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Authors: Niall Ferguson

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The biggest threat of all, however, came not from ships flying the Jolly Roger. It came from other Europeans who were trying to do exactly the same thing. Asia was about to become the scene of a ruthless battle for market share.
This was to be globalization with gunboats.
Going Dutch
 
The wide, brown Hugli River is the biggest branch of the Great Ganges Delta in Bengal. It is one of India’s historic trading arteries. From its mouth at Calcutta you can sail upstream to the Ganges itself and then on to Patna, Varanasi, Allahabad, Kanpur, Agra and Delhi. In the other direction lie the Bay of Bengal, the monsoon trade winds and the sea lanes leading to Europe. So when Europeans came to trade in India, the Hugli was one of their preferred destinations. It was the economic gateway to the subcontinent.
Today, a few crumbling buildings in the town of Chinsura, north of Calcutta, are all that remain of the first Indian outpost of one the world’s greatest trading companies, the East India Company. For more than a hundred years it dominated the Asian trade routes, all but monopolizing trade in a whole range of commodities ranging from spices to silks.
But this was the Dutch East India Company – the Vereenigde Oostindische Compagnie – not the English one. The dilapidated villas and warehouses of Chinsura were built not for Englishmen, but for merchants from Amsterdam, who were making money in Asia long before the English turned up.
The Dutch East India Company was founded in 1602. It was part of a full-scale financial revolution that made Amsterdam the most sophisticated and dynamic of European cities. Ever since they had thrown off Spanish rule in 1579, the Dutch had been at the cutting edge of European capitalism. They had created a system of public debt that allowed their government to borrow from its citizens at low interest rates. They had founded something like a modern central bank. Their money was sound. Their tax system – based on the excise tax – was simple and efficient. The Dutch East India Company represented a milestone in corporate organization too. By the time it was wound up in 1796 it had paid on average an annual return of 18 per cent on the original capital subscribed, an impressive performance over such a long period.
It is true that a group of London-based merchants had already subscribed £30,000 to ‘set forthe a vyage ... to the Est Indies and other ilandes and countries thereabout’ provided they could secure a royal monopoly; that in September 1600 Elizabeth I duly gave ‘The Company of Merchants of London trading into the East Indies’ a fifteen-year monopoly over East Indian trade; and that the following year their first fleet of four ships sailed for Sumatra. But Dutch merchants had been trading with India via the Cape of Good Hope since 1595. By 1596 they had firmly established themselves at Bantam, on the island of Java, from where the first consignments of Chinese tea destined for the European market were shipped in 1606. Moreover, their company was a permanent joint stock company, unlike the English company, which did not become permanent until 1650. Despite being founded two years after the English one, the Dutch company was swiftly able to dominate the lucrative spice trade with the Moluccan islands of Indonesia, once a Portuguese monopoly. The Dutch scale of business was simply bigger: they were able to send out nearly five times as many ships to Asia as the Portuguese and twice as many as the English. This was partly because, unlike the English Company, the Dutch company rewarded its managers on the basis of gross revenue rather than net profits, encouraging them to maximize the volume of their business. In the course of the seventeenth century the Dutch expanded rapidly, establishing bases at Masulipatnam on the east coast of India, at Surat in the north-west and at Jaffna in Ceylon. But by the 1680s it was textiles from Bengal that accounted for the bulk of its shipments home. Chinsura seemed well on its way to becoming the future capital of a Dutch India.
In other respects, however, the two East India companies had much in common. They should not be equated naively with modern multinational corporations, since they were much more like state-licensed monopolies, but on the other hand they were a great deal more sophisticated than the associations of buccaneers in the Caribbean. The Dutch and English merchants who founded them were able to pool their resources for what were large and very risky ventures under the protection of government monopolies. At the same time, the companies allowed governments to privatize overseas expansion, passing on the substantial risks involved. If they made money, the companies could also be tapped for revenue or, more commonly, loans, in return for the renewal of their charters. Private investors, meanwhile, could rest assured that their company had a guaranteed market share of 100 per cent.
The companies were not the first such organizations; nor were they by any means the last. One had been founded in 1555 (as ‘The Mysterie and Companie of the Merchants Adventurers for the discoverie of Regions, Dominions, Islands and places unknown’); it ended up as the Muscovy Company trading with Russia. In 1592 a Levant Company was formed when the Venice and Turkey Companies merged. Licences were granted in 1588 and 1592 to companies wishing to monopolize respectively the Senegambian and Sierra Leonese trade in West Africa. These were succeeded in 1618 by the Guinea Company (‘Company of Adventurers of London Trading to the Ports of Africa’), which in 1631 was rechartered with a thirty-one-year monopoly on all trade with West Africa. By the 1660s a new and powerful company, the Company of Royal Adventurers into Africa, had come into being with a monopoly intended to last no less than a thousand years. This was an especially lucrative enterprise, since it was here – at last – that the English found gold; though slaves would ultimately prove the region’s biggest export. At the other climatic extreme was the Hudson Bay Company (the ‘Honourable Company of Adventurers of England Trading Into Hudson’s Bay’) founded in 1670 to monopolize the trade in Canadian furs. In 1695 the Scots sought to emulate the English by establishing their own Company of Scotland Trading to Africa and the Indies. The South Sea Company, intended to monopolize trade with Spanish America, came later, in 1710.
But were the monopolies granted to these companies actually enforceable? To take the case of the two East India companies, the trouble was that they could not both have a monopoly on Asian trade with Europe. The idea that flows of goods to London were somehow distinct from flows of goods to Amsterdam was absurd, given the proximity of the Dutch and English markets to one another. In establishing itself at Surat on the north-west coast of India in 1613, the English East India Company was very obviously trying to win a share of the lucrative spice trade. If the volume of spice exports was inelastic, then it could only succeed by taking business away from the Dutch company. This was indeed the assumption: in the words of the contemporary political economist William Petty, there was ‘but a certain proportion of trade in the world’. The hope of the East India Company director Josiah Child was ‘that other Nations who are in competition with us for the same [business], may not wrest it from us, but that ours may continue and increase, to the diminution of theirs’. It was economics as a zero-sum game – the essence of what came to be called mercantilism. If, on the other hand, the volume of spice exports proved to be elastic, then the increased supply going to England would depress the European spice price. The English company’s initial voyages from Surat were exceedingly profitable, with profits as high as 200 per cent. But thereafter the predictable effect of Anglo-Dutch competition was to drive down prices. Those who contributed to the second East India joint stock of £1.6 million (between 1617 and 1632) ended up losing money.
It was therefore all but inevitable that English attempts to muscle in on the Eastern trade would lead to conflict, especially since spices accounted for three-quarters of the value of the Dutch company’s business at this time. Violence flared as early as 1623, when the Dutch murdered ten English merchants at Amboina in Indonesia. Between 1652 and 1674 the English fought three wars against the Dutch, the main aim of which was to wrest control of the main sea routes out of Western Europe – not only to the East Indies, but also to the Baltic, the Mediterranean, North America and West Africa. Seldom have wars been fought for such nakedly commercial reasons. Determined to achieve naval mastery, the English more than doubled the size of their merchant navy and, in the space of just eleven years (1649 to 1660) added no fewer than 216 ships to the navy proper. Navigation Acts were passed in 1651 and 1660 to promote English shipping at the expense of the Dutch merchants who dominated the oceanic carrying trade by insisting that goods from English colonies come in English ships.
Yet despite some initial English successes, the Dutch came out on top. The English trading posts on the West African coast were almost wholly wiped out. In June 1667 a Dutch fleet even sailed up the Thames, occupied Sheerness and forced the Medway boom, destroying the docks and ships at Chatham and Rochester. At the end of the second Dutch War, the British found themselves driven out of Surinam and Polaroon; in 1673 they temporarily lost New York too. This came as a surprise to many. After all, the English population was two and a half times bigger than the Dutch; the English economy was bigger too. In the third Dutch War the English had the additional benefit of French support. Yet the superior Dutch financial system enabled them to punch well above their economic weight.
By contrast, the cost of these unsuccessful wars placed a severe strain on England’s antiquated financial system. The government itself teetered on the brink of bankruptcy: in 1671 Charles II was forced to impose a moratorium on certain government debts – the so-called ‘Stop of the Exchequer’. This financial upheaval had profound political consequences; for the links between the City and the political elite in Britain had never been closer than they were in the reign of Charles II. Not only in the boardrooms of the City but in the royal palaces and stately homes of the aristocracy, the Anglo-Dutch Wars caused consternation. The Duke of Cumberland was one of the founders of the Royal African Company and later governor of the Hudson Bay Company. The Duke of York, the future James II, was governor of the New Royal African Company, founded in 1672 after the Dutch had ruined its predecessor. Between 1660 and 1683 Charles II was given ‘voluntary contributions’ of £324,150 by the East India Company. Literally cut-throat competition with the Dutch was spoiling the Restoration party. There had to be an alternative. The solution turned out to be (as so often in business history) a merger – but not a merger between the two East India companies. What was required was a political merger.
In the summer of 1688, suspicious of James II’s Catholic faith and fearful of his political ambitions, a powerful oligarchy of English aristocrats staged a coup against him. Significantly, they were backed by the merchants of the City of London. They invited the Dutch stockholder William of Orange to invade England, and in an almost bloodless operation James was ousted. This ‘Glorious Revolution’ is usually portrayed as a political event, the decisive confirmation of British liberties and the system of parliamentary monarchy. But it also had the character of an Anglo-Dutch business merger. While the Dutch Prince William of Orange became, in effect, England’s new Chief Executive, Dutch businessmen became major shareholders in the English East India Company. The men who organized the Glorious Revolution felt they needed no lessons from a Dutchman about religion or politics. Like the Dutch, England already had Protestantism and parliamentary government. But what they could learn from the Dutch was modern finance.
In particular, the Anglo-Dutch merger of 1688 introduced the British to a number of crucial financial institutions that the Dutch had pioneered. In 1694 the Bank of England was founded to manage the government’s borrowings as well as the national currency, similar (though not identical) to the successful Amsterdam Wisselbank founded eighty-five years before. London was also able to import the Dutch system of a national public debt, funded through a Stock Exchange, where long-term bonds could easily be bought and sold. The fact that this allowed the government to borrow at significantly reduced interest rates made large-scale projects – like wars – far easier to afford. Perceptive as ever, Daniel Defoe was quick to see what cheap credit could do for a country:
Credit makes war, and makes peace; raises armies, fits out navies, fights battles, besieges towns; and, in a word, it is more justly called the sinews of war than the money itself ... Credit makes the soldier fight without pay, the armies march without provisions ... it is an impregnable fortification ... it makes paper pass for money ... and fills the Exchequer and the banks with as many millions as it pleases, upon demand.
 
Sophisticated financial institutions had made it possible for Holland not only to fund its worldwide trade, but also to protect it with first-class naval power. Now these institutions were to be put to use in England on a much larger scale.
The Anglo-Dutch merger meant that the English could operate far more freely in the East. A deal was done which effectively gave Indonesia and the spice trade to the Dutch, leaving the English to develop the newer Indian textiles trade. That turned out to be a good deal for the English company, because the market for textiles swiftly outgrew the market for spices. It turned out that the demand for pepper, nutmeg, mace, cloves and cinnamon – the spices on which the Dutch company’s fortunes depended – was significantly less elastic than the demand for calicoes, chintz and cotton. This was one reason why, by the 1720s, the English company was overtaking its Dutch rival in terms of sales; and why the former made a loss in only two years between 1710 and 1745, while the latter’s profits declined. The English East India Company’s head office was now in Leadenhall Street. This was where the meetings took place of the company’s two governing bodies – the Court of Directors (shareholders with £2,000 or more of East India stock) and the Court of Proprietors (shareholders with £1,000 or more). But the real symbols of its growing profitability were the immense warehouses in Bishopsgate built to house the growing volume of imported cloth the company was bringing to Europe from India.
BOOK: Empire: The Rise and Demise of the British World Order and the Lessons for Global Power
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