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. 

Caravan Merchants and the Silk Road

Caravane sur la Route de la soie - Caravan on the Silk Road. Source: Atlas Catalan via Wikimedia Commons

The above illustration shows a caravan of merchants traversing the famed Silk Road. As evidenced here, caravan merchants usually consisted of large groups of travellers, often on camelback as well as horses.

A Belgian (?) 1934 Bill of Exchange

 


Source: Minerva Archives, taken from Wikipedia

This bill of exchange dates back to 1934. It looks to be Belgian in provenance. The stamps suggest that, like many bills of exchange subject to government regulation, it incurred stamp duty.

I Promise

Did merchants use trust when they used negotiable instruments of credit?

Merchant networks frequently operated with reputation at the forefront of transactions. If a merchant had a weak reputation or was unestablished, any credit he obtained is likely to have been at a higher rate of interest, to reflect potential risk. Altruistic trust didn't feature in any prominent sense in these networks; there was inevitably a large measure of calculation involved based on repeated transactions of the past. In family firms, the reputation of the firm as a whole was paramount, such that any absconding or disreputable actions by agents or representatives of the firm were held as damaging to the firm's overall reputation, even if such parties were not family members.

What determined Interest Rates on Bills of Exchange?

An English Bill of Exchange dated 1810.

Image courtesy of the British Museum Trustees.

 Interest rates on bills of exchange could fluctuate considerably. These rates depended on several factors: the prevailing market rate, the particular usage of the bill, the riskiness of the transaction, or the familiarity and strength of the connections involved in the exchange. Main commercial hubs which connected long-distance trading, often featured more favourable rates. Merchants frequently borrowed money through bills where interest rates were low, and sold where rates were high. In this way, complex systems of arbitrage evolved.

Did you Know that Hundi was Used by the East India Companies to Expand their Influence?

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.

Merchants and Bills of Exchange

Calcutta Merchants circa 1850.

The agents of credit instruments were inextricable from the instruments themselves. Merchants and bankers used credit instruments according to the rules, laws or customs governing their networks. Within a given network several kinds of credit instruments supporting different types of transactions inevitably evolved. Bills of exchange in particular, performed functions dictated by mercantile customs, norms and laws. Over time, specific bills of exchange acquired known classifications and functions which transcended individual networks. These instruments allowed merchants from one
community or region to conduct business with other merchants in far-flung locations.

A British Indian Promissory Note

In this video podcast I talk about a British Indian promissory note dating back to 1859. The note shows all the hallmarks of formalisation, and demonstrates some of the financial workings of the British Raj. Notes like these were keystones to financing the expansion of British Indian commercial activities both in the era of the British East India Company and the British Raj. Many of these promissory notes drew on the networks and resources of Indian indigenous bankers or merchants, as well as affluent British merchants.

The Promissory Note

Historically, credit instruments evolved into different formats and circulated widely amongst merchant communities to alleviate the need for carrying specie. Most modern historical forms that we know of, have typically taken some sort of paper format. They recorded the credits and debits of a given transaction, and allowed for greater flexibility and circulation in a variety of situations, and particularly in response to perceived risk. The hastily scribbled IOU, was quite simply, the rudimentary progenitor of more evolved forms of promissory notes. Later, this IOU was worded as a promise to pay a specific sum, and was witnessed by others to seal the promise, as shown by this 1774 English promissory note.

(Source Wikimedia)

In time, the promissory note became even more sophisticated. They conformed to set templates, carried official stamps to cover stamp duty, incurred interest, and were issued by formal institutions such as banks. The example below shows a 1926 promissory note drawn by a prominent South Indian
merchant community known as the Chettiyars to formalise a debt to the Rangoon branch of the Imperial Bank of India.