A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein

The high interest rates were a two-edged sword. On the one hand, they afforded the Company, and subsequent private English traders, enormous profits through borrowing at low rates in England and lending at astronomical rates in China. But it did the EIC no good to have chronically insolvent trading partners who were in constant need of rescue. Even today, international commerce is a highly uncertain enterprise, and merchants frequently have to bear losses. Adequate credit is to trade what altitude is to aircraft; without it, the odds of coming to grief over perilous commercial terrain are great. All merchant enterprises sooner or later lose cargoes or encounter soft markets. Without ample capital reserves and the ability to borrow at low rates of interest, bankruptcy is inevitable. Stretching the analogy a bit, if the hong system was an aircraft unable to attain a safe altitude, it also operated on only one engine. The Chinese had no functioning insurance markets; when fire swept Canton in 1822, most of the local traders were wiped out.