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Tuesday, December 28, 2004

The world's first multinational

Corporate greed, the ruination of traditional ways of life, share-price bubbles, western imperialism: all these modern complaints were made against the British East India Company in the 18th century.

by Nick Robins

New Statesman Cover Story (December 13 2004)

In The Discovery of India, the final and perhaps most profound part of his "prison trilogy", written in 1944 from Ahmednagar Fort, Jawaharlal Nehru described the effect of the East India Company on the country he would shortly rule. "The corruption, venality, nepotism, violence and greed of money of these early generations of British rule in India", he wrote, "is something which passes comprehension". It was, he added, "significant that one of the Hindustani words which has become part of the English language is 'loot'".

For most of the succeeding sixty years, the East India Company sank from view. No plaque marked the site where its headquarters had stood in the City of London for more than two centuries. It was regarded as something that could be consigned to the history books, its deeds to be squabbled over by academics and imperial romantics. But the onset of globalisation has revived interest in a company that could be seen as a pioneering force for world trade. Exhibitions at the British Library and the V&A, plus a string of popular histories, have sought to revive the reputation of the "Honourable East India Company". Its founders are now hailed as swashbuckling adventurers, its operations praised for pioneering the birth of modern consumerism and its glamorous executives profiled as multicultural "white moguls".

Yet the East India Company, romantic as it may seem, has more profound and disturbing lessons to teach us. Abuse of market power; corporate greed; judicial impunity; the "irrational exuberance" of the financial markets; and the destruction of traditional economies (in what could not, at one time, be called the poor or developing world): none of these is new. The most common complaints against late 20th- and early 21st-century capitalism were all foreshadowed in the story of the East India Company more than two centuries ago.

In The Wealth of Nations (1776), Adam Smith used the East India Company as a case study to show how monopoly capitalism undermines both liberty and justice, and how the management of shareholder-controlled corporations invariably ends in "negligence, profusion and malversation". Yet nothing of Smith's scepticism of corporations, his criticism of their pursuit of monopoly and of their faulty system of governance, enters the speeches of today's free-market advocates.

Smith's vision of free trade entailed firm controls on corporate power. And, as did his own times, subsequent history shows how right he was. If it is to contribute to economic progress, the corporation's market power has to be limited to allow real choice, and to prevent suppliers being squeezed and consumers gouged. Its political power also needs to be constrained, if it is not to rig the rules of regulation so that it enjoys unjustified public subsidy or protection. Internal and external checks and balances must curb the tendency of executives to become corporate emperors. And clear and enforceable systems of justice are necessary to hold the corporation to account for any damage to society and the environment. These are tough conditions, and have rarely been met, either in the age of the East India Company or in today's era of globalisation.

Today, we can see the East India Company as the first "imperial corporation", the very design of which drove it to market domination, speculative excess and the evasion of justice. Like the modern multinational, it was eager to avoid the mere interplay of supply and demand. It jealously guarded its chartered monopoly of imports from Asia. But it also wanted to control the sources of supply by breaking the power of local rulers in India and eliminating competition so that it could force down its purchase prices.

By controlling both ends of the chain, the company could buy cheap and sell dear. This meant organising coups against local rulers and placing puppets on the throne. By the middle of the 18th century, the company was deliberately breaching the terms of its commercial concessions in Bengal by trading in prohibited domestic goods and selling its duty-free passes to local merchants. Combining economic muscle with extensive bribery and the deployment of its small but effective private army, the company engineered a series of "revolutions" that gave it territorial as well as economic control.

After Robert Clive's victory at the Battle of Palashi in 1757, the company literally looted Bengal's treasury. It loaded the country's gold and silver on to a fleet of more than a hundred boats and sent it downriver to Calcutta. In one stroke, Clive netted a cool GBP 2.5 million (more than GBP 200 million today) for the company, and GBP 234,000 (GBP 20 million) for himself. Historical convention views Palashi as the first step in the creation of the British empire in India. It is perhaps better understood as the company's most successful business deal.

It was the unrivalled quality and cheapness of textiles that had lured the East India Company to Bengal, and it would be Bengal's weavers who felt the full force of the company's new-found market power. Never rich, the weavers nevertheless had a better standard of living than their counterparts in 18th-century England. At a time when the British state was intervening on the side of the employer - for example, to set maximum levels for wages - India's weavers were able to act collectively, aiding their ability to negotiate favourable prices. But the East India Company eliminated the weavers' freedom to sell to other merchants, and so crushed their limited but important market autonomy. It imposed prices forty per cent below the market rate, and enforced them with violence and imprisonment. Many weavers were driven to despair. One account reports that, among the winders of raw silk, "instances have been known of their cutting off their thumbs to prevent their being forced to wind silk".

As the company transformed itself from a modest trading venture into a powerful corporate machine, so its systems of governance completely failed to cope with the new responsibilities that it faced. As Philip Francis, one of its leading critics, put it, instead of seeking "moderate but permanent profit", the company had recklessly pursued "immediate and excessive returns". Corruption assumed epidemic proportions and speculation overtook its shares, stoked up by insider trading led by Clive and other executives.

In the history of financial crises, the South Sea Bubble is often regarded as the only premodern crash worthy of note. But the East India Company also engineered its own stock-market boom, ending in a share-price slump that rocked the world. The company's share price doubled in the decade following Palashi, stoked by ever more extraordinary acquisitions, such as the takeover of Bengal's entire tax system in 1765. In London, the company's management and shareholders fought for control of a money machine they believed would yield unlimited returns. A swarm of "bulls" and "bears" descended on the company's shares, with shareholders voting for a doubling of the annual dividend from six to twelve per cent in order to cash in on the new-found wealth. This upward spiral of "infectious greed" - to use a phrase employed by Alan Greenspan, chairman of the US Federal Reserve, more than two centuries later - came to an end in May 1769 when news of renewed conflict in India reached the London markets. The share price fell sixteen per cent in a single month, and would continue a downward course for the next fifteen years, reaching the depths in July 1784 after a fall of 55 per cent.

Yet the human tragedy was just beginning. In Bengal, the annual monsoon rains had failed. But what turned a manageable natural disaster into a catastrophe was the manipulation of local grain markets by East India speculators, driving up the price of food beyond the reach of the poor. "As soon as the dryness of the season foretold the approaching dearness of rice", went one eyewitness account, "our Gentlemen in the Company's service were as early as possible in buying up all they could lay hold of". The situation was compounded by the company's decision to increase the rate of tax to ensure that revenue levels remained stable. Estimates vary, but up to ten million people may have died of starvation. When the full story became known in Britain, there was fury at the firm's negligence. As Horace Walpole wrote at the time: "We have murdered, deposed, plundered, usurped - nay, what think you of the famine in Bengal, in which millions perished, being caused by a monopoly of provisions by the servants of the East Indies".

The company's fortunes had now turned sharply downwards. By the end of 1772 it was, in effect, bankrupt. A final slump in its shares precipitated a Europe-wide financial crisis, and forced the company, begging for a bailout, into the arms of the government. But not only was the East India Company the mother of the modern multinational corporation, it also stimulated one of the first movements for corporate reform.

Well-versed in the history of the Roman Republic, Britain's elite feared that, just as the proceeds of Rome's conquest of Asia (western Anatolia) had been used to subvert its ancient freedoms, so the company's takeover of Bengal would bring despotism back home. If left unchecked, argued one editorial, the company could "repeat the same cruelties in this island which have disgraced humanity and deluged with native and innocent blood the plains of India". Prior to his conservative turn during the French revolution, Edmund Burke pressed repeatedly for the company to be made accountable to parliament and for its system of exploitation to be ended. "Every rupee of profit made by an Englishman is lost for ever to India", he concluded, a judgement that would probably be echoed today by millions of people working at the wrong end of the multinational bargain.

All the tools with which we are now familiar were deployed to tame the firm: codes of conduct for company executives, rules on shareholder abuse, government regulation, and ultimately, as with so many failed firms, nationalisation.

Government intervention over a hundred years transformed the company from a purely commercial institution to an agent of the British state. It was only in the wake of the great rebellion against company rule, which shook northern India in 1857-58, that its anachronistic position as a profit-making ruler was put to an end. Direct control of the company's territories passed to the crown, and the British Raj was born.

Yet in spite of all the parliamentary inquiries and waves of regulation, few of the company's executives were ever brought to book. Clive narrowly escaped parliamentary censure in 1773, only to die by his own hand. Parliament then turned its attention to Warren Hastings, governor-general of Bengal, voting twice to recall him for mismanagement. Both times this was rebuffed by the company's shareholders and, as a last resort, and at Burke's instigation, the medieval practice of impeachment was revived and used against him. Among the charges was that Hastings had introduced a company monopoly over the production of opium and, in an attempt to smuggle the crop into China, had awarded the contract at a knock-down price to the son of the East India Company chairman, who promptly sold it on for a tidy profit. Hastings was also the first to seek deliberately to break China's ban on the importation of opium. His attempt failed, but would be pursued by his successors, with tragic consequences. Burke won Commons majorities in support of his case, and in February 1788, the trial of Hastings began in the Lords with Burke delivering a four-day opening speech against him.

What makes Burke's challenge to Hastings and the East India Company so compelling are the principles on which it was based. "The laws of morality", he declared, "are the same everywhere ... there is no action which would pass for an act of extortion, of peculation, of bribery, and oppression in England, that is not an act of extortion, of peculation, of bribery, and oppression in Europe, Asia, Africa and the world over". Against the relativism that increasingly viewed India as an inferior land in which different standards of justice should apply, Burke unfurled the standard of absolute values, protesting against "geographical morality". In the heat of his reactions to the French revolution, Burke would oppose Tom Paine's Rights of Man. But in the case against Hastings, Burke argued for companies to be judged by their respect for what we would understand as universal human rights. The trial was interrupted, first by George III's madness and then by the French revolution. After eight long years, Hastings was acquitted of all charges, a result that surprised nobody, given the political complexion of the Lords.

Yet there is one instance where the company's impunity was broken. In 1774, a group of Armenian merchants launched a civil case for damages against Hastings's predecessor, Harry Verelst. Led by Gregore Cojamaul and Johannes Padre Rafael, the merchants alleged that Verelst had arbitrarily locked them up in Bengal six years earlier, confiscating their property and removing their freedom to trade. It is a testimony to the British legal system that in December 1774, the Lord Chief Justice decided in favour of the Armenians, judging that Verelst had been guilty of "oppression, false imprisonment and singular depredations". Verelst had to pay GBP 9,000 in damages, as well as full costs. Thousands of miles away from the scene of the crime, the principle of extra-territorial liability for corporate malpractice was established in 1770s London.

Many in business regard the current upsurge of global litigation against corporations such as Talisman, Unocal and Shell as somehow new and unjustified. Yet Verelst's case provides a powerful precedent, demonstrating that more than 200 years ago, a senior executive of the world's first multinational was tried and found guilty of what we would now consider human rights abuses.

It is not, however, Cojamaul's statue that stands outside the Foreign Office in Whitehall, but Robert Clive's. That such a rogue still has pride of place at the heart of government suggests that Britain has not yet confronted the connections between its corporate and imperial pasts. This is not mere forgetfulness, but the mark of a continued belief that the unrestrained pursuit of market power and personal reward is to be praised at the highest levels. In India, the East India Company's mismanagement remains part of the national consciousness; here, knowledge of the company's corruption and abuse is almost entirely lacking. We still do not recognise the "imperial gene" that remains at the heart of modern corporate design.

Perhaps Nehru can help us. In The Discovery of India, he examined the consequences of England's long domination of India in terms of karma, the spiritual law of cause and effect. "Entangled in its meshes", he wrote, "we have thus struggled in vain to rid ourselves of this past inheritance and start afresh on a different basis". Independence was a necessary starting point for India, wrote Nehru, but Britain, too, needed to "start afresh". As we approach the 250th anniversary of Palashi, we do not need further glorification of the East India Company's contribution to consumerism or of the celebrity of its executives. We need an honest reckoning with the human costs of its quest for market domination.

Nick Robins's Imperial Corporation: reckoning with the East India Company will be published next year. He also takes part in The Great Debates: Hastings v Burke (Radio 4, 29 December, 8 pm)

Copyright New Statesman 1913 - 2004

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