Authors: Tirthankar Roy
In his book, Smith concludes that monopoly is bad for everyone—consumers, suppliers, employees and society as a whole. It destroys the foundation of the market as competition is necessary to discipline and regulate the self-interested behaviour of individuals. He argues in the
Wealth of Nations
for an ‘obvious and simple system of natural liberty’ in which the pursuit of self-interest is guided by ‘an invisible hand’ which benefits the whole society and raises its standards of living.
Although the East India Company’s monopoly status
was ‘an unjustified tax on both consumers and producers’, according to Adam Smith, the reality was that the Company faced considerable competition from the private trade of its own employees. A fundamental flaw in the compensation structure of its employees allowed many to carry on business on the side, and some became hugely wealthy as a result. Corporate executives today are able to become wealthy (via stock options, for example) but no corporation would allow competition with itself. Even then the Company was constantly uncomfortable with it and tried to ban it periodically. It tried to prosecute its most outstanding employees—Oxenden, Aungier, Day, Yale. Roy tells us that the most notorious employee-competitor was Thomas Pitt who returned home with a great fortune, including one of the world’s largest diamonds, which eventually went on to adorn Marie Antoinette’s crown and Napoleon’s sword. Pitt went to acquire a seat in Parliament from where he attacked the Company’s monopoly.
But Adam Smith found a different flaw. Private trade of the Company’s employees confirmed to him a fundamental defect in the joint-stock company, where ownership was separated from management. He worried that employees might turn the corporation to their own ends and not look after shareholders’ interests with the
‘same anxious vigilance’ that an owner or a partner would and, as a result, ‘negligence and profusion must always prevail, more or less, in the management of the affairs of such a company’. Smith’s was a prescient warning. Even today audit committees of company boards are wrestling with accountability of executives to shareholders. While separation of owners and managers has many positives—the ability to source capital from a wide range of investors and replace incompetent children of hereditary founders by effective professionals—the limited liability of shareholders makes for carelessness in the oversight of funds and leaves a company vulnerable to executive malpractice. The standards of governance are obviously higher today but there remains an ever present danger of executives exploiting the corporation for their own ends, just as the Company’s executives did in the eighteenth century.
The attack on the Company’s monopoly grew over time in which Adam Smith was often quoted. Its share price boomed when news of the acquisition of the Bengal diwani from the Mughal emperor reached London’s financial markets in April 1766. However, the Bengal Bubble burst soon afterwards on repeated bad news about mismanagement in India. Many Members of Parliament were shareholders and, as the stock price plunged, they grew angry. There were cries against the
Company’s monopoly and this led to the reforms of the 1770s, 1780s and 1790s, which effectively punctured the Company’s autonomy as a business and breached its monopoly.
By the beginning of the nineteenth century, the Company went into decline as a commercial concern. It was partly due its political troubles with Parliament, but had more to do with Britain’s industrial revolution which changed the pattern of trade. Consumers in England were now happy with cheaper cottons from their own mills and the Company’s famous auctions of Indian cottons declined precipitously. Weavers in India could not compete with machine-made cloth. If the Company had not been rescued by the growing trade with China in tea and opium, it would have quickly died. Its commercial importance declined in India after the 1820s where it essentially became a political administrator until the British government officially took over India after 1857.
The Company made its ‘second fortune’ in China. Since Roy’s book is confined to India, I shall supplement it with some remarks on its Chinese personality. The English love affair with Chinese tea began to grow after
Parliament passed Pitt’s Commutation Act of 1784 which lowered barriers to the entry of tea and undercut smuggling. Consumption grew steadily and the Company’s profits from tea auctions touched a £1 million a year by 1833. Its second fortune was financed initially by silver bullion, but gradually it was funded by opium.
The Celestial Empire of Qing China disliked foreigners and refused to trade with Europeans as it would have implied equality and compromised its sense of superiority. The Company persevered, however, and eventually set up temporary trade facilities in Canton on the Pearl River. There it found its match in a cartel of Chinese merchants, the Co-Hong, who inflicted constant humiliation. China was the only source of tea and even arrogant monopolies learn to bend. Gradually the two monopolies began to trust each other—to the point that Co-Hong accepted the Company’s word for the number of tea chests that failed quality control in London.
So millions of pounds of tea began to pass through the Company’s warehouses in Canton. The most popular varieties were four black teas—Bohea, Congo, Souchon and Pekoe—and three green teas—Singlo, Heyson and Bing. The tea travelled west on the Company’s ships to Britain and beyond. On the return
journey, the ships picked up silver to pay for the tea. The huge export of silver created a balance-of-payments problem for Britain. In India, the answer to this problem had been Clive and after that the Industrial Revolution. But in China the Company became a drug-lord and reversed the flow of bullion by selling high-quality Patna opium. It encouraged peasants in Bihar and Bengal to cultivate opium, which it smuggled through third parties into China in chests branded with Company seals (chaap).
As opium was illegal in China, the Company’s ships could not carry it. So it sold it in auctions in Calcutta from where it made its way to China. The drug was smuggled by independent agents, such as Jardine Matheson and Dent & Co., who established an intricate network of bribes at the Chinese customs (hoppo) who turned a blind eye to the contraband. The proceeds of the smuggled drug were deposited with the Company’s factory at Canton. By 1825, most of the funds needed to buy tea in China were raised through opium.
So successful was the poppy crop that its growing rapidly expanded to central and western India, especially the Malwa territories of the Marathas, from where it was exported to Macao via Bombay. There were many reasons for the Maratha Wars and the control of opium trade was one of them. In 1838, when smuggled opium
approached an amazing 1400 tons a year, the Chinese imposed the death penalty for opium smuggling and sent a Special Imperial Commissioner, Lin Zexu, to curb smuggling. This led to the First Opium War (1839–42) between China and Britain. China lost and had to cede Hong Kong to Britain under the Treaty of Nanking. A Second Opium War was fought by Britain and France against China from 1856 until 1860. China lost again.
In the end, opium trade did great damage to China. According to some accounts 27 per cent of Chinese males in the 1870s were seriously addicted and in 1905, one in five males in China was reportedly an opium smoker. Millions suffered and died of addiction in the nineteenth century, which the Chinese call a ‘century of humiliation’. Only in 1907 did Britain finally agree to stop the export of Indian opium, and in 1911 its manufacture was abandoned in Bihar. It was Mao’s revolution in 1948, however, which finally cured China of its opium addiction.
Thomas Babington Macaulay, the English historian, essayist and politician, called the East India Company ‘the greatest corporation in the world’. Today we would
not use those words. We might call it the world’s most ‘powerful’ corporation, which it was during its 275-year life that extended from the mercantilist period of chartered monopolies to the industrial age of the modern corporation. We might also think about its tragic nature which created so much wealth but also did much damage. The East India Company’s story is a cautionary tale about the dangers of monopoly but it is also an inspiration as the pioneer of many corporate institutions that are a part of our modern world.
Mercifully, as Tirthankar Roy points out, corporations do not invade countries today. It is a long way from 1612 when the Company defeated the Portuguese navy off the coast of Surat and won its first trade concession from the Mughal emperor. Legitimate corporations no longer maintain private armies, although security is an obsession with many. Nor do they aspire to become drug lords. The East India Company engaged in violence, drug-dealing and openly bribed Members of Parliament and high officials in exchange for licenses and favours. This is the dark side of the story.
But its institutional contributions are equally impressive. The joint-stock ownership has survived the industrial and the post-industrial ages. So has the hierarchical system of management. The Company did an impressive job of rewarding and motivating employees
and creating an environment for careers open to the talented. Roy recounts inspiring stories of many talented young men—Oxenden, Aungier, Charnock and others—who rose from below and went on to perform extraordinary, often heroic, deeds thousands of miles away from home. It is not an accident that the Company managed to throw up talent generation after generation, and gain its loyalty. Although Adam Smith fretted about the moral hazard in separating investors from professional managers, the Company obviously achieved efficiency through the division of labour. Smith may have been distrustful of employees but the Company’s shareholders were not. This innovation survives, although boards of companies still wrestle with the issues of corporate governance that Smith raised about the accountability of employees in a faceless setup.
Monopoly was clearly a birth defect, but it was constantly breached and it created a flawed corporate culture which led to conflict in the minds of its employees between private and corporate interest. The Company had permitted private trade in the belief that employees were not sufficiently compensated for the huge risks involved. It soon realized its mistake, however, and tried to stamp it out—but without success. Companies today reward employees for taking great risks, but they do so in a transparent way through
bonuses and stock options, which have the additional benefit of aligning the individual’s with the company’s goals. Some entrepreneurial communities, such as Marwaris and Jains, have a similar way of compensating employees—allowing them to trade privately. Often, however, it is a method of training youngsters who in a few years are expected to set out on their own.
Every child in India grows up reading in school the perfidious story of how Clive and the Company stole Bengal at Plassey in 1757. So, it is hardly surprising that Indians remain suspicious of trade, merchants and foreign companies. ‘The return of the East India Company’ is still invoked in public discourse about trade liberalization, multinationals and market-based policies. More than sixty years after Independence, India has become the world’s second-fastest growing economy, the minds of the young are decolonized and liberated, and so it is time, perhaps, to get over the ‘East India Company syndrome’.
The ‘East India Company syndrome’ has been behind a sentiment called swadeshi in India’s public life after Independence. It is variously nationalist, xenophobic, anti-foreign, and usually exhibits itself in a clamour for tariff protection and self reliance in economic policy. It was first practised with Mahatma Gandhi in the 1920s, who used it successfully as a political tool to mobilize
Indians against foreign rule. But after Independence, it was exploited by businessmen to get barriers erected against foreign goods and investment. The economic reforms of the 1990s were a clear turning point against this sentiment as tariff walls tumbled and India opened up to trade and investment despite rearguard action by the protectionist Bombay Club.
Tirathankar Roy’s story of the East India Company has brought a fresh perspective to history, which for too long has been a dreary account of the reign of kings. He breathes life into history, as will the rest of the volumes in our series, in creating a romantic, adventurous world of seafaring merchants who took mad risks; of highly skilled craftsmen who made beautiful products; of bankers who provided capital which sometimes bankrupted them; and rulers who realized from time to time that their self interest lay in nurturing business.
Gurcharan Das
I AM INDEBTED to Huw Bowen, Gurcharan Das, Om Prakash, Lakshmi Subramanian and Thomas R. Trautmann, who read previous versions of the text with great care and patience, and offered detailed, insightful and valuable comments. The comments led to numerous editorial and stylistic changes, correction of errors, fresh reading, extensions, and sometimes restatement of the arguments. Thanks are also due to Sanjay Subrahmanyam for suggesting important references.
I need to clarify two stylistic points. In order to keep the text unburdened with footnotes, I have refrained from adding citation details in the text, except to mention the name of the author and sometimes the date of publication, if relevant to the context. Full details of the work can be found in the bibliography at the end of the book. Throughout the text, the names of the three Company towns (Bombay, Calcutta and Madras) follow the old convention.
BUSINESS AND POLITICS were transformed in South Asia between 1600 and 1800. The English East India Company was one of the main agents of the change. In these two centuries, the Company created a mass market in Britain for Asian goods, including Indonesian spices, Indian cotton cloth and Chinese tea. It created new channels of intra-Asian trade, bringing Persia, India, China and Indonesia closer than ever before. The Company established three port cities in India which drew wealthy and skilled people from all over India. It converted vast quantities of American silver into Asian goods. And the Company was the means by which European colonialism in South Asia began. Not only was it pivotal in India, it enjoyed similar importance in Britain as well. At its peak, the Company was the most important mercantile firm in London, wielding political
influence and commanding large financial resources. There was hardly any prominent figure in the business world of London in these two centuries who did not take an interest in the Company or was not connected with it.
Written about extensively, the Company remains an enigma to historians. A firm enjoying a state guaranteed monopoly, it was also an umbrella for private enterprise conducted by its own employees. Started with the express intention of trading in the Indian Ocean, it gradually transformed itself into a colonial power. British in origin, the Company’s mercantile choices were shaped by current conventions of business in Asia. Ambitions of partners and agents, individuals who ran its operations overseas, the Indian kings and nobles with whom it had to negotiate the right to trade, and the political disputes in which the Company got embroiled in, had to be factored in while trading. The East India Company became an entity with many faces, of which the imperial one eventually came to overshadow the others.
How do we explain this baffling phenomenon of a peddler of goods transforming itself into a world power? The task would become easier if we could answer two significant questions. One of these is a question of origin and the other one is a question of definition. Why did a transnational corporate firm, a rare entity in the
seventeenth century, appear in Western Europe rather than in the other prominent commercial regions of the contemporary world, India or China, for example? As to the question of definition—what kind of an entity was the East India Company? How similar or different was it from the modern firm?
If the question of origin demands no more than a straightforward narrative, it is the definition of ‘Company’ that raises peculiar difficulties. Most histories of trade and empire in the early modern world suggest that the Company’s territorial conquests cannot be understood as results of accident or opportunism, but were connected with the very character of the organization itself. If there is any truth in this, the Company must have been a very different body from what we would understand today by the term ‘company’. Surely today’s multinationals do not, at least not all of them, feel obliged to invade the countries where they do business in? On the other hand, the prospect that the Company succeeded as a business venture thanks to its organizational form, should invite us to compare the Company then with companies now in the hope of finding some similarity between them. From current perspective, it would be interesting to know what differentiates business objectives and strategies of the East India Company from those of today’s multinational conglomerates.
Viewed in another way, in studying the East India Company, we study an organization that simultaneously served profit and power. In performing this task, it will not be enough to restrict our attention to rules of business and economics alone. We need to merge them with the rules of politics. This is a complex undertaking, but one that gives the Company story its peculiar attraction.
The East India Company was formed in London on the last day of 1600 by a group of merchants, mariners, explorers and politicians. Its mandate was to finance trading voyages to India, Southeast Asia and China with subscribed capital.
The desire to trade overseas, and sponsor merchant fleets for the purpose, had been a long-standing one, and took shape in response to the rise of the Iberian empire in America and Portuguese power in the Indian Ocean. Approximately a century before the Company started, Vasco Da Gama, Alvarez Cabral and Aphonso de Albuquerque had established a Portuguese sphere of influence on the western coast of India. Da Gama discovered the passage to India and Southeast Asia via the Cape of Good Hope. The sea route was long and
dangerous with the risk of violent tropical storms near the Cape. The journey across the Arabian Sea was unfamiliar to many sailors, and required taking on board Indian navigators from the east African port of Zanzibar. The sea route was none the less an important discovery because it allowed the Europeans access to the east without having to go overland or across West Asia, which would mean negotiating passage with potentially hostile powers like the Caliph of Egypt, the Ottoman Turks and the Shah of Persia. The Mediterranean route to the east, furthermore, was monopolized by Venetian and Genoese merchants. As the Portuguese established posts and colonies in Diu, Bassein, Ceylon and Goa, their hegemony on the seas was constantly challenged by the maritime states on the Arabian Sea littoral. But these threats were not very serious ones.
The economic interest of the Portuguese in this time lay much further east, in the spices from the Indonesian islands. Eastern spices sold at astronomical profits in the markets of Europe. A successful trading enterprise could bring goods capable of making a 1000 per cent profit, justifying constant threat from piracy, tropical storm, shipwreck and attacks by rivals. The spices, moreover, could be paid for with other goods from the east, such as cotton cloth from India, which were cheap and in demand everywhere. It is difficult to imagine that such
profit opportunities would go uncontested for long. In the mid-sixteenth century, coinciding with the reign of Elizabeth I in England, the challenge to the Portuguese supremacy in the east began to take shape in England and Holland. These two Protestant powers looked at the Catholic nations of Spain and Portugal as political and economic rivals. But it was not only the religious rivalry, nor the profit motive, insecurity and royal patronage, that can explain the outburst of maritime enterprise that followed in the next decades.
Elizabethan London represented a unique conjunction of elements to make a maritime revolution likely. Sailors, soldiers, landlords, artisans, scientists, artists and merchants—ordinary people all and divided one from the other by class barriers—shared a curiosity about Asia. In a uniquely English fashion, groups in command of diverse skills came together to serve the common purpose of exploration of that world.
In the later decades of the sixteenth century, dramatic episodes of maritime exploration led by Walter Raleigh, Humphrey Gilbert, John Hawkins and Martin Frobisher had taken place. In the course of these voyages, nautical instruments like astrolabes and the compass were perfected, and knowledge about navigation tools, maps and charts, and oceanic currents had travelled from China and the Mediterranean to Western Europe.
Around the same time, the average size of ships built on the Thames increased considerably, and the English could match their nautical and naval capacity as well as knowledge of the seas with that of the Dutch, the Spanish and the Portuguese.
Curious and brilliant scientific minds joined the adventurers. The greatest of them perhaps was ‘Dr’ John Dee, Cambridge-schooled mathematician, explorer and consultant to some of the leading contemporary expeditions, including those led by Martin Frobisher to Canada. He had financial stake in several of the ventures into the New World, and his theoretical knowledge of navigation was constantly drawn upon by leading mariners. An amateur astrologer, he prepared the horoscopes of sea captains, and considering how many sea captains made it big, must have been good at telling fortunes. Dee, it is said, coined the term ‘British Empire’, meaning territories in the northern hemisphere that were subjugated during King Arthur’s mythical conquests in the sixth century, and to which the British Crown could legitimately lay claim.
A confidence in the ability to conduct hazardous journeys joined hands with the money that came in from a coterie of merchants of the City of London. In the beginning of Elizabeth’s reign in 1558, the City merchants were only a few hundred in number, the
majority among them belonging to the cloth merchants’ guild. Forty years later, business had grown and the numbers were larger. The Crown’s own income was never enough to maintain the expensive navy. Hence, potential income from trade and contributions of the merchants were becoming attractive options for the state. The Queen’s order to expel the Hanseatic League of merchants from England in 1597 led to a shifting of English commercial capital from the Continent to England, and saw a more ambitious and outward-looking class deciding affairs in the City. For many of the merchants who had been to the Continent, a teeming world of commerce with India and China, in which the only Europeans to participate until now had been the Portuguese, seemed almost within reach.
The obstacles to successful maritime expeditions in Asia were many. Quite apart from the physical hazards of the journeys, there was the rivalry with the Iberians. The Portuguese and the Spanish were entrenched in the sea routes to the west and the east, and if the English were to break into the trading world of Asia by sea, they needed to overcome stiff naval challenge from these two nations. During the sixteenth century, expeditions to discover a north-eastern passage to India, which would avoid the Portuguese, were proposed. After much money was spent and several books had been written on the subject, the quest was abandoned as unattainable.
Events of the last decades of the sixteenth century, however, showed the English that the Iberians were not invincible. Indeed at times surprisingly poorly defended in the Atlantic. The Spanish and the Portuguese had overstretched themselves in trying to control open seas with very limited resources. While trying to protect a maritime monopoly, they had neglected trade. Consequently, the wealth of their colonies had not risen in line with territorial ambitions. In the Spanish case the colonies would soon be draining the mother country.
That these powers could be defeated was tellingly demonstrated by the great ‘pirate’ Francis Drake. In the 1560s, Drake built his career by raiding Spanish treasure trains in the Panama isthmus, and sending the loot home. These raids also gave him possession of ships captured from the Spaniards, and in turn, brought him the status of merchant. His daring and ruthlessness made him an ideal candidate to lead an ambitious enterprise to raid Spanish possessions in the Pacific, sponsored by a number of ‘equall companions and frindly gentlemen’, among whom was included the Queen herself. Drake’s dramatic exploits on the Pacific coast of South America capturing one ship after another exposed the weakness and unpreparedness of the Spanish naval presence. Along with much gold and silver, these
raids yielded a cluster of maps that eventually helped Drake cross the Pacific itself. In 1588, Drake and other commanders orchestrated the defeat of the greatest fleet in Europe, the Spanish Armada. Drake’s Pacific journey was closely followed by another under Thomas Cavendish.
Unlike trips to the Atlantic and the Pacific, which were primarily for territorial control, the Indian Ocean expeditions of the West European nations were motivated mainly by the prospect of commercial profits though they had to reckon with Portuguese resistance. When the West Europeans ventured into Asian trade, they formed a mercantile company. It was this organizational innovation, as well as the propensity to trade overseas, that distinguished the English and other Europeans at this time from the Indians or the Chinese.
Although long-distance trade was not more developed in Europe than Asia, the company form of organization, together with monopoly charter and the backing of the king were unique features of commerce in western Europe and had no counterpart in the Asian business tradition. Partly reflecting this institutional ability of pooling large amounts of money together, interest rates
were lower in western Europe than in India.
Interest rates in India were generally much higher, but when lenders and borrowers were linked by caste and kinship, the rates came down. Therefore, organized enterprise that involved much risk and large capital tended to be confined to castes and communities, between the members of which there was sufficient trust. Interest rates did not ordinarily need to cover the risk of default when lending was done between a father and a son, or an uncle and a nephew. For most large trading or banking firms in early modern India, principals and agents tended to belong in the same caste or community. Both were merchants, often related by blood and marriage, and had similar commercial interests, ambitions and capacities.
The English association or corporate firm was an alternative to this, Asian, organizational model. Like the community, it was founded on common interest, but unlike the community, it did not stand on a foundation of ethnic and filial loyalties. It was potentially more unstable in the short run than a family. The ambitions of the principals and the agents were not perfectly matched. But it was a more powerful, and therefore stable, entity in the long run than a family. It was more powerful because it could embrace innovative yet risky ideas more readily than could a community, being
unencumbered by family ties; and it was more stable because it could change with the times. The association form allowed the company to consider financing maritime expeditions that involved uncertainty, whereas the Indian merchants were known for their risk-averse mentalities.
The association form lowered the entry bar to private enterprise for all kinds of wealthy people, and thus enabled a collaboration to develop between diverse forms of capability. The decision to put money into expeditions seemed sensible to many rich Londoners precisely because such enterprises depended for their success upon collaboration between navigation and commercial skills. The company form could more easily create conditions for such collaboration. The one singular element of the English context, therefore, without which the Company’s origin cannot be understood, is the partnership between merchants-bankers and sailors-soldiers-navigators. Of course, merchants routinely hired sailors and soldiers in India too. But sailors persuading merchants to take unique patterns of commercial risk—precisely what led to the founding of the Company—would be a very unusual phenomenon in contemporary India. On the point of enabling an equal partnership between navigators and merchants, Western Europe in 1600 had become an exceptional corner of the world,
even though the merchants hardly had any idea where that exceptionality might lead them.