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Financing the Raj

Financing the Raj: The City of London and Colonial India, 1858-1940

David Sunderland
Copyright Date: 2013
Published by: Boydell and Brewer,
Pages: 256
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  • Book Info
    Financing the Raj
    Book Description:

    This book explores the financial relationship between the Indian government, as represented by the India Office, and the City of London during the period of direct British rule. The universally accepted view is that the Office acted in the interests of the City and to the detriment of India. 'Financing the Raj' disputes this conclusion. It argues that India was a constituent part of the City, contributing to and benefitting from its operation through the formation of close symbiotic and trust relationships, the exchange of gifts, the recycling of funds, and, perhaps most significantly, the support of the gold standard. The book examines the Office's activities from a British and practical perspective. In the first part, the issue and sale/purchase on the London market of Indian government debt is explored. Next, the author discusses the purchase of silver and the 'scandal' of 1912, when the award of a major contract to the family firm of the Under Secretary of State for India led to accusations of cronyism and fraud. The finance of Indian trade, the management of exchange rates and the transfer from India to London of the money needed to meet the Indian government's UK commitments are then investigated. The book concludes with an analysis of the Office's investment role and its management of the three cash reserves held in the capital. 'Financing the Raj' overturns many myths, demonstrating that those involved in Indian finance did work in the best interests of India and were well aware of the close interrelationship between Indian finance, the City of London and the wider British economy. It will be of interest both to historians of empire and historians of finance. DAVID SUNDERLAND is Reader in Business History at the University of Greenwich and the author of four monographs and numerous articles on the economic history of London, British Imperialism and nineteenth-century social capital. He is also Series and Collection editor of Pickering & Chatto's Britain and Africa series of source monographs.

    eISBN: 978-1-78204-094-1
    Subjects: History

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-v)
  3. List of Figures and Tables
    (pp. vi-vi)
  4. Preface
    (pp. vii-vii)
  5. Abbreviations
    (pp. viii-viii)
  6. Introduction
    (pp. 1-15)

    Lionel Abrahams saw India’s London financial operations as a large waterway system comprising ‘rivers running into a lake at one side and so many rivers running out of the lake at the other side’. The goal of India Office (IO) officials like himself was to connect ‘incoming rivers with … outgoing rivers’, a task he acknowledged was ‘sometimes difficult’.¹ To truly understand the IO’s financial operations one must extend this analogy. India’s waterways did not exist in isolation. They formed part of a much larger system, the City of London, which in turn was connected to and fed a vast...

  7. 1 The Issue of Government Loans: Purpose, Location of Issue and Purchasers
    (pp. 16-28)

    The amount of Indian government debt on the London markets rose from £1.49m in 1800/1 to £272m in 1938/9 (Figure 1). It comprised the government loans discussed in this and the following two chapters, and the sterling bills and the securities of the guaranteed railway companies, which are considered in Chapter 4. In addition, a large proportion of the rupee stock issued in India was also held by British investors, purchases that are again explored in Chapter 4. From 1857/8 to 1935/6, when the last government loan was issued, the IO sold £407.71m of debentures/stock for which it obtained approximately...

  8. 2 The Issue of Government Loans: Demand
    (pp. 29-47)

    The demand for Indian debentures/stock was high for reasons unconnected to the machinations of the IO. In the early part of the period, there was little competition for investors’ funds from foreign governments or domestic industry, and there was a patriotic element to the purchase of Indian securities.¹ Much of the railway equipment bought with the proceeds of issues was sourced in the UK and the completed infrastructure, built by British engineers, ultimately increased UK exports and reduced the cost of imports.² More importantly, investors believed Indian loans to be secure and that the Indian government would default neither on...

  9. 3 The Issue of Government Loans: Yields, Assets and Repatriation
    (pp. 48-66)

    One of the main lures used by the IO to attract timid investors to Indian government loans was yield, the annual dividend paid, which was determined by each issue’s interest rate, the price paid for the debentures/stock at issue and various other factors. From 1880 to the First World War, the annual yields of Indian loans, as calculated by the formula interest rate/price x 100, were lower than those of the securities floated by the Crown Agents for the Crown colonies and by the Australian dominions, and far smaller than foreign government issues. The Indian government thus paid relatively less...

  10. 4 Other London Debt
    (pp. 67-85)

    The Government of India’s presence in the London capital market was not limited to the issue of loans. The IO had some involvement in the flotation of the securities of the purchased guaranteed railway companies, and sold sterling bills, short-term investments with lives of between three to twelve months.¹ There was also at any one time a considerable holding in Britain of Indian rupee stock, and, in 1917/18, the Indian government floated a large rupee war loan, the proceeds of which were used to take over a proportion of the 5 per cent British war loan 1929–47.

    The IO...

  11. 5 The Purchase of Silver and Other Currency Activities
    (pp. 86-100)

    From 1900 to 1925/6, the IO bought £132.96m of silver.¹ The metal was used for the minting of rupee coins, and, to a lesser extent, the pressing of medals, and purchases were therefore determined by Indian demand for coinage, which rose when exports were high and the economy buoyant.² After large acquisitions from 1857 to 1862, no further orders were placed until 1900.³ Rather than leading to a dearth of currency, the 1893 closure of the mints caused hoarders of rupee coins to exchange their stashes for silver bars, the value of which was more secure, and, when this process...

  12. 6 The Finance of Indian Trade
    (pp. 101-114)

    The finance of Indian trade was largely managed by the Indian exchange banks, which were based in Britain, but operated in India, and, in some cases, South East Asia and Australia. For much of the period there were five to seven such banks, the most important of which were the Oriental Banking Corp. (established in 1851, failed in 1892), the Hong Kong & Shanghai Banking Corp. (established 1865), and the Chartered Mercantile Bank of India, London & China (1858).¹ As reflected by their name, their main role was exchange dealing, and for the whole of the period they dominated this sector. The...

  13. 7 Council Bills: Purpose and Nature
    (pp. 115-136)

    Council bills became one of India’s main methods of remittance in 1862 and were unique; other Empire countries moved funds to the UK via commercial bills of exchange through the agency of local or UK banks.¹ They were issued for a number of reasons. The most important was to allow the Indian government to remit to Britain the money needed to meet a variety of commitments, commonly known as the home charges, without the despatch of gold. Total expenditure on these various outlays amounted to £920.94m from 1879/80 to 1925/6, to which should be added the £133m spent on the...

  14. 8 Council Bills: Price
    (pp. 137-152)

    In the setting of bill prices, the IO had two goals. It wished to sell its bills at or above the rate at which they were exchanged for rupees in India, sales below this figure leading to losses that had to be recouped by higher taxes, more borrowing or less capital expenditure.¹ Secondly, it wanted stability. Fears that the exchange would fall and money would be returned to the UK at a loss discouraged the arrangement of forward contracts and trade, inward capital investment and English investors’ purchase of rupee debt, and weakened the credit of India in the London...

  15. 9 Indian Government Difficulties in Cashing Bills and Other Methods of Remittance
    (pp. 153-165)

    A major drawback of council bills was that, on occasion, the Indian government simply lacked the funds to cash them, particularly after 1904. This state of affairs was partly due to the difficulties faced by the government in the early part of the period in determining the size of Treasury balances at any one time and in predicting the amount of coin that would flow back to its Treasuries, which often caused shortages of funds towards the end of the trading season.¹ A further factor was the unpredictable nature of the Indian climate and harvests. Good crops and high exports...

  16. 10 Gold Standard and Paper Currency Reserves
    (pp. 166-187)

    Created in 1899 on the recommendation of the Fowler Committee, the Gold Standard Reserve (GSR) was initially intended to support the establishment of a gold currency.¹ With the abandonment of an Indian gold standard, its purpose then became to underpin the exchange and to provide a pool of money that could be used to cash the reverse council bills sold in India and cashed in London when the exchange rate fell below the gold export point and as an alternate source of funds when council bills/sterling could not be sold/bought at sufficiently high prices. It also provided temporary loans to...

  17. 11 Home Balances
    (pp. 188-206)

    Theoretically, the home balances were used to meet India’s UK commitments. In reality, they often far exceeded the country’s liabilities, from 1860/1 to 1939/40 averaging £6m, and rising to £18m in 1910/11 and £16.6m in 1917/18 (Figure 15).¹ This excessive size was partly designed to allow the IO to make loans to the City and to increase the Bank of England’s gold holdings, which directly benefitted Indian finance, and was partly the result of poor budgeting and an aversion to risk. The uncertainty of the monsoon and unexpected external ‘shocks’ caused estimates of expenditure and receipts to be highly inaccurate...

  18. Conclusion
    (pp. 207-214)

    Like nature’s ecosystems, Indian finance at first appears highly complex, a perception exploited by IO officials, who ‘delight[ed] in the lucidity of mystification’, aware that the financial labyrinth that constituted their work acted as a cloak, shrouding their activities from criticism.¹ In reality, the world of Indian finance was a surprisingly small one, comprising no more than a hundred individuals and institutions, and relatively straightforward. It can perhaps be best understood through the prism of principal-agent theory and the concepts of trust, the gift economy and enlightened self-interest. Principal-agent theory postulates that all agents possess two interests – that of...

  19. Appendix 1. The Recycling of Funds
    (pp. 216-216)
  20. Appendix 2. Finance of Indian Trade
    (pp. 217-218)
  21. Bibliography
    (pp. 219-230)
  22. Index
    (pp. 231-240)
  23. Back Matter
    (pp. 241-241)