Finance in History: Labor Days
The Lowell Mills offer a lesson in the perils of focusing on labor costs at the expense of technology.
from CFO Magazine
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.
As early as 1826, Lowell's utopia began to give way to competitive pressures. England, which bought much of America's raw cotton, continued to turn it into cotton cloth at a ferocious pace. In response, the U.S. mills tried to increase productivity by speeding up production and productivity. A woman who had once tended one loom soon found herself tending four.
In 1834, the Lowell Mill's directors tried another tack — cutting fixed labor costs. When management announced that the women would have their wages cut, the Lowell Mill girls, as they were called, went on strike, or in the language of the day, they "turned out." After only a few days, the strike collapsed and their attempt to forestall the wage cut failed.
Two years later, management decided it had to cut costs again, though not its own, and again it targeted its women operatives. Pay was to be cut by $1 a week, and simultaneously, the amount the girls paid the company for their rooms in the boardinghouses was to increase. At the time, they were sleeping two to a bed and eight to a room. This time, over a thousand women turned out, striking for several weeks.
Throughout, the women's efforts to improve their working conditions were undermined by the willingness of later immigrants, first Irish, then Italian, to take whatever wages were offered. Ultimately a six-year depression that began in 1837, brought on by overly easy bank credit and rampant real estate speculation, ended any attempt at labor organization. Jobs disappeared by the thousands, and what little power the fledgling labor movement had evaporated.
Of course, if savings on labor costs created intolerable conditions for mill workers, the demand for cheap cotton had bred an even more ghastly system. The raw material used in the mills came from the South, and was grown and picked by slaves. Two-thirds of the Southern cotton was sold to England. The other third was shipped north to New England. Many workers sympathized with the plight of slaves and supported abolitionism, but also suffered themselves when the Civil War broke out. Realizing that they would make more selling raw cotton than by making cloth, Lowell's mill owners closed their mills and sold off the contents of their warehouses.
Many of the mills reopened after the war, but eventually most moved to the South themselves. Although most attribute this development to the lure of cheaper labor and proximity to raw materials, another factor played a part. As the management hierarchy of the mills suggests, investors focused on finance and labor. Responsibility for technology — specifically, the machines that spun, wove, and finished the cloth — was relegated to an outside superintendent. As Steven Lubar reports in "Managerial Structure and Technological Style: the Lowell Mills, 1821-1880," shareholders challenged the need for skilled (and therefore costly) managers for these machines. Neither the management system nor the accounting systems (this was before the day of useful cost accounting) fostered an appreciation for the role technology played in operations. As a result, the Lowell mills were slow to repair and slower to invent more efficient machinery. In the end, operators found it simpler to start over in a new location than to repair old machinery.
Today, of course, even the southern mills are closed, with almost all textiles made overseas. But you can still visit the remarkable cotton mills of New England. They're museums.
R.G. Voorhees is a reporter at CFO magazine.
© CFO Publishing Corporation 2007. All rights reserved.