S02: Canton Trade

• 1773: Boston Tea Party
• 1776: US Declaration of Independence
• 1776: Adam Smith wrote The Wealth of Nations
• 1784: First American Ship, Empress of China, arrived in Canton
• 1789: French Revolution
• 1792-93: George Macartney Mission to Qing China

• What was the Canton trade? How did it create the modern global economy? How did the system end?
• How should the Heard brothers proceed with their family business?
• Family business as the oldest, most enduring, and universal business institution. What explains their longevity – and fragility?

• What is a “company”?
• What role – economic, political, social – did they play in the expansion of European colonialism?

• The concept of corporations as distinct legal entities dates back to ancient Rome.
• In England, groups with common interests could act as corporate bodies with legal rights in the medieval period.
• Early corporate forms were used for local government and granted by the Crown.

• By the 16th century, various corporations existed (universities, hospitals, etc.) but lacked joint stock or capital.
• 16th-century companies were mercantilist corporations with monopoly trading rights granted by the Crown.
• Monopolistic privileges were integral, protected by the State against foreign competition.

Marketable Securities:

• Liquid financial instruments with short maturities that are easily bought and sold in secondary markets
• Examples include Treasury bills, commercial paper, and stocks.
• Buying/selling shares provided liquidity for investors and capital for businesses
• Investors earn interest while retaining quick access to their cash.

Maturity Transformation:

• Allowed liquid saving to fund long-term investment
• Financial institutions meet the liquidity needs of their customers while earning a profit from the net difference in interest rates between short-term borrowings and long-term loans.

• European colonialism, spanning four centuries and various continents, was primarily driven by corporations.
• Corporations initiated, funded, and managed overseas expansion, but they were often controversial, indebted, and prone to failure.
• Contradictory nature: public and private, individual and collective, centralized and diffuse, national and cosmopolitan, etc.

Mercantilism

• Dominated European economic way of thinking from 16th to 18th century.
• To increase a nation’s wealth and power, exports should be as high as possible and imports minimized.
• Based on bullionism: the wealth of the country is its gold and silver reserves.
• Defensive of trading monopolies, such as the East India Company.

Free trade

• Key thinkers: Adam Smith (b. 1723-1790, The Wealth of Nations); David Ricardo (b. 1772-1823, comparative advantage); Emmerich de Vattel (The Law of Nations, 1758)
• The wealth of the kingdom comes from land and the value of labor; it’s not an extension of the crown and its treasure.
• There are gains to trade; free trade is better than protectionism.
• State aid and industrial policy distort the economy and create welfare losses.
• Questions the notion of scarcity – that the total resources are limited.

• Mercantilism was built on the Triangular Trade – exchange of African slaves to the Americas, raw materials from the Americas to Europe, and manufactured goods from Europe back to Africa and the Americas.
• How to re-organize Britain’s economic life after the loss of American colonies?

• Cheap exchange rate to boost exports and growth.
• Keep the economy relatively closed to foreign financial flows.
• Had it not done so, foreign capital chasing the high returns in China would have put upward pressure on the Chinese exchange rate and undercut its ability to export.

• Costs: Distortions, reduced welfare for Chinese, trade imbalance with the world
• Benefits: Huge domestic savings, boosted investments, reduced vulnerability to risk, and facilitated China’s economic rise.

• Like the Ming, coastal trade only permitted at designated ports
• Canton (Guangzhou) as sole port open for Western trade
• Revenue went to imperial treasury
• Fixed, seasonal trading period
• Mobility restriction: Special residential quarter for foreign merchants

• Western demand for tea and silk drove trade with China.
• The British grew opium in India and sold it to China to offset trade deficits.
• By 1830, tea consumption in Britain was high, and taxes on tea made up 10% of British government revenue.

• Canton trade system (1757-1842): Hong merchants acted as exclusive middlemen between Western traders and Chinese government
• Hong merchants held licenses, controlled trade, and enforced regulations
• They purchased imports, arranged exports, ensured compliance

• Only allowed to trade in Canton and live in designated quarters
• Subject to Qing law, with no diplomatic representation

• Great Britain, exported opium grown in India and sold it to China
• Indian opium replaced silver as medium of trade
• The British used opium profits to purchase Chinese porcelain, silk, and tea

Let us suppose that foreigners came from another country, and brought opium into England, and seduced the people of your country to smoke it, would not you, the sovereign of the said country, look upon such a procedure with anger, and in your just indignation endeavor to get rid of it?

• Who were the Heards?
• Where were they from?
• Why China? What was their first business model?

Broadly:

• What was China like in 1840?
• What was it like to be a foreign company?
• What were the main driving forces of China trade?

AHC:

• What is a commission house?
• What are the potential risks and opportunities of this business model?
• What was their relationship with Chinese merchants and other Western firms?

• The First Opium War began in 1839 after the Qing tried to stop the opium trade.
• Britain won the war and gained concessions under the Treaty of Nanjing (1842)
• Secession of Hong Kong, opening of treaty ports, indemnity payment, and extra-territoriality.
• The cohong system ended, and more Chinese merchants became involved in opium trade.

• AHC was a commission house, not purchasing goods themselves but facilitating transactions between Western and Chinese merchants.
• Merchants advanced payment to AHC, who then purchased and transported goods (mainly tea) from China to the US, earning a commission.
• AHC had limited capital and was relatively risk-averse.

• AHC started as a non-familial partnership before ownership shifted to Augustine’s nephews.
• AHC both competed and cooperated with other American and British firms, including assisting Jardine, Matheson & Co. during the First Opium War.

• What changed in the following areas: ownership, location, communications, transportation, financing, and competition?
• What opportunities and risks did these change present to AHC?

• 1839-1842: First Opium War, ended with the Treaty of Nanking
• 1840: Founding of Augustine Heard & Company (AHC)
• 1850-64: Taiping Civil War, deadliest civil war, with over 20 million deaths
• 1858: British raj; EIC dissolved; direct crown rule in Indian subcontinent
• 1861-1865: American Civil War

Form groups of three:

• John
• Augustine II
• Albert

(George doesn’t play a key role and is left out.)

Discuss:

• How should the decision be made, given the unequal shares (and non-familial associates)?
• What should the family business do in face of new political, technological, and commercial challenges?

• In 1862, Augustine Heard Sr. retired, leaving his nephews to decide whether to adjust the Augustine Heard & Co. (AHC) business model.
• Lacking consensus, John, Augustine II, and Albert continued to operate AHC traditionally.
• The brothers rotated in and out of on-the-ground management roles in China, and married while back in the United States.

• AHC’s trust in outside agents led to significant problems.
• Everett used bills of exchange from London to conduct AHC’s business.
• Everett was authorized to use the bills to cover a $30,000 debt.
• Everett issued $361,500 in bills under AHC’s name, far exceeding the authorized amount.

Looking into this by the light of subsequent experience, [asking my brother Augustine to join me in the China trade] was a mistake. It is never well to put all one’s eggs into one basket!

• Was its demise inevitable, or was it a result of management decisions (or lack thereof)?
• Could they have done anything differently as one of the Heard brothers?

More than a family story:

• Augustine Heard & Co. declared bankruptcy on April 19, 1875, amid a lack of coordination, family dysfunction, lawsuits, and untrustworthy partners.
• AHC shut down in 1877, with Jardine, Matheson & Co. taking over operations.
• By 1891, all the American commission houses had folded.

Rise of Chinese capitalism

• Once dominated by American and British profiteers, trade in China was increasingly in the hands of Chinese merchants once relegated to the role of intermediaries.
• Enterprising compradors passed on their knowledge to their own sons and nephews.
• A new era of Chinese family business had begun.

• Family business as the oldest, most enduring, and universal business institution.
• What explains their longevity – and fragility? Leadership succession, corporate governance, and path dependence
• How does the presence of family connections help or inhibit the normal workplace decision-making process?
• How can family businesses share power and responsibility among members of the same (or different) generations?