The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor

by David S. Landes

  The big shots had even more incentive than the small fry—their sea chests were bigger. Even the so-called inspectors could make far more money by averting their eyes. A governor-general, nominal salary 700 florins a month, could take home a fortune of 10 million florins; a junior merchant was ready to pay 3,500 florins to the Appointments Board for a post that paid 40 a month but yielded 40,000. In the end, the company began to tax its officers on their presumed gains, which only encouraged them to attend more assiduously to their own business. Small wonder that after the VOC’s demise, its logo came to be read as Vergaan onder Corruptie (Perished by corruption).11

  Even so, the company made money. It paid dividends that averaged 18 percent per year from the time of its founding. Most of the VOC’s earnings came from its monopolies of agricultural products: spices from the Spice Islands to begin with; then rice from Java, because one could not allow these specialized islands to waste spice land on food; then coffee and sugar, which the company introduced into Java. (Coffee came originally from the Mocha area in the Arabian peninsula, but the Dutch did so well acclimating it in Java that they gave us a new generic term for the beverage.) The other profits came from purchases in the open market: porcelain, silks, and tea in China; silks and cotton in India; and so on. But here the company had to compete with other buyers, including its own agents. No wonder the directors preferred monopolies.

  Yet in the long run the monopolies were precarious. To maintain them against native and outsiders required the use of force so expensive that only a sovereign with taxing power could hope to pay the bill.12 Inevitably, the VOC was led to substitute its own governance for that of native princes. The VOC thereby incurred the kind of nonbusiness expenses that are open-ended and unpredictable; that do not show up in the books because they are so easily spread about; that grow insensibly until too late. (Compare the budgetary deficits that afflict modern nation-states.)

  This governance, moreover, led the company to impose a command economy. In J.S. Furnivall’s words, “the archipelago became one vast estate, literally, a plantation.”13 This strategy may have enhanced on occasion the direct revenues of the company, but only at the expense of native cultivators and tax revenues; so that in the long run the VOC earned less than it could have in a free market.14

  In the long run: in the absence of force (and force has its own costs), people will not allow themselves to be done to. At some level they would rather sit on their hands or resort to “crime.”

  Take cloves. The clove tree, which grows to some forty feet at maturity, was found only on Amboina (Ambon) and a few lesser islands. The Dutch, seeking monopoly, moved people from the other clove islands to Amboina, destroying their trees beforehand, the better to control them and prevent them from selling to non-Dutch buyers. In the language of the VOC, only the Amboinese were “privileged” to grow cloves.

  This privilege entailed the obligation to cut down trees on demand; also to buy all foodstuffs from the company at company (that is, high) prices. On the company side, the VOC was free to set the price for the clove crop. The aim presumably was to give the grower as little as possible, but not so little as to drive him out of business. Needless to say, the VOC, in its instinctive greed, did not pay enough, and the “privileged” Amboinese lost interest in their privilege. When the Dutch found clove output lagging demand in 1656, they made the people of the island plant more trees. But then in 1667 further planting was forbidden, and in 1692 and 1697 the growers were made to cut trees down. In the mid-eighteenth century demand picked up again, so the company imposed new planting, only to follow that a few years later by more cutting. By this time, growers were impoverished and disgusted, and the population of Amboina had fallen by a third. Meanwhile the British and French had started cultivating cloves in their own territories. The Dutch monopoly was broken, and spices in general faded as a precious commodity.15

  Coffee is another, more egregious example of what Adam Smith called “so perfectly destructive a system.”16 Coffee was first brought to Holland in 1661, and from 1696 attempts were made to cultivate the coffee tree in Java. Native growers were paid some 10 stuiver a pound, and at that price took eagerly to the new crop. So the company, always on the alert for economies, reduced the price to 2.5 stuiver, whereupon the natives began cutting coffee trees down, even in the face of punishment. So the company introduced compulsory cultivation and delivery, while raising the price; but later, when pepper gained in value, the company told the growers to cut down the coffee trees and substitute pepper. In 1738 it was decided to reduce the area under coffee by half, and the next year the company fixed the purchase quota at 2.7 million pounds. But when it became clear that the Netherlands alone would take 6 million, the company raised its quota to 4 million—always playing it safe. Yet it paid the Javanese grower so little that in 1751, it was able to buy less than 1 million pounds. Coffee trees take four years to mature, and these alternate plantings and cuttings precluded a flexible, rational response to changing demand.

  Over the course of the eighteenth century the Dutch East India Company saw trade volume fall (spices were down) and profits with it; but it continued to pay generous dividends, even borrowing the sums required. A very bad sign. Was it making money? Our records are incomplete, and the methods of accounting make calculations difficult. The profits and losses of governance, for example, are not included with the commercial results, indeed are not available. Even Fernand Braudel, who had at his disposal a large squad of research assistants, had to give up: “…the very system of accountability prevents drawing up a general balance sheet and thus any exact calculation of real profits.”17 Who is to say that even the directors, the Heeren XVII, knew the real state of affairs? We assume that big business enterprises are rational and that rationality entails awareness. The annals of business make it clear, though, that much decision making is guesswork and improvisation. Otherwise, how do these enterprises manage to dig themselves so deep a hole?18

  Toward the end of the century the hazards of politics made matters much more difficult. Holland got caught up in war with England in 1781-84, and the VOC found it hard to move goods between the Low Countries and the Indies. It had to ask for moratoria on its debt while borrowing afresh. The state was now the company’s only creditor (bankers knew better), and its fate was bound up with that of the United Provinces. Then came the French Revolution, which boosted radical politics in the Netherlands and set up a puppet Batavian Republic (1795), much less sympathetic to the big business interests of the old regime. When the renewal of war with Britain drove sales down by almost two thirds, the outcome was inevitable. The Dutch state took over the company—assets, debt, and empire.

  This empire remained; indeed, the governments of a restored Holland (1814-) worked well into the nineteenth century to round it out. Costs of administration were covered by imposing delivery quotas on selected plantation crops (coffee, tea, sugar), and by lucrative monopolies of salt and opium. From 1870 on, the Dutch abandoned the plantation “Culture System,” partly owing to the conviction that a free market would work better, partly owing to a bad conscience about forced labor. Two new, high-growth products eased the transition to liberalism: the transplantation of Brazilian rubber in 1883, and the discovery and exploitation of oil deposits in Borneo and Sumatra in the late 1880s (foundation of Royal Dutch, 1890). But little time remained to redeem the errors of an earlier age before World War II allowed the Japanese to seize these Dutch possessions. The Japanese occupation lasted only a few years, yet that was more than enough. The change in regime fed aspirations for freedom. It taught the Indonesians that Asians could beat Europeans, that the Europeans were not invincible.

  Japan’s surrender returned the archipelago to the Dutch, but only for a moment. In 1949, the Netherlands granted the islands independence, the more readily because Dutch public opinion had been prepared by several generations of penitent self-criticism. A new Indonesian republic took command. It too was an empire, claiming sovereignty over all the
lands received from the Dutch, plus extra pieces like East Timor, regardless of local identity and aspirations. Unhappy dissenters from Indonesian dominion could seek shelter in the Netherlands—the Dutch would treat them better. Ironically, thanks to the VOC and Western imperialism, the dream of the old sultans of Sumatra and Java was finally realized by the new sultans of “popular democracy.”

  11

  Golconda*

  The British are like the strong rapid current of water, they are persevering, energetic, and irresistible in their courage. If they really want to obtain something they will use violence to get it. The Dutch are very able, clever, patient, and calm. If possible they try to reach their goal by persuasion than by force of arms. It may well happen that Java will be conquered by the British.

  —A Javanese prince, c. 1780†

  The Romans had a saying, Pecunia non olet—Money does not smell. People may not like the way it was made or the person who made it, but they like, and will take, the money.

  In another sense, though, money does smell, powerfully, and its odor will draw people from far and near.

  In 1592, England was at war with Spain and Portugal, which we saw had been joined to the Spanish crown by the play of marriage and inheritance. Some four years before, the English had repelled and destroyed a Spanish seaborne invasion (the self-styled Invincible Armada). Now an English naval squadron was waiting off the Azores to intercept and capture Spanish ships coming from the New World and perhaps laden with the treasure of Mexico or Peru, when along came a Portuguese carrack. This was the Madre de Deus, back from the East Indies, headed for Lisbon.* She was bigger than any vessel the English had ever seen: 165 feet long, 47 feet of beam, 1,600 tons, three times the size of the biggest ship in England; seven decks, thirty-two guns plus other arms, gilded superstructure; and her hold was filled with treasure.

  Here was the stuff of dreams—chests bulging with jewels and pearls, gold and silver coins, amber older than England, bolts of the finest cloth, tapestries fit for a palace, 425 tons of pepper, 45 tons of cloves, 35 tons of cinnamon, 3 of mace, 3 of nutmeg, 2.5 tons of benjamin (a highly aromatic balsamic resin used as base in perfumes and pharmaceuticals), 25 tons of cochineal (a dyestuff made from the dried bodies of the female of an insect found in semitropical climes), 15 tons of ebony. Even before the English squadron commander could take charge of the prize, his rampaging crewmen had stuffed their pockets with everything they could carry.

  When the prize came into Dartmouth Harbor, it towered over the other ships and the small houses at quayside. Traders, dealers, cut-purses, and thieves came from miles around, from London and beyond, like bees to honey—to visit the ship (the local fishermen plied ceaselessly and expensively between vessel and shore) and seek out drunken sailors in the taverns and dives, the better to buy, steal, pilfer, and fence the loot. By English law, a large share of this catch was owed to the queen; and when Elizabeth learned what was going on, she sent Sir Walter Raleigh down there to get her money back and punish the looters. “I mean to strip them as naked as ever they were born,” swore the valiant Sir Walter, “for Her Majesty has been robbed and that of the most rare things.”

  By the time Sir Walter took things in hand, a cargo estimated at half a million pounds—nearly half of all the monies in the Exchequer—had been reduced to 140,000. Even so, it took ten freighters to carry the treasure around the coast and up the Thames to London. Next to the ransom of Atahualpa, it was perhaps the greatest haul in history. And like the ransom of Atahualpa, it was an immensely potent appetizer. This whiff of wealth, this foretaste of the riches of the East, galvanized English interest in these distant lands and set the country (and the world) on a new course.

  The English learned another lesson from the “Mother of God.” When, some years later, a rich prize vessel was brought into the Thames for unloading, the men who did the job were given as work clothes “suits of canvas doublet without pockets.”1

  The English came into the Indian Ocean, like the Hollanders, at the end of the sixteenth century. They came as interlopers and plunderers, better at fighting than trading. Only later, and then cautiously, did they shift to commerce.

  The Dutch formed their VOC by merger of independent companies, and moved vessels and armaments into the area on a substantial scale, with a view to booting the Portuguese and other pretenders from the Indonesian archipelago. The English, by contrast, acted piecemeal, treating each voyage as a separate venture and requiring participating merchants to reassemble their capital each time. When the English and Dutch clashed in those early days, the English sometimes won but lacked the muscle to mount a real challenge; and so, looking for alternative trade opportunities, they turned north to India. This would prove a lucky strike.

  Like the Dutch, the English preferred to avoid the Portuguese. They set up at first on the eastern or Coromandel coast, well away from Malabar. On the western side of India they leapfrogged Goa to obtain trading privileges in Surat, the major port of the Moghul empire, gateway to the riches of the Indian interior and the trade with Persia and Arabia. Later on (1661) they got permission to set up in Bombay, then an almost uninhabited island. This was reasonably safe from landside aggression (compare Goa), and the English developed it into a factory-base and the major commercial center of the west coast.

  On the other side of the peninsula, after planting themselves at Madras, the English moved north into the Bay of Bengal and the valley of the Hugli River. There, beginning in 1690, they built their own commercial city on the territory of a tiny village called Calcutta. The key was the purchase in 1698 of a kind of “feudal” privilege (zamindari rights of tax collection). These rights, though flouted at first by local authorities resentful of European intrusion, were increasingly honored as Indian merchants and officials came to depend on English trade, assistance, and goodwill.2

  In all of this, the name of the game was buying interested friendship and collaboration. Begin with the big merchants and the courtiers of the Great Moghul. Go on to local agents and feudatories, who looked to the English for gifts (bribes) and stipends, shipped export goods in their vessels, and in some instances even invested with them. Thomas Roe, ambassador to the Court of the Great Moghul in Agra, defined the task: “Let this be received as a rule, that if you will profit, seek it at sea and in quiet trading, for without controversy it is an error to seek garrisons and land wars in India.”3

  The Dutch also tried to play this game in India, but fell short of English success. For the Dutch, Indonesia had priority, and India got the leavings of their attention and resources. In the islands, Dutch firepower extruded competitors, made violence easier. They got off on their strong foot, and the aggressive temperament of such proconsuls as Coen set the pattern. Dutch preferences also reflected material opportunities. They aimed at monopoly in Indonesia, against the interest of the locals. That was not feasible in India, where home rulers were stronger and where other players, already established, disputed the marketplace.

  Yet all businessmen prefer monopoly to competition. Once English strength increased, they too resorted to force: threats of naval blockade that would have hurt Indian trade to other countries and interrupted the pilgrimage to Mecca; construction and garrisoning of forts; seizure and ransom of Indian vessels. In 1677, Gerald Aungier, the East India Company’s president at Surat and governor at Bombay, wrote the directors in London to spell out the new conditions of business. He recommended a “severe and vigorous” policy: “Justice and necessity of your estate now require you to manage your general commerce with your sword in your hands.” This advice found favor in London, where Josiah Child headed the company and was determined to surmount the vagaries of Indian politics. In 1687, instructions went out to Fort St. George (outside Madras): use power to ensure a large and continuing revenue, such as might lay “the foundation of a large, well-grounded, sure English dominion in India for all time to come.”4 Here was a ticket to involvement in Indian politics and government. Already the breakup of the Mogh
ul empire loomed, leading Indian pretenders to power to seek allies among the foreign companies.

  Meanwhile the nature of hereditary rule is to produce fools as well as statesmen, and the Moghuls mistakenly nourished the conviction that merchants like the British could only submit to the warrior children of Timur and Babar. The Nawab of Bengal squeezed and mulcted them in time-honored fashion—after all, what are sponges good for?

  For a time, the British stood still and complied. But these were not ordinary merchants. Arbitrary levies turned the intruders to thoughts of violence. One vexed Englishman said it straight in 1752: “Clive, ’twould be a good thing to swinge the old dog [the Nawab]…the Company must think seriously of it, or twill not be worth their while to trade in Bengal.”5 And Clive thought seriously.

  In India the English learned that Asia had more and better to trade than spices. In particular, India produced the world’s finest cotton yarn and textiles, and the English were quick to seize the opportunity. Here they left their rivals behind. The Portuguese had shown little interest in these products, and even the Dutch were slow to catch on. But the East India Company (EIC) decided to push cotton fabrics and make a market: “calicoes are a commodity whereof the use is not generally known, the vent must be forced and trial made into all ports.”6