The Epic Saga of the Nabobs: Wealth, Power, and Scandal in the East

Have you ever heard of the nabobs? These were the wealthy individuals who accumulated massive fortunes in the East, like Robert Clive, the archetypal 'nabob' . The term comes from the Persian word 'nawab,' referring to an East India Company merchant or officer who struck it rich overseas. Clive left England as a teen and returned 22 years later a multi-millionaire .

But not everyone was impressed. The Georgian aristocracy, including the King, saw the nabobs as nouveau riche, resenting that so few people controlled so much wealth - similar to how some view investment bankers today . The nabobs also faced accusations of immorality, abuse of power in India, and bribery back in London .

Things came to a head when the Company took over Bengal and raised taxes during a severe drought. This led to a catastrophic famine, killing around 10 million people . As the Company's finances crumbled, a global financial crisis ensued, and the British government had to decide whether to let the East India Company collapse .

In 1772, Clive was summoned before Parliament, claiming he was never corrupt and only motivated by duty . With many MPs holding shares in the Company, a government bailout was granted in 1773, saving the Company with public money . This led to the Regulating Act, which reorganized the Company's administration, and Warren Hastings was appointed the first Governor-General of Bengal .

However, scandals persisted. Hastings faced allegations of misconduct and financial mismanagement, and the King demanded his removal . After a defeat in the First Anglo-Maratha War, Charles James Fox tried to nationalize the Company in his 1783 India Bill, but it was defeated, and his administration collapsed . In 1784, William Pitt the Younger introduced the India Act, placing the Company under Crown administration and establishing a Board of Control to oversee its operations .

So, why does this story matter to today's youth? The rise of the nabobs shows us how wealth, power, and corruption can collide in history, with far-reaching consequences for millions of people . It's a tale of ambition, scandal, and the struggle for control - a gripping saga that still echoes through the modern world .

Warren Hastings (1732–1818) (fig. 15) was appointed the first Governor-General of Bengal to oversee the Company’s reform. Yet the scandal of corruption did not go away and soon he too became the object of allegations of misconduct and financial mismanagement. In 1779, the King wrote that ‘the Company is ruined and Parliament turned to ridicule unless Mr. Hastings is instantly removed from his situation’.[15] Following a painful defeat in the First Anglo-Maratha War (1775–82), Charles James Fox attempted to nationalise the Company in his 1783 India Bill, proposing to place its management under a group of parliamentary-appointed commissioners. Owing to the intervention of George III, the bill was defeated and Fox’s coalition administration fell. The following year William Pitt the Younger introduced his India Act to bring the Company under Crown administration. The act established a Board of Control made up of six members of the King’s Privy Council ‘to check, superintend and control all acts, operations and concerns which in any wise related to the civil and military Government, or revenues of the territories and possessions of the East India Company

It was equal parts business, war machine, monopoly, and colonizer. The company traded and taxed, persuaded and extorted, enriched and looted. How it survived a quarter millennium (1600-1858) to become, in Edmund Burke’s immortal words, “a state in the disguise of a merchant” says much about bad economics and government policy.

This government created monopoly grew out of a faulty economic theory, mercantilism. This idea had two foundational premises: economic activity is zero-sum and wealth equates to how much bullion a country possesses. Accordingly, European governments enacted trade restrictions and controls to achieve positive balances of trade by completely dominating domestic and colonial markets. Tariffs, corporate favoritism, and autarky are all mercantilist policies.

But its biggest legacy is bloodshed. Belief in economic gain as occurring at someone’s expense encouraged the annihilation of competitors. France and Britain, assisted by their joint-stock companies, regularly fought for economic supremacy abroad throughout the 18th Century. The assumption of wealth as fixed incentivized the proactive use of force, whether against other Europeans or natives, to obtain riches.

Indeed, the axiom that individuals respond to incentives requires fleshing out a corollary: perverse inducements also matter. The East India Company waged war because victory carried rewards. Company officers received annuities and kickbacks from allied princes or puppets installed on the thrones of previously incompliant rulers. Consequently, men of modest backgrounds, Robert Clive notably, returned home very wealthy. Enlisted men also had cause to fight, the allure of enrichment from military prize money or looting.

But graft, prize money, and loot did not cover military expenditures, as wars grew larger and costlier. So the company took the next logical step, tax. At the barrel of a gun, both prince and peasant filled company coffers with tax revenues. Taxation slowed the export of bullion abroad, a major plus in mercantilist thought, and kept the balance sheets in the black. This money also lubricated a lobbying effort to protect the company’s monopoly. A mid-century loan of £1 million to finance British debt was worth paying to keep competitors out the subcontinent.

But success through belligerence is a shaky proposition. And after the Seven Years War (1756-1763), a series of inconclusive conflicts drained the coffers. The 1770 famine in Bengal (Eastern India), which killed ten million people, made financial problems dire. The stock price cratered as investors pulled their money out, and by 1772 the company was insolvent, facing dissolution, and begging Parliament for relief.

The famine brought public anxieties about corruption and despotism in India beneath Britain’s flag to a boil. Lord Rockingham, leader of the opposition Whig Party, lit into the company for its “rapine and oppression” in Bengal. Indeed, the decision to raise taxes during the famine reeked of tyranny. Moreover, earlier mandates to plant certain crops and regulations against hoarding turned a crisis into a catastrophe.

Company lobbyists responded with an imperialist version of too big to fail. Bankruptcy meant terminating hard won British preeminence in the subcontinent. Despite the difficulty of France overcoming the Royal Navy’s dominance at sea to reclaim Indian possessions, the argument stuck. The Regulating Act of 1773 provided a £1.5 million loan and capped dividends. It also banned employees from accepting bribes and kickbacks, and appointed a Governor General of Bengal to enforce the regulations.

The problem was Parliament chose a compromise, regulating rather than liquidating the company or leaving it alone, which proved unenforceable. How could politicians in London, let alone one man in Calcutta, compel a vast corporate machine to comply with government regulations?

Fifteen more years of corruption and war answered that question. After passing additional legislation in 1784, Parliament lost its patience and took serious action. It impeached Warren Hastings, the appointed Governor General from 1773. And none other than the father of conservatism, Edmund Burke, served as chief prosecutor. His grandstanding on February 13, 1788 would make any Congressmen blush, and is worth quoting at some length.

“Mr. Hastings’s government was one whole system of oppression, of robbery of individuals, of spoliation of the public, and of suppression of the whole system of the English government, in order to vest in the worst of the natives all the power that could possibly exist in any government; in order to defeat the ends which all governments ought, in common, to have in view…

I impeach Warren Hastings of high crimes and misdemeanors…in the name of the Commons of Great Britain, whose national character he has dishonored. I impeach him in the name of the people of India, whose laws, rights, and liberties he has subverted…whose property he has destroyed, whose country he has laid waste and desolate. I impeach him in the name and by virtue of those eternal laws of justice which he has violated.”

After this thunderous opening, the trial dragged on for years and descended to bizarre depths. Burke prosecuted a civil servant appointed to overhaul a government created monopoly six thousand miles from oversight. The monopoly defended itself on the grounds of property rights, or “sacred charter.” The government responded that the company was chartered to trade, not rule, despite failing to enforce this until 1773. And to cap it off, Parliament renewed the company’s charter for another twenty years in 1793 and acquitted Hastings two years later. The result, predictably, was more of the same.

Continued wars in the19th Century, namely the conquest of the Northwest Territories and Punjab, again strained finances and setup further intervention from Parliament. In 1813 the company lost its monopoly over everything except tea and trade with China, and ceased all commercial function 1833. Only the administrative machinery, the foundation of crown rule, saved it from dissolution until the Mutiny of 1857. A century after Clive’s triumph at the Battle of Plassey inaugurated British ascendance, the East India Company fell and mercantilism passed away.

Or did it? Observers of the TARP theatrics will notice parallels. Wall Street banks, like the East India Company, nearly paid for their mistakes with bankruptcy. But thanks to a powerful lobbying effort, each wrangled a bailout by prophesizing doom: the collapse of the world economy or the end of British dominance in India.

The behavior of government in both cases was appalling. Parliament tried to exercise oversight without direct control, only to end up venting its anger about continuing company misbehavior by impeaching its chief regulator. Likewise, Congressmen grandstanded about imposing reforms on banks in exchange for TARP money. Consequently, the banks got their bailout, Congressmen received publicity and rescuing the economy and passing Dodd-Frank, and taxpayers got handed the bill.

Both the East India Company and TARP were flagrant examples of corporate collusion with government. Concerned persons rightly fear such behavior. However, the best prevention is greater economic freedom rather than state control. The government cannot create wealth anymore than business can, or should, rule. Central planners and social engineers cannot, and will never, create more prosperity than free individuals.

Tim Reuter writes on books for Forbes.com, and is a frequent contributor to RealClearSports.