The first Opium War had started. It would not end until 1842 and the infamous Treaty of Nanking, which awarded Britain monetary recompense, eliminated the hong monopoly, set Chinese export and import tariffs at a low rate, and opened Canton and four other treaty ports (Shanghai, Amoy, Foochow, and the island of Ningbo). In these ports, Britons had the privilege of extraterritoriality (immunity from Chinese law) and were governed by British consuls. No mention was made of opium, whose continued importation was tacitly understood by both sides. To this day, the humiliation of the Treaty of Nanking burns in China’s national consciousness. That not one American in a hundred has heard of it does not augur well for Sino-American relations in the twenty-first century.
The English sought, in addition, a permanent colony. Matheson had long desired Formosa, but from London Jardine argued that this island was too large to pacify and pushed for the port of Ningbo. Neither had his way; Elliot, a former naval officer, coveted Hong Kong’s superb harbor, and on his own initiative had its transfer written into the treaty. Even before the treaty was signed, Matheson moved the partnership’s headquarters to Hong Kong, beginning the island’s and the firm’s dual ascent to prosperity.
To be sure, Elliot was not the only Englishman who entertained doubts about the morality of the opium trade. The Anglican clergy and the Tory opposition leader Robert Peel spearheaded a movement against it. The most eloquent advocate of prohibition was a thirty year-old backbencher, William Gladstone, whose sister had been ravaged by opium addiction. When Peel moved in Parliament in 1840 to condemn the attack on China, young Gladstone gave an impassioned speech in the Commons that launched him into public prominence. Decades later he would serve four terms as prime minister.
For the most part, in mid-eighteenth-century England opium was still a benign nostrum dispensed to colicky babies and swallowed by little old ladies to ease the infirmities of age. The nascent prohibition movement was no match for what the historian W. Travis Hanes called “big opium”—the consortium of Chinese merchants and their allies in London led by William Jardine.45
Opium traffic grew even more rapidly after the First Opium War. In 1845, for example, the auditor-general of the new colony of Hong Kong estimated that at any one time, there were eighty clippers carrying opium to China or tea from it, one-fourth of them Jardine Matheson’s. Gradually, Jardine Matheson became the focus of the increasing anti-opium sentiment in England.
In private, Jardine Matheson was happy with the illicit trade and greatly feared the possibility of legalization, which the Chinese entertained from time to time, as this would open the traffic up to competition from “men of small capital.”46 Its fears were well founded. In 1858, the Treaty of Tianjin, which concluded the Second Opium War, forced the Chinese to legalize opium (in addition to granting ten more treaty ports, paying further reparations, and handing over Kowloon). The legalization of the trade meant that anyone could purchase malwa in Bombay, ship it on one of the new vessels of the Peninsular and Oriental Steamship Company, and sell it in Hong Kong. Within a few years, Jardine Matheson found itself forced out of the opium trade by men like David Sassoon, a Bombay merchant of Baghdadi Jewish origin. Sassoon’s knowledge of local Indian producers, his family’s extensive business connections, and legalization enabled him to wrest control of the trade from the “old” English country traders. Sassoon would be joined in the opium trade by many Indian traders, especially Jeejeebhoy’s Parsi heirs.
The displacement of Jardine Matheson from the opium trade proved a blessing in disguise, as it was forced to diversify. Imports of opium peaked at approximately a hundred thousand chests per year by 1880.47
Societal norms can change with great rapidity. For example, in 1600, even the most enlightened Europeans saw nothing wrong with black slavery; in 1800, few Europeans, and not very many Chinese, faulted Britain for exporting opium to China. It should not go unnoticed that tobacco, which is at least as addictive as opium and has killed far more people, is today aggressively marketed around the globe by the corporate heirs of William Jardine and James Matheson.
If the importation of a harmful product, opium, did China no good, the importation of a harmless good, machine-manufactured cotton cloth, is today blamed for plunging India into poverty. Certainly, that was how Karl Marx saw it when he quoted the EIC’s governor-general, William Bentinck: “The misery hardly finds a parallel in the history of commerce. The bones of the cotton weavers are bleaching the plains of India.”48 India’s founders saw it the same way, as do many Indians today.
The standard narrative goes something like this. The English forbade the export of Indian manufactured goods, while allowing British goods “free entry.” The result was the destruction of India’s vaunted textile industry. In the words of Jawaharlal Nehru, modern India’s founding father and first prime minister:
The liquidation of the artisan class led to unemployment on a prodigious scale. What were all these scores of millions, who had so far engaged in industry and manufacture, to do? Where were they to go? Their old profession was no longer open to them, the way to a new one was barred. They could die, of course; that way of escape from an intolerable situation is always open. They did die in the tens of millions.49
Marx and Nehru did capture an essential truth: in 1750, India provided nearly one-fourth of the world’s textile output; by 1900, its output had shrunk to less than 2 percent.50
The overall loss to the Indian economy was relatively modest, since most of the nation’s output was agricultural: somewhere in the range of two million to six million jobs—at most, 3 percent of the labor force—not the scores of millions in Marx’s and Nehru’s apocalyptic prose.51 (By comparison, unemployment in the United States during the Great Depression exceeded 30 percent.) Some economic historians argue that because of imports of superior and cheaper English thread, the domestic weaving industry actually expanded. Curiously absent from most discussions is the indisputable fact that hundreds of millions of Indians, poor and wealthy alike, were able to clothe themselves in English cloth that was both less expensive and better made.52
India had not gotten poorer; rather, the rapidly industrializing West had gotten vastly richer. Modern economic historians, in both Europe and India, now ascribe India’s troubles in the eighteenth and nineteenth centuries to a number of factors unrelated to British trade policy: poor soils, the frequent failure of the monsoon rains, inadequate inland transportation systems, a lack of functioning capital markets, and the death, in 1707, of the last great Mughal emperor, Aurangzeb.53
Can we blame the British, as Nehru did, for letting British goods into India scot-free while barring the flow of Indian goods in the opposite direction? Only to a relatively small degree: by the mid-nineteenth century, most English imports into India were subject to a duty of either 3.5 percent and 7 percent (depending on whether they arrived on British or non-British vessels). The comparable duty paid on foreign (including Indian) goods landing in England was between 15 and 20 percent; agricultural goods, such as Indian sugar and raw cotton, incurred a much lower rate.54 This was discriminatory, to be sure, but not prohibitive. Nor can it be plausibly argued that abuse of the diwani by the English drained India of its wealth. The British spent a much greater proportion of the diwani on public works, such as the subcontinent’s massive rail system, than was ever spent under the luxury-loving Mughals, and in any case the revenues did not amount to much more than 1 percent of national income.55, 56
Having surveyed Britain’s checkered dealings in Chinese opium and Indian cotton, we now turn to the final, and most historically significant, episode in the nineteenth-century history of free trade: its commerce with the Continent in grain.
Since at least the fifteenth century, the crown saw fit to micromanage its vital grain trade with a series of “corn laws.” In common English usage, “corn” meant all grain—barley, rye, and particularly wheat. (Maize was unknown in Europe before Columbus.) Between 1660, when detailed statutory records begin, and the final re
peal in 1846, no fewer than 127 corn laws were enacted to govern every imaginable facet of commerce in grain and other foodstuffs: retail and wholesale transactions, storage, import, export, and most critically of all, government tariffs. The great nineteenth-century battle over free trade was in many ways a debate over the wisdom of such intrusive involvement by government in what was increasingly an international trade.57
Until the mid-eighteenth century, England’s wealth and power derived not from trade or manufacturing, but from the strength of its agriculture, which had become so efficient that by 1800 just two-fifths of the country’s workforce was needed to feed it.58 During the turbulent seventeenth century, English farmers exported little grain. When peace and institutional stability finally came in the wake of the Revolutionary Settlement of 1689, England became the granary of northern Europe.
Then, just as quickly as the surplus had appeared, it vanished. Four events consumed the bounty. First, a series of massive conflicts gripped Europe and crippled the regional grain trade. Between the Seven Years’ War in 1756 and the end of the French-Napoleonic wars in 1815, England was either engaged in global conflict or preparing strenuously for it. Second, during the eighteenth century, England’s population nearly doubled, to nine million. Third, rapid industrialization after 1760 shifted workers and financial capital from farms to factories. Finally, a series of crop failures began in 1756 and continued, on and off, for nearly two decades. In most years after 1780, Britain was a net importer of grain, mostly from Denmark, Poland, and coastal Germany. The year 1808 was the last time that England sent abroad more grain than it purchased.59
During the years of self-sufficiency and bounty, not many people, even farmers, had given the corn laws much notice. Sometimes these statutes favored the landed aristocracy by imposing high taxes and thus discouraging imports, or even by paying traders a bounty on exports, and sometimes they favored urban dwellers by doing the opposite. But for the most part, the laws were irrelevant: the medieval economy was largely self-sufficient, and in any case, law-enforcement manpower was spread so thin in medieval societies that it rarely got around to enforcing these obscure statutes.
The importance of the corn laws increased with the outbreak of the Seven Years’ War in 1756; food shortages swept the industrial centers in the north, and rioters sacked granaries and even bakeries. Grain merchants, who for centuries had ignored or been blithely unaware of the sales strictures of the corn laws, suddenly found themselves condemned to hang by hastily assembled tribunals. (In the end, most were pardoned or “transported” to Australia.)
Suddenly, agricultural trade policy moved to the forefront of public debate. Over the next several decades, Parliament passed a series of corn laws designed to increase supplies to consumers and maintain the interests of the landed aristocracy. They usually did neither. After 1793, war with revolutionary France and a series of disastrous crop failures again caused scarcity. Wheat prices, which had averaged forty shillings per quarter (five hundred pounds, or a quarter ton) during the century before 1790, spiked to well above a hundred shillings, as shown in Figure 11-1. On October 29, 1795, when the king was on his way to deliver the opening speech to Parliament, a mob surrounded his entourage. Shots were fired into his carriage while the mob shouted “Peace! Peace!”
Figure 11-1. Price of Wheat in England 1700–1850
The government pulled out all the stops. It forbade the export of grain and its use in distilleries, eliminated all import duties, and purchased Baltic wheat through official channels. The navy seized grain from neutral ships bound for France. These actions not only fell short of stopping widespread starvation, but also enraged wealthy landowners no longer able to gouge an impoverished and hungry populace.
The government then offered bounties for imports and encouraged consumers to eat bread made from wheat flour mixed with barley or rye. But by the late eighteenth century, even the poor had long been accustomed to white wheaten loaves, and bakers refused to make mixed breads that were doomed to go stale and unsold.60
After 1800, favorable harvests temporarily reduced prices, and in November 1804 landowners took advantage of the overall wartime scarcity and forced through Parliament a corn law using a traditional “sliding scale” of duties on foreign wheat.
Placing such an onerous import duty on foreign wheat, for which transport costs were already higher than for domestic wheat, assured English farmers of a minimum price of sixty-three shillings per quarter, more than 50 percent higher than its historical level. The Corn Law of 1804 served to reveal the mind-set and political power of England’s growers, and also clearly illustrated the double-edged sword of protectionism, which seeks to shelter domestic producers (in this case, Britain’s landed aristocracy) at the expense of consumers. Essentially, England’s landowners sought to make permanent the high wartime grain prices.
The law had nearly no effect, because poor harvests and the intensifying French wars soon drove market prices once again well above a hundred shillings. In 1809, scarcity in England combined with a French bumper crop to give Napoleon the irresistible opportunity of reaping huge profits by selling grain to the enemy.61
Table 11-1. Import Levies on Wheat: Corn Law of 1804
Grain Price
(shillings per quarter ton)
Import Tax
(shillings per quarter ton)
Below 63
24.25
Between 63 and 66
2.5
Above 66
0.5
In October 1813, Britain and its allies invaded France, and by April 1814 Napoleon had been sent to Elba. Between those two dates the price of wheat fell from approximately 120 shillings to seventy shillings, and English landholders, now accustomed to triple-digit market prices, again pleaded for legislation to extend their windfall profits into peacetime. Once again, the poor marched in the streets and besieged Parliament.
At this point, the centuries-old history of the corn laws converged with a family saga of similar vintage—that of the Ricardos. Not long after the expulsion and slaughter of Portugal’s Jews in the early sixteenth century, many members of this remarkable clan found refuge in the free port of Livorno, or Leghorn, north of Rome. Uniquely among the Italian city-states, Livorno did not force Jews to wear badges, live in ghettos, or tolerate harangues from priests.
The chief business of Livorno’s Jews was the ancient Mediterranean red coral trade, but as supplies dried up, tolerant and up-and-coming Amsterdam beckoned to one clan member, Samuel Israel, who moved to the Dutch republic sometime around 1680. There, the family prospered; Samuel’s grandson, Joseph Israel Ricardo, became a successful stockbroker, helped set up the Amsterdam stock exchange, and was intimately involved in financing Holland’s military effort during the Seven Years’ War.
Joseph Ricardo’s missions to fund Holland’s armed forces often took him to London. His son, Abraham Israel Ricardo, could not help noticing that the English capital had replaced Amsterdam as the world’s financial center. Sometime around 1760, Abraham Israel Ricardo established the family in the city on the Thames. His son David would become the great advocate and theoretician of free trade, and also the most influential and vocal early opponent of the corn laws.62
David had been born in 1772, four years before the publication of Adam Smith’s Wealth of Nations, which vigorously espoused free trade. He apparently came across the book for the first time at age twenty-seven in a library in Bath, where his wife had been taking the cure. In subsequent years, he surpassed his father’s success in the London stock exchange, and in 1815 the young broker profited hugely by his ownership in government bonds that increased in value after the victory at Waterloo (along with Nathan Mayer Rothschild, who had gotten early word of the victory). David used his newfound wealth to obtain a seat in the House of Commons and to pursue intellectual interests. At some point he acquired his own copy of Smith’s book, in which 150 notations were later found. These scribbles formed the basis of his famous Principles of Poli
tical Economy and Taxation, published in 1817.
Principles proved a worthy successor to Wealth of Nations; in the words of the historian David Weatherall, “Adam Smith explained what the capitalist system was. David Ricardo explained how the capitalist system works.”63 Ricardo’s famous chapter on foreign trade begins with this forthright statement, which turns mercantilism on its head: “We should have no greater value if, by the discovery of new markets, we obtained double the quantity of foreign goods in exchange for a given quantity of ours.” Ricardo proceeded to describe the law of comparative advantage, in which he poses the following hypothetical situation. Imagine that it takes 120 Englishmen to produce a given quantity of wine and 100 to produce a given quantity of cloth, whereas it takes only eighty and ninety Portuguese, respectively, to produce the same quantities of wine and cloth. Even though Portugal was more efficient than England in producing both wine and wool, Ricardo argued that it was better for Portugal to concentrate on what it did best—wine, which it needed only eighty workers to produce—and exchange the wine it did not consume for cloth made in England, rather than make its own cloth.64 But Ricardo’s conclusions proved too opaque for his contemporary audience, and even today, the law of comparative advantage is often misunderstood.65
A more cogent example will suffice. Imagine for a moment a famous attorney whose services are so highly desired that his hourly fee is $1,000. Further imagine that he is also very skilled at woodworking—so proficient that he is twice as productive as the average carpenter. Remodeling a kitchen, for example, which might take a carpenter two hundred hours, would take our talented attorney only one hundred. Since the average carpenter earns $25 per hour, our attorney’s woodworking skills are worth $50 per hour in the marketplace.
Splendid Exchange, A Page 36