The analysis presented is based on a case study of Lancashire cotton textile firms. It traces their financial history through the sharp boom of 1919-20, and the sudden crisis that followed. Using a sample of representative companies it is shown that firms unwittingly adopted inappropriate financial structures that acted as the decisive constraint on the adoption of recovery strategies in the subsequent slump. The paper explains how the relationship between indebtedness and asset values prevented subsequent internal financial retrenchment, restructuring and re-equipment, and dictated the competitive processes within the industry. It is demonstrated that financial constraints were the decisive factor determining the feasibility of competitive strategies available to the industry's leaders.