transportation costs were not preordained, but the direct result of the expansion of its national territory. Most significant is the Mississippi River, whose surge of cotton freight turned New Orleans into a key American cotton port. The first steamboats appeared on the Mississippi in 1817, reducing costs. By the 1830s, railroads connected the new hinterland to river and seaports.

Until the advent of mechanized harvesting during the 1940’s cotton was a labor intensive crop. In the US, however, nearly any shortage can be fixed with the right amount of money.

In every society there are smaller farms, the reality is in 1860 85% of all cotton picked in the south were on farms larger than 100 acres and the planters who owned those farms owned 91.2% of all the slaves. The larger the farm, the better the planter could take advantage of the economies of scale. Larger farms could afford the gins to remove seeds, and presses to compress the loose cotton into tightly pressed bales to lower shipping costs, they could engage in agricultural experiments to wrest more nutrients from cleared soil and they could buy more slaves to avoid any labor constraints.

The large planters took political power including the 3/5’s clause which successive Presidents, Supreme Court judges, and both houses of Congress backed. At the state level, railroads were allowed to develop which decreased the costs of moving cotton bales.

Linking to dividend paying stocks, looking at the cotton industry you see a structure that has tenacles into a many different aspects of normal society. Innovation and technology play a part, demand plays a big role, political influence helps limit the negative aspects and profits continue. Ideally your investments do more good for everyone including yourself.

There are more questions than answers, till the next time – to raising questions.