A Hundi in the Vernacular. Copyright: British Museum Trustees
The best known indigenous South Asian credit institution is 'hundi'. For hundreds of years, this system was used by merchants to remit money from one place to another, and to make payments like a bill of exchange. While I am loathe to put a square peg around hundi, some kind of approximation of hundi is necessary. My rough approximation of hundi is two-fold: a South Asian bill of exchange, and remittance system. So, hundi was both an instrument and a system. The mercantile networks which supported the use of hundis were often so well-established and pervasive that hundis were used in other parts of Asia, and even in distance locations like Africa where South Asian commerce had taken root. Over the course of the 16th, 17th, 18th and 19th centuries, even the Portuguese, Dutch, French and British East India companies used hundis to expand their own commercial and military presence in South Asia. Forming alliances with affluent South Asian merchants, and being able to tap into their networks was a significant factor in the British East India Company's ultimate hegemony over the other European companies.
East India House: The Headquarters of the British East India Company in London, Demolished in 1861. Copyright: British Museum Trustees.
Hundi was extremely versatile and largely considered reliable. The use of hundis was supported by
the reputation of individual merchants and their established networks. Using hundis issued by South Asian merchants also meant that European companies could trade in new areas where their own reputations were unestablished. Interest rates on hundis were correspondingly adjusted by South Asian merchants depending on the nature of the transaction, and the status of the European merchant. For Europeans, hundi networks were an important source of capital and liquidity. European merchants were able to convert their assets into capital at short notice without needing to rely on specie, which could at times be scarce. The delay in payment stipulated by hundis (in common with other bills of exchange) meant that hundis served as credit and not just a vehicle for effecting payment. The hundi system also facilitated holding deposits, much like a current account, with different merchants. Unlike an IOU which relied on direct acquaintance with the debtor or lender, hundis were highly negotiable, making their circulation much greater.
the reputation of individual merchants and their established networks. Using hundis issued by South Asian merchants also meant that European companies could trade in new areas where their own reputations were unestablished. Interest rates on hundis were correspondingly adjusted by South Asian merchants depending on the nature of the transaction, and the status of the European merchant. For Europeans, hundi networks were an important source of capital and liquidity. European merchants were able to convert their assets into capital at short notice without needing to rely on specie, which could at times be scarce. The delay in payment stipulated by hundis (in common with other bills of exchange) meant that hundis served as credit and not just a vehicle for effecting payment. The hundi system also facilitated holding deposits, much like a current account, with different merchants. Unlike an IOU which relied on direct acquaintance with the debtor or lender, hundis were highly negotiable, making their circulation much greater.
Thanks for another great post, Marina. I'm curious, though: if hundis were negotiable, and direct acquaintance between the counterparties wasn't necessary, then how does it sustain on a reputation-based system? How does reputational information circulate when people are no longer part of the same community, network, etc.? Everything we read about reputational mechanisms suggests that the bigger or more dispersed the community, the more recourse they would have to formal legal institutional to bolster private-order mechanisms like reputation. So what would it be here? Obviously there are EIC courts, on which Fraas and others have written about. But what came before that?
ReplyDeleteMany thanks Fahad for another excellent set of questions. In the first instance, the reputation of the person issuing the hundi (the drawer) was paramount, as was his relationship with the person on whom the hundi was drawn (the drawee). The bearer of the hundi (the payee) need not have had a connection with the drawee. For this reason, a hundi could be endorsed to different parties many times over, thus leading to greater circulation. These are the basic functional principles of bills of exchange. Our modern currency note takes this a step further since the reputation of the Bank of England (in the case of pounds sterling), or the Federal Reserve (for the US dollars) guarantees the value of the note to the bearer with such a degree of certainty that the drawee need have no connection with the drawer. There are of course instances where currencies have failed, but these are such unusual or rare circumstances (usually entailing the bankruptcy of an entire country) that most people would implicitly trust a currency note.
ReplyDeleteNow hundi was not entirely reliable, which is why I stated it was "largely" reliable. In fact, the British Indian courts were responsible for resolving a a number of hundi disputes. But more on that particular subject another day. (Look out for posts in the section "In the Dock".)
DEAR MARINA,IT WUD BE GREAT IF YOU DISPLAY SOME OLD HUNDIS FROM QUEEN VICTORIA TO KING GEORGE 1V
ReplyDeleteThanks for your comment. I''ll see what I can unearth.
ReplyDelete