Was Hundi a Merchant Guild? The Question of Contract Enforcement

Merchant guilds are an important subject for economic historians because of their importance in understanding merchant organisation or networks in trade. One question that particularly occupies occupies economic historians is the question of contract enforcement. How did merchants cooperate and transact with each other, and minimise the risk of defaulting? Today we tend to think of contracts as a necessary prerequisite for transactions, backed up by a legal system. In times past, promises would have formed the basis for the earliest form of contract. A promise was regarded as less risky where parties were known to each other because peer pressure and collective reprisals in the community were more likely to reduce the risk of someone reneging on a promise. As long-distance trade with foreign entities developed, the risk of defaulting would have been greater. 

Merchant guilds are seen by some scholars to have helped with contract enforcement in various ways. First, by establishing jurisdictions, second, by developing a tighter network within which peer pressure and collective reprisals could exert their influence. Guild courts also developed among some trading communities, and again, some scholars assert that these courts were preferable to public courts by providing a degree of autonomy from intervention by foreign rulers or state interests. They also suggest that these guilds mapped superior information about behavioural patterns between traders and could better uphold the values of litigants. 

On the other hand, other scholars have pointed out that guilds were limited in scope and jurisdiction, and were not always in existence. There was also no guarantee in practice, that they did not come under the political influence of the state or ruler. In any case, guilds tended to be more culturally specific, which could leave a foreign trader in the lurch. 

Hundi, provides an interesting South Asian contribution to this question of enforcement. Was hundi a merchant guild? There was some overlap between merchant guilds and hundi. For instance, in some cases, established guilds may have created their own rules governing the use of hundi as a system. However, hundi itself was not a guild, and transcended the jurisdictional confines of guilds. This undoubtedly gave greater weight to its flexibility and the perception of informality. 

It seems reasonable to surmise that hundi's dominant function was not fixed, but rather varied over time, closely mirroring the needs of its agents and their political and economic contexts. In terms of contract enforcement, hundi was an institution which served Indian merchants particularly well because it embodied economic and cultural sanctions. Hundis could have extensive reach if ratified by a merchant community of great repute; similarly, the circulation of hundis issued by specific merchant communities served to further the network's reputation. Hundi networks were typical of mercantile networks where 'trust' was related to expectations about behaviour and reputation. Before the advent of the British Indian courts, hundi networks relied on concrete information flows within given mercantile networks. This kind of information determined transaction costs within merchant networks. Distances breached by a given merchant community, and levels of difficulty involved in obtaining or exchanging either capital or goods, were reflected in hundi interest rates, which allowed merchants to control supply and demand. If a good or currency was in short supply, hundi interest rates were likely to have been correspondingly higher.

This seemed to work well within specific jurisdictions or networks, but the advent of British Indian law from 1858, and the arrival of hundi disputes within the British Indian courts changed the course of hundi contract enforcement. More on this in a future post...