History of Venture II: Slavery and America’s Industrial Rise

24 minutes


Updated February 11, 2023

The Dawn of the Insurance Industry

Slave trading was a risky and perilous business. In addition to the dangers posed by the sea in the 18th century, there was always the possibility of a slave revolt. While insurance for suppressing rebellions at sea did not cover losses owing to deaths caused by suppressing the rebellion if fewer than 10% of the enslaved cargo were killed, the insurance industry was established to spread these risks.

Slavery is the most extreme manifestation of the insurance principle of placing a high value on human life. In 1790, the slave trade and the transportation of slave-grown produce from the West Indies accounted for at least one-third of the premiums collected by the London Assurance Company. In the 18th century, insurance flourished and developed its capital accumulation logic, playing a significant role in the rise of finance capitalism in London. The 1720 Act of Parliament, which permitted the formation of two joint-stock insurance companies heavily involved in insuring the slave trade, facilitated the formation of Royal Exchange Insurance, later the Guardian Royal Exchange, and now a subsidiary of AXA, and the London Insurance, which was subsequently merged with Royal and Sun Alliance. The most important business for Lloyd’s of London was the West Indian slave trade.*

The 1781 tragedy of the British slave ship Zong is conspicuously absent from histories of capitalism and venture capital. However, scholars have argued convincingly that the need to insure against losses in the slave trade was a crucial factor in the development of the modern insurance industry, which led to the establishment of the venture capital industry as we know it today.

From Liverpool’s docks, the Zong sailed to the African coast, where slaves were loaded and transported to Jamaica. The small Dutch ship was purchased by Richard Hanley for William Gregson and others. Gregson had long invested in slavery, and they purchased insurance to cover the shipment of their slaves. For a successful voyage, a capable and seasoned captain was required to manage the crew, cargo, and commercial activities. Luke Collingwood’s appointment as Zong captain marked the beginning of a series of poor choices. Collingwood had completed nine to ten Atlantic voyages, but never as captain.* When the surgeon-turned-captain assumed command in Africa, he assembled his crew and loaded slaves using unorthodox methods.

In Africa, crew recruitment was even more difficult than in England. Prior to an already perilous voyage, Captain Collingwood knew few of his crew members. The majority of captains carefully inspected each slave and loaded them in small numbers. Collingwood was inherited by 244 slaves. He had neither chosen nor known them, and they had occupied the ship for months without his knowledge or consent. Collingwood loaded the 110-ton ship with 459 enslaved individuals, despite the fact that ships of that size typically carried only 193.

The voyage across the Atlantic was difficult. First, water containers began to leak, depleting the crew’s supply. This complicated their extensive journey. Jamaica was, on average, 61 days away. The Zong was at sea for over a hundred days. The captain fell ill, began hallucinating, and lost control of the ship. The crew threw one-third of the chained Africans into the ocean and condemned them to die out of fear that the ship’s water supply would run out and the entire cargo would perish without recourse to insurance. James Walvin, author of The Zong: A Massacre, the Law and the End of Slavery, argues that the Zong’s crew was conducting the slave trade as usual. Consequently, this crime initially received little attention. However, Gregson and the other Liverpool cargo owners later filed a claim with their insurance provider for the 132 Africans who had died.

The subsequent trial combined sentimentality and humanism to foster abolitionist views in the 19th century, resulting in many Britons viewing the murder of 132 Africans aboard the Zong as cruel and immoral. This marked the beginning of the abolition of slavery in the United Kingdom.*

Across the Pond in the Southern Seas

By the beginning of the Civil War in 1861, more millionaires per capita lived in the Mississippi Valley than in any other part of the United States. Cotton grown and picked by enslaved workers was America’s most valuable export. Slaves were worth more than all the country’s railways and industry put together. There were more financial institutions per square mile in New Orleans than in New York City. What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was a combination of the UK and America’s unflinching willingness to use violence on nonwhite people to exploit seemingly endless supplies of land and labor. Given a choice between modernity and barbarism, prosperity and poverty, lawfulness and cruelty, democracy and totalitarianism, America chose all of the above. By the eve of the Civil War, slave laborers, on average, picked 400% more cotton than their counterparts did 60 years earlier. Undeniably an incredible amount of productivity, the system was pulling as much out of its enslaved workforce as it possibly could.*

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Enslavers expanded their operations aggressively to capitalize on economies of scale inherent to maximizing crops in America and the Caribbean, buying more enslaved workers, investing in better tools, and experimenting and iterating products to achieve optimal outputs. They established convoluted organizational structures, with a central office staffed by owners and lawyers in charge of resource allocation and long-term planning, and multiple divisional units accountable for different operations. Punishments rose and fell based on the demands of the market—the price of goods in the UK was directly correlated with the level of discipline inflicted on the enslaved to keep their work rates high.

To expand their operations and make more money, they needed more capital. So they took mortgages. The way in which mortgages work is a bank lends the money to buy a house, and against that loan, the asset (typically the house itself) is leveraged. If the loan is not paid in full, the house is seized by the creditor. The concept of mortgages is not new to either the UK or America, yet, the concept of bricks, mortar, or land being leveraged is not where mortgages started. The industry began with enslaved people. Plantation owners approached banks for loans to procure further land, resources, and slave labor, using the slaves they already owned as collateral.

A newly formed banking industry was used by enslavers to mortgage their slaves to finance the scaling of their operations. The bundling of these debts created bonds that are still used today, and investors were paid dividends from profits made on the mortgaged enslaved people. Today, this is called securitizing debt, and at the time, it ostensibly allowed global markets to invest into the business of slavery. State-chartered banks took slave-backed mortgages from plantation owners, bundled the collective debts into bonds, and sold those bonds to investors throughout the Western world. Thus, when owners made payments on their mortgages, investors received a return. Securitizing debt in this way became an incredibly efficient way of pumping global capital into the American slave economy at the time. Historians have shown that most of the credit powering the American slave economy came from the London money market.

Between 1820 and 1860, approximately 875,000 enslaved people were transported to the western frontier via the domestic slave trade.* As men moved westward, credit played a crucial role in their economic success. As shrewd managers of their financial portfolios, planters could profit from the cotton produced by their slaves and use this human property to acquire more land and slaves. Slaveholders frequently pledged the same human property to multiple creditors. The securitization of enslaved people brought these men one step closer to the fortunes that drove them westward in the first place.

Similarly to slaveholders in the Upper South and factory owners or merchants in the North, settlers in the Southwest relied on loans to finance their speculative endeavors and the day-to-day operations of their plantations, such as the purchase of shoes for their slaves, seed for the upcoming season, or new tracts of land. However, this credit system was not as standardized or regulated as it is in the modern day. For elite planters, local merchants known as “factors” provided the necessary loans for cotton production, typically “advances” on the following season’s harvest, which elements would sell on commission in the Atlantic market.*

Britain officially abolished the African slave trade in 1807, yet Britain and much of Europe continued to fund slavery in the United States until the 1860s. The total slave population in the Americas was around 330,000 in 1700, it was just shy of three million by 1800, and it finally peaked at over six million in the 1850s. Slave-backed mortgage bonds can be traced back to the UK recipients of slave-owner compensation payments. Reparations to the tune of £20M (approximately £15B in today’s money) were made by the British government and funded until 2015 by the British taxpayer to those “adversely affected” by the abolition of slavery.

Yes, you read that correctly. The people who were compensated at the abolition of slavery were those who had been enslavers rather than those who had been enslaved. The proceeds of these compensation payments were then used to make investments in railroads, railways, and slave-backed mortgage bonds that provided significant returns and the intergenerational wealth that those associated with the enslavement of people indigenous to Africa and the Americas have benefited from ever since.

In the early 19th century, one in six non-landowning British people derived their wealth from the slave trade. Former slave owners and their descendants were prominent Bank of England directors throughout the 19th century. Merchants in the West Indian trade then evolved into bankers as they responded to the need for credit instruments to facilitate the flow of slaves and tropical produce.*

Conversely, enslaved people were subjected to 12 years of further indentured labor and were not compensated in the Caribbean. In just as macabre a reality, their American counterparts were used as mortgage collateral in which enslaved individuals financed the system that perpetuated their subjugation while perversely creating intergenerational wealth for their enslavers and the institutions that enabled them.

“At the height of slavery, the combined value of enslaved workers exceeded that of all the railroads and factories in the nation.”*

Bubble, Bubble, Toil and Trouble

Bonnie Martin argues in her recent work on slave mortgages that this financial practice was the “invisible engine” of slavery. By offering an enslaved person as collateral, men could acquire an enslaved person, a plot of land, or other plantation product without having the full purchase price in cash. In addition to increasing the number of potential borrowers and the acquisition rate of slaves, mortgages enabled slaveholders to maintain their workforce in the fields while also exploiting the same enslaved men and women financially. Without necessarily exploiting an enslaved person’s labor in the field or selling an enslaved person outright, slaveholders could still reap a tremendous financial benefit as human property owners. According to Martin’s analysis of more than 8,000 mortgages issued after the American Revolution, enslaved people served as collateral for 41% of the loans and generated 63% of the capital.*

The Consolidated Association of Louisiana Planters (CAPL) used slaves as collateral to establish a lending institution. The Louisiana state legislature established CAPL in 1827, using the European brokerage services of Baring Brothers of London. European investors purchased slave mortgage bonds from US state governments. This led to an increase in slaves. In 1836, New Orleans had the most bank capital. Following Alabama’s example, other states supported banks that offered slave-based bonds to Europe.

The price of cotton continued to rise, and more money flowed into the slave economy, with increasing numbers of individuals in the Western world continuing to invest.

This caused a speculative second slave-related bubble in the Southwest (following the earlier documented South Sea Bubble), which burst in 1839 due to the South’s excessive cotton production. Consumer demand exceeded supply and prices began to decline in 1834, resulting in a recession known as the Panic of 1837. Investors and creditors called in their debts, leaving plantation owners in significant debt. They could not sell their enslaved labor force or land to pay off debts because, as the price of cotton declined, so did the cost of enslaved labor, and land. The toxic debt caused the majority of state-sponsored banks to fail, but investors still wanted their funds.

Too Big to Fail … Again

Following the economic downturn, state governments could have raised taxes to redeem the bonds, but their constituents voted against it, and the governments listened. They could have taken possession of the plantations, effectively ending the cotton industry. However, because the cotton industry held everything together, foreclosing on it was equivalent to foreclosing on the entire economy. So they opted for inaction, largely because the cotton industry was “too big to fail.”

Eight states, including Florida, defaulted on their debts, and as a result, Southern planters became dependent on Northern credit despite having three million slaves as capital. Northern capital journeyed south to purchase cotton, thereby establishing a new system. The Lehman Brothers (bankrupt in 2008) began as “factors,” lending money to slave-owners for future crops and slave mortgages. The term factory has its origins in the Portuguese word feitoria, the term used from the 15th century to designate a trading post on the coast of Africa. In the context of the transatlantic slave trade of the 19th century, a factory commissioned a locale that “produced” enslaved people and was managed by a “factor.”

Brown Brothers, a London-based bank, extended credit to these factors. Numerous household names in the financial services industry began their existence in this manner. The significance of cotton grown by West Indian slaves to the Lancashire textile industry led to the emergence of Liverpool cotton brokers who later rose to prominence in the US cotton broking industry. Slavery was inextricably intertwined with cotton production and cotton trade, spawning numerous parallel business streams.*

In 2019, sociologist Matthew Desmond said that “the enslaved workforce in America was where the country’s wealth resided.”* He was speaking explicitly about the US, however the same was equally true of the UK.

Comparing and contrasting the EIC and cotton bailouts, worrying trends can be identified. Mystifying financial instruments—which conceal risk and connect people all over the world—are used to fuel growth. Scores of paper money are printed on the myth that some institution—cotton, housing, Indian wares, slavery—is unbreakable. Add to this, the intentional exploitation of Black and Brown people. Finally there is impunity for the profiteers when the bubble bursts. The EIC directors were bailed out and faced no penalties in 1772. Similarly, borrowers were bailed out after 1837. Identical similarities can then be noted when the banks were bailed out after 2008.

The Decline of Slavery and the Advent of Capitalism

Capitalism, and indeed the foundations of venture capitalism, began in brutality. Exploitation, plundering, and slavery enabled Britain and the fledgling US to become the powerhouses in the global economy they are today.

Slavery and industrialization fed each other. Many slave traders, planters, and merchants diversified into manufacturing, agriculture, and infrastructure, or kept their money in banks and finance houses that loaned to the developing capitalist economy. Some slave profits were spent on conspicuous consumption, yet, even this helped to boost the market economy. As the slave economy grew, credit, banking, and insurance became ever more important.*

As Robin Einhorn has argued, tax codes also reflected the exceptional wealth stored in enslaved people, with virtually every Southern legislature choosing to discount human property assessments that would otherwise dwarf all other taxable assets in value.* There are several other examples of how practices developed to systemize and maximize profitability during slavery have flowed through to modern venturing. When a CFO depreciates assets for tax purposes, and when work rates are tracked, recorded, and data analyzed for optimal performance rates, it may feel as though we are managing metrics for scale with forward-thinking management approaches, when in fact, many of these operations were developed by enslavers to optimize their plantations. Andrew Carnegie, founder of a company that eventually became part of U.S. Steel, is famed for embodying similar rationality. Carnegie was particularly famous for his industrial activities’ “vertical integration.” By investing in iron ore and coal mines and railroads to transport the ore and coal to his steel mills, he dramatically reduced the cost of the final product and won market share from competitors.*

Though both historians and economists long-contested this point, a broad consensus has emerged over the last several decades that plantation slave labor was a highly efficient system of labor exploitation.* Slaves labored under drivers in gangs that gained significant momentum. Between 1800 and 1860, modern “human resources” tactics such as speed-up and measured task working, enforced by the whip and other forms of torture, drove a 400% rise in cotton-picking output in the United States. Industrialization did not reduce the workload of slaves; rather, it increased it as slaves were pushed harder to keep up with the steam-powered processing of harvested cane. A slave picked 200 pounds of cotton a day in 1850; in the 1930s, despite technological advances, a “free” laborer picked just 120 pounds.*

Before it was abolished in 1888, slavery had become a central feature of the modern economy. It had its origins in feudal times and helped industrial capitalism take off. Samuel Greg, who opened the first water-driven yarn spinning factory in England near Manchester in 1784, also owned Hillsborough Estate on Dominica. His brother-in-law, Thomas Hodgson, owned slave ships, and his banker brother-in-law, Thomas Pares, made his fortune through slavery. Moses Brown, who made his money in the West Indian provisioning trade, opened the first US cotton mill with mechanical spinning in 1790 in Pawtucket, Rhode Island.*

Eric Williams’s Capitalism and Slavery (1944) essentially asserts that after European elites accumulated enough surplus wealth from slavery to fund the Industrial Revolution, capitalism swiftly superseded slavery. According to Williams, slavery began a rapid decline in the early 19th century after fueling Europe’s modernization. As industrial capitalism became the worldwide standard, anti-slavery sentiment grew in favor of a more efficient and less capital-intensive manner of commodity production. Slavery was unnecessary. Ideology followed the economy. Sharecropping and wage peonage continued after freedom, proletarianizing former slaves. Technological development, modern agriculture, and industrial industries replaced traditional anarcho-syndicalism and slavery.

Sidney Mintz argues in Sweetness and Power (1985) that slave-plantation sugar fueled European industrialization, urbanization, and class formation. “A transatlantic trade network linked the daily nourishment they put into their bodies directly to the institution of slavery and the slaves who suffered to produce it. Surplus calories from sugar and surplus capital from slavery fueled capitalism’s industrial march and unbridled consumption.” Slavery produced consumer goods while providing a market for European-made goods. Slaves would be forced to consume before being consumed.

The sugar-slave complex boosted international trade in manufactured goods, raw materials, and foods. Those North American colonies without slave economies earned enough from supplying the slave colonies to correct their balance of payments with Britain. The sugar-slave complex increased international trade, capital, manufactured goods, and raw materials, as well as the need for shipping and shipbuilding.*

Leonardo Marques furthers that America’s maritime supremacy grew out of the slave trade. According to him, “the United States became unquestionably predominant” in constructing ships for the slave trade, taking maximum advantage of the country’s “abundant supplies of cheap lumber and improvements in the US shipbuilding industry, which saw advances in vessel design theory.” This made American ships the best and fastest vessels globally and allowed them to dominate the whaling industry during the early 19th century.*

This proffers an entirely new layer of meaning to the phrase “profiting off the backs of others”—it would appear that the transatlantic slave bubbles that were never allowed to burst conveniently provided wealth for the few. This wealth went on to fuel the whaling industry and the Industrial Revolution, which has since filtered down into the wealth gaps that are entrenched in society today.

Conversations: Venture’s Historyan hour, 15 links

Irwin: Mapping Inequality

Terry Irwin (Transition Design Institute, Carnegie Mellon University)

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