Eras of rapid change are much more likely to give rise to financial bubbles than stagnant periods. The former are far more prone to excessive enthusiasm, the expansion of credit, and the accumulation and mis-investment of surpluses than the latter. In the 1860s, the American Civil War abruptly cut off one of the world’s leading industrial areas, northern England, from the raw material, cotton, which was central to its economic output, namely textile products. This sent prices for the commodity much higher and merchants in search of other cotton sources, from Brazil to Egypt to India. In India, the rush for cotton and the financial inflows from exports of the commodity caused a financial bubble that burst very soon after the American Civil War ended.
Cotton Trade
Bombay before its 1860s financial bubble was a considerable city in India and the British Empire but its economy was still fairly small. The city was home to only around forty-three trading firms and a few banks. The latter were the Bank of Bombay, Oriental Bank, Chartered Bank, Mercantile Bank, Agra Bank, and Commercial Bank. The most relevant to the story of the bubble was the Bank of Bombay. It was formed in 1840 with a very small capitalization of 52 lakh (5.2 million) rupees. The Bank of Bombay issued notes used by merchants in trade but otherwise silver coinage made up the money supply of Bombay Presidency, the area of Bombay and its nearby regions.
The city in 1860 was home to very limited industry, though shipping and shipbuilding were important. India’s telegraph and railway networks were still being built out and steamships only departed from the city once every other week. At the time, Bombay had not yet completed construction of a railway terminus, set to be built by reclaiming land from the sea.
Back then, business and financial activity in Bombay was less remarkable than in Calcutta and Eastern India. That said, the importance of Bombay had been propelled for a while by the cultivation and trade of opium from India to China. This was formative for the city’s financial community and made Bombay more cosmopolitan, as it attracted merchants from elsewhere, whether Europeans, Parsis, or others, into the city.
After the opium trade, the next fuel for Bombay’s economic development was cotton. Cotton produced in Dharwad further to the south was about as good in quality as that produced in the United States and saw strong foreign demand. This and other cotton would be brought to Bombay to be baled and exported. This activity took place at Apollo Bunder, then the busiest pier in the city, at the Old Customs House of Bombay, and the Cotton Green (today’s Badhwar Park neighborhood). This trade was initially the business of a small number of merchants.
American Civil War
An opportunity to greatly expand the cotton exports of India emerged in 1861. The American Civil War almost completely shut off American cotton exports to Liverpool and the Lancashire textile mills in Britain. This had profound effects on India as cotton buyers turned to Indian supplies. The price of Surat cotton, which prior to 1863 would fetch 3-5 pence per pound in Liverpool, could now be sold for 20-24 pence. In Bombay, this cotton changed hands more cheaply, at 600-700 rupees per candy, a unit approximately equal to 500 pounds.
Cotton cultivation in India grew. The attraction was so great that, in 1862, farmers were ploughing fields that already had partially grown grain crops in order to replant their fields with cotton. By volume, cotton exports from Bombay grew from approximately 528,000 bales per year in the two years before the American Civil War to 1.2 million bales in 1865, almost all of it destined for Lancashire. By value, Bombay’s total exports reaching 40.52 crore (405.2 million) rupees; over 70% of this, or 29 crore rupees, were cotton exports. These cotton exports had nearly sextupled from just 5 crores in 1861, the result of growing volumes and higher average prices.
During these years, there were stories of mattresses being recycled for their cotton and replaced with beds made of coconut fibers. To provide capital for the extraction of more cotton, banks became interested in financing the cotton industry. There was also tremendous financial speculation in cotton as prices were volatile. Many traders speculated in a futures market in cotton that developed around so called ‘time bargains’ which were bets on the price of cotton at a future time.
Money Supply in Bombay
Imports into Bombay in 1864-65 were just 14 crore rupees. Thus, exports were not matched by imports so there was a net flow of precious metals into the city as the trade surplus was paid for by foreigners in gold or silver. Whereas imports of gold into India summed to 4.23 crore rupees in 1860-61, they more than doubled to 9.83 crore rupees in 1864-65. The figures for silver imports were 5.32 and 10.07 crores respectively in those two years.
A lot of these precious metals were received at Bombay; cumulative imports of gold and silver from 1861-65 were nearly 52 crore rupees for the Bombay Presidency specifically, but not all of this stayed in the city. The silver travelled into the interior of India to pay for cotton. This and other drains on silver meant it was largely gold which abounded, not silver. There was a movement underway to inaugurate a gold standard in India as a result of this imbalance.
Gold may have been flowing into the city in large volumes but this did not mean there was no use for it. Demand for money surged as merchants in the city borrowed whatever they could to buy cotton from producers in the interior. So, money actually became scarce. Even prosperous borrowers would borrow at 18% in these years. Nonetheless, a share and property bubble got underway in Bombay; the gold available in the city was enough for that.
Share Bubble
People, rich and poor, had jumped into the market for cotton; there was also a large increase in banking activity and financial speculation not directly associated with that commodity. The most frenetic months came after March 1864. While cotton cleaning, pressing, and spinning companies were launched, after a point, shares in financial and land companies were the center of the speculation. The latter were particularly interesting. Many land companies were firms engaged in reclaiming land from the shallow Back-Bay of the city, much of modern Mumbai being reclaimed from the sea.
During the share bubble, the combined equity value of 101 Bombay companies, including banks and land companies with a paid-in capital of nearly 30 crore rupees, rose much higher. At the peak of the bubble, the premium on Bombay company shares grew by nearly 38 crores, an increase in their value by an increment greater than their cumulative paid-in capital to begin with. Making this more remarkable, many of these companies were new, and their shares would trade at premiums as soon as issued, yet the companies themselves would often last just a few months before folding.
“One of the principal features of the year in Bombay has been the great increase in banking and financial companies which we have lately witnessed. Another feature has been the excessive speculation in all sorts of Joint-Stock shares” – from the 1863-64 Annual Report of the Bombay Chamber of Commerce
One company, the Elphinstone Financial Association of India, had a nominal share capital of one crore rupees of which just twenty-five lakh (or 25%) was paid-in. Yet, near the peak of the bubble, the shares had a nominal value of four crore rupees. In Ahmedabad, not too far away from Bombay, shares in local companies were appreciating by even larger proportions.
Shares in new companies were trading at premiums before capital from subscribers had even been paid-in. Promoters were creating new companies left-and-right, the same promoters usually associated with different companies. The financial and legal community of Bombay was kept busy in the boom years; newspapers were full of prospectuses, lawyers were busy drafting new Memorandum and Articles of Association for unusually large fees, and brokers were paid (typically in shares) to make a market in the new securities, buying and selling as needed to rig the price.
Bank of Bombay
Not only were new financial companies formed, including many banks, but existing banks were transformed by the bubble underway. Various legal restrictions placed on the Bank of Bombay were lifted in 1863. New legislation expanded the varieties of collateral against which the bank could lend money. Money was now lent without collateral, or merely collateralized with securities whose values were momentarily inflated. The bank could also lend money against shares that had not yet been paid-in by their subscribers. Alongside existing banks like the Bank of Bombay, new banks and finance companies also extended credit which furthered the speculative fever.
The Bank of Bombay, like other banks, enlarged its capital during the bubble years too. In the case of the Bank of Bombay, it doubled its capital. Shares in banks were generally offered in values of 200 to 250 rupees, though Bank of Bombay shares had a paid-in capital per share of 1,000 rupees. The sum was not too large to discourage many India Office and Indian Army personnel from investing in the bank. Its shares, with a cumulative nominal paid-in value of two crore rupees, rose to be worth ten crore in the bubble. Someone holding a single 1,000-rupee share of Bank of Bombay at the start of the bubble would have an unrealized gain of 2,850 rupees by August 1864.
“a mania for share speculation broke out which continued to grow in intensity till it seemed to absorb the time and attention of the community. The legitimate trade of Bombay was comparatively neglected, and the energies of the people devoted to the promulgation of schemes, the utility of which to the public, was probably the last thing thought worthy of consideration by the promoters.” – from the 1864-65 Annual Report of the Bombay Chamber of Commerce
The Bubble Deflates
As the above quote notes, the non-financial and non-cotton sectors of the economy did not seem to develop much in the bubble years. It likely did not help matters that money was actually in short supply. Silver was shipped inland to pay for cotton and some of it was hoarded or used in ornamental products rather than circulate as money. Money was also in high demand by the cotton trade and speculators. By the autumn of 1864, the Bank of Bombay was discounting bills at an interest rate as high as 23%.
Likely helping to cool the rest of the economy to a considerable degree were the high prices found in the city as mid-decade approached. Prices and rents rose, which hurt the living standards of many in the city despite the windfall of high cotton revenues. Besides making some industries less competitive, the prices hurt people like soldiers, civil servants, and other workers on fixed salaries.
Then, the American Civil War came to an end in the Spring 1865. Cotton prices fell at first but then recovered in the immediate few months afterward. Still, Bombay’s cotton trade eventually collapsed and a commercial crisis in the city set in as soon as March 1865. Share prices fell and never recovered. There was also a famine in 1866 which caused cotton production to contract sharply as land was returned to producing food crops. By value, exports from Bombay did not return to their 1864-65 levels until 1888-89.
In these challenging circumstances, the Bank of Bombay experienced losses on loans backed only by shares or ‘personal security’ but no other assets. Many of its clients were insolvent; one of the first insolvencies to afflict the bank was the failure of a Parsi merchant, Byramjee Hormusjee Cama. To this merchant, the bank had made advances of 16.46 lakh rupees and experienced a loss of 9.45 lakhs.
The Bank of Bombay’s dividend was suspended in July 1865 and the failure of another bank, Asiatic Bank, accelerated the demise of Bank of Bombay. The bank initially held onto many shares it had repossessed in hope of a recovery that never came. Though it was already liquidating assets by 1866, the Bank of Bombay was wound up in 1868. A ‘New Bank of Bombay’ was formed in 1867 to replace the old one.
Lesson
When the American Civil War interrupted the transatlantic trade in cotton, an effect on American planters and British spinners and cloth manufacturers was the obvious consequence. That wartime spending in America or cotton scarcity in Britain might give rise to speculative activity in these countries is unsurprising. Yet, the event also set off a rush to buy cotton elsewhere that sent huge sums of money to India and much of this routed through Bombay; this set off a stock market bubble in the city. Even in the mid-19th century, no longer were the circumstances that led to financial bubbles entirely local. International trade and growing demand for a wider array of commodities meant events taking place halfway around the world could set off bubbles as well.
More from the Tontine Coffee-House
Read about the market for cotton in Liverpool during the American Civil War and a commodity bubble fueled by indigo in 1810s-1820s India. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Dutta, Vipul. Indian Business History – Lec 5: Emergence of Bombay and Cotton Trade, 1750-1850, Indian Business History Course at IIT Guwahati, Dept. of Humanities and Social Sciences. www.youtube.com/watch?v=HAxmbDSB34k. India.
2. Martineau, J. The Life and Correspondence of Sir Bartle Frere: Volume 2. John Murray, 50 Albemarle Street, 1895.
3. Stapley, Karen. “The Bombay Banking Crisis.” Qatar National Library, 21 Sept. 2017, www.qdl.qa/en/bombay-banking-crisis.
4. Wacha, Dinshaw Edulji. A Financial Chapter in the History of Bombay City. 2nd ed., A.J. Combridge and Co., 1910.
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