The economics of the East India trade

An obvious aspect of mercantile activity, but one which will bear reiteration, is that the faster a merchant's capital is turned over, the smaller the amounts of money capital the merchant must employ. Conversely, the more slowly it is turned over, the larger this portion. The problems of the long-distance overseas trade were different from those in the domestic and European trades. The merchant's capital invested in his activities was employed for a much greater length of time, which increased the farther afield his ventures went. Furthermore, the greater distances put the investments at greater risk. The distances over which mercantile capital was employed thus became the material basis in the period of circulation. Watson 1980, p. 13

Watson defines primary costs as the direct payments made to purchase goods in Asia and bring them to market in London, and secondary costs as all the expenses of managing the trade in overseas posts, including the costs of building and maintaining factories and forts, and building 'country shipping' [1], bribes and gifts to Indian authorities, the costs entailed in procuring firmans from the Indian rulers, the costs of maintaining monopoly status in England, the costs involved in employing Indian merchants as servants and brokers, and the costs incurred in the putting-out system to Indian artisans.

Note on country shipping

Above [1] country shipping refers to ships intended for transport between ports in Asia but not back to the Atlantic. Such vessels were useful on the Company's account, in collecting specific items where the source of supply was in a subsidiary location away from their main centres of business.

As the volume of English trade grew, the necessity for the infrastructure became more critical; buildings had to be enlarged, lading facilities improved, and ships of greater tonnage and security employed. Such necessities at long distances also had the consequence of concentrating the spatial activity of English merchants at nodal points under their control, thus increasing demands upon the 'country trade' to feed the commodities into the main locations. p. 15

(FP note) The same ships might be employed in general country trade, in bulk commodities like rice and sugar, or luxuries like elephants or fine horses. The luxury trade catered mainly to the Mughal rulership class. Much of this general regional shipping market fell into the hands of the Company employees on a private basis. They employed a combination of capital brought from home, with that from local merchant-investors, and to some extent local minor rulers. Thomas Pitt, got his first start in such a combine managed by Walter Clavell in Bengal in the 1670s.

The East India Company

The Company was always looking to reduce secondary costs and achieve a quick turnover of invested capital, yet:

In the early years of the Anglo-Indian relationship, at the periods [of the year] of most activity when the 'Europe ships' were being laden, the Company had almost its entire investment for the year at risk. The major consequence of this realisation among the directors was the shift from factory to fort, the paradigm of which was the construction of Fort St. George [at Madras, now Chennai] in 1640.

Since money and its increase appear as the exclusive purpose of the operation, it is no wonder the company considered secondary costs as dead stock. Furthermore, as soon as the goods purchased are held in warehouses, those goods become stationary, that is, not easily moved, and therefore vulnerable to destruction or appropriation by others. The goods purchased have become wealth, and are in the stage of mercantile process which is most vulnerable. The value of the goods now lies in their potential at the selling place. Their material condition is critical for their re-sale values, while the goods in themselves represent the cost of the interest being paid on the original investment. The longer they remain as goods, the greater the costs they must defray at the time of sale. p. 15

The need to keep valuable goods as safe as possible, from confiscation or deterioration, motivated the\ building of permanent bases:

The initial rationale behind the building of factories was to purchase commodities cheaply in season, by having somewhere to store and protect them until the transports arrived in India.

While most of the company's directors at this time saw the necessity for factory and fort as an evil necessity, which was not within their purview as merchants, their servants in India became increasingly vociferous in their complaints about their treatment by Indian authorities and in their advocation of strongly defensible positions from which to drive the trade. Being on the spot, they were aware of the realities of Indian life and of their own very vulnerable positions within it. Whenever the Indian polities reacted over acts of piracy by Europeans, they tended to exact retribution from the Englishmen around them, irrespective of culpability. Moreover, the English servants had, from the beginnings of English settlement in India, conducted an active private trade of their own. Protection for their own activities was also necessary, and this was justified in terms of their protection as company servants. The views of the servants in India began to receive a more sympathetic audience in the court of directors during the period 1658 to 1760, a development given its greatest impetus during the 1680s when Sir Josiah Child became convinced about the need to expand the company's revenues in India. In order to defray the costs of the infrastructure, during this period, when Aurangzeb's push to the south and the conflicts with the Marathas justified the belief in fortifications, it became clear that the pressure on profits was becoming intolerable. p. 16

Source

I. B. Watson, Foundation for Empire (Vikas: New Delhi 1980)