How cotton caused India's first stock market bubble
The American civil war led to India's cotton boom and it's first stock market crash
Hi,
I know it’s been a while since my last post. Consistency is something I’m working on.
Today’s article is about the cotton craze which gripped Bombay in the 1860’s, leading to India’s first stock market crash.
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The makings of Bombay:-
In 1661, the islands of Bombay were given as dowry to King Charles II of England by the Portuguese. Bombay at that time consisted of farms and fishing villages. The islands were rented out to the East India Company (EIC) for the annual rent of £10 (Rs. 148,000 today) and a loan of £50,000 at 6% interest from the EIC.
At the time, Surat was the EIC’s seat of power in Western India. But Bombay had two advantages over Surat.
The first- Bombay’s deep natural harbour allowed for larger ships to dock more easily which was a boon for trading vessels and the second - it wasn’t on the radar of the Maratha warrior Shivaji. Surat had been raided twice by Shivaji and the constant threat of war loomed over EIC’s operations.
The EIC understood that the harbour would need infrastructure to support it. Plans were laid to make Bombay an urban city. Gerald Aungier, the second governor of Bombay set up the first Anglican mint in 1670, established a court of law, built causeways to link the islets, and authorized the construction of St Thomas’ Cathedral.
The Governor sought to attract wealthy traders and merchants from Surat. Panchayats (local governing bodies) were formed promoting religious freedom along with the rule of law. This incentivised people to migrate to Bombay. Gujarati traders, Parsi weavers and shipbuilders and Jewish bankers were among the first communities to settle in the city.
The climate was perfect to help Bombay grow.
The cotton mania:-
Fast forward two centuries, in 1861 the American Civil War disrupted the global supply chain for cotton. Britain’s textile exports were under threat due to a lack of raw cotton coming from America. American cotton produced using slave labour, met 77% of the total cotton needs of Britain.
The Industrial Revolution gave British machine-made cloth a competitive price advantage. The superior margins in cotton processing kept the wheels turning in Britain’s economy. The livelihood of 25% of the population combined with 10% of all British capital was invested in cotton textiles.
The ever-enterprising businessmen and women of Bombay took advantage of the opportunity. The cultivation of cotton increased from 1.07 mn acres of land in 1861 to 2.07 mn by 1865.
By 1862, the first full year of the war, 90% of raw cotton imported to Britain was from India. From 1861-1865 the value of cotton exports to Britain jumped from Rs.16 crore to Rs.40 crore. With most of the cotton production happening in Western India and within a radius of 300 miles of Bombay, the port became an export center for all of India.
In an absolute frenzy, old mattresses were torn apart to remove the cotton within and new beds were made of coir fibre. The “white gold” was too precious a resource to be slept on.
In the words of Dinsha Wacha in his book Premchund Roychand: His Early Life and Career
“King Cotton was the great deity at whose shrine… the merchant and the trader, the rich and the poor, high and low, master and servant, all paid pooja”
Traders, brokers, businessmen flushed with money from cotton trading, sought to park their surplus rupees and make more money on it. Enter stage right - the Stock Market.
Share prices of companies that didn't exist a few years ago were rising astronomically. Shares of The Back Bay Reclamation, with face value of Rs.5,000, traded at Rs.50,000. Bank of Bombay's Rs.500 share touched Rs.2,850.
Fearful of losing out, the common man’s participation in the stock market increased. To cater to the public there was a surge in the number of stockbrokers. From a handful of brokers gathering under a banyan tree at Horniman Circle in 1855 their numbers shot up to 250 plus members by 1870’s.
The brokers group became an official organization known as The Native Share & Stock Brokers Association. The association was the first stock exchange established in Asia. Today it is know as the Bombay Stock Exchange.
The Bombay Gazetteer records that by 1864, there were 31 banks, 8 land companies, 16 press companies, 10 shipping companies, 20 insurance companies (as against 10 in 1855) and 62 joint stock companies where none had existed previously.
The bust:-
The end of the American Civil War seemed to put an end to the speculation in the Indian stock market. From mid 1865, Britain would once again source its cotton from the USA. The Indian stock market bubble popped.
While the bubble might have started with the surge of money from cotton trading, in reality, the lack of rules around lending were propping up the high premiums that were being added on to shares.
Banks seeking to earn a higher rate of return, were loaning money while paying little attention to the net worth of the borrower. Loans against shares were commonplace fuelling asset price bubbles.
In Bombay, the news that the war had ended caused uncertainty over economic prospects leading to mayhem in the markets. Everyone tried to sell their shares in overvalued companies. But there were no buyers. The Back Bay Reclamation shares fell from Rs 50,000 to under Rs 2,000 - a fall of 96%. Bank of Bombay's shares which sold at Rs 2,850 were down to Rs 87.
The disaster drained the city - its population declined by 21% in the years following the crash.
Needless to say, Bank of Bombay as well Back Bay Reclamation declared bankruptcy taking with them hundreds of people.
The stock market crash also led to the implementation of Act XXVIII by the EIC. This helped them deal more efficiently with liquidation and insolvency so that the losses could be resolved.
Despite the gloom caused by the bust, a monument of the time still endures. The Rajabai clock tower located in the University of Mumbai campus was built by Premchand Roychand who ironically was one of the leading stock market speculators of the time.
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Such a fabulous post, Aditi. I am really enjoying this fresh view of Indian history. It immensely helps in making sense of Indian state, today.
Good to read how Indian cotton was a part of a global trade long before globalisation entered the lexicon. Historically, cotton and textile have played a very critical role in triggering industrial revolution, in England in the 18th and 19th century, to China at the end of the 20th century, and many in between.
It is also interesting to know how British colonial regime stymied industrialisation India, by following a trade policy that put Indian textile and garment manufacturers at a disadvantage. And successive governments in independent India continued in the same vein making Indian manufacturing less competitive in the global market. Consequently, today, it is Bangladesh, Indonesia, Vietnam, etc that are now entering the global market on the back of textile and garment manufacturing, out competing India. While India has emerged as one of the top 2 or 3 largest cotton growing countries, over the past two decades, yet value addition in the form of textile and garments have continued to elude the potential.