False Economy - Alan Beattie [102]
The spice trade during the sixteenth century was dominated by the Portuguese, not least because their explorers had found routes around the Cape of Good Hope to India and then to East Asia. But as we will see in the following chapter, on corruption, they ran their trading empire badly. They used an inefficient distribution network of German, Spanish, and Italian merchants, and were vulnerable, as often happens in international trade, to newer, smarter, and better-organized competitors.
Trading spices or other long-distance goods involved not just the risks of unreliable trade winds, storms, and piracy, but also the danger of sudden falls in prices, rendering a trip unprofitable. Overcoming these risks required an operation of considerable size and reliability, good information and the ability to exploit it—and critically, a monopoly of sales back home that would prevent the operation's being undercut by an unexpected glut on the market.
The East India Company, founded in 1600, was the latest and most ambitious of a series of English trading companies given a royal monopoly with a view to exploiting long-distance commerce. The East India Company was run largely by the same clique of merchants that already ran the Levant Company, which was created to run trade with Turkey. The two initially shared the same governor, Alderman Thomas Smythe.
The first fleet of four ships departed for East Asia in 1601 with definitive evidence of a monopoly franchise—letters of introduction from Queen Elizabeth I asking local rulers, sovereign to sovereign, to trade with the Company. The sultan of Aceh, in what is now Indonesia, was their first successful contact, granting the Company trading rights and exemption from local customs duties. In the major trading city of Bantam, on the island of Java, it established the first English "factory"—the term was used then to denote not a manufacturing plant but a permanent foreign center for regular trade. Without a fixed trading post, merchants who visited only once a year and had to sail halfway across the world to get there would be at a bargaining disadvantage with local trading partners, who would be able to drag out the negotiations as long as they liked, knowing that each day waiting for a deal would be costing their counterparts money.
The first Company expedition to East Asia returned with five hundred tons of peppercorns, earning a knighthood for its commander. Throughout the seventeenth century it battled against its Dutch rival, which was created in 1602. But the Dutch East India Company proved to be very difficult to dislodge from its growing dominance of the spice trade. The Dutch had better ships and a much more developed financial system, which widened the pool of capital providers well beyond a narrow clique to encompass even quite modest investors. They could split their investments among many different ships, thus sharing the risk. They could borrow at much lower interest rates. They provided a sophisticated forward market that allowed merchants to sell produce at a guaranteed price in the future, avoiding the risk of sudden price changes.
In its financial and logistical sophistication, the Dutch East India Company looked much more like a modern trading system. Yet it not only relied on a monopoly of demand in the domestic market but, through brutal use of military force, managed to establish exclusive supplies of spices from East Asia as well. (Giles Milton covers this period beautifully in his entertaining Nathaniel's Nutmeg.) Indeed, the history of trade routes and supply chains was, for centuries, not one of free agents operating in open markets, but of merchants exploiting military power and monopoly. For many trade routes and products, there was no alternative. Few companies operating without guaranteed markets would have put up so much money, men, and ships for such distant and uncertain trade. Any European power with a pretension to being a trading nation started