The Dawn of Innovation (45 page)

Late nineteenth-century British savants were mesmerized by the relentless American advance. A near-obsessive search for the causes of the relative British decline spurred a century's worth of economic history on both sides of the Atlantic that offers a superb lens for tracing the sources of American advantage. The divergent paths followed by the American and British steel industries were the most intensively researched, because they were among the few that readily lent themselves to direct comparison.

Loss of leadership in steel was especially painful for Britons. Steel was the foundation industry for the late-Victorian period, much as information technology is today. Nor was there any question of British ability to produce the world's finest steel. Sheffield steel set the quality standard for the world, and its crucible steel had almost the status of a semiprecious metal. Almost all the era's steelmaking advances came from the United Kingdom: the hot-air blast furnace, the Bessemer process, and the Thomas-Gilchrist basic lining, enabling the use of high-phosphorus ore. Charles Siemens invented the furnace used for the Siemen-Martin open-hearth method of steelmaking that competed with Bessemer's, especially in nonrail applications. Siemens belonged to the great German industrial family but spent most of his life in England and eventually became a citizen.

The American challenge lay in the vast growth of its steel-making
capacity
. Stephen Jeans, secretary of the British Iron Trade Association, and the steel engineer Frank Popplewell both wrote book-length surveys around the turn of the century seeking the reasons for the American success.
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As Jeans put it, just the increase in the American output over the six years from 1895 was “considerably larger than the total output of steel of all kinds throughout the world in any one year prior to 1890, and is
about half a million tons more than the total make of steel in Great Britain in any two years prior to 1897.”
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Jeans glumly noted that American annual steel and pig-iron output was already twice as large as Great Britain's and greater than the total of Great Britain and Germany combined.

Popplewell and Jeans each make it clear that the American advantage involved no fundamental breakthroughs but was rather about methodologies, work organization, and mechanization. Popplewell's list of the characteristic features of an American plant were all in place at Carnegie's Edgar Thomson Works by the early 1880s. There were some splendid British steel plants; indeed, Holley had extolled several as models for the United States. But there were many more older, smaller plants and a lower degree of mechanization. Continuous processing through the entire ore-to-steel cycle was rare, and smaller plants could not afford expensive equipment like the chargers that injected the chemical and mineral additives into the converter mechanically. Popplewell commented on the “very conspicuous absence of labourers in the American mills.”
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American rail and rod mills routinely produced three times the output of British mills with fewer than half the men.

The cost advantage once enjoyed by the British industry from its conveniently located ore and coal supplies gradually disappeared as Americans mechanized ore mining and transport through the 1890s. Great Lakes Mesabi Range ore was surface-mined with giant steam shovels, and Popplewell was awestruck at lake port ore handling: huge mechanical clamshell shovels unloaded 5,000-ton ore boats into moving lines of freight cars, at rates over 1,000 tons per hour. Carnegie Steel's own Pittsburgh-to-Erie railroad, with some of the largest cars and the most advanced loading facilities, had driven ore transport costs as low as a seventh of a cent per ton.

The big American production runs were facilitated by a high degree of product standardization. Holley had pressed hard to standardize rail patterns before his death in 1882, but it was not accomplished until 1898, compressing some 119 different rail designs down to just 10. Carnegie Steel accomplished a similar result in structural steel at about the same time,
with the publication of its structural steel handbook, which was soon adopted by the whole industry. The British found standardization much more difficult, in part because so much of their product was exported and in part, as in the case of rails, because of the resistance of smaller railroads and the manufacturers that serviced them.

The British still led the world in the scale and quality of their ship-plate production and in other high-end products, and no other country, Jeans felt, could match the British in ultralarge steam forges for ship components. Although American locomotives from Baldwin were spreading throughout the world, Jeans did not think they came up to British quality but conceded that they were cheaper.

Jeans's overall conclusion, that American steel “can compete with Great Britain and Germany in the leading markets of the world,”
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was sugar coating for his parliamentary audience. The scale, the aggressiveness, the modernity of the American plants that he so painstakingly documents leave little doubt that the contest was over. Indeed, just about the time Jeans completed his review, Great Britain was transmuting from the world's dominant steel producer into the largest steel importer. Both American and German steel, it seemed, were underselling Great Britain in its home market.

The failure of the British to keep pace is a classic example of the disadvantages accruing to a technological first mover. By the time American and German competitors appeared on the scene, the structure of the British industry already had a settled character. The prevalence of smaller companies, many specializing just in iron or just in steel, was not conducive to American- and German-scale processing efficiencies and mechanization, for they were not cost-effective for any but the largest works.

Just as important, a competitive late entrant usually starts with the most modern plant, and if it enjoys a high growth rate, requiring constant plant additions, its advantage in facilities will steadily grow. Older competitors, with flat or falling shares, will find it commensurately hard to finance plant upgrades. By the 1880s the British industry was clearly behind the Germans and Americans in production technology. A number of
Britons understood that only a root-and-branch reconstruction of the industry could restore its competitiveness, but the financial and organizational obstacles, in a country committed to laissez-faire economic principles, made it practically impossible.

A long finger of suspicion points at both British workers and British managers. Most fair-minded observers conceded that American and German workers and bosses were better educated and more open to scientific advances. Worker recalcitrance and union resistance were major obstacles to mechanization throughout British industry. But British managers also played a big role in the deterioration. The entrepreneurial drive of the 1840s and 1850s had markedly ebbed. Old-school managers, consciously or not, connived with their workers to stick with what they knew: the smaller plants, the old methods, the clubman's version of genteel competition. As one expert put it, “outside England people say, ‘What is the saving?' In England, the first question is, ‘What is the cost?'” A sympathetic American was struck by the “pessimism and lack of courage” among British iron and steel men.
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The same slippage can be seen in the British chemical industry. In mid-century, Great Britain led the world in inorganic chemicals (ammonia, caustic soda, sulfuric acid) but failed to adjust when the new Solvay technology emerged in the 1870s; within a decade German and Belgian manufacturers had perhaps a 20 percent cost advantage, with far less environmental damage. The Americans came on strongly in the late 1890s, starting with the Solvay process and the even newer electrolytic technology. Similarly, in electrical power generation, the steam turbine engine, one of the critical enabling technologies, was invented by an Englishman, Charles Parsons, in 1884. But the industry was quickly dominated by America's General Electric and Westinghouse and Germany's Siemens. Some failures seem cultural. In reaction to a wave of machine-made American shoe imports in the early 1900s, British industry switched to American shoemaking machines yet somehow never realized American productivity levels.

Jack Brown, an industrial historian at the University of Virginia, supplies a striking example of the British cultural difference. British rail lines
typically made all their equipment—not just their locomotives and cars, but everything else, including tapestries, table-settings, ticket-blanks, and furniture. That was not absurd: each was seeking to express a specific company personality to its employees and customers. U.S. rail lines, by contrast, outsourced almost everything—George Pullman owned and maintained virtually all the lines' luxury sleeping cars. The only value being served was economic rationality. When British lines were forced to turn to American suppliers during a long 1895 strike, they were shocked to find that they were saving 30–40 percent on their own costs of production.
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Finally, the vulnerability of the British industry was increased by the country's ideological commitment to free-trade dogma, in face of steep protective steel tariffs in both the United States and Germany—and on the part of the Germans, flagrant, predatory, below-cost “dumping,” as they attacked Great Britain's steel markets everywhere. (An important distinction is that US trade policy was protective but not predatory. It artificially obstructed British imports, but almost all of its steel production was consumed at home. Germany's strategy was predatory: it dumped most of its production overseas, making up the losses by charging high prices at home.)

It is all the more remarkable, therefore, that the British political and business establishment emphatically rejected a return to protectionism in the early 1900s, even though it was labeled, reasonably enough, as “fair trade” retaliation against predators. The politics and interests involved were complicated, but to a striking degree, the rejection was based on a web of highly abstract arguments. As the
Times
put it, “Protection . . . brings its own punishment. Nature will retaliate upon France whether we do or not.”
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The flower of the British economics establishment, the legendary professors Marshall, Pigou, and Jevons, all pronounced on the folly of trade restriction, insisting that the British industry was merely undergoing a “natural” adjustment. Winston Churchill worried how ministries and Parliament, “hitherto chaste because unsolicited,” might behave once the protectionist bawd ran free.
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In the United States, the usual penalty to the protective nation—excessive prices—did not apply in steel because of Carnegie. By economic rationality, if British steel was selling at $25 per ton pretariff, American steel makers would price as close as they could to $53 ($25 + $28). That is why tariffs were often called the “mother of all trusts”
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—the windfall profits were so high that American firms would quickly reach market-sharing agreements, as happened in sugar, whiskey, tin plate, and other industries.

But it didn't happen in steel. From 1886 through 1899, the British export price averaged $23 per ton, or $51 to the customer after the tariff. But the average selling price from American Bessemer mills was only $28. In other words, the Americans left $23 of available tariff protection on the table; in 1897 and 1898, the average American price was actually lower than the British pretariff price. In steel, in other words, the tariff had only minimal impact on final prices, because of Carnegie's persistent drive to steal share from his competitors.
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The primary driver for J. P. Morgan's purchase of Carnegie Steel in 1901, and the roll-up of most of the rest of the industry in a new conglomerate, US Steel, was to reestablish the cartel. With Carnegie safely dispatched to the fields of philanthropy, Morgan could finally slow the march of technology to staunch the drain of capital spending, and keep steel prices at whatever level was needed to service his massive acquisition debt. From then on, most new advances came out of railroad or automobile company labs, or from overseas. US Steel settled into the sleepy dominance that came to characterize nearly all big American industries until the Japanese and German assaults of the 1970s and 1980s.

By the end of the century, the United States, almost inadvertently, was poised to make inroads into Great Britain's dominant position in global finance. The British branch of the great Rothschild banks was run by “Natty” Rothschild, grandson of old Nathan. The London house's founder
was accustomed to be lead finance house to underwrite British overseas adventures. When the South African war broke out in 1899, Rothschild was shocked to learn that the government planned to grant half the financing mandate to an American syndicate led by Morgan. After fierce lobbying by the financial elite, Morgan was given only a very minor role during the first round of fund raising. But as drawn-out war pressured British gold reserves, the Exchequer had no choice but to give Morgan an equal role. Worse, it was forced to yield to Morgan's peremptory demand that he get twice the commission as the British consortium. Niall Ferguson, the historian of the Rothschild family, writes, “It was an early sign of that shift in the centre of financial gravity across the Atlantic that would be such a decisive—and for the Rothschilds fateful—feature of the new century.”
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The underlying tidal shift was that the United States was transmuting from a debtor to a creditor nation. America's long history as a debtor was the inevitable result of its persistent trade deficits on top of the strong inflow of investment capital, primarily from the British.

The trade deficit began to shrink in the latter part of the 1870s, primarily from a big jump in exports of grain, flour, meat, and animal fats. Purely in merchandise trade—that is, excluding services like finance and transportation—the United States was nearly always in surplus after 1876 and finally flipped into surplus in both goods and services in the mid-1890s. By the end of the century, its finished manufactured exports had a dollar value greater than either cotton or wheat.
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