Grant Sutherland

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The Crash of the East India Company

In May 1769 the stock of the East India Company peaked. Having risen steadily for five years it declined within a month from £273 to £239. The proximate cause of the fall was the rumoured gathering of a French naval squadron in Mauritius (the main base for France’s Navy in the Indian Ocean, and the island from which the British in India had learned to fear the launch of French hostilities). On this occasion the rumour was false, there was no French squadron, and the hostilities never came. But by the time the truth was known in London, the rumoured but non-existent fleet had inflicted such a timely blow upon the Company that it never recovered.

In the ensuing three years the government was compelled to take an increasing role in the Company, through the Loan Bill and in the Regulating Act, which introduced the British government for the first time into a direct participation in the Company’s Indian affairs.

But if false rumour had lit the fuse of the disaster, the powder had long since been laid down in the Company’s foundations by two activities so profitable that all reasonable considerations of risk were put to one side. The lesser of these was the ‘splitting’ of Company stock as a prelude to the annual election of the Company’s Court of Directors. The greater was the practice of purchasing goods in India with Bills written against the Company in London.

The battle for control of the Company’s Court of Directors had in the years preceding the crisis become a focus for speculators. These took up ‘split’ stock from friendly owners prior to the vote in the hope of returning the same stock post-vote at a profit to themselves. Both parties were vulnerable to any intermediate change in price, and there was the added risk to the first owner that his trust in the loyalty of the temporary owner was misplaced. Many of the purchases were funded by third-party loans. But so great was the perceived prize that these evident dangers were ignored, and only when the crash came did the general entanglement make it painfully evident that one man’s fall could bring the next man’s ruin. Lord Shelburne alone lost almost £40,000. Smaller players were wiped out entirely.

But these losses were borne by individuals, and the Company might well have survived the speculative crash had it not been for the self-inflicted damage done by its servants in India recklessly writing Bills on the Company.

The common practice in the Eastern Trade was for the Company’s servants to buy Indian goods on credit by issuing Bills of Exchange. The goods were shipped to London where a twice-yearly sale was held, which raised the money for the Company to meet the Bills whenever they fell due. There was, however, a fatal weakness in the system: the Company’s servants in India could accrue large private pecuniary rewards through an excessive issuance of these Company notes. Without a properly enforced limit from the Court of Directors on the face-value of the Bills, the Company’s traders and factors gave a sharp demonstration of the worthlessness of requests for self-restraint when measured against the allurement of risk-free self-enrichment.

In 1770 the Directors had given permission for £212,000 worth of Bills to be issued: in the event, the Company’s servants in India issued Bills to the value of £1,000,000. When the goods purchased with these Bills were sold in the Company’s London sales of 1771 and 1772 there was insufficient profit from the sales to redeem the Bills. The shortfall was several hundred thousand pounds.

The Company, effectively bankrupt, and unable to borrow on the markets due to a Europe-wide credit crisis, turned to the government.

For several years past, the government had received an annual £400,000 subvention from the Company as a contribution to the extensive military assistance rendered in India by the king’s troops and navy. But with the Company’s finances suddenly in ruins the subvention was stopped, and in a desperate attempt to stem the crisis the government offered the Company a conditional loan by bond of £400,000. It was an enormous sum, but the Company Directors quibbled the government’s conditions. The government was furious. But equal to its fury was its terror of the financial consequences to the nation if the Company failed. Eventually the loan was forced upon the Company by statute. Although most of the original conditions were then dealt with separately in the Regulating Act, one important condition was retained in the Loan Bill: the Company was prohibited from accepting in excess of £300,000 annually in Bills of Exchange issued by its servants in India.

The prohibition was simple and clear. And it was an instant death-knell to the risk-free plundering of the Company by its own traders in the Indian Presidencies. In the aftermath of the crisis Robinson, the secretary to the Treasury involved in negotiating the Loan Bill, said that this one amendment saved the Company. Certainly without such a prohibition there was no reason for the traders to alter their behaviour (apart from a general public opprobrium, to which they had already proven themselves immune).

The Regulating Act went on to impose government appointed Justices on those Indian courts-of-law previously overseen by the Company, and a Governor General over the Indian Presidencies. On the financial side, it dictated terms over the Company’s dividend payments. But all of these were merely preludes to the India Act of 1784 which brought the Company once and for all beneath the government’s control.

The damage inflicted on the Company by the great crisis was obvious. More subtle was the manner in which the government was wounded.

The government had entered the crisis carrying a large debt, incurred during the Seven Years War. After extending the enormous Crisis Loan to the Company, the government’s own financial position became even weaker. So weak, indeed, that it began to conduct Imperial policy with half an eye on its own financial predicament.

Debates over the taxation of the American colonies had been proceeding in the British parliament since the Stamp Act in 1765. But after the repeal of most of the Townshend duties in 1770 the cries of, “No taxation without representation,” had largely fallen quiet. Now the government’s position hardened. In an attempt to help the Company (and hence itself) through its financial difficulties, the British government in 1773 absolved the Company of the domestic duty on tea. At the same time it insisted that this duty should continue to be paid by the Americans. The Boston Tea Party followed, and with it the general revival of colonial opposition to British taxes, culminating in the Continental Congress of 1774.

The first step toward the War of Independence had been taken.

The Company’s financial crisis had become - invisibly - a crisis of Empire.

I've written three novels set in the British Empire of the Eighteenth Century. The Cobras of Calcutta, based on Clive's expedition to Bengal, The Hawks of London, based on the reformer and rake John Wilkes, and The Eagles at York Town based on the final siege of the Revolutionary War. I've also posted a free short story online as an example of the style used in these British Empire pieces.