Agency House Crises in India: What Role Did Indigo Play?

by Tehreem Husain

English, Dutch, and Danish factories at Mocha, 1680 ca. Public Domain picture


History provides us with many examples of asset bubbles which have led to systemic crises in the economy. Popular examples are that of the Tulip mania and the South Sea Bubble. This blog discusses the case of an indigo price bubble in nineteenth century India, perhaps the first of its kind, which lead to a contagion like crises in the economy.

 Almost 17.4% of Indian GDP was derived from the agricultural sector in 2015-16, with nearly half of the Indian population being dependent on agriculture and allied activities for livelihood. This makes smooth functioning of commodity markets of considerable importance to policymakers. Throughout time, there have been many episodes of commodity price surges and ensuing market volatility due to traditional demand-supply gaps, monetary stress and financialization of commodity markets inclusive of speculation (Varadi, 2012). What role did agriculture play in commodity market volatility during the late 18th/ early 19th century? Little is known about perhaps the first asset bubble of its kind in India – the indigo crisis, the reasons attributed to it and the cost it imposed on different sectors of the economy.

With the advent of the East India Company, India was a global trade destination for a number of commodities including cotton, silk, indigo, saltpetre and tea. In order to trade these commodities with global markets, European traders needed banks to finance foreign trade. Indigenous bankers in India did not provide this particular banking function and hence the East India Company diversified its business by introducing agency houses in Calcutta which amongst others also performed banking functions. These agency houses performed all the banking functions of receiving deposits, making advances and issuing paper money. Their responsibility of note circulation crucially helped them in carrying out their diversified lines of businesses as ship-owners, land owners, farmers, manufacturers, money lenders and bankers (Cooke, 1830). It was the agency house of Messrs. Alexander & Co. which started the first European bank in India, called the Bank of Hindostan, in 1770 (Singh, 1966).

In the early nineteenth century these agency houses were tested for their endurance and continuance due to three factors. Firstly and most importantly, during the early 1820s, agency houses borrowed money at low interest rates and invested it prodigally in indigo concerns-the crop being the only profitable means of remittance in Europe. The crisis multiplied when newly formed agency houses, besides investing capital in their own indigo concerns, fiercely competed with the old houses in making indiscriminate advances to indigo planters and paid little regard to the actual state of the market. Excessive demand of indigo fuelled the prices in the mid 1820s and encouraged increased production of the commodity which eventually led to a glut in the market and sharp decline in its price. This rise and fall in prices is evident from the fact that the indigo price shot up from Rs. 130/maund in 1813 to Rs. 300 in 1824, and then fell to Rs. 145/maund in 1832 (Singh, 1966).

The second challenge, along with indigo price volatility, was the start of the first Anglo Burmese war in 1825. This further led to stressed monetary conditions resulting in a scarcity of metal in Calcutta (Sinha, 1927).

Thirdly, in terms of the global landscape, this period marked the peak of investment boom in Britain, which characterized an explosion of company promotions and bond issues by foreign governments, mining companies, railways, utilities, docks and steamships. In total during 1824-25 some 624 companies hoping to raise £372 million were brought to the market. However, with the investment boom peaking out in 1825, market conditions had changed. Interest rates had risen making borrowing more expensive, investor sentiment had become more cautious which eventually led to a panic like situation resulting in bank failures and bankruptcies (Brunnermeier & Schnabel, 2015).

In such times of local and global economic stress, several minor agency houses failed in 1827 which shook investor confidence in the remaining agency houses. A notable case is that of the agency house of Messrs. Palmer and Co., known as the ‘indigo king of Bengal’, which faced heavy withdrawals from their partners and eventually led to the closure of their private bank and finally their own demise in 1830. This panicked the market and led to further withdrawals of capital investments.

During this period agency houses made desperate appeals to the government for financial relief and highlighted their importance in the Indian financial system at that time. In a minute dated 14th May 1830, Lord William Bentick, Governor General of India from 1828-35, accentuated systemic importance of agency houses. He highlighted that not only would there be a dislocation of trade in some staple commodities, any damage to the ‘conglomerate’ nature of the agency houses would cause severe disruptions in other industries, most notably shipping. Finally, loans were granted to these houses in the form of treasury notes bearing 6 percent interest.

Despite the monetary aids provided by the government, the wave of agency house failures could not be curbed. More agency houses failed in January 1832. In addition to this, the unexpected fall in the price of indigo created difficulties for one of the biggest agency houses Messrs. Alexander & Co. It is important to note that the relief package came under stringent conditions. They were obliged to withdraw their bank notes from circulation, and were given an extended period for the payment of their debts provided they end their banking operations (Savkar, 1938). This resulted in the demise of the Bank of Hindostan and the Commercial Bank.

Overall seven great Agency Houses of Calcutta failed within a short span of four years which had detrimental effects on the Indian economy at that time. It may be summarized that speculation in indigo and mixing of trading and agency business were the pivotal reasons behind the failure of these agency houses. More importantly, this episode of a commodity price bubble spreading its tentacles to the entire economy had a phenomenal impact on the structure of business. It is recoded that from a handful of firms in the year before 1850, there were 170 firms working as joint stock organizations in 1868. The first commercial register to identify firms with tradable stock was established in 1843 which listed eights firms (Aldous, 2015). Joint stock organizational form also entered banking. A key example is the rise of the Union Bank of Calcutta (Cooke, 1830). The crisis also led to the establishment of a number of private banks by the British expats (Jones, 1995).


Political Institutions Shaping Economic Outcomes: Land Tenures in Colonial Sind 1843-1920

by Tehreem Husain

Interactions of political and economic institutions and their ramifications on development outcomes have been recognised by academics and policymakers alike. This blog analyzes the principal-agent relation between the British coloniser and local landlords and peasants in British Sind during 1843-1920. It argues that changes in political institutions during the period affected economic institutions, which through path dependence persists today.


Research in the area of comparative institutions and economic development points to the fact that political institutions once in place, persist and shape the political-economic interactions between different groups and agents. Moreover, past institutional frameworks also have a degree of influence on the direction that institutional change takes place (Acemoglu and Robinson, 2008). This has been the case in British Sind (part of Bombay Presidency till 1935) as well. Sind’s primarily agrarian societal structure was based in powerful landlords who held large tracts of land with peasants having little or negligible ownership rights. The institution of land tenures – a term which encompasses rights of land occupancy, land revenue collection and land ownership – did not only impact agricultural productivity and welfare outcomes during the period under study but can still be felt today.

Acemoglu, Johnson and Robinson’s seminal paper on institutions (2005) has highlighted the instrumental role that land tenures and property rights play in determining social outcomes and trajectory of economic growth of a group, region or a nation. This is applicable to British Sind too. During 1843-1920 system and laws regarding land revenue and tenures were taking roots in the region. Overall, three different forms of land tenure systems were introduced in India; landlord-based system (zamindari), an individual cultivator based system (ryotwari), and a village-based system (mahalwari). Selection of a system was mainly defined by the actual or prospective land revenue from an area. The importance of choosing a specific land tenure system and hence extraction of land revenue from a region can be gauged from the fact that by the mid-nineteenth century land revenue contributed more than 50 percent and even seventy years later by 1920 more than 40 percent to the total revenue of British India.

In ensuring smooth collection of land revenue, the governance structure adopted by the British aligned itself to the indigenous societal structure using the local landlords as ‘intermediaries’, usually those who had ‘traditional’ or ‘customary’ authority. The colonial state maintained de jure ‘direct rule’ over the territory however in reality coercion was enforced by intermediate local political elites who operated outside the bureaucratic-rational apparatus of the state (Naseemullah and Staniland, 2014). The local landlord was made powerful firstly by granting them revenue-free lands which were heritable, and secondly, by giving them powers to collect revenue. This was done in exchange of curtailing any political and social resistance against the British. On the other hand, unlike in other parts of India where agricultural tenants had occupancy rights (Swamy, 2011), tenants in Sind would till the land and meet conditions that the landlords may impose on them from time to time without any land-ownership (Hughes, 1876).

Granting local landlords rent free lands and special privileges of land revenue collection fortified the extant hierarchical societal structure and was broadly aimed at establishing and perpetuating British rule through the institution of land tenures. Land revenue and administration records exhibit that 19.5% of land amongst large tracts of land (500 acres or more) had rent-free status in Sind-the highest in the entire Bombay Presidency. Moreover, legislative acts were also passed during this period to ensure that the power and influence the landlords wielded was not undermined.

Interestingly, upon Sind’s annexation to the empire in 1843, the British desired to deal directly with the cultivator and implemented the ryotwari system of land tenures. However, they soon realized the local landlords were wielding enormous authority over the peasants living with little or no land rights. Hence ryotwari system converged closely to a zamindari system; though official records continued to recognize it as the former. Consequently, the utilitarian nature of ryotwari system was destroyed by trading rights of the peasants for achieving political gains.

The approach of granting rent free lands and closely following the zamindari system of land tenures was at odds with the colonial power’s fiscal target of improving public finances from this area for the larger aim of achieving political expediency. The fact that a significant portion (87 percent) of revenue was alienated in Sind relative to rest of Bombay Presidency is evidence of this claim. Moreover, it also impacted agricultural productivity. This can be ascertained from the fact that alienated land had the lowest yield. Colonial records also give evidence to the claim that revenue per acre from alienated land was quite low in Sind and was falling. More importantly, incidence of revenue in non-alienated land was highest in Sind. This shows that the incidence of revenue was primarily on tenants and on small landlords. As much as the analysis of historical land tenure systems in Sind gives insight on how economic institutions were influenced and shaped it also serves as a social premise on Sindi society which to this day has largely been unchanged relative to what it was more than 150 years ago.

Furthermore, comparison of land revenue and administration records from Sind to rest of the Bombay Presidency suggests that the land grants to the landlords in Sind were very pronounced relative to other districts in the Presidency. Overall, analysis of land revenue and administration records from 1843-1920 highlight three aspects of economic history of Bombay Presidency in British India.

First, it argues that the, like in other parts of the colony, British colonizers exploited agency relation to govern Sind and used local landlords as their agents. The interesting part is that they built principle-agent relation by first confiscating the whole area and then making grants of large tracts of heritable rent­-free land to the old rulers and landlords. These land grants were the highest in Sind compared to rest of the Bombay Presidency and reinforced the existing social order through land tenure system. Primary purpose of this approach was to ensure smooth governance in the province.

Second, using land tenures as an instrument to achieve political expediency, they implemented ryotwari land tenure system on paper which, however, in spirit, was more like the zamindari system. This has implications for earlier work on historical land tenures in India (for instance Banerjee, 1985) wherein official records on land tenures have been considered as the practiced one. This needs to be tested for other parts of British India. This impacted agricultural productivity and revenue outcomes.

Third, although land granted as jagirs, inam etc. was done elsewhere in the Bombay Presidency (of which Sind was a part till 1935), this article argues that this was carried out in the harshest form in Sind where the tenant had no occupancy rights unlike elsewhere in the Bombay Presidency. The impact of this was reflected in low agricultural yields from alienated land in Sind relative to the same category elsewhere in the Bombay Presidency. Moreover, these effects are still being felt today and these institutions have permeated through time and shown path dependence. Researchers using data from the latest agricultural census of Pakistan 2010 have shown that inequality in terms of land ownership has increased through time in Sind.

The Great War and Evolution of Central Banking in India

by Tehreem Husain, The Express Tribune


Post global financial crisis, there has been increased importance on exploring financial history of advanced economies and emerging markets to identify episodes of boom, crisis and regulatory responses from which parallels can be drawn today. In this blog, Tehreem Husain discusses an episode from early twentieth century Indian financial history which narrates the tale of a crisis and the evolution of a regulatory institution-the central bank in its wake.

The importance of India amongst the pool of emerging market economies can be gauged from the fact that it contributed 6.8 per cent to global GDP on PPP basis in 2014. Sustaining this growth track requires robust financial regulatory frameworks which can only come with a thorough understanding of its history and the events which led to the evolution of its crucial building block-the central bank. Researching early twentieth century Indian financial history suggests that the onset of the Great War and the financial crisis that ensued in India gave impetus to the creation of a central banking institution in the country.

The Great War, one of the most expensive wars in history, caused untold loss of human life and damages to economic and social resources. Britain at the forefront of the war went through insurmountable stress to meet financing needs of the war. Stephen Broadberry and other eminent economic historians have estimated that the cost of the Great War to Britain exceeded one-third of the total national income of war years. As the war continued in Europe, its stress spilled over the boundaries of mainland Britain and British colonies also became entangled in human and financial costs. For instance, not only did India contribute approximately 1.5 million men recruited during the war, but Indian taxpayers also made a significant contribution of £146 million to Britain to finance the war.

War times impose huge costs on the entire economy but more so for banks, due to the key role that they play in financing it. The National Bureau of Economic Research published a special volume on the effect of war on banking in 1943. One of the chapters, ‘Banking System and War Finance’, highlighted the crucial importance of commercial banks for Treasury borrowing. Banks constituted the largest purchasers of government obligations in addition to being the single most important outlet for the sale of government obligations to the public during World War II. Going back, similar to the experience of other countries, during the Great War Indian treasury borrowed heavily from the banking system. Debt archives from 1918 show that Rs 503.3 million were raised in the form of loans, Treasury Bills and Post Office Cash Certificates. At the same time government continued to issue fresh currency notes, which contributed to extraordinary liquidity flushing the banking sector (evidenced by a high cash-to-deposit ratio).

Studying the Indian economy during that time period using macro-financial indicator analysis, the relation between the British involvements in the Great War and the evolution of central banking is explored in India. Evidence suggests that exigencies of war-finance and government resorting to banking system to finance expenditures, the latter came under huge strain. A stressed macro and financial environment during the war years further weakened the fragile and fragmented Indian banking system. It led to a contagion like financial crisis accelerating bank failures in the war years and beyond. This crisis went unabated due to lack of a formal regulatory structure.

The near absence of regulatory oversight leading to financial crisis gave impetus to the creation of a central banking authority. Although the idea of a ‘banking establishment for India’ dates back to 1836, as a consequence of this episode, restructuring and reforms process ensued. This led to the introduction of a quasi-central banking institution, the Imperial Bank of India in 1921 and finally the creation of a full fledged central bank – the Reserve Bank of India, in 1935. In general, as argued by economists Stijn Claessens and M. Ayhan Kose (2013) deficiencies in regulatory oversight[1] leading to currency and maturity mismatches and resultant financial crisis are applicable to this episode as well.

Interestingly, this episode was not unique to India. In the presence of no regulatory institutions, management and resolution of financial crisis becomes increasingly complex. Historian Harold James has written that the global financial panic of 1907 demonstrated the necessity to America the need to mobilize financial power themselves in the form of a central bank analogous to the Bank of England. The Federal Reserve was created in 1913.

To conclude, one can argue that absence of a formal central banking institution in India resulted in many stressed scenarios for Indian financial system and missed opportunities for the imperial government. This meant that at that time there was no liquidity support available to the failing commercial banks, no control and coordination of credit creation (i.e. no reserve requirements), no mechanism or support for price discovery of the securities to be traded in the primary and secondary markets, etc. A similar argument was given by Keynes in his book ‘Indian Currency and Finance’ supporting the idea of an Indian central bank. Had there been a central bank in India it would have performed three essential functions: (a) assist the government in flotation of bonds or other government securities to the commercial banks, (b) provide direct lending to treasury in the form of ways-and-means advances or by purchase of government securities, and (c) provide reserves to the commercial banks to help them buy government obligations and offer them guidance and support to carry on as much of their traditional task of financing trade and industry as was compatible with a maximum war effort.

This article was based on the working paper ‘’Great War and Evolution of Central Banking in India”.

[1] Claessens, S., and Kose, M.A, 2013,” Financial Crises: Explanations, Types and Implications”, IMF Working Paper WP/13/28