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Shorting the Future? Capital Markets and the Launch of the British Electrical Industry, 1882–1892

Published online by Cambridge University Press:  20 August 2020

William P. Kennedy  and
P. J. R. Delargy
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Abstract

Although Britain's electrification started with considerable technological and market advantages, it proceeded remarkably slowly and hesitantly. Using share-price data, this study investigates the conventional explanations for this disappointing outcome: notably, perverse regulation and competition from entrenched gas-light providers. It finds that these oft-cited factors had an imperceptible impact on the course of the British electrical industry's turbulent market launch in 1882. However, we show that, owing to the fledgling electrical industry's need for incessant experimentation, short-sighted, self-serving decisions by the management of the early British industry's most prominent firm squandered a well-funded start, with long-lasting adverse consequences.

Keywords

Anglo-American Brush Electric LightEdison and Swan United Electric LightLondon Stock ExchangeSecond Industrial RevolutionBritish electrificationfirst-mover advantage
Type
Research Article
Information
Business History Review , Volume 94 , Issue 2 , Summer 2020 , pp. 287 - 320
Copyright
Copyright © The President and Fellows of Harvard College 2020

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Footnotes

We wish to thank the LSE's Pump Priming Scheme and the Leverhulme Trust (Grant F4BB) for making this research possible. We would also like to thank the Universities of Galway and Essex for library and computing facilities, as well as the staff of Santry Book Depository, Trinity College, Dublin. R. E. Bailey, E. H. Hunt, and L. Hannah offered helpful comments on earlier versions of this article, as did three anonymous referees. We alone are responsible for any remaining errors.

References

1 In this article, the electrical industry includes all electrical activity (i.e., the manufacture of equipment for the generation and use of electricity and the service undertaking of providing it to end users) except telecommunications. We date the creation of the electrical industry (as opposed to a laboratory phenomenon) from the first large-scale public demonstrations of electric lighting in Paris in May 1877.

2 Byatt, I. C. R., The British Electrical Industry, 1875–1914: The Economic Returns to a New Technology (Oxford, 1979), 5Google Scholar; Kennedy, William P., Industrial Structure, Capital Markets, and the Origins of British Economic Decline (New York, 1987), 16–57Google Scholar; Gordon, Robert J., The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (Princeton, 2016), 115–17CrossRefGoogle Scholar, 269–71; Gerben Bakker, Nicholas Crafts, and Pieter Woltjer, “A Vision of the Growth Process in a Technologically Progressive Economy: The United States, 1899–1941” (working paper 341, University of Warwick, Coventry, U.K., 2017), table 2.

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4 König, Wolfgang, “Science-Based Industry or Industry-Based Science? Electrical Engineering in Germany before World War I,” Technology and Culture 37 (Jan. 1996): 70–73CrossRefGoogle Scholar; Murmann, Johann Peter, “The Co-Development of Industrial Sectors and Academic Disciplines,” Science and Public Policy 40 (Apr. 2013): 229–46CrossRefGoogle Scholar. Many men first educated as electrical engineers later made important contributions to science, perhaps because of its close links with physics.

5 Clapham, John H., An Economic History of Modern Britain, vol. 2, Free Trade and Steel (Cambridge, U.K., 1932), 109Google Scholar.

6 See, for example, Arthur A. Bright, The Electric-Lamp Industry: Technological Change and Economic Development from 1800 to 1947 (Cambridge, MA, 1949), 106–9; Stephen Broadberry, The Productivity Race: British Manufacturing in Historical Perspective, 1850–1990 (Cambridge, U.K., 1997), 241–44; Byatt, British Electrical Industry, 1–10, 210–19; Clapham, Economic History, 109; Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880–1930 (Baltimore, 1983), 60–66, 227–61; Kennedy, Industrial Structure, 29–31; Alexander Siemens, “Inaugural Address of the President,” Journal of the Institution of Electrical Engineers 23 (Jan. 1894): 11–12; John F. Wilson, Ferranti and the British Electrical Industry, 1864–1930 (Manchester, 1988), 31; and Daniel R. Shiman, “Explaining the Collapse of the British Electrical Supply Industry in the 1880s: Gas versus Electric Lighting Prices” Business and Economic History 22 (Fall 1993): 318.

7 I. C. R. Byatt, “Electrical Products,” in The Development of British Industry and Foreign Competition, 1875–1914: Studies in Industrial Enterprise, ed. Derek Aldcroft (Glasgow, 1968), 273. See also Hughes, Networks of Power, 238–47, 257. C. A. Parsons and Company, the producer of steam turbines, was the only British company that became an important manufacturer and exporter of electrical equipment.

8 Hughes, Networks of Power, 250, 443–44, 447; Tom McGovern and Tom McLean, “The Genesis of the Electricity Supply Industry in Britain: A Case Study of NESCo from 1889 to 1914,” Business History 59, no. 5 (2017): 675–80.

9 Hughes, Networks of Power, 87; Robert Fox, “Thomas Edison's Parisian Campaign: Incandescent Lighting and the Hidden Face of Technology Transfer,” Annals of Science 53, no. 2 (1996): 157–67; I. C. R. Byatt, “The British Electrical Industry, 1875–1914” (unpublished D.Phil. thesis, Oxford University, 1962), 10, Bodleian Library; Leslie Hannah, “Pioneering Modern Corporate Governance: A View from London in 1900,” Enterprise & Society 8 (Sept. 2007): 642–86.

10 See, for example, Bright, Electric-Lamp Industry, 106–9; R. E. Crompton, Reminiscences (London, 1928), 111–12; Hughes, Networks of Power, 64; Ranald Michie, “The Finance of Innovation in Late Victorian and Edwardian Britain: Possibilities and Constraints,” Journal of European Economic History 17 (Winter 1988): 506–9, 518; and R. H. Parsons, The Early Days of the Power Station Industry (Cambridge, U.K., 1939), 189–98, among many others going back to the 1880s, although none considers the evidence in detail.

11 James Foreman-Peck and Robert Millward, Public and Private Ownership of British Industry, 1820–1990 (Oxford, 1994), 163–66.

12 By 1882, such compulsory purchase clauses were common. See Foreman-Peck and Millward, Public and Private Ownership, 165; and Paul Johnson, Making the Market: Victorian Origins of Corporate Capitalism (Cambridge, U.K., 2010), 26.

13 John F. Wilson, Ferranti: A History, vol. 1, Building a Family Business, 1882–1975 (Lancaster, U.K., 2000), 66, 76; Electrical Review (formerly The Telegraphic Journal and Electrical Review [hereafter, ER]), 27 Sept. 1884, 253–54; Brian Bowers, A History of Electric Light and Power (New York, 1982), 135–41.

14 Parsons, Early Days, 12–20.

15 ER, 9 Feb. 1884, 109; 27 Sept. 1884, 253–54; 27 Dec. 1884, 521.

16 Parsons, Early Days, 21–30, 190; Wilson, Ferranti: A History, 66; F. W. Beauchamp Gordon, “The State and Electrical Distribution,” in A Plea for Liberty: An Argument against Socialism and Socialistic Legislation, ed. Thomas Mackay (New York, 1891), paras. XI.29–XI.30.

17 “The Electric Lighting Committee,” ER, 3 June 1882, 399–400; “Parliamentary Intelligence: The Electric Lighting Act,” Times (London), 17 July 1882, 9; 21 July 1882, 4; Economist, 22 July 1882, 907. Interestingly, when this issue arose later in Germany, despite the controversies in Britain, twenty-one years of secure private tenure was considered appropriate. “Capital Issues in Germany,” ER, 22 Jan. 1909, 155–56.

18 Parsons, Early Days, 189, 191; Hughes, Networks of Power, 63–66.

19 Michie, “Finance of Innovation,” 516; Hughes, Networks of Power, 63.

20 Siemens, “Inaugural Address,” 12–13.

21 Economist, 4 Nov. 1882, 1368.

22 ER, 30 June 1883, 530–34.

23 ER, 29 Mar. 1884, 258.

24 See Parsons, Early Days, 185–90; R. A. S. Hennessy, The Electric Revolution (Newcastle, 1972), 22; Thomas Parke Hughes, “British Electrical Industry Lag: 1882–1888,” Technology and Culture 3, no. 1 (1962): 37–39; and Hughes, Networks of Power, 63–66 (albeit in both cases Hughes offers a more nuanced assessment than do many discussing the subject).

25 Michie, “Finance of Innovation,” 498–500, 503–8.

26 The average internal rate of return (weighted by buyout price) of the fourteen private companies bought from shareholders by local authorities before 1914 was 12.84 percent. Three companies, which had raised a total of £62,600 (5.36 percent of the £1,166,300 raised by all electrical companies before purchase by local authorities), were acquired from liquidators, returning nothing to shareholders. For details, see table 1 in the online appendix for this article.

27 ER, 10 Feb. 1883, 116–17; 14 July 1883, 30.

28 ER, 12 May 1883, 397; 9 June 1883, 452; 14 July 1883, 30.

29 Hughes, Networks of Power, 86–105, 230–47; Wilson, Ferranti: A History, 68, 82–90. From 1887, as the ability to switch readily between AC and DC currents emerged, the decision in May 1889 of the BoT's Marindin Committee to ensure that AC systems faced competition from DC ones in the same administrative district was an especially egregious error borne out of technological ignorance.

30 See Byatt, British Electrical Industry, 21–25, 32–36, 40–41, 55–56; Leslie Hannah, Electricity before Nationalisation: A Study of the Development of the Electricity Supply Industry in Britain to 1948 (Baltimore, 1979), 7, 9; and Shiman, “Explaining the Collapse,” 318–26.

31 Byatt, British Electrical Industry, 21–24.

32 William D. Nordhaus, “Do Real-Output and Real-Wage Measures Capture Reality? The History of Electric Lighting Suggests Not,” in The Economics of New Goods, ed. Timothy F. Bresnahan and Robert J. Gordon (Chicago, 1997), 45–46.

33 Steven W. Usselman, “From Novelty to Utility: George Westinghouse and the Business of Innovation during the Age of Edison,” Business History Review 66 (Summer 1992): 264–67; Crompton, Reminiscences, 109–10; Byatt, “British Electrical Industry,” 42–43; Parsons, Early Days, 27, 37; Wilson, Ferranti: A History, 67–68, 82–90; and Hughes, Networks of Power, 244–46. For the importance contemporaries placed on reliability, for reasons of safety as well as convenience, see ER, 30 June 1883, 527.

34 Jean Strouse, Morgan: American Financier (New York, 1999), 230; Parsons, Early Days, 106; Hughes, Networks of Power, 72–73.

35 Harold C. Passer, The Electrical Manufacturers, 1875–1900: A Study in Competition, Entrepreneurship, Technical Change, and Economic Growth (Cambridge, MA, 1953), 86; ER, 25 Oct. 1884, 321; 15 Nov. 1884, 397.

36 Passer, Electrical Manufacturers, 89; Hughes, Networks of Power, 41.

37 Byatt, British Electrical Industry, 21–24. Edison noted that less than 10 percent of gas company revenues came from public lighting contracts. Passer, Electrical Manufacturers, 80.

38 Passer, Electrical Manufacturers, 120–21, 185; Hughes, Networks of Power, 43–46; ER, 3 May 1884, 377.

39 Byatt, British Electrical Industry, 24–25; Hughes, Networks of Power, 51–52, 67–73.

40 Byatt, British Electrical Industry, 8; Hannah, Electricity before Nationalisation, 5–6; Hughes, Networks of Power, 57, 61–65.

41 Bright, Electric-Lamp Industry, 107; Hennessy, Electric Revolution, 32–34; Michie, “Finance of Innovation,” 512–13.

42 Byatt, British Electrical Industry, 8.

43 Leslie Hannah, “J. P. Morgan in London and New York before 1914,” Business History Review 85 (Spring 2011): 113–17; James Foreman-Peck and Leslie Hannah, “Extreme Divorce: The Managerial Revolution in UK Companies before 1914,” Economic History Review 65 (Nov. 2012): 1219–23; Mary A. O'Sullivan, Dividends of Development: Securities Markets in the History of U.S. Capitalism (Oxford, 2016), 83–84, 102–5.

44 Only two electrical companies created before 1882 did not also raise money in 1882: Albo-Carbon Light (less than £20,000 cash) and Siemens Brothers (£375,000 nominal).

45 Burdett's was published from 1882 under the auspices of the Committee of the Stock Exchange.

46 Ruth Dudley Edwards, The Pursuit of Reason: The Economist, 1843–1993 (London, 1993), 431–33. By 1914 the Investor's Monthly Manual's popularity was waning as sources of daily prices appeared.

47 Bright, Electric-Lamp Industry, 44–57. The fractious Sawyer-Man partnership was the only (partial) exception.

48 Only £400 of nonequity securities were issued in 1882.

49 Investor's Monthly Manual (IMM), 30 June 1882, 242. The Economist, reviewing the Stock Exchange “manias” of 1882, highlighted two, the electrical one and purchases of Canadian land, noting that Canadian land had garnered “probably four or five times” the money electricity had. While the newspaper expected both investments to bear fruit eventually, it did not expect the over-eager investors of 1882 to be among the beneficiaries. Economist, 23 Dec. 1882, 1585–86.

50 Because of the much smaller role of public markets in the United States and Germany in the early 1880s, a similarly clear estimate of the total funds committed to early electrification in those countries is not possible. On the United States, see Thomas R. Navin and Marian V. Sears, “The Rise of a Market for Industrial Securities, 1887–1902,” Business History Review 29 (June 1955): 106–13; on Germany, see Carstens Burhop, David Chambers, and Brian Cheffins, “Law, Politics and the Rise and Fall of German Stock Market Development, 1870–1938” (Legal Studies Research Paper No. 4/2015, Faculty of Law, University of Cambridge, Cambridge, U.K., Feb. 2015), 14–21. In both countries, the number of new public issues rose strongly in the 1890s.

51 Passer, Electrical Manufacturers, 86–88.

52 Hughes, Networks of Power, 45.

53 Unable to attract outside funds for manufacturing, Edison and his Menlo Park coworkers launched their lamp factory with $10,000 from their own resources. By 1883 they had invested a total reported to be only $35,000. Passer, Electrical Manufacturers, 98–99; Matthew Josephson, Edison (London, 1961), 248, 300.

54 W. Bernard Carlson, with comment by John Sutton, “The Coordination of Business Organization and Technological Innovation within the Firm: A Case Study of the Thomson-Houston Electric Company in the 1880s,” in Coordination and Information: Historical Perspectives of the Organization of Enterprise, ed. Naomi R. Lamoreaux and Daniel M. G. Raff (Chicago, 1995), 64–67; Carlson, Innovation as a Social Process: Elihu Thomson and the Rise of General Electric, 1870–1900 (New York, 1991), 144, 154–56, 174–75, 181.

55 Passer, Electrical Manufacturers, 131–37. The cash was raised in a private rather than public offering, and assumes all shares were issued for fifty dollars each.

56 In 1882 the Times only intermittently reported price quotations for the floundering Maxim-Weston Electric Company (known as Electric Light & Power Generator Company before June 1882).

57 Passer, Electrical Manufacturers, 20.

58 Brian Bowers, “Robert Hammond,” in Dictionary of Business Biography, vol. 3, ed. David Jeremy and Christine Shaw (London, 1985), 21.

59 “Prospectus for Hammond Electric Light & Power Supply Company,” Times, 21 Jan. 1882, 14.

60 See William P. Kennedy and P. J. R. Delargy, “Notes on Early British Electrification: The 1880s” (discussion paper, Department of Economics, University of Essex, Colchester, U.K., 2020), app. tables 1A, 1B, and 1C, https://repository.essex.ac.uk/27552/.

61 ER, 14 Jan. 1882, 26; Times, 21 Jan. 1882, 14; 24 July 1882, 11; Byatt, “British Electrical Industry,” 333, table 64.

62 Byatt, “British Electrical Industry,” 464; Hughes, Networks of Power, 21–22; Crompton, Reminiscences, 93–94, 107–10.

63 Only the partially paid-up shares, reflecting the experience of the cash-investing public, are plotted. Facing no calls, the fully paid shares—issued by and to company insiders for noncash assets such as patents—enjoyed markedly higher returns while experiencing the same general price trajectory. The third-largest gas company, London-based South Metropolitan Gas, was too infrequently traded to be included.

64 As part of a project to create a comprehensive British stock market index for the period, market capitalizations were calculated for all companies (1,197) whose prices appeared in the IMM at end-June 1883. That data identified the index companies used in Figure 1. In the 1880s, railroads and banks constituted by far the largest groups on British stock exchanges. London's Gas Light & Coke, ranked twelfth by market capitalization in June 1883, was the largest company outside the two dominant groups.

65 Dividend increases generally boost share prices. For contemporary confirmation, see Fabio Braggion and Lyndon Moore, “Dividend Policies in an Unregulated Market: The London Stock Exchange, 1895–1905,” Review of Financial Studies 24 (Sept. 2011): 2937–38, 2940, 2952, 2957; and Gareth Campbell and John D. Turner, “Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain,” Economic History Review 64 (May 2011): 583–84.

66 Economist, 20 May 1882, 604–5; Times, 10 May 1882, 13; 13 May 1882, 13; H. Osborne O'Hagan, Leaves from My Life, vol. 1 (London, 1929), 121–23; ER, 27 Jan. 1883, 79. Insider selling is readily inferred from the trading of fully paid shares, which had been issued only to company insiders upon flotation.

67 Short covering was indicated by settlements “on account,” whereby the short positions were carried over to the next settlement period, subject to a payment to the responsible broker of the difference between the price per share at the time of borrowing it and its price on settlement day. Walter S. Schwabe and G. H. Branson, A Treatise of the Laws of the Stock Exchange, 2nd ed. (London, 1914), 55, 66–71. Also, the Times noted that A-AB's shares were held in “strong hands” unlikely to accommodate short sellers. Times, 10 May 1882, 13.

68 See, for example, Economist, 20 May 1882, 604–5; and Times, 24 July 1882, 11.

69 ER, 22 July 1882, 59–60; 6 Jan. 1883, 17; 27 Jan. 1883, 79; Wilson, Ferranti: A History, 47, 53.

70 ER, 22 July 1882, 59–60; 5 Aug. 1882, 93.

71 ER, 27 Jan. 1883, 78–79.

72 ER, 5 Aug. 1882, 93; 27 Jan. 1883, 77.

73 ER, 2 Feb. 1884, 97; 9 Feb. 1884, 114.

74 ER, 8 July 1882, 13; 28 Oct. 1882, 327.

75 ER, 22 July 1882, 59–60.

76 Times, 15 Feb. 1883, 11, col. 2.

77 ER, 12 May 1883, 405. The HELPS's subconcessions paid cash for equipment but no cash for technology rights, only ordinary shares issued fully paid (eventually going to a premium over par). The Australasian venture was absorbed by A-AB in a major reorganization in 1889. Shares in Australasian Brush (and those issued in exchange for them) never had a positive internal rate of return on investment before 1914.

78 Claims of false prospectuses were common but by no means the only ones. ER, 12 May 1883, 404–5; 22 Dec. 1883, 491; 2 Feb. 1884, 95–97.

79 ER, 22 Dec. 1883, 491–93; 2 Feb. 1884, 94; 29 Mar. 1884, 258.

80 Economist, 20 May 1882, 604–5; 4 Nov. 1882, 1368; ER, 18 Nov. 1882, 385; 30 June 1883, 530, 534; 1 Dec. 1883, 424–25.

81 These amounts comprise cash from both share issue and concession sales. The A-AB total does not include its concessionaires’ uncalled cash, totaling £587,000.

82 Wilson, Ferranti: A History, 53–55.

83 ER, 19 Apr. 1884, 336.

84 Economist, 4 Nov. 1882, 1368; ER, 18 Nov. 1882, 385; 23 Dec. 1882, 502; 30 June 1883, 530, 534; 1 Dec. 1883, 424–25; Siemens, “Inaugural Address,” 10–11.

85 ER, 23 Feb. 1884, 161.

86 ER, 20 June 1885, 562.

87 Entries for House-to-House Electric Light Supply Company in Burdett's, vol. 8 (1889) and in Stock Exchange Official Intelligence, vol. 19 (1900) (under Brompton & Kensington Electricity Supply Co., as the company was known from 1899).

88 Tim Procter, “Robert Hammond,” in Oxford Dictionary of National Biography, vol. 24, ed. H. C. G. Matthew and Brian Harrison (Oxford, 2004), 963. In 1882, perceptively anticipating a severe shortage of competent electricians, Hammond had established an electrical training school, which survived as Faraday House until 1962.

89 ER, 2 Feb. 1884, 91.

90 Byatt, British Electrical Industry, 187–88; Burdett's, vol. 3 (1883); Byatt, “British Electrical Industry,” 319.

91 ER, 12 May 1883, 401–3.

92 Byatt, “British Electrical Industry,” 10, 17; ER, 7 Jan. 1882, 1; 18 Aug. 1882, 119–20; 25 Aug. 1882, 146, Dec. 22, 1883, 485–86.

93 Byatt, British Electrical Industry, 99–100; ER, 2 June 1883, 459.

94 See Kennedy and Delargy, “Notes on Early British Electrification,” app. 1C, https://repository.essex.ac.uk/27552/.

95 Sir William was born in 1823, sent to Britain by Werner in 1841 (where he remained for the rest of his life), granted FRS (Fellowship of the Royal Society) in 1862, and knighted in 1883. On the dynamo invention, see J. D. Scott, Siemens Brothers, 1858–1958: An Essay in the History of Industry (London, 1958), 46. On electric railways, see Byatt, British Electrical Industry, 30.

96 ER, 29 Mar. 1884, 258.

97 Goetzler, Weiher, The Siemens Company: Its Historical Role in the Progress of Electrical Engineering, 1847–1980 (Munich, 1977), 39–42Google Scholar.

98 Bright, Electric-Lamp Industry, 110–11; Passer, Electrical Manufacturers, 132.

99 Scott, Siemens Brothers, 63–71.

100 Siemens, Georg, trans. Rodger, A. F., History of the House of Siemens, vol. I, The Era of Free Enterprise (Freiburg/Munich, 1957), 310–16Google Scholar.

101 Barker, T. C. and Robbins, Michael, A History of London Transport, vol. 2, The Twentieth Century to 1970 (London, 1978), 19, 35–36Google Scholar, 44.

102 Byatt, British Electrical Industry, 138, table 29.

103 ER, 2 June 1883, 452. Lawyers, promoters, and liquidators had “good reason to bless the name of Brush.” ER, 11 Apr. 1885, 339.

104 Evidence for this argument is found in William P. Kennedy and P. J. R. Delargy, “The Electrification of Britain before 1914: The Second Attempt,” (discussion paper, Department of Economics, University of Essex, Colchester, U.K. [in preparation]).

105 Byatt, British Electrical Industry, 138, 69–70.

106 Byatt, 4–5; Crafts, Nicholas, Surging Ahead, Falling Behind, and Fighting Back: British Economic Growth from the Industrial Revolution to the Financial Crisis (Cambridge, U.K., 2018), 72–76CrossRefGoogle Scholar.

107 On Sweden, see Sandberg, Lars G., “The Case of the Impoverished Sophisticate: Human Capital and Swedish Economic Growth before World War I,” Journal of Economic History 39 (Mar. 1979): 225–41CrossRefGoogle Scholar. Swiss technological education was very much in the German mold; e.g., Emil Rathenau had studied at the Swiss Federal Institute of Technology. In 1842, William II of the Netherlands created a Royal Academy in Delft for the technological instruction of civil servants, which in 1864 became the Polytechnic School and is today one of the largest and most prestigious engineering schools in Europe. Japan after 1868, acutely aware of its technological backwardness, made great efforts to rectify it, with a particular emphasis on electrical applications. Saxonhouse, Gary, “A Tale of Japanese Technological Diffusion in the Meiji Period,” Journal of Economic History 34 (Mar. 1974): 150–54CrossRefGoogle Scholar; Braguinsky, Serguey and Hounshell, David, “Spinning Tales about Japanese Cotton Spinning: Saxonhouse (1974) and Lessons from New Data,” Journal of Economic History 75 (June 2015): 373–76CrossRefGoogle Scholar. In 1873 William Ayrton was appointed chair of Natural Philosophy and Telegraphy at Tokyo's Imperial College of Engineering, arguably becoming the first professor of electrical engineering in the world.

108 See, for example, Reich, Leonard S.. “Edison, Coolidge, and Langmuir: Evolving Approaches to American Industrial Research,” Journal of Economic History 47 (June 1987): 341–51CrossRefGoogle Scholar.

109 ER, 29 Mar. 1884, 258.

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