2
The sixteenth and seventeenth centuries saw the emergence of some of the most remarkable business organizations the world has seen: “chartered companies” that bore the names of almost every part of the known world (“East India,” “Muscovy,” “Hudson’s Bay,” “Africa,” “Levant,” “Virginia,” “Massachusetts”) and even of bits that were too obscure to bear names (“The Company of Distant Parts”). These companies were complex entities. In 1700, the British East India Company employed over 350 people in its head office, more than many modern multinationals. They were also remarkably long-lasting. The East India Company lasted for 274 years. The Hudson’s Bay Company, which was founded in 1670, is still with us, making it the world’s oldest surviving multinational.
Chartered companies represented a combined effort by governments and merchants to grab the riches of the new worlds opened up by Columbus (1451–1506), Magellan (1480–1521), and Vasco da Gama (1469–1524). All of them were the lucky recipients of royal charters that gave them exclusive rights to trade with this or that bit of the world. They thus bestraddled the public and private sectors. Sometimes, the monarch insisted on a share in the firm himself, as Colbert (1619–1683) did on the French king’s behalf when he set up his country’s East Indies company in 1664. But, in general, northern European governments, led by the English and Dutch, preferred to operate through independent companies.
These chartered companies also drew on two other ideas from the Middle Ages. The first was the idea of shares that could be sold on the open market. The idea of offering shares in enterprises dates back at least to the thirteenth century. Across Europe, you could buy shares in mines and ships.1 In Toulouse, mills were divided into shares that their holders could sell like real estate. But the naval capitalism of the sixteenth and seventeenth centuries dramatically expanded the idea, bringing stock exchanges in its wake. The other idea, which had occasionally surfaced before, was limited liability. Colonization was so risky that the only way to raise large sums of money from investors was to protect them.
The first chartered joint-stock company was the Muscovy Company, which was finally given its charter in 1555. Two decades earlier, a group of London merchants had dispatched a fleet in a predictably disastrous attempt to find a northern passage to the East Indies; one boat got as far as Archangel—and attracted the notice of the czar, Ivan IV, who was keen to increase trade with England. Under the Muscovy charter, eventually won by a consortium including the famous navigator Sebastian Cabot (1483–1557), the Company was given a temporary monopoly over trade routes to the Russian port (and also encouraged to continue the search for a northeast passage). The company was able to raise enough money to finance the long journey to Russia by selling tradable shares. The Muscovy Company faded from view after about 1630, but it spawned a host of imitators seeking other monopolies.
Some of them looked west. Richard Hakluyt (1552–1616), an eminent geographer, was responsible for whipping up interest in America—and for persuading Elizabeth I to grant charters to several groups of investors. His Discourse on Western Planting (1584), which he presented to the queen, was arguably one of the first company prospectuses.2 Colonizing America, he argued, would be “a great bridle to the Indies of the King of Spain,” delivering fishing fleets that “we may arrest at our pleasure”; it would advance “the enlargement of the gospel of Christ” by converting the heathen; and, of course, it would yield up not just North American treasure but also “all the commodities of Europe, Africa and Asia.”3 The Virginia Company duly raised funds from seven-hundred-odd Elizabethan “adventurers,” including Sir Francis Bacon—and produced, in return, no profits.
The main prizes were to the east. The risks of investing in voyages to the spiceries of Indonesia would be akin to the risks of investing in space exploration today. Indeed, the quarter century before the creation of the two main East Indies companies showed why charters, shares, and limited liability were so necessary. In 1582, having failed to find a northeast passage, the London merchants pinned their hopes on one Edward Fenton, who duly headed out into the Atlantic and unveiled a new plan to his crew: to capture the island of St. Helena and “there to be proclaimed king.”4 In 1591, the merchants backed the far more competent James Lancaster: three years, six weeks, and two days later, his ship limped back home with a paltry cargo, having lost all but 25 of his 198 men to disease and storms. In 1595, the Dutch chose a former spy, Cornelis de Houtman: he bombarded Bantam, a vital Javan port, executed a bunch of locals, poisoned one of his own captains, and returned home with two-thirds of his crew gone. His backers were saved by the inflation in spice prices, which meant that the miserable amount he brought back covered their costs. But that was not something they could count on: the market for spices remained small and was easy to swamp with just a couple of deliveries.5
It was hardly surprising that the Dutch merchants decided that state-sponsored collusion was preferable to this. The monopoly that they eventually secured from the state in 1602—the Dutch East India Company, alternatively known as the VOC (for Vereenigde Oost-Indische Compagnie) or the Seventeen (after its seventeen-strong board)—became the model for all chartered firms. Whereas the English East India Company initially treated each voyage as a separate venture, with different shareholders, the VOC made all the voyages part of a twenty-one-year venture (something the English imitated a decade later). The VOC’s charter also explicitly told investors that they had limited liability. Dutch investors were the first to trade their shares at a regular stock exchange, founded in 1611, just around the corner from the VOC’s office. All the Amsterdam hub needed to prove its capitalistic credentials was a market crash, which duly arrived with tulip mania in 1636–1637.
If the Dutch set the fashion for stock-market speculation at home, they also set the tone for competitive imperialism abroad. The VOC’s first voyage had the simple instructions: “Attack the Spanish and Portuguese wherever you find them.” Within forty years, the VOC had established itself as the dominant force in the Moluccan Spice Islands, driving the Portuguese away and forcing the English to concentrate on India. The Dutch founded an Atlantic equivalent to the VOC, the Westindische Compagnie, in 1621. But they remained fixated by the spiceries. In 1667, they famously swapped their small North American trading center, New Amsterdam (better known nowadays as Manhattan), for the nutmeg-rich spice island of Run.
It would be wrong to claim that the great chartered companies were the commercial norm for the next two centuries. Most business life continued in smaller enterprises, typically partnerships, where all the employees could be gathered in one family home. Fernand Braudel claims that the biggest bank in Paris on the eve of the revolution employed only thirty people.6 At various points in this period, there were brief spasms of enthusiasm for the joint-stock concept among smaller businessmen (there was one splurge in London in the 1690s).
Still, it was the big chartered companies that hogged the limelight. And it was thanks to their abuses that, as late as 1800, many reformers saw the joint-stock company as dangerous and old-fashioned. The main evidence for the prosecution came from the most remarkable company of the period, the English East India Company, and from its most remarkable financial scandal—the frothy combination of the South Sea Bubble and the collapse of the Mississippi Company.
THE HONORABLE COMPANY
The East India Company was more than just a modern company in embryo. “The grandest society of merchants in the Universe” possessed an army, ruled a vast tract of the world, created one of the world’s greatest civil services, built much of London’s docklands, and even provided comfortable perches for the likes of James Mill and Thomas Love Peacock.7
It all began on September 24, 1599, when a group of eighty merchants and adventurers, including veterans of the Levant Company and a few of Francis Drake’s crew, met at the Founders Hall in the City of London. Under the chairmanship of the lord mayor, Sir Stephen Soane, they agreed to petition Elizabeth I to set up a company to trade with the East Indies. They also elected fifteen directors. At first, things went well: Elizabeth gave her provisional approval. But her Privy Council stalled over the necessary paperwork. Politicians worried that the voyage would derail a peace treaty with Spain, and there was a tug of war over who would command the venture. The court wanted the aristocratic Sir Edward Michelbourne, who had himself been lobbying for an East Indies monopoly. The merchants said they would prefer “a man of their own quality” rather than “a gentleman,” and they wanted James Lancaster as their commander.
The merchants won. On December 31, 1600, “the Governor and Company of Merchants trading to the East Indies,” a group of 218 men, was granted a charter, giving them a monopoly for fifteen years over trade “to the East Indies, the countries and ports of Asia and Africa, and to and from all the islands’ ports, towns, and places of Asia, Africa and America, or any of them beyond the Cape of Good Hope and the Straits of Magellan.” Two months later, Lancaster set sail with five ships.
In September 1603, Lancaster returned in triumph. Despite the usual disasters (a quarter of his men were dead by the time he reached the Cape), he had set up a factory in Bantam and brought back all five ships and five hundred tons of pepper. Unfortunately, there was a hitch: the monarch himself—now James I—had just acquired a shipload of pepper, and insisted that his should be sold first. The 218 members of the Company were told that for every £250 they had each invested, they now had to subscribe another £200 to pay for the next voyage.
The young company faced fierce opposition from the Dutch and the Portuguese. Michelbourne caused all manner of problems: he persuaded James I to allow him to go on a voyage of discovery and then plundered many of the young company’s customers. The Company also had a hard time satisfying the demands of its foreign clients. The Sultan of Achin wanted an English rose for his harem, for example. The greedy merchants were willing to oblige, and even found a girl “of excellent parts for music, her needle and good discourse,” but they eventually ran up against James I’s opposition.8
None of this took the wind out of the young company’s sails. The early voyages proved remarkably profitable. The tenth voyage, in 1611, for example, earned a return of 148 percent on its shareholders’ capital of £46,092.9 The Company probed new markets extending from the Red Sea to the East Indian Archipelago. In 1612, it had the confidence to move from financing one voyage at a time to financing several voyages at once. The Company’s first joint-stock offering in 1613–1616 raised £418,000; its second (1617–1622) raised a colossal £1.6 million.10 By 1620, it boasted thirty to forty large and heavily armed ships, which traveled in convoys of twelve or more vessels.11
The Company soon established a routine of sixteen-month-long voyages. On the outward leg, scheduled in late winter to take advantage of favorable winds, its most important cargo was silver, normally bought abroad by the Company’s network of continental agents (mercantilist philosophy objected to exporting the metal directly from England). The cargo also included other things that were easy to trade: lead, tin, mercury, corals, ivory, armor, swords, satins, and broadcloths.12 In India, most of this was exchanged for cotton textiles, which was then traded in the Spice Islands for pepper, cloves, and nutmeg. Sometimes an excursion to China, Japan, or the Philippines added silk, indigo, sugar, coffee, and tea. But the normal route was back via India, where part of the spice cargo was traded for tea, which found a ready market in Europe.13
All this required sophisticated administration. Most of the Company’s predecessors, such as the Levant Company, had been little more than regulatory bodies, supervising the activities of the syndicates that did the real business of raising capital and trading on their own accounts. The East Indies merchants created a two-tier structure. The General Court included all the shareholders with voting rights: many of these were bigwigs from court and parliament. The day-to-day management was entrusted to the Court of Directors, twenty-four men all elected by the General Court. The governor and his deputy, assisted by a growing number of accountants, clerks, and cashiers, worked through seven committees specializing in accounting, buying, correspondence, shipping, finance, warehousing, and private trade. The Court of Directors also supervised the overseas network of resident “factors” who managed the local trading posts, or factories.
This whole elaborate structure depended on the quality of these factors. They were prey to all sorts of dangers, from warlords, diseases, and the climate, and to constant temptations, not least the temptation to enrich themselves rather than their employers. The Company made a point of selecting the sons of its bigger shareholders to fill the jobs. It encouraged loyalty by paying generous salaries and referring to the firm as a “family.” It inculcated diligence by encouraging them to go to church daily, and came down hard on drunkenness, gambling, and extravagance. The head office scrutinized the factors’ performance against statistical averages, and asked their friends and relatives to submit confidential appraisals of their abilities. It also made factors post bonds indemnifying the Company against losses resulting from misconduct.
FOR KING AND COUNTRY
This all sounds organized enough. Yet, the plain fact is that the Company nearly died in the mid-seventeenth century. At home, it was almost undone by politics, particularly by the English civil war (1642–1649) and Oliver Cromwell, who was more sympathetic to free trade. Overseas, it was effectively driven out of the Spice Islands by the brutal VOC. In January 1657, the General Court, in an emergency session, agreed to sell the island of Run and its factories in Surat and Bantam for a mere £14,000. But Cromwell relented. On October 19, the Company was reborn with a new charter, establishing it on a more permanent basis: the merchants of London promptly subscribed some £786,000. The new Company, making a virtue out of necessity, decided to focus more on India—and prospered mightily. Peace, a succession of successful voyages, and a dramatic expansion of the Company’s powers (Charles II allowed the directors to acquire land and declare war) all led to huge profits.
By the late seventeenth century the Company was a well-organized monopoly, providing some £20,000 in customs duties to the crown. But it was still a state monopoly—and one mired in politics. Fellow merchants resented its power and ambitious courtiers plotted to appropriate a share of its profits. Mercantilists accused it of draining away the country’s precious silver. Nonshareholders resented the spoils enjoyed by their more fortunate countrymen. (In 1680, the Company paid a 50 percent dividend and a single share sold for as much as £300.)14 Even disinterested critics had questions. Should a single monopoly account for nearly half of Britain’s trade? Should British businessmen govern overseas territories? Should a company possess a private army?
There was hardly a time when someone wasn’t raising one of these pesky questions, or meddling in the Company’s affairs. The Whig revolutionaries who deposed James II in 1688 promoted a rival company (which eventually merged with the existing one in 1708–1709). In 1700, the government banned the sale of Asian silks and fancy cottons in England, forcing the Company to find another profitable line in the form of Chinese tea.
The Company also became deeply involved in Indian politics. For a long time, it vacillated between cooperating with the locals and imposing direct control. The balance gradually slipped toward direct control, as the locals proved incompetent and the factors spotted a regular income in tax farming. All the same, by 1700, there were no more than fifteen hundred Britons in India, most of them in fortified encampments such as Calcutta’s Fort William, and they also had to “share” India with the French Compagnie des Indes, which was in a similar quandary.
The decisive figure in the Company’s evolution was Clive of India (1725–1774). Robert Clive, a hotheaded clerk who had already tried to commit suicide twice, was one of the few Company men to escape when the French seized Madras in 1746. In 1751, he led an audacious raid with eight hundred men to capture the fortress town of Arcot; more remarkably, he then fought off a fifty-day siege by a far greater French and Indian force. After a brief stint in England, he was tempted back to Madras in 1756, recapturing Calcutta and then vanquishing the Nawab of Bengal at the Battle of Plassey. That and a subsequent English victory over the Moghul emperor at Buxar in 1764 cemented the Company’s control over Bengal, paved the way for its other acquisitions, both hostile and friendly, and relegated the French to mere onlookers.
“Commerce steels the nerves of war/Heals the havoc Rapine makes,/And new strength from Conquest takes,” gushed the poet laureate, William Whitehead. But many Britons were resentful. Clive was dogged by questions about the despoiling of Bengal. The Company’s employees had become so synonymous with ostentatious wealth that they gave the English language a new word: nabobs or nobs. “What is England now? A sink of Indian wealth,” fumed Horace Walpole.
In 1767, the Company bought off parliamentary opposition by promising the crown £400,000 a year in return for undisturbed possession of Bengal. It had miscalculated: in 1772, it was forced to ask for a gigantic loan of £1 million in order to avert bankruptcy. The loan came with a stinging parliamentary report by the Burgoyne Committee, the revelation of more malpractice, and, at last, a successful attempt at suicide by Clive. But his death did little to clear the smell of scandal. Warren Hastings, the first official governor-general of India, from 1773 to 1784, and the architect of tighter British control over the Moghul Empire, was impeached by parliament, though a lengthy trial eventually vindicated him.
Nevertheless, it was under Clive and Hastings that the Company transformed itself into a form of government—“an empire within an empire,” as one director admitted. As tax revenues replaced commercial profits, a proliferation of boards, councils, and committees sprang up in both London and India. Its outward-bound ships were more likely to be loaded with soldiers and guns than they were with broadcloth. Even in China and the Far East, where the Company’s remit was more strictly commercial, it faced increasing competition from nimbler private entrepreneurs. The rise of both the Royal Navy and maritime insurance had reduced the risks of foreign trade, in effect eroding the raison d’être for the chartered monopolies.15
Unsurprisingly, critics argued that this ever-more political body should be nationalized. The 1773 decision by parliament to give the Company a monopoly over tea in America helped provoke the Boston Tea Party, and with it the American Revolution. In 1784, William Pitt’s India Act imposed a new government Board of Control, though it left the directors in charge of its day-to-day business. The Company was also caught up in the debate over slavery. In the 1790s, Elizabeth Heyrick launched the first consumer boycott, urging her fellow citizens in Leicester to stop buying “blood-stained” sugar from the West Indies; the Company was eventually forced to get its sugar from slaveless sugar producers in Bengal.
In the nineteenth century, the government used the renewal of the Company’s license, which occurred every twenty years, to bring it under even tighter control. In 1813, the government abolished its monopoly of trade. In 1833, it deprived it of its right to trade altogether, turning it into a sort of governing corporation. In 1853, with the introduction of competitive examinations for its staff, the Company lost its remaining powers of patronage. When the Indian mutiny broke out in 1857, the Honorable Company became the scapegoat for the uprising (not altogether unfairly: one revisionist historian has argued that the dispute was not about imperialism or even forcing Hindus to use pigskin cartridges, but about the Company’s stifling lock on job opportunities for ambitious locals).16 The Company’s army passed to the crown; its navy was disbanded; and, when its charter expired on June 1, 1874, this extraordinary organization passed away quietly, with less fanfare than a regional railway bankruptcy.
JOHN LAW AND THE GOD MAMMON
Early joint-stock companies were instruments of rampant financial speculation as well as economic imperialism. In the early eighteenth century, the governments of France and Britain used two chartered companies—the Mississippi Company in France and the South Sea Company in England—to restructure the vast debts that they had accumulated during the wars of 1689 to 1714. Their aim was to reduce the cost of servicing the public debt by converting government annuities, which paid fixed interest, into lower-yielding shares. The result was the biggest financial bubble in history, bigger even than the bubble of the 1920s in the United States.
The man who set the whole disaster in motion was John Law (1671–1729).17 The son of a wealthy Scot, Law spent an irresponsible youth in London indulging his passions for women, gambling, and mathematics, but he was eventually forced to flee to Amsterdam after killing a rival in a duel. There he managed to amass a huge fortune through financial speculation. In 1704, he returned to Scotland with hopes of a royal pardon and ambitious schemes for introducing paper money. The royal pardon was not forthcoming, and he took his schemes back to the Continent.
His big break came in 1715, when a rakish young regent, Philippe, the Duke of Orléans, succeeded Louis XIV. The two men knew each other from Paris’s gambling dens. In May 1716, Law persuaded the duke to allow him to set up a Banque Générale, charged with issuing banknotes. Law’s plan was to rescue France from its rampant inflation, shortages of coins and unstable currency, by introducing paper money. The regent deposited a million livres with the new bank, ordered French tax collectors to remit payments to the treasury in banknotes, and invited the public to pay taxes in notes. In December 1718, with assets exceeding 10 million livres, the bank was transformed into the Banque Royale.
With the French money supply under his control, Law then bid for the trading concession belonging to the Compagnie d’Occident, which he rechristened the Mississippi Company, converting a chunk of French national debt into shares in the firm. Soon afterward, the Mississippi Company acquired a succession of other overseas trading monopolies—and threw in the Royal Mint for good measure. One monopoly now controlled the entire colonial trade of the most powerful nation on earth.
Law issued a large number of shares in his businesses, but kept speculative fever high by announcing generous dividends and allowing existing shareholders to buy yet more shares at a preferential rate. His boldest move came in 1719 when he offered to convert the entire national debt from annuities into company shares; he also offered a huge sum for the right to take over royal tax collection. He financed all this by issuing large numbers of shares.
The result was mass frenzy. Mobs of investors, from aristocrats to valets, besieged Law’s offices. By one account, some 200,000 investors, hailing from Venice, Genoa, Germany, and England, as well as the French provinces, converged on Paris. Law allowed investors to buy shares in installments, paying 10 percent of the purchase price each month; at the same time, he provided loans from the Banque Royale on the security of shares. Between December 25, 1718, and April 20, 1720, the value of the banknotes issued by the Banque Royale rose from 18 million livres to 2.6 billion livres. The price of single shares in the Mississippi Company reached 10,000 livres. At the height of the bubble, Law sold call options, allowing investors to pay a deposit of 1,000 livres for the right to buy a 10,000-livres share within the next six months. “It is inconceivable what wealth there is in France now,” mused one observer. “Everybody speaks in millions. I don’t understand it at all. But I see clearly that the God Mammon reigns an absolute monarch in Paris.”18
Law’s control of both the central bank and the stock market allowed him to avoid the tedious question of what his company actually did. Law liked to tell aristocrats that the Mississippi Company provided a great opportunity for missionary work in the colonies: he even brought specimen Indians to Paris in his ships.19 But the Mississippi Company’s real activities in North America, spiritual or anthropological, were fairly meager. Louisiana—the one bit of America that France controlled—was relatively poor and backward. As Niall Ferguson notes, Law was reduced to conscripting orphans, criminals, and prostitutes to populate his Promised Land.
The bubble inevitably burst. In early 1720, a growing tide of investors began to abandon the Mississippi Company (many shifting their investments to the new bull market in London). Using his powers as controller general, Law tried desperately to stem the outflow of capital. The value of his shares and banknotes continued to tumble regardless, and he was forced to abolish the paper currency and close the Banque. In December 1720, false passport in hand, he fled to Brussels, leaving France in chaos.
THE SOUTH SEA BUBBLE AND THE CAROUSEL OF FOOLS
The drama of the South Sea Company did not quite reach the heights of the Mississippi Company. The British had several advantages, including the fact that the Whig-controlled Bank of England, created in 1694, remained outside the control of the Tory-backed South Sea Company; indeed, they were often at war.20 And the South Sea officials were never able to use exchange-control regulations when the price of their shares began to fall. Yet the overall scam was the same.
The South Sea Company was founded in 1711 with a monopoly of trade with Spanish America. By 1719, war with Spain was strangling this business, so its directors decided to focus instead on the market for public debt. The architect of the scheme was John Blunt, the son of a prosperous Baptist shoemaker and a man with a genius for turning the language of the Bible into advertising jingles. (“The greatest thing in the world is referred to you,” he said at one point. “All the money in Europe will center amongst you. All the nations of the earth will bring you tribute.”)21 His company’s directors, mostly men of wealth and reputation, included Edward Gibbon’s grandfather and namesake.22
On January 21, 1720, a parliamentary announcement proclaimed that the Company would take over the entire British national debt, absorbing annuities with a capital value of around £30 million. Even before the measure was enacted on April 7, the South Sea Company’s share price rose rapidly from £128 in January to £187 in mid-February. The subscriptions were filled in hours. The share price reached £950 by the beginning of July, with foreign investors joining the stampede. Even without the example of Law, the timing was propitious. There was widespread belief that public debt needed to be retired as quickly as possible. The country was in a euphoric mood buoyed by military successes against the French.23 There had also been a boomlet in the creation of small new companies, many of them set up to exploit government-granted patents, which in turn had spawned a new sort of person who traded their shares—the stockjobbers who frequented the coffeehouses around Exchange Alley.
The South Sea directors worked hard at exciting this market, using the same sorts of devices as John Law, and paying particular attention to the new financial press. Quotations for South Sea stocks even appeared in local papers like the Plymouth Weekly Journal. William Hogarth mocked the speculative frenzy with his cartoon The Carousel of Fools. Unfortunately, the directors did their job too well. A flood of proposals for new companies engulfed Exchange Alley, prompting the South Sea directors to persuade their political allies to pass the ironically named Bubble Act of June 11, 1720. This made it extremely difficult to set up a new joint-stock company, thus reducing the number of enterprises that would compete with the South Sea Company for capital.
The act, which was not repealed for a century, was a disaster for the evolution of the Company. It was also pointless, since the collapse of the South Sea Company later that summer punctured the market anyway. By August, a desperate credit crunch hit London. By October, the Company’s share price was back to £170. Eventually, the government effectively nationalized the Company, leaving the investors with large losses, but saving most of the financial system.24 All the same, the Chancellor of the Exchequer and several directors of the Company were consigned to the Tower of London. And what the prime minister, Sir Robert Walpole, called “the never to be forgotten or forgiven South Sea scheme” still damned the name of joint-stock companies of all sorts.25
A BODY WITHOUT A SOUL
The damage done to companies by these shenanigans was immense. These organizations had raised hackles from the very beginning. Sir Edward Coke (1552–1634), for example, had complained that “they cannot commit treason, nor be outlawed or excommunicated, for they have no souls.” Two centuries later, the lord chancellor, Edward Thurlow (1731–1806), echoed his words: “Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like.”26
Were they really that bad? Both the South Sea and Mississippi companies bilked thousands of investors of their money. Worse still, chartered companies often found their hands covered in blood. They pioneered slavery (which we will cover in more detail in the next chapter). In India, the East India Company intimidated its local rivals, particularly the country’s native indigo growers. As one anonymous pamphlet put it in 1773, “Indians tortured to disclose their treasure; cities, towns and villages ransacked, jaghires and provinces purloined: these were the ‘delights’ and ‘religions’ of the Directors and their servants.”27 Clive based his defense partly on that refuge of all multinational scoundrels: that India was a barbaric, uncivilized place, so anything went there.
On the other hand, in America, chartered companies sometimes played a more enlightened role. Sir Edwin Sandys (1561–1629), the treasurer of the Virginia Company, first earned James I’s wrath by making a speech in the British House of Commons questioning the legitimacy of any government not based on a mutual contract between ruler and ruled. In 1619, the Virginia Company effectively introduced representative democracy into the colonies, authorizing a General Assembly in which members elected the company’s officers.28 John Winthrop (1588–1649) took Massachusetts down the same road in 1630 when the General Court of the Massachusetts Company transformed itself into a commonwealth, redefining “freemen” from stockholders in a commercial venture to citizens of a state.29 Roughly put, the General Courts evolved into increasingly rebellious state legislatures.
Economic liberals produced a different array of charges. Adam Smith (1723–1790), who was obsessed with the East India Company’s abuses in Bengal, had two basic complaints. First, he disliked the fact that chartered companies possessed monopolies (albeit ones that were being diluted, even as he scribbled away, by both licensed and clandestine competition). For him, the chartered companies were “either burdensome or useless” and they “either mismanaged or confined” trade.30 Second, he thought that joint-stock companies were inherently less efficient than sole traders. In particular, he worried about the “agency” problem: hired managers would not bring the same “anxious vigilance” to their firms’ interests as owner-managers. “Negligence and profusion, therefore must always prevail.…”
Yet, it is possible to defend the chartered corporations a little on both these counts. First, as we have seen already, chartered monopolies did make some sense, given the enormous risks of trading with the other side of the world.31 And whatever the merits of mercantilism, the northern European model, in which the state subcontracted imperialism to companies, proved much more successful than the southern European model (notably in Spain), where the crown directly sponsored economic imperialism.
As for Smith’s second charge—that the chartered firms were less efficient than owner-managed companies—this, too, is open to dispute. For all its faults, the East India Company demonstrated that when information was scarce and trust at a premium, a company could be more efficient than individual agents trading in the market. The Company’s network of trusted factors compiled information that could never be gathered by any private businessman rooted in one local market (its ledger book took two hundred pages just to list the goods purchased in one voyage). And it used this knowledge to build a complex trading system to its own advantage.32
The East India Company’s other great step forward was to provide a cradle for Company Man. Its administrators were collectively known as “civil servants” long before government employees thought of calling themselves by the same name. During the impeachment of Warren Hastings, Edmund Burke described the rule of the company as “a government of writing and a government of record.”33 James Mill, who combined his job at the Company with writing the Elements of Political Economy (1821), explained that “the business, though laborious enough, is to me highly interesting. It is the very essence of the internal government of sixty million people with which I deal.”
Like all bureaucracies, this one had its inefficiencies. Mill’s son, John Stuart Mill (1806–1873), who wrote much of System of Logic (1843) and Principles of Political Economy (1848) during office hours, found “office duties an actual rest from the other mental occupations which I have carried on simultaneously with them.”34 Thomas Love Peacock, who was actually one of the Company’s more dedicated employees, wrote a satirical poem on the time-wasting inherent in much office life.
From ten to eleven, at a breakfast for seven:
From eleven to noon, to begin twas too soon;
From twelve to one, asked “what’s to be done?”
From one to two, found nothing to do;
From two to three began to foresee
That from three to four would be a damned bore.
Any organization that provides a rest home for poets and philosophers cannot be entirely bad. All the same, something had to be done to reinvigorate the idea of the company. That is the subject of our next chapter.