Territorial Monopoly: How The East India Company Took Over India

The East India House (Wikimedia)

The East India Company’s charter began with an original sin—Elizabeth I granted the company a perpetual monopoly on trade with the East Indies. With its monopoly giving it enhanced access to credit and vast wealth from Indian trade, it’s no surprise that the company grew to control an eighth of all Britain’s imports by the 1750s. Yet it was still primarily a trading company, with some military capacity to defend its factories. That changed thanks to a well-known problem in institutional economics — opportunism by a company agent, in this case Clive of India.

The history of how an English company superseded a great empire in India is really about the corrupting power of government.

How did a joint stock company founded in Elizabethan England come to replace the glorious Mughal Empire of India, ruling that great land for a hundred years? William Dalrymple’s splendid history, The Anarchy, tells that story—and purports to warn us about the perils of corporate power. The American edition sports the provocative subtitle, “The East India Company, Corporate Violence, and the Pillage of an Empire” (compared with the neutral British subtitle, “The Relentless Rise of the East India Company”). Yet the story Dalrymple really tells is of how government power corrupts commercial enterprise.

The “anarchy” in the book’s title refers to the disintegration of Mughal India following the death of Emperor Aurangzeb in 1707. Religious intolerance, devastating Persian and Afghan invasions, a series of weak and unstable rulers, and powerful viziers and regional potentates left the emperor imprisoned and his heir, Shah Alam, exiled from Delhi.

Official of the East India Company riding in an Indian procession, watercolour on paper, c.1825–30; in the Victoria and Albert Museum, London.

© Photos.com/Thinkstock

One particularly unstable potentate, Siraj ud-Daulah, Nawab of Bengal, alienated his bankers, the Jagat Seths, and demanded foreign merchants dismantle their walls, which were erected mostly to defend against other European companies. Facing threats from the French, the company governor of Calcutta refused. Siraj plundered the settlement. A company force led by Clive recaptured Calcutta, backed by crown forces that feared yielding advantage to the French.

The Jagat Seths then bribed the company men to attack Siraj. Clive, with an eye for personal gain, was happy to do so. In what Dalrymple calls a crucial point, the company directors had no part in this. They “consistently abhorred ambitious plans of conquest,” he notes. Clive’s defeat of Siraj at Plassey and the subsequent chain of events that led to Shah Alam giving tax-raising powers to the company in 1765 may be history’s most egregious example of the principal-agent problem.

Thus, the East India Company acquired by accident the ultimate economic rent — a secure, unearned income stream. Company cronies initially thwarted attempts at oversight in London, but a government bailout in 1772 following the Bengal Famine and the collapse of Ayr Bank confirmed the crown’s interest in the company, which had now become Too Big to Fail. Adam Smith called the company’s twin roles of trader and sovereign a “strange absurdity” in Book IV of The Wealth of Nations (unfortunately, Smith’s long condemnatory discussion of the company receives only a cursory reference from Dalrymple). As part of the bailout, Parliament passed the Tea Act to help the company dump its unsold products on the American colonies by giving it the monopoly on legal tea there (Americans drank mostly smuggled Dutch tea). This, of course, led to the Boston Tea Party and the American Revolution.

By 1784, Parliament had set up an oversight board that increasingly dictated the company’s political affairs. The attempted impeachment of Governor-General Warren Hastings by the House of Lords in 1788 confirmed that the company was no longer its own master. By that stage, the company was an arm of the state. Dalrymple’s coverage of the subsequent racist policies of Lord Cornwallis and the military adventures of Richard Wellesley make for compelling reading, but they are not examples of unfettered corporate power.

Dalrymple’s book is an excellent example of popular history—engaging, readable, and informative. However, he should have stuck to the history and not tried to draw a trustbusting parallel with today’s big companies. Where the parallels exist, they are to do with cronyism, rent-seeking, and bailouts, all of which are primarily sins of government.