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How Abraham Lincoln triggered India's first stock market crash

2015 marks the 150th year since the great fall of 1865. The authors trace its story

Sachin P Mampatta & Rajesh Bhayani 

The New Oriental Bank and Share Market, Bombay, from The Illustrated London News, 1865

Cowasji Jehanghir Readymoney was unhappy. Bank of Bombay, of which he was director, was increasingly gravitating towards laxity. It wanted to lend against the shares of other banks, a decision he vehemently opposed.

It was 1863. The Sepoy Mutiny of 1857 in the Indo-Gangetic plains had been put down brutally. The control of India had passed from the East India Company to the British crown. Parsi and Gujarati brokers had been trading in shares for eight years at different locations in Bombay (the Bombay Stock Exchange would be born 12 years later), and a roaring bull market was underway.

Share prices of companies that didn't exist till a few years ago were rising astronomically. The Back Bay Reclamation share, with face value of Rs 5,000, traded at Rs 50,000. Bank of Bombay's Rs 500 share touched Rs 2,850.

The source of all the speculation lay in events taking place in distant United States where Abraham Lincoln, the 16th president, and his campaign against slavery had triggered a civil war.

The conflict choked the traditional source of cotton for the British. The cloth mills of Birmingham and other places soon turned to India, buying up all they could and more. The average exports prior to the war were 528,000 bales - they expanded to over 1.2 million bales by 1865.

This was a period of unprecedented prosperity for those engaged in the cotton trade. Cotton was called "white gold"and its demand grew so large that traders grabbed anything they could lay their hands on, even tearing apart mattresses and pillows so that they could sell the stuffing.

New beds, they say, began to be made of coir fibre - cotton had become far too valuable to sleep on.

The money they made from selling cotton to the English was deployed in the share market. The rise in the market was also fuelled by investors who managed to get loans from banks to invest in shares. The investors were certain that the shares would continue to rise as the cotton boom rolled on, and banks were certain that the money loaned at high interest rates would be safe. Both, say historians, were right; but only for a time.

Readymoney feared it would all come to grief one day.

"Such practice will induce greatly more gaming in shares. I would wait and never have this sort of dangerous business for the present," he registered his protest. "We are only following the example set by Bank of Bengal, but we must not follow them. Their gross mismanagement of this kind brought Union Bank of Calcutta to total ruin, whose board was composed of highly, more than highly, respectable gentleman; two baronets, one gone to jail, another run away to England, and other three ruined for life."

Union Bank of Calcutta included amongst its original shareholders Dwarkanath Tagore, the grandfather of Nobel laureate Rabindranath Tagore. The bank collapsed shortly after Dwarkanath Tagore passed away. The Tagore family, and indeed the whole of Calcutta, faced financial difficulties for some time afterwards.

Readymoney felt the same story would play out in Bombay. But he was dogged by ill health and advancing age. The breaking point finally came when Bank of Bombay increased its capital despite his express opposition. He resigned.

The institution was the poorer without Readymoney. In the absence of his calming influence, Bank of Bombay became one of the key sources for capital for the speculation mania as it reached some kind of frenzy.

"…ordinary clerks, officers, pleaders, adventurists, editors, and even sweepers had started dreaming about minting money. At the junction of the Meadows Street and Rampart Row…hordes of brokers and speculators would gather that would lead to terrible traffic jam. Share mania had turned Mumbai mad," says historian Amrit Gangar, author of 24 x 7 = Mumbai (Arunodaya Prakashan, Ahmedabad, 2011)

The man who replaced Readymoney at the position of influence in Bank of Bombay was Premchand Roychand, a financial whiz kid and beloved of the masses. Crowds would gather from early morning at his Byculla bungalow. Young and old, rich and poor, they all came to him, attracted like moths to a flame. Everybody wanted to meet the man with the golden touch, and maybe lay his hands on a share or two.

Roychand came from a modest background but had done well for himself. He liked to donate to charities generously - like Readymoney.

Readymoney had gifted the city a convocation hall, an ophthalmic hospital, an art gallery and 40 drinking water fountains. His surname is said to have come from his ready disposition to distribute his money. Roychand gave to the university, and helped build Rajabai Tower, the tallest structure in Bombay at that time.

Roychand also possessed prodigious financial talent and a decidedly speculative streak. Every new company looked to get him on board as a promoter or took his advice about who should be given the shares that were just waiting to soar in value.

Not even the government was immune.

On November 16, 1864, Bartle Frere, the governor of Bombay, issued a circular in which he cautioned civil servants from involving themselves in shares during "the present period of excitement". He had noticed that a significant number of government employees had been investing in the market.

But the circular seemed to have had little effect. Most had made more money in the stock market than they would in all their years of service - giving it all up didn't make sense. In one of the earliest instances of conflict of interest, some were even found to have bought stakes in companies they dealt with in official capacity.

The boom saw hectic corporate activity. In December 1864, there were 31 banks, 16 financial associations, 8 land companies, 16 press companies, 10 shipping companies, 20 insurance companies as against a total of 10 in 1855. In 1855, there were no joint stock companies at all. By 1862, there were 62.

The newspapers were full of advertisements for new share issues and other stock market business such as annual general meetings for shareholders.

But some sections also sounded a warning. "We must rebuke the wild rage going on…This must end in a fearful smash, and we warn the Bombay public to beware!," said one of the saner voices.

What contributed to the bull-run were "time bargains", essentially forward contracts, which made it easier for people to bet on the rising share prices. Though conflicting reports exist, there do seem to have been some attempts to defuse the situation.

Governor Frere attempted to pass what was called the Wager's Bill that would have clamped down on these time bargains. The move was stoutly opposed by merchants. Jivraj Balloo, the most important cotton trader of the time, signed a petition against the Bill. So did Roychand. Also opposed to the Bill were over 250 British firms that felt that its provisions interfered with free trade.

Frere prevailed nonetheless and managed to get the Bombay Legislative Council to pass the Bill. It was sent to John Lawrence, the Viceroy and governor general, for assent in November 1864. Unbelievably, the Bill was lost in transit between Shimla and Calcutta before it could be signed into law.

By the time Lord Lawrence could sign it and bring it into operation, it was too late. The stock market bubble had burst two months ago.

The Back Bay Reclamation shares fell from Rs 50,000 to under Rs 2,000 - a fall of over 96 per cent. Bank of Bombay's shares which sold at Rs 2,850 were down to Rs 87.

The meltdown happened because the American Civil war ended in May 1865, which caused cotton prices to fall in anticipation of resumption of supplies from the United States. Exports collapsed and would take another quarter century to reach the same level as 1865.

The effect on the city's elite was utter ruin. Imagine if the Tatas, Birlas and Ambanis all went bust at once today. For the Bombay of the time, this actually happened.

The premier business houses of that time, the so-called merchant princes of Bombay, saw their wealth evaporate before their very eyes. Behramji Hormusji Cama went under after failing to come up with Rs 3.3 crore. Other failures include Rustomji Jamsetji Jejeebhoy and Kharshedji Furdunji Parekh. These were premier business families of the city, the names of many still survive through the educational institutions and hospitals they funded.

The disaster didn't drain the city just economically - its population declined by 21 per cent in the years following the crash. There were estimated to be 816,000 people in Bombay in 1864 - the census of 1872 put the population at 644,000.

This was said to be on account of the "migration from Bombay of the swarms of adventurers and labourers from all parts of India and from abroad who were attracted to the city by the speculative enterprises and the high prices of labour which marked the season of unexampled prosperity".

"The stock market crash of 1865… was the first major event of this kind in the history of this country. Most of the measures to prevent such occurances were yet to be introduced in the prevailing company law," says historian Dwijendra Tripathi who authored The Oxford History of Indian Business.

The first rudimentary regulation governing securities market would only be introduced in 1925, a full 60 years after the stock market's first great crash.

Key sources
1. A Financial Chapter In The History Of Bombay City: Wacha, DE

2. Explorations in Modern Bengal, C. 1800-1900: Essays on Religion, History, and Culture: Amiya P. Sen

3. The Emergence of an Industrial Labor Force in India: A Study of the Bombay Cotton Mills, 1854-1947: Morris David Morris

4. The Shaping of Modern Gujarat: Plurality, Hindutva, and Beyond: Acyuta Yâjñika, Suchitra Sheth

5. Scientific Management of small investors protection in the millennium with reference to India; challenges and opportunities (1991-2011): Kirit Janyantilal Somaiya

6. The Rise of Bombay: A Retrospect: Stephen Meredyth Edwardes

7. Sir Bartle Frere and His Times: A Study of His Bombay Years, 1862-1867: Rekha Ranade

8. The Oxford History of Indian Business: Dwijendra Tripathi

10. Bombay: the cities within: Sharada Dwivedi, Rahul Mehrotra

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First Published: Sat, July 11 2015. 00:30 IST