World History Project - 1750 to the Present
- READ: The Emergence of Industrial Capitalism
- READ: Class Structure
- READ: Rise of the Proletariat
- READ: Responses to Industrialization
- READ: Ottilie Baader (Graphic Biography)
- READ: Child Labor
- BEFORE YOU WATCH: Capitalism and Socialism
- WATCH: Capitalism and Socialism
READ: The Emergence of Industrial Capitalism
The article below uses “Three Close Reads”. If you want to learn more about this strategy, click here.
First read: preview and skimming for gist
Before you read the article, you should skim it first. The skim should be very quick and give you the gist (general idea) of what the article is about. You should be looking at the title, author, headings, pictures, and opening sentences of paragraphs for the gist.
Second read: key ideas and understanding content
Now that you’ve skimmed the article, you should preview the questions you will be answering. These questions will help you get a better understanding of the concepts and arguments that are presented in the article. Keep in mind that when you read the article, it is a good idea to write down any vocab you see in the article that is unfamiliar to you.
By the end of the second close read, you should be able to answer the following questions:
- What two elements does the author use to define capitalism at the beginning of this article?
- What are credit and interest, and why did they become more common in this period?
- What is a bank, and how did the idea of a bank get to Europe?
- What are bonds, and how did the English government get involved in issuing bonds?
- How did joint-stock companies help stimulate trade?
- How did joint-stock companies help stimulate empire?
- What two elements did capitalist individuals and joint-stock companies combine in order to produce things and make profits?
Third read: evaluating and corroborating
Finally, here are some questions that will help you focus on why this article matters and how it connects to other content you’ve studied.
At the end of the third read, you should be able to respond to these questions:
- Throughout this article, the author points out that capitalism was a major innovation, but they also point out that some elements of capitalism had been around for a long time. Viewed through the production and distribution frame, what was new about capitalism around 1750?
- You heard a lot about industrialization in the last unit, and you’ve encountered some information about reform movements in this unit. How do you think capitalism helped create a need for reform movements in the Long Nineteenth Century?
Now that you know what to look for, it’s time to read! Remember to return to these questions once you’ve finished reading.
Overview of New Economic Systems
Painting of a large group of people gathered in a courtyard. A man wearing a red robe and feathered top hat is shown pointing out towards the crowd while speaking to another individual.
By Eman M. Elshaikh
We're used to credit cards now, but the very idea of credit, interest, and banking were pretty radical innovations in our economic history—and they led to the emergence of capitalism in Europe.
In case you missed it, the Industrial Revolution was—as nearly everything in this course has suggested—a big deal. Throughout the long nineteenth century, it transformed global trade, production, and changed how people lived and worked. It even changed how individuals thought about the world, and their place in it. One reason industrialization had such a big effect was that it was tied to the economic system known as capitalism. We even call the system that emerged in the long nineteenth century "industrial capitalism".
That's because the two things are as dependently linked to each other as an axle to a wheel. And industrial capitalism is still pretty much the basis of our global economic system today, with some alterations. So where did capitalism come from? How come it was around in 1750, right when industrialization needed it? No spoilers, but the answers are "enlightening"…
Innovations in finance
Okay that was a spoiler, but it's an important connection to recognize: Both the idea of capitalism and the capitalist system as we know it first emerged during the long nineteenth century, because that's when Enlightenment philosophers were talking about it. They described an economic system with these two main ideas:
- Private individuals or groups of individuals invest their money (“capital”) in assets or in companies, making them owners or part owners
- Labor, raw materials, and finished products are exchanged on a free market where the buyer and seller agree on prices
Capitalism is a tad bit more complicated than that, but it’s a start.
Portrait of Enlightenment philosopher Adam Smith. Smith is painted wearing a black, button up boat and is looking off to the side.
Now, technically, free markets and private investment have both existed for a long, long time, and in many parts of the world. But Enlightenment philosophers were able to put it into a coherent philosophy, and industrialists were now—keyword now—able to use it to great effect… and profit. Why now? Because gradual changes in the two hundred or so years before the long nineteenth century had cleared the path for industrial capitalism to march on in.
Maybe the most important of these changes was the spread of credit. Credit is central to capitalism. It is an agreement between a borrower and a lender that a loan will be repaid later. In many cases, the agreement adds interest. Interest is what the borrower must repay in addition to the value of the initial loan.
In many parts of the world, credit and interest were limited, and in some cases forbidden, by religious and moral views. But long-distance trade and the high costs of gunpowder warfare, both increasingly important in the seventeenth and eighteenth centuries, required credit. Both kings and traders had to borrow money to stay in business, so its use expanded. Meanwhile, Italian merchants returning from trade expeditions to the Muslim and Hindu world had just learned what a bank was (a place where people could pool and invest money) and brought the idea home.
Banks developed new ways to deal with money, such as the bill of exchange (sometimes called a promissory note) meaning the bank fulfills the buyer's promise to pay the seller. Bills of exchange helped people give money to each other without exchanging cash and without having the money immediately at hand. These bills could also be sold or transferred to others and were safer to transport across long distances. If they sound familiar, it's because they're related to modern-day checks. Fun fact: the English word for check came from the third century Persian word čak, which became the Arabic word sakk during the Abbasid Caliphate!
Drawing of a group of men wearing powdered wigs sitting around a table. One man is shown placing a seal on a charter.
For a while, the Mediterranean was the hotspot of financial innovation. But power eventually shifted to Northern Europe. Dutch, British, and Swedish banks adapted foreign technologies to their own economic systems. They also developed new financial technologies, like exchanging currencies and using a standard currency for debits and transfers. Trade got more efficient, because now you could move money without having to use coins or bills of exchange.
Around this time, banks started to manage money on much larger scales, including dealing with government debt. For example, when the English government needed money to finance a war with France, the Bank of England sold bonds to its customers. Bonds were basically loans to the government, which individuals could give through a bank, and the government promised to pay back the loan plus interest at a later date.
Empire and finance
These financial technologies revolutionized the way many nations dealt with trade, war, and especially colonial expansion. Still, international trade was risky and costly. To send a fleet of ships across the ocean, and pay and feed a crew, was financial gamble few individuals could take. During the Age of Exploration, a successful voyage promised merchants great profits. But if the ships sank or if nothing useful was found, you lost all your money. If only there were a way to share that risk with others…
Joint-stock companies were the answer. Ownership of a joint-stock company was shared by several investors—they simply split initial costs and shared the profits. High-risk, high-profit business ventures became more common. Yes, they could still fail, but joint-stock companies minimized individual losses. The company basically became a separate thing so that no one person took on a huge burden. Soon, stock markets emerged, making it easy to buy and sell shares in a company. For better or for worse, a much larger segment of the population were now traders.
Painting of large ships returning to port. Each ship is waving a different country’s flag. Smaller row boats can be seen following them in.
Strictly speaking, joint-stock companies were not new, since we know they were used in the Song Dynasty in China around 1000 CE. They were also around in a different form in the Muslim World. But in the sixteenth and seventeenth centuries, the joint-stock model really took off on a more international scale, starting in Europe.
Imperialism as a private business may sound strange, but joint-stock companies were often able to fund colonizing projects better than governments. Running an empire was not cheap, since travel and administration costs really added up. So when it came to building overseas empires, joint-stock companies were the way to go. Among the wealthiest were the British East India Company and the Dutch East India Company. These were companies, not governments, yet they performed colonial administration in India on behalf of the British and the Dutch. Many joint-stock companies also invested in the risky, but very profitable, trade in human beings. By the eighteenth century, the Atlantic slave trade was a business supported by investors, banks, and insurance—all the components of capitalism.
As Europeans gained access to spices and other goods from around the globe, consumer demand increased dramatically—and a quick walk through your grocery store will show the demand never went away. Things like sugar, pepper, and coffee had been too expensive to import into Europe. But under European imperialism, they were valuable commodities as raw materials, which were then turned into highly profitable finished goods.
From the middle class to the free market
Business was booming, at least for Europeans. In a world that used to be just a few rich people and a whole lot of poor people, middle classes began to emerge, particularly in Europe. This had a lot to do with the rise of the merchant class, who were able to generate wealth through trade.
As the middle classes gained power, they also started talking to each other and trying to gain more political power. Enlightenment ideas were swirling around, and more people felt a sense of national belonging, which only grew as national wealth grew. All this led to a new social and political environment during the seventeenth and early eighteenth centuries.
It was in this context that capitalism really began to dominate the economies of European countries, their overseas empires, and their trading networks. That's why Enlightenment philosophers were able to describe that system comprehensively—because it was thriving even before the Industrial Revolution. But what did this shift look like on the ground by 1750? As trade expanded, some joint-stock companies and individuals acted as capitalists. They hired people who had been peasants, but who now became wage laborers, meaning they had to sell their labor to survive. Capitalists also bought their tools, farms, mines, and buildings. By putting those things together with labor, they could produce things on a large scale, and then sell them for a profit. A profit they didn't have to share with their workers.
All of that money could then be re-invested in the business, including sponsoring innovations like new machines and technologies that could make stuff even faster. Which brings us—and capitalism—to the Industrial Revolution.
The author of this article is Eman M. Elshaikh. She is a writer, researcher, and teacher who has taught K-12 and undergraduates in the United States and in the Middle East. She teaches writing at the University of Chicago, where she also completed her master’s in social sciences and is currently pursuing her PhD. She was previously a World History Fellow at Khan Academy, where she worked closely with the College Board to develop curriculum for AP World History.