Picking up where we last left off (see my previous post), Adam Smith next describes two great external events — the War of Austrian Succession (1740-48) and the Seven Years’ War (1756-63) — that improved the fortunes of the East India Company. Smith writes (sentences ##32-36):

“During the French war, which began in 1741, the ambition of Mr. Dupleix, the French governor of Pondicherry, involved them in the wars of the Carnatic, and in the politics of the Indian princes. After many signal successes, and equally signal losses, they at last lost Madras, at that time their principal settlement in India. It was restored to them by the Treaty of Aix-la-Chapelle; and about this time the spirit of war and conquest seems to have taken possession of their 
servants in India, and never since to have left them. During the French war, which began in 1755, their arms partook of the general good fortune of those of Great Britain. They defended Madras, took Pondicherry, recovered Calcutta, and acquired the revenues of a rich and extensive territory, amounting, it was then said, to upwards of three millions a year.” (Smith 1784, pp. 68-69)

What did the East India Company do with these riches? They ended up having to bribe the British government 400,000 pounds per year. Smith matter-of-factly states (sentence #37):

“They remained for several years in quiet possession of this revenue: but in 1767, administration laid claim to their territorial acquisitions, and the revenue arising from them, as of right belonging to the crown; and the company, in compensation for this claim, agreed to pay the government four hundred thousand pounds a year.” (Smith 1784, p. 69)

According to Smith (sentences #38 & #39), this bribe was equal to the amount to be paid in annual dividends to the shareholders of the East India Company:

“They [the board of directors of the East India Co.] had before this gradually augmented their dividend from about six to ten per cent; that is, upon their capital of three millions two hundred thousand pounds they had increased it by a hundred and twenty-eight thousand pounds, or had raised it from one hundred and ninety-two thousand to three hundred and twenty thousand pounds a year. They were attempting about this time to raise it still further, to twelve and a half per cent, which would have made their annual payments to their proprietors equal to what they had agreed to pay annually to government, or to four hundred thousand pounds a year.” (Smith 1784, p. 69)

But it was not to be. According to Smith (sentence #40), the East India Company was saddled with massive amounts of debts — “upwards of six or seven millions sterling”! — so it was prohibited from increasing the dividend payments to its shareholders by two successive acts of Parliament in 1767 and 1768:

“But during the two years in which their agreement with government was to take place, they were restrained from any further increase of dividend by two successive Acts of Parliament, of which the object was to enable them to make a speedier progress in the payment of their debts, which were at this time estimated at upwards of six or seven millions sterling.” (Smith 1784, p. 69)

Next, the government and the East India Co. cut a deal: the company agreed to continue its bribe payments to the British government for five more years; in exchange, the government would allow the company to increases its dividend payments by one percent per year. Smith writes (sentences #41 & #42):

“In 1769, they [the members of the board of directors of the East India Co.] renewed their agreement with government for five years more, and stipulated that during the course of that period they should be allowed gradually to increase their dividend to twelve and a half per cent; never increasing it, however, more than one per cent in one year. This increase of dividend, therefore, when it had risen to its utmost height, could augment their annual payments, to their proprietors and government together, but by six hundred and eight thousand pounds beyond what they had been before their late territorial acquisitions.” (Smith 1784, pp. 69-70)

With this now deal in place, Smith explains (sentences ##43-46) why the company should have been able to finance a “sinking fund” to pay off its massive debts over time:

“What the gross revenue of those territorial acquisitions was supposed to amount to has already been mentioned [i.e. “upwards of three millions a year”]; and by an account brought by the Cruttenden East Indiaman in 1768, the net revenue [of the East India Co.], clear of all deductions and military charges, was stated at two millions forty-eight thousand seven hundred and forty-seven pounds. They [the East India Co.] were said at the same time to possess another revenue, arising partly from lands, but chiefly from the customs established at their different settlements, amounting to four hundred and thirty-nine thousand pounds. The profits of their trade too, according to the evidence of their chairman before the House of Commons, amounted at this time to at least four hundred thousand pounds a year, according to that of their accountant, to at least five hundred thousand; according to the lowest account, at least equal to the highest dividend that was to be paid to their proprietors. So great a revenue might certainly have afforded an augmentation of six hundred and eight thousand pounds in their annual payments, and at the same time have left a large sinking fund sufficient for the speedy reduction of their debts.” (Smith 1784, p. 70, my emphasis)

So, what could go wrong? I will proceed into the last part of this very long paragraph in my next post. (To be continued …)