Why did the East India Company move away from trade towards territorial administration between the 1750s and the 1830s?
The extent and nature of corporate power are issues that have become familiar today. Yet these issues are hardly new. This essay will broadly accept the point that the East India Company (EIC) moved from trade and towards territorial administration between the 1750s and the 1830s. However it will be argued that trade was still an important part of its activities and motivations, and so that the move into territorial administration can be seen as a development of its activities rather than as simply replacing trade. In answering the question as to why this development took place, this essay will consider both the motives of the East India Company, and the opportunity which allowed these desires to be acted upon. It will be argued that the opportunity to move from trade to territory was there because of what was happening in Indian politics by the second half of the eighteenth century. The decline of the Moghul Empire left a power vacuum and a period of political uncertainty which the British were able to exploit. The initial phase of territorial administration took place in Bengal, and in outlining this the point will be emphasized that this change was at first motivated - at least partly – by a desire to protect trading interests. However the primary motivation for the move towards the administration of territory was that it allowed vast amounts of revenue to be generated by means of taxing the Indian population. The British wanted the money that they could take off the Indians. The acquisition of territory also had important implications for the EIC’s ability to control the terms of trade, providing a further (financial) reason that the EIC wanted to control territory in India. The expansion of the EIC’s activities was also intimately linked to the mindset of those who worked for it. Their motivations – a blend of opportunism and patriotism, the emphasis perhaps being on the former – are important in terms of explaining why the Company moved in the direction that it did. But was the EIC fully in control? The size of its army and administration – and the consequent expenses associated with these – came to demand the acquisition of more and more territory. The move from trade towards administration came to have a self-perpetuating quality to it. It will be argued that the EIC’s ambitions led to its being overstretched, and ultimately, to its downfall.
The British EIC was founded in 1600 as a trading company, with a monopoly on all trade in the East Indies. Throughout the seventeenth century it established a string of trading posts along the eastern and western shores of India, the jewel the crown of which was to become Calcutta, in Bengal. The EIC exported spices, silks and cottons from India to the British market, and the trade was a profitable one. In 1674-5 the EIC exported £155,000 of British manufactured goods, £410,000 in silver bullion, and imported £860,000 worth of Indian goods, largely textiles. It also entered the shipping business both within India and between India and other Asian destinations, especially China, having seen the opportunity to make money by competing within pre-existing Asian trading networks.
By 1815, however, the EIC governed, directly and indirectly, Bengal, much of the upper Ganges basin, and extensive areas of eastern and southern India. It had its own army of 150,000 men. Independent princes feared its power and many sought its friendship and protection. Financially it was principally dependent on land taxes collected form the provinces it ruled. It was deeply involved in the administration of these provinces. Trade still mattered to the Company, but less than before. Since 1793 its monopoly had been whittled away by British govt which was falling under spell of Adam Smith’s economic theories. Also by 1810 interlopers had captured a quarter of the Indian market and were selling goods worth £2 m a year. India’s territorial revenues, not its trade, had become the chief prize in the East. The question’s assumption that the EIC had moved from trade to empire is in this sense correct.
The opportunity for the EIC to move from trade to territorial administration arose because of the declining state of the Mughal Empire by the second half of the eighteenth century. The central authority of the Mughal emperors was dissolving, and their imperial system had given way to regional states. This fragmenting of authority did not necessarily equate with political failure. It has been argued that decentralisation allowed a more rigorous local administration, and hence greater tax yields. But at the very least it meant that the Indian political landscape was in a state of flux. While the Mughal empire continued to exist – albeit increasingly tenuously – the British found themselves having to negotiate their terms of trade with India’s new leaders. These were the Nawabs, the leaders of the provinces, or statelets, into which India had disintegrated. There were struggles for power within these provinces that the British were more or less willingly drawn into. Commercial negotiations were closely connected to political decisions and administrative procedures at the provincial level. So the British found themselves increasingly drawn into both the politics and the administration of the changing political systems within India. It is debateable, certainly during the initial stages of these developments, as to what degree of intentionality there was on the part of the EIC to get involved in this capacity. These changes in its role were both insidious and incremental. What is of less doubt, however, is that the possibility of territorial administration came to be seen as a great opportunity for the Company to increase its revenues.
Initially, however, the EIC’s reason for acquiring territory was that of protecting trading interests - it was defensive in nature. In 1756 the Nawab of Bengal attacked and occupied Calcutta. The EIC’s trading interests were threatened, and the incident was a blow to its prestigious reputation. Clive wrested Calcutta back from Siraj in 1757 by inflicting military defeat at the battle of Plassey. He then installed a more favourable leader as Nawab. The customary land taxes passed into the hands of the Company, and the new Nawab - Mir Jair - was ostensibly in charge of the justice and policing. However by 1772 these functions had passed into the hands of the EIC as well. And while the administrative right to collect taxes (the diwan) was initially phrased as being a duty to the Mughal Emperor – and indeed was subject to checks by the Emperor’s officials – the EIC’s appreciation of the Emperor’s political weakness meant that they could keep the tax revenue themselves.
This ability to generate revenue through tax was the most important motivation for the EIC’s political control over increasingly large areas of India. Following the example of the French in the Carnatic, the EIC’s members quickly realised that the profits of territorial control were greater than the profits from trade. While the collecting of taxes was the EIC’s main concern, this could not be done in the abstract. It necessarily became involved in not just the administration but also the political and legal aspects of the territories that it acquired, as a means to the end of securing profit from these provinces.
Trade did not become irrelevant, however: it continued alongside the administration of territory. And control of territory gave the EIC the power to set the terms of trade in its own favour. To put the point in economic terms, as well as providing the demand for Indian goods, the EIC were now able to have significant influence on the supply of those goods, and in particular on the prices that were paid for them: they were able to buy cheap and sell dear. Bengal’s weavers knew this to their cost. The EIC eliminated their freedom to sell to other merchants, so crushing their limited but financially important market autonomy, and exploited this administrative policy by imposing prices of 40 per cent below the market rate.
The final main financial aspect of the EIC’s military activities was that of simple looting. As Nehru observed, the Hindu word “loot” is one of the few that have passed into the English language. This was following Clive’s own example of having emptied the Bengal treasury immediately after the battle of Plassey, securing £250,000 for the Company, and £20,000 to put towards regaining his family’s ancestral seat at Styche, in Shropshire.
The personal motivations of the people who worked for the EIC help to explain the move towards territorial administration. A lot of money could be made if one was in a position of power within India; by securing favourable terms of trade, by siphoning off some of the money raised in taxation, or by accepting bribes from the area’s leading businessmen. Like Clive, many of the EIC’s employees wanted to make enough money to go back and join the ranks of the gentry. Some had not been able to afford to purchase a Commission in Britain. A second motivation was patriotic. Initially the EIC’s main military involvement was in fighting against the French presence in India, lead by Dupleix, in the context of the Seven Years’ War, and in restricting the French to trading posts in enclaves such as Pondicherry, thereby eliminating a major source of competition for the Company. Those working for the EIC believed that they were serving the interests of Britain in expanding territory and influence.
The EIC was able to secure territory through deployment of its army, which it developed immediately following its annexation of Bengal. The role of the army is relevant to the question of how the territory was acquired, but it also goes to the question of why it was acquired. The army both facilitated and required territorial expansion. Bengal was followed by twenty years of intermittent campaigns to acquire more territory, which allowed the EIC to create and sustain its new position as a major military power within India. The British Indian army as a bulwark for trade in an era of continuing political flux. However as well as being a means to an end for securing territory, the army maintenance of the army came to be an end in itself, due to the huge financial outlay that was required. Its existence put an enormous demand on the EIC to generate further income. And the best way of generating further income was that of securing more territory and taxing the locals. However the more territory it acquired the longer the borders were that it needed to defend, making the army all the more necessary. And so in this sense the EIC’s move from trade to territory could be argued to be self-perpetuating. It had become something of a vicious circle.
The Company’s finances were strained to breaking point. In Warren Hastings's period the British were drawn into expensive and indecisive wars on several fronts, which had a dire effect on the Company's finances. The costs of administration and of defending the borders of its territories from seemingly endless danger had become too great. It was forced to petition Parliament for assistance. The Charter Act of 1813 deprived the company of its India trade monopoly except for the trade in tea and the trade with China, and the British Crown asserted its sovereignty over the Indian territories which the Company had held. While the ideology of free trade played its part in these measures, the simple fact was that the EIC was no longer commercially viable. Ironically, the move from trade to territory – initially seen as being a lucrative opportunity - had contributed very significantly to the Company’s downfall.
The EIC moved from trade to territory because that was where the real money was to be made, the opportunity being there due to Indian political weakness. However the army was too expensive and so this approach became unsustainable. A final point may be made, about the nature of decision-making within the EIC: there is a risk of assuming too high a degree of agency on the part of the Company itself. While the Directors of the Company were in London, whereas the “men on the spot” who initiated the move towards territorial acquisition were many thousands of miles away. The conquests that had begun in the 1750s had never been sanctioned in Britain. The overwhelming sense that one has when considering the rapid ascent and descent of the EIC is that of a lack of control. A nerve-wracking time for investors, indeed, raising early issues as to the need for more regulation of corporate activities. Although when one considers fairly recent events in corporate America (Enron, WorldCom), one wonders how much progress has really been made.
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