Part 3o of Chapter 1 of Book 5 of The Wealth of Nations Simplified

The British East India Joint Stock Company (1600-1874) Icon

August 1, 2021

115 The old English East India Company was established in 1600 by a charter from Queen Elizabeth.

It did business as a regulated company in its first 12 voyages to India.

  • It used private capital only in their general ships.
  • In 1612, it united into a joint stock.

Its charter was not confirmed by act of parliament and conveyed an exclusive privilege. For many years, it was not much disturbed by interlopers.

Its capital never exceeded £744,000 at £50 a share.

  • The share price was not so exorbitant nor its dealings so extensive to cause gross negligence, profusion, gross malversation.

It had a successful business for many years despite some extraordinary losses caused by the malice of the Dutch East India Company and other accidents.

But in time, when the principles of liberty were better understood, it became more doubtful how far a Royal Charter, not confirmed by act of parliament, could convey an exclusive privilege*.

*Superphysics Note: Without parliament, the company would lose to smaller private competitors

The decisions of the courts of justice on this question were not uniform. They varied with:

  • the government’s authority, and
  • the humours of the times.

Interlopers multiplied on the company. From the end of Charles 2nd’s reign in 1685 to that of William 3rd in 1702, they brought it great distress.

In 1698, a proposal was made to parliament to loan £2 million to government at 8%, provided the subscribers were collected into a new East India Company with exclusive privileges*.

*Superphysics Note: Here, the investors wanted guaranteed profits by eliminating private businesses

The old East India Company offered £700,000, nearly the amount of their capital, at 4% on the same conditions.

  • Public credit was such in a bad state, that it was more convenient for government to borrow £2 million at 8%* than £700,000 at 4%.

*Superphysics Note: This is the similar condition of poor countries in 2015 getting Chinese debt

The proposal was accepted and a new East India Company established.

  • The old East India Company could continue until 1701.

East India Company as a Semi Joint Stock

At the same time, it subscribed £315,000 very artfully into the new company’s joint stock.

  • The act of parliament failed to emphasize that all subscribers of the £2 million loan were united into a joint stock.

A few private shareholders had subscriptions of only £7,200. They insisted:

  • on doing business on their own stocks separately at their own risk
  • that the old East India Company had a right to private business on its old stock until 1701, and
  • like the private owners, the Company had a right to a private trade on the £315,000 which it had subscribed into the new company’s stock.

The competition between these 2 companies and with private businesses almost ruined both.

In 1730, a proposal was made to parliament to put its business under a private regulated company and laying it open.

  • The East India Company opposed this proposal.
  • They were very strongly against the ensuing competition.
  • They said that:
    • In India, the competition raised the price of goods so high that they were not worth buying.
    • In England, the competition overstocked the market and sunk the price of goods so low that no profit could be made.

The plentiful supply was a great advantage and conveniency to the public.

  • It reduced the price of Indian goods so much in the English market.
  • But it did not raise the price of goods very much in the Indian market.

All the extraordinary demand that competition could bring was just a drop of water in the immense ocean of Indian commerce.

“The increase of demand though in the beginning it may sometimes raise the price of goods, never fails to lower it in the run.”

  • It encourages production and increases the competition of the producers.
  • Those producers turn to new divisions of labour and improvements never thought of in order to undersell one another.
  • The company complained of:
    • the cheapness of consumption, and
    • the encouragement given to production.

These are precisely the two great effects promoted by political economy.

East India Company as a Joint Stock

The competition they complained of was not allowed to continue for long.

  • In 1702, the 2 companies were united by an indenture tripartite, to which the queen was the third party.
  • In 1708, by an act of parliament, they were perfectly consolidated into 1 company as The United Company of Merchants trading to the East Indies.

This act had a clause which allowed the separate traders to continue their trade until September 29, 1711. At the same time, it empowered the directors, upon 3 years notice, to:

  • redeem their little capital of £7,200, and
  • convert the whole stock of the company into a joint stock.

The company’s capital was increased from £2 million to £3.2 million through a new loan to the government.

In 1743, the company advanced another £1 million to the government.

  • This million was raised by selling annuities and contracting bond-debts, not by a call on the proprietors.
  • It did not increase the stock on which the proprietors could claim a dividend.

It increased their trading stock.

  • Their trading stock was equally liable with the other £3.2 million to the losses and debts by the company.

From 1708 or 1711, this company fully established the successful monopoly of English commerce to the East Indies.

  • A moderate dividend was annually given to their proprietors from its profits.

The French war began in 1741.

Mr. Dupleix was the French governor of Pondicherry. His ambition involved the French in:

  • the Carnatic wars, and
  • the politics of the Indian princes.

At this time, the spirit of war and conquest possessed the East India staff in India and never left them.

  • Another French war began in 1755 as the Seven Years’ War.
  • The company defended Madras, took Pondicherry, and recovered Calcutta.
  • They acquired the revenues of more than £3 million a year from this rich and extensive territory.

In 1767, the French crown laid claim to their company’s territorial acquisitions and its revenue.

  • The company agreed to pay the government £400,000 a year in compensation for this claim.

Before this, they gradually increased their dividend from 6% to 10%.

  • From their capital of £3.2 million, they increased it by £128,000 or raised it from £192,000 to £320,000 a year.
  • They were attempting to raise it to 12.5%.

It would have made their annual payments to their investors equal to their £400,000 annual payment to government.

But during the 2 years when their agreement with government was to take place, they were restrained by 2 successive acts of parliament from increasing the dividend.

Their debts were then estimated at more than £6-7 million sterling. They wanted to pay their debts faster.

In 1769, the company renewed their agreement with government for 5 years more. During those 5 years, it should be allowed to gradually increase its dividend to 12.5%, never increasing it more than 1% per year.

At its highest, this dividend increase could increase its annual payments to the investors and government only by £608,000 more than what it was before their recent territorial acquisitions.

The net revenue of those territorial acquisitions from an account by the Cruttenden East Indiaman in 1768 was £2,048,747.

At the same time, the company had another revenue of £439,000:

  • partly from lands, and
  • chiefly from the customs at their settlements.

At this time, their trade profits was:

  • at least £400,000 a year, according to their chairman before the House of Commons,
  • at least £500,000 a year, according to their accountant,
  • at least equal to the highest dividend that was to be paid to their proprietors, according to the lowest account.

So great a revenue might certainly have afforded an increase of £608,000 in their annual payments.

At the same time, it would have left a large sinking fund sufficient for speedy debt reduction.

In 1773, their debts increased by:

  • An arrear in the payment of the £400,000
  • Another payment to the custom-house for duties unpaid
  • A large debt to the bank for money borrowed
  • A fourth payment for bills drawn on them from India of more than £1,200,000 and wantonly accepted

These accumulated claims obliged them to:

  • immediately reduce their dividend to 6%, and
    • a release from further payment of the stipulated £400,000 a year, and
    • a loan of £1,400,000 to save them from immediate bankruptcy.

The great increase of their fortune only gave their staff :

  • a pretext for greater profusion, and
  • a cover for greater malversation

Their conduct was subjected to a parliamentary inquiry.

  • Several very important changes were made in the constitution of their government at home and abroad.
  • In India, their principal settlements of Madras, Bombay, and Calcutta were previously independent of one another. These were subjected to a governor-general who was assisted by a council of 4 assessors.
  • Parliament nominated this governor and council who were to reside at Calcutta.

Calcutta became the most important English settlement in India, replacing Madras.

  • The court of Calcutta was originally instituted for mercantile cases in the city.
  • It gradually extended its jurisdiction with the extension of the empire.
  • It was replaced with a new supreme court.
    • It had a chief justice and 3 judges to be appointed by the crown.