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    China Business
     Sep 4, 2008
Page 3 of 5
CHINA'S DOLLAR MILLSTONE, Part 2
Developing China with sovereign credit
By Henry C K Liu

War II, the Dutch East Indies became the independent nation of Indonesia, with 222 million people the world's fourth-most populous country and the most populous Muslim-majority nation. Membership in international institutions such as the World Trade Organization, the International Monetary Fund and the Bank of International Settlements are only treaty obligations assumed by sovereign states.

Britain immediately followed the Dutch example of expanding colonialism through a joint stock company. The British East India Trading Company had been granted a royal charter by Elizabeth I on December 31, 1600, two years before the founding of VOC, with the intention of bestowing upon it favorable trade privileges

 

with India. The company was a collective enterprise of London private businessmen who banded together to make money importing spices from South Asia.

The royal charter granted the newly created company a 21-year monopoly on all British trade in the East Indies. The Company through private placement quickly transformed from a private commercial trading venture to one that virtually ruled India and other Asian colonies as an imperialist overlord as it acquired auxiliary governmental and military capability. But its shares were not publicly traded until after the founding of the London stock exchange in 1801. Thereafter, the corporate structure of the British East India Company became a classic model of a successful publicly traded joint stock company.

Many innovative organizational features, such as reliance of a network of highly compensated agents, known as compradors, to efficiently exploit chaotic markets, were later copied by modern transnational corporations. The comprador system reduced capital levels for the company while spreading the risk away from the company. Much of the dirty exploitation was carried out by comprador agents while top management at company headquarters stayed above it all by comforting itself with having played fair according to the high-sounding principles of capitalism,
For centuries, the spice trade with the East Indies relied on land routes across Asia and the Middle East, but by the 16th century, the superior shipping technology of the Portuguese permitted Europeans to cut out Arabic intermediaries to make far greater profits. The Spanish and Portuguese had a monopoly of the East Indies spice trade until the destruction of the Spanish Armada in 1588, which permitted the English and Dutch to control this lucrative trade.

Yet British East India Company policies in Bengal were responsible for failing to prevent the Bengal famine of 1770, which left a third of the native population of 30 million dead from starvation. As a trading entity owned and run by a foreign race, the Company's mandate was to maximize profit by exploiting its chartered right to impose a land tax over its jurisdiction and trade tariffs on imports. The land tax in Bengal was raised five fold to 50% from 10% of the estimated value of the agricultural produce on all land in territory control by the Company, including land not directly owned by the Company.

Land tax was the key device of the British colonial authorities of all its colonies to make the natives productive in monetary terms. Native farmers and rangers were compelled to produce more than their families needed for consumption and to sell the surplus in the market for money issued by the Company to pay land taxes. Most of the tax revenue did not stay in India or other colonies for local development. It flowed to England as dividends for British shareholders.

All investments in India and other colonies were directed toward raising trade profit for the Company, rather than to improve the welfare of the natives. As the Bengal famine approached its most severe stage in April 1770, the Company announced a further increase of the land tax to 60% of potential production value.

The Company forbade the "hoarding" of rice at a good harvest so that it could maximize profit from low prices it paid growers due to a supply glut, thus preventing traders and dealers from holding reserves to feed the native population during lean periods. It also paid farmers to plant opium and tea cash crops instead of rice to increase company profit.

The tea that was dumped into the harbor by members of the Boston Tea Party in the American Revolution in 1773 was British East India Company property. American colonists were protesting against the British East India Company's monopoly over tea exports to the colonies. By the time of the famine, full monopoly in grain trading had been firmly established in India by the Company and its agents. The Company had no plan for dealing with the grain shortage besides measures to assure food supply for British executives and their native employees. Globally, company profit doubled in the decade of the famine.

The privileged monopoly of the Company was criticized by Adam Smith, advocate of free trade, Edmund Burke, apologist for American secessionism yet conservative critic of the French Revolution, and British home merchants locked out of the lucrative Asia trade, who protested against the Company's administrative abuses and monopolistic ineptitude. In 1833, Parliament declined to extend the monopoly of the British East India Company on trade between Britain and China. Jardine, Matheson & Co took advantage of this open-market opportunity to transform itself from the position of leading agent of the British East India Company to that of a competitor to prosper in the next century.

Opium smuggling into China
In the 18th century, England was incurring huge trade deficits denominated in silver with China under Qing dynastic rule, as silver was legal tender in China. This trade deficit was draining silver from the British Mint at a time when England was on the gold standard, which undervalued silver, causing silver to leave England en masse to effectuate an inflow of gold. Thus British merchants had to buy silver in continental Europe with gold at higher prices that cost almost one more ounce of silver for every ounce of gold sold, because of the silver/gold ratio set by European bimetallism.

The price differential of silver between England and the Continent continued until Germany demonetized silver in the 1870s. This meant silver before the 1870s was priced higher as a monetary unit in Europe than its intrinsic value as a commodity because of German seigniorage. Silver was also priced lower both commercially and monetarily in Europe than the silver/gold ratio set by the gold standard in England.

Because there was not much that China would want to buy from the West in the 18th century because China, as a more advance civilization and a wealthier economy, was producing all the goods she needed in superior quality, especially from Britain where goods produced by early industrialization were generally crude and monotonous, the British East India Company resorted to opium smuggling to China, where opium trade was illegal, to balance the Company's rising trade deficit.

To impose the illegal opium trade on China, the Company soon found it needed to persuade the British government to adopt gunboat diplomacy to turn trade into economic and political imperialism. Beginning in early 19th century, Britain became the "Workshop of the World" of crude mass-produced products that even members of the British upperclass themselves did not find attractive and had to be exported to less cultured colonies. But Chinese markets were too cultured for these goods. Until opium smuggling, the British were unable to break into the huge Chinese market.

Britain needed more new capital to finance its growing industries and sought it from new wealth reaped from overseas colonies. She also needed more raw materials to maintain its growing industries and more markets for the finished goods in a mercantilist trade regime. She also needed safe shipping routes between the British Isles and her far-flung colonies. Lord Palmerston (1784-1865), liberal successor to the conservative Duke Wellington as Foreign Secretary in 1830, claimed that Britain wanted only peace and prestige, a euphemism to justify his gunboat diplomacy to expand illegitimate British commercial dominance all over the world. But China remained elusive to British colonial ambitions until the British introduced opium in its China trade.

At home, Palmerston's expansionist foreign policy ran into conflict not only with the English landed gentry who opposed trade expansionist industrialists. The Corn Laws were passed by Parliament to protect British agriculture from cheap imports. (See Big money and the Corn Laws, Asia Times Online, May 1, 2002.) Palmerston also clashed with Queen Victoria who wanted British foreign policy to avoid creating situations that would weaken monarchism in Europe, where it was increasingly threatened by the rising revolutionary ferments of republicanism, democracy or socialism. Most royal families were her blood relatives through marriage. Her apprehension was not mere paranoia, as the German Kaiser and the Russian Czar both lost their crowns. The Kaiser went into exile in the Netherlands and lived until 1941. The Russian imperial family lost their lives through revolutionary regicide. But on imperialism on non-while peoples, the queen and her foreign minister were of one mind.

Palmerston launched the First Opium War of 1841 against China, considered then "the sick man of Asia" by Europeans. He was advised by William Jardine, head of Jardine, Matheson & Co, who literally planned the entire military operation and drafted the proposed surrender terms to be presented to a defeated China. Easy British victory forced a poorly governed China open to Western imperialism for the next century. While the British smuggled opium to China from British India, the Forbes and Delano families of Boston smuggled opium from Turkey, grown under British supervision, into China with China Clippers. Much of the profit from the US opium trade went to Boston and through Boston banks to finance the expansion of the US West as investments in railroads built mostly with imported Chinese slave labor.

The Bengal famine of 1770 caused liberals in British politics to realize that private companies could not be expected to deal effectively with socio-political issues of mercantile colonialism. For a solution, British liberals opted for political colonialism and passed the Government of India Act of 1858 to make the British Crown the direct ruler of India, following the so-called Indian Rebellion in 1857, in reality an independence struggle brutally suppressed by British forces. All properties of the East India Company were transferred to the Crown, Queen Victoria subsequently being anointed with the title of Empress of India in 1876.

The Company's 24,000-man private military force was incorporated into the British India Army, leaving the Company with only a shadow of the power it had wielded years earlier. Without its monopoly and quasi-governmental powers, the Company was finally dissolved on January 1, 1871 by the East India Stock Dividend Redemption Act.

The British East India Company throughout its history naturally had an interest in developing a network of fortified supply points along shipping routes from Britain to India. As early as 1620, the Company attempted to lay claim to the Table Mountain region overlooking today's Cape Town in South Africa and later occupied it. Cape Town was a key supply point for shipping to India, just as Singapore was for shipping to China after the opening of the Suez Canal in 1869. The rounding of the cape in 1488 was a major milestone in Portuguese navigational attempts to establish direct sea trade routes to the Far East. The British East India Company also ruled St. Helena, where the defeated Napoleon was kept prisoner until death under Company administration.

Elihu Yale (1649-1721), Boston born but who returned with his family to England at age four, was connected to the British East India Company for two decades and became the second governor of Madras, now Chennai, in 1687. His widowed grandmother had remarried Governor Theophilus Eaton (1590-1657) of the New Haven Colony in Connecticut. Yale amassed a fortune in his lifetime, largely through secret contracts with native Madras merchants against company directive. By 1692, repeated flouting of company regulations and his illegal profiteering led to Yale's being relieved of the post of governor.

In 1718, Cotton Mather (1663-1728), a socially and politically influential New England Puritan minister and pamphleteer and a figure in the infamous Salem Witch Trials, asked Elihu Yale in to help the Collegiate School of Connecticut, founded in 1701, with money for a new building in New Haven, Connecticut. Yale sent Mather a carton of goods that the school subsequently sold for 560 pounds sterling, a substantial sum in the early 1700s. In gratitude, officials named the new building Yale; eventually the entire institution became Yale University, founded initially by opium smuggling profit from the British East India Company.

Collapse of the Chinese economy
Over the length of two centuries, Britain devastated the economy of China, the largest nation in the world, with an ancient, highly developed civilization and the richest economy in the world until the British came in early 19th century.

The war indemnity of the First Opium War of 1841 alone imposed on China the payment to Britain of 10 million pounds sterling, 3 million pounds of which was for the destruction of confiscated opium contraband. Untold millions of pounds were subsequently collected from unequal treaties forced upon China, the first being the infamous Nanking Treaty, which among preferential trade concessions granted to British interests ceded Hong Kong to Britain. The First Opium War showed the West how weak imperial China really was behind its crumbling superpower facade and opened China subsequently to a century of foreign aggression and exploitation, draining wealth on a massive scale from China to the European powers, the United States and Czarist Russia.

In 1900, the war indemnity from an Eight-Power Coalition invasion of China as a result of the xenophobic Boxer Uprising forced China to pay 982 million taels, or 40 billion ounces, of pure silver at the then British-controlled market price of three taels per pound sterling, yielding 327 million pounds, of which Russia received 29%, Germany 20%, France 15%, Britain 11%, Japan 7.7% and the US 7.3%. This was three times the global trade deficit of 109 million pounds incurred by Britain in 1910.

But the pound sterling was set by the British gold standard at 15 ounces of silver, and 982 million taels of silver convert to 40 billion ounces of silver, or 2.6 billion pounds sterling, not 327 million pounds. The sum of 2.6 billion pounds was over 24 times the British global trade deficit in 1910. This sum and other payment obligations from subsequent unequal treaties were so large that Britain demanded and received control of Chinese maritime custom service to collect tariffs to pay Western Powers their due from unequal treaties.

The final collapse of the economy of dynastic China was caused by the advance of Western political imperialism initially via the 

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