Avoiding 'negligence and profusion': The ownership and organisation of Anglo-Indian trading firms

320 Pages·2015·2.55 MB·English

by  Michael Aldous

LONDON SCHOOL OF ECONOMICS AND POLITICAL
SCIENCE
AVOIDING ‘NEGLIGENCE AND PROFUSION’: THE
OWNERSHIP AND ORGANISATION OF ANG LO-
INDIAN TRADING FIRMS, 1813 TO 1870.

MICHAEL ALDOUS

A THESIS SUBMITTED TO THE DEPARTMENT OF ECONOMIC
HISTORY OF THE LONDON SCHOOL OF ECONOMICS AND
POLITICAL SCIENCE FOR THE DEGREE OF DOCTOR OF
PHILOSOPHY, LONDON, JUNE 2015

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Declaration
I certify that the thesis I have presented for examination for the PhD degree of the
London School of Economics and Political Science is solely my own work other than
where I have clearly indicated that it is the work of others (in which case the extent of
any work carried out jointly by me and any other person is clearly identified in it).
The copyright of this thesis rests with the author. Quotation from it is permitted,
provided that full acknowledgement is made. This thesis may not be reproduced
without my prior written consent.
I warrant that this authorisation does not, to the best of my belief, infringe the rights of
any third party.
I declare that my thesis consists of 102057 words.
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Abstract
Debates in business and economic history have focused on the role played by business ownership
and organisational forms on the performance of firms, industries and economies. Alfred
Chandler asserted that it was the adoption of hierarchical managerial structures and joint-stock
ownership which enabled an unprecedented expansion of the scale of business in the late 19th
century. This argument is widely debated and a growing literature has looked at the role played
by different forms of business organisation, such as the partnership and cooperative, in enabling
economic growth.
This thesis contributes to these debates through an investigation of Anglo-Indian trading firms
between 1813 and 1870. A new data-set of firms operating in Calcutta identified the use of
various business forms to conduct trade. In this period the number of trading partnerships
increased from 24 to 88, whilst the number of joint-stock firms expanded from a handful in the
years before 1850 to over 170 by 1868. In the decade after 1858 the number of hybrid managing
agency firms tripled, whilst the number of firms using agents grew from 57 to 183.
Drawing on the ‘analytic narratives’ method a novel analysis using transaction cost and agency
theories is made of four firm case studies. This analysis reveals that changes in the economic
environment altered the transactions undertaken by the firms and incentivised the adoption of
different forms of ownership. In turn, the internal organisation of the firms adapted to mitigate
costs of agency caused by changes in ownership.
These findings show that entrepreneurs sought adaptive organisational solutions to balance an
evolving set of trade-offs between transaction and agency costs. Key to this process was the
capacity of the partnership form to reduce the costs of agency incurred by firms operating with
geographically distant actors. This resulted in the proliferation of the managing agent form.
These findings reinterpret existing explanations of the evolution of firms in the Anglo-Indian
trade, showing that problems of managing agents at distance remained a key challenge
throughout this period.
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Acknowledgements
This thesis was made possible by the generous financial assistance of the Economic and Social
Research Council, through the award of an ESRC Standard Research Studentship ES/J500070/1,
and an Economic History Research Scholarship from the London School of Economics and
Political Science. The members and students of the LSE Economic History department have
been excellent colleagues, offering support and friendship. The Graduate seminar offered
excellent opportunities to trial ideas and receive important feedback at different stages of the
project.
To my supervisors, Gerben Bakker and Tirthankar Roy, I offer the most sincere thanks for the
mentoring they have provided over the course of the PhD. Through their dedicated reading and
constructive comments they helped me avoid numerous mistakes, whilst constantly challenging
me to push my thinking further. They have taken the thesis in many new directions, and shaped
my research and writing skills in countless ways. All remaining errors in the text are mine alone,
and I hope that the thesis does in some small way reflect their own high standards of research.
My parents have been a constant source of encouragement and support and I dedicate this thesis
to them. The spirit of inquiry, desire for knowledge and love of history that drove me to
undertake the PhD were all fostered by them. To Joanna, my love, thanks for putting up with me
in the last stages of writing up, I know it hasn’t been much fun, and only someone with the
patience of a saint could have seen this through.

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Table of Contents
List of table ................................................................................................................................. 8
List of figures .............................................................................................................................. 9
Glossary and abbreviations ....................................................................................................... 10
Chapter 1 Introduction ....................................................................................................... 12
1.1 Methodology and analysis ........................................................................................ 14
1.2 Periodization and boundaries of the study ................................................................ 15
1.3 Identification and definition of the firms .................................................................. 16
1.4 Selection of case studies and sampling issues........................................................... 17
1.5 Data and sources ....................................................................................................... 19
1.6 Motivation and contributions .................................................................................... 21
1.7 Organisation of the thesis .......................................................................................... 22
Chapter 2 Trading firms, history and the theory of the firm. ................................................. 24
2.1 Introduction ............................................................................................................... 24
2.2 Debates of markets, hierarchies, strategy and structure. ........................................... 25
2.3 The agency houses grow out of the shadows of the EIC .......................................... 29
2.4 The end of an era and new trading partnerships. ...................................................... 33
2.5 The ‘absurd, hated and pernicious principle’ of managing agency........................... 34
2.6 Managing agents, Joint-stock firms or Free-Standing Companies ........................... 37
2.7 Further research opportunities .................................................................................. 42
2.8 Historical applications of the theory of the firm ....................................................... 47
2.9 The methodology and analytical frameworks ........................................................... 50
2.10 Hypotheses and themes for analysis ......................................................................... 56
Chapter 3 Indigo, volatility and slow-growth, 1813 to 1850. ................................................ 58
3.1 Introduction ............................................................................................................... 58
3.2 A new market emerges. ............................................................................................. 59
3.3 The lucrative but volatile indigo trade ...................................................................... 63
3.4 Organisation of the indigo market. ........................................................................... 66
3.4.1 The ryoti system of production ......................................................................... 67
3.4.2 The zerat system of production ......................................................................... 76
3.5 The role of the trading firms ..................................................................................... 80
3.5.1 Improving access to credit and capital .............................................................. 81
3.6 The influence of market structure on firm organisation ............................................ 86
3.7 Quantifying the agency houses and trading partnerships .......................................... 87
3.7.1 Size and structure of the firms .......................................................................... 89
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3.7.2 Organisation of international trade.................................................................... 95
3.8 The challenge of volatile markets and thin finance .................................................. 97
Chapter 4 Opening the Indian market: John Palmer and Co. ............................................ 99
4.1 Introduction ............................................................................................................... 99
4.2 Small houses with many lines of business .............................................................. 100
4.2.1 The core business of banking .......................................................................... 101
4.2.2 Constructing a trading network ....................................................................... 104
4.2.3 Palmer and the indigo trade ............................................................................ 106
4.3 The management and financing of an agency house .............................................. 107
4.3.1 A network of firms .......................................................................................... 109
4.3.2 Multiple sources of finance ............................................................................. 111
4.4 New opportunities in colonial markets ................................................................... 113
4.5 Indiscipline, lax lending, and failure ....................................................................... 116
4.5.1 The collapse of the house ................................................................................ 117
4.6 Organising transactions through partnerships ......................................................... 120
4.7 Agency costs and the problems of contracting ....................................................... 124
4.7.1 The growing costs of monitoring and opportunism ........................................ 125
4.7.2 The threats of untimely dissolution ................................................................. 127
4.7.3 Difficulties with decision making and minority repression ............................ 128
4.8 The agency house crisis explained as a failure of contracting ................................ 131
Chapter 5 From traders to plantation owners: Gisborne and Co. .................................... 135
5.1 Introduction ............................................................................................................. 135
5.2 Filling the void left by the agency houses ............................................................... 136
5.2.1 Undertaking the British export trade ............................................................... 137
5.3 Organisation of a new trading partnership .............................................................. 140
5.3.1 A network of partners ..................................................................................... 144
5.3.2 The agreement with Barings ........................................................................... 146
5.4 From traders to plantation owners .......................................................................... 148
5.5 A stable and long-lived firm ................................................................................... 152
5.6 Experiments with integration and ownership .......................................................... 155
5.6.1 Achieving stability and profitability in the indigo sector ................................ 158
5.7 Improved contracts and coordination ...................................................................... 162
5.7.1 Aligning the interests of diverse partners........................................................ 165
5.7.2 The increasing costs of untimely dissolution .................................................. 166
5.8 Experiments in creating a stable network ............................................................... 169
Chapter 6 Tea, growth and take-off, 1850 to 1870. ......................................................... 173
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6.1 Introduction ............................................................................................................. 173
6.2 An evolving and diversifying market ...................................................................... 174
6.3 The emergence of the Indian tea trade .................................................................... 177
6.4 Organisation of the tea industry in Assam .............................................................. 181
6.4.1 The cultivation and production process .......................................................... 183
6.4.2 The importance of labour and management .................................................... 185
6.4.3 Conducting the trade ....................................................................................... 187
6.5 The effects of fixed costs and financing on the role of the firm ............................. 189
6.5.1 A different form of business organisation ....................................................... 194
6.6 The emergence of the corporation .......................................................................... 195
6.7 The rise of the managing agents ............................................................................. 201
6.8 The pressures of capital and competition ................................................................ 206
Chapter 7 Building a new industry: The Assam Company. ................................................ 208
7.1 Introduction ............................................................................................................. 208
7.2 The foundation of a company ................................................................................. 209
7.2.1 Establishing the operations in India ................................................................ 211
7.2.2 Rising costs and managerial problems ............................................................ 214
7.3 Reforms, reorganisation and growth ....................................................................... 217
7.4 Competition, conflicts of interest and a crisis of management ............................... 219
7.4.1 The problems of managing agents at distance ................................................ 223
7.5 Volatile returns and radical reform ......................................................................... 227
7.6 Capital intensity, transactions and asset specificity ................................................ 231
7.6.1 Integration and the abandonment of the network model ................................. 233
7.6.2 The Joint-Stock form; a rational response ...................................................... 235
7.6.3 A hierarchical system of management ............................................................ 237
7.7 Failed experiments with governance ....................................................................... 239
7.7.1 A problem of incentives .................................................................................. 241
7.8 The effects of a separation of ownership and management .................................... 244
Chapter 8 The best of both worlds: Ogilvy, Gillanders and Co.......................................... 248
8.1 Introduction ............................................................................................................. 248
8.2 Established as commission traders .......................................................................... 249
8.2.1 Policies for conducting trade ........................................................................... 252
8.2.2 Expanding the trading network ....................................................................... 253
8.3 The move into indigo .............................................................................................. 254
8.3.1 Managing an indigo factory ............................................................................ 256
8.3.2 Making indigo profitable ................................................................................ 257
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8.4 Expansion into tea ................................................................................................... 259
8.4.1 Growing the agency business .......................................................................... 262
8.4.2 Organising the agency operations ................................................................... 263
8.5 A balance achieved between capital, risk and the costs of agents .......................... 268
8.6 A hybrid of ownership forms to manage multiple transactions .............................. 272
8.7 The importance of the partnership in aligning diverse interests ............................. 274
8.7.1 Hiring, knowledge and expertise .................................................................... 277
8.7.2 Flexibility of the partnership form .................................................................. 278
8.7.3 A coda to the benefits of partnership .............................................................. 279
8.8 Flexible boundaries of the firm ............................................................................... 281
Chapter 9 Conclusion ...................................................................................................... 286
9.1 An evolving choice of business forms .................................................................... 287
9.2 The balance between transaction and agency costs ................................................ 291
9.2.1 Ownership, organisation, and performance .................................................... 293
9.3 A new interpretation of 19th century Anglo-Indian trading firms ........................... 294
9.3.1 The historical development of trading firms ................................................... 297
9.3.2 The historical theory of the firm ..................................................................... 298
9.4 Limitations of the findings ...................................................................................... 299
9.5 Managing agency capitalism ................................................................................... 301
Appendix One Note on the Calcutta Directories ................................................................. 303
Bibliography of Works Cited .................................................................................................. 306

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List of tables
Table 1. The four selected case studies ..................................................................................... 19
Table 2. Williamson's transaction and governance framework ................................................ 53
Table 3. Lamoreaux and Rosenthal's agency cost and ownership model ................................. 56
Table 4. Summary statistics of indigo production, import and consumption, 1814 to 1848 .... 63
Table 5. A commodity chain for indigo production and sale in 1840 under the ryoti system .. 68
Table 6. Costs and profits in the ryoti system, 1835 ................................................................. 75
Table 7. Costs and profits under the zerat system, 1855 ........................................................... 78
Table 8. The number of partners per firm in aggregated bands, 1824 to 1868 ......................... 92
Table 9. The total managerial capacity of trading firms in aggregated bands, 1843 to 1868 ... 94
Table 10. Summary statistics of the size and scope of the trading firms .................................. 94
Table 11. The profit share of partners at Gisborne and Co., 1835 - 1841 ............................... 141
Table 12. Assam Co. and Jorehaut Co. production as proportion of total tea production, 1859
to 1875 .................................................................................................................................... 181
Table 13. A commodity chain for tea production in 1865 ...................................................... 184
Table 14. Costs and profits in tea production, 1860 ............................................................... 190
Table 15. Indian joint-stock firms paid-up capital and capital per firm, from 1851 to 1865 and
1866 to 1882. .......................................................................................................................... 199
Table 16. The number of firms represented by each managing agent in bands, 1858 to 1868 203
Table 17. Managing agents summary statistics ...................................................................... 203
Table 18. Sectors in which the firms represented by managing agents were located, 1858 to
1868 ........................................................................................................................................ 204
Table 19. Ogilvy, Gillanders and Co. retained capital and profit shares in 1840 ................... 251
Table 20. Agency agreements of Gillanders, Arbuthnot and Co. ........................................... 262
Table 21. Departments and partners for Gillanders, Arbuthnot and Co. in 1870 ................... 264
Table 22. Gillanders, Arbuthnot and Co. partners profit share and retained capital in 1871 .. 267
Table 23. Summary of the four case studies ........................................................................... 290

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List of figures
Figure 1. Nominal values of imports and exports in Bombay, 1813 to 1849. .......................... 60
Figure 2. Estimated Bengal indigo crop, British imports and consumption, 1814 to 1848. ..... 64
Figure 3. Average price for a pound of middling quality indigo in London, 1814 to 1849. ..... 65
Figure 4. Estimated Bengal indigo crop, British imports and consumption, 1842 to 1856. ..... 66
Figure 5. Real London indigo prices per pound differentiated by grades of quality and the
difference between fine and low quality, 1816 to 1833. ........................................................... 70
Figure 6. Estimated value of the indigo market in Britain, 1814 to 1848. ................................ 72
Figure 7. Bank of Bengal and Bank of England interest rates, 1842 to 1862. .......................... 84
Figure 8. The number of trading firms in Calcutta in benchmark years, 1813 to 1868. ........... 88
Figure 9. The mean average and maximum number of partners, 1824 to 1868. ....................... 91
Figure 10. The average and maximum numbers of assistants and average and maximum total
managerial capacity in trading firms, 1843 to 1868. ................................................................. 93
Figure 11. The number of East India Agency houses in London, 1813 to 1868. ...................... 96
Figure 12. The organisation of Palmer and Co. ...................................................................... 110
Figure 13. Gisborne and Co. partner’s deductions, 1835 to 1841. .......................................... 142
Figure 14. Gisborne and Co. Capital accumulated per partner, 1834 to 1841. ....................... 143
Figure 15. The organisation of Gisborne and Co. ................................................................... 153
Figure 16. Gisborne and Co. Capital, profits, and deductions, 1835 to 1841. ........................ 154
Figure 17. Real value of Indian exports and imports, 1813 to 1869. ...................................... 174
Figure 18. Total British imports of tea with Chinese and Indian shares, 1866 to 1880. ......... 176
Figure 19. Level of tea production in India, 1840 to 1875. .................................................... 178
Figure 20. British imports and consumption of tea, 1840 to 1852. ......................................... 179
Figure 21. Average price of Assam Co. tea at the London auctions, 1847 to 1870. ............... 180
Figure 22. Highest prices achieved for five grades of tea, 1841 to 1851. ............................... 188
Figure 23. The number of joint-stock firms in Calcutta, 1813 to 1868. ................................. 196
Figure 24. The number of joint-stock firms by sectors, 1868. ................................................ 197
Figure 25. The number of managing agents and the firms they represented, 1858 to 1868. .. 202
Figure 26. The number of joint-stock firms with agents, 1858 to 1868. ................................. 205
Figure 27. Comparison of the Assam Co. and Jorehaut Co. production, 1840 to 1870. ......... 220
Figure 28. The Assam Co. profits, 1853 to 1870. ................................................................... 229
Figure 29. The Assam Co. London share price and dividend, 1857 to 1872. ......................... 230
Figure 30. The organisation of the Assam Co......................................................................... 234
Figure 31. The organisation of Ogilvy, Gillanders And Co. ................................................... 270
Figure 32. Consolidated profit and loss of Gillanders, Arbuthnot and Co., 1849 to 1869...... 271
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