The Opium Trade and the Foundations of American Industrial Capitalism

`The past isn’t dead, it isn’t even past

-William Faulkner

Whether history repeats itself or mostly rhymes may be debated, but it is undeniable that the present often resembles a distorted mirror’s reflection of the past. In our time, an opiate epidemic scourges the nation, fueled by an industrial supply of fentanyl manufactured in China[1].

What few Americans realize is that 150 years ago, a similar trade ran in reverse, and long before America’s culture of prohibition culminated in a War on Drugs, the Western powers waged several Wars for Drugs, or more specifically, the right to traffic opium in full contravention of Chinese law, largely so that Britons could affordably satisfy their own addiction to tea.

This trade is a largely forgotten chapter in our history, but is well remembered in China and lies at the foundation of American economic development and Sino-Western relations to this day.

It is a complicated story, at the confluence of demographics, monetary policy, the Great Divergence of the West, and driven by simultaneous revolutions, in modes of economic production, approaches to war, forms of government, and conceptions of human liberty.

Thucydides Trap and The Great Divergence

The political scientist Graham T. Allison coined the idiom Thucydides’s trap to describe when a rising power challenges the status of a declining power and this conflict leads to war. He uses it in the present to refer to the possibility of conflict between the United States and an increasingly powerful China.

In the late 18th and early 19th centuries this phenomenon ran in reverse.

China is the oldest nation on Earth. Unified 2200 years ago after a long period of civil war referred to as the Warring States period[2].

It has been the most populous nation on Earth the entire time.

Conversely, for most of its history Western Europe was a backwater. At its heights an occupied territory of the Roman Empire, it could for all intents and purposes be considered a region of, sparsely populated, impoverished, internecine, and geostrategically unimportant polities.

The reasons for this have to do with how states project power. States may project power either economically or militarily.

Because militaries are a massive expenditure for the state requiring manpower, the former is a prerequisite for the latter.

So the foundation of relative power between nations is relative prosperity.

There is a simple algebra that determines whether a nation is an economic superpower:

How many people does it have, and how productive are each of those people on average?

The product of these factors determines a nation’s economic power. For most of history since the advent of agriculture, the vast majority of people were subsistence farmers, so power naturally gravitated toward states that sustained large populations and agricultural surpluses.

China always had significant geographical advantages. Deserts, oceans, and mountains on its periphery protected it from most foreign invaders, and its relative abundance of rivers facilitated internal commerce and food production.

These advantages were compounded by agricultural innovations during the Song dynasty in the 10th and 11th centuries which led to the broad-based cultivation of hardy strains of rice imported from Vietnam, doubling crop yields and causing a commensurate increase in China’s population[3].

These advantages made them arguably the most powerful nation on earth for centuries until the 19th century. Then this happened:[4]

GDP Per Capita

Through a series of historical contingencies beyond the scope of this essay, the nations of Western Europe evolved towards a set of institutions including limited liability companies, financial markets, and intellectual property rights, that unleashed human potential.

Productivity per person in Western Europe exploded and the global balance of power was changed forever.[5]

At the same time, China’s population without industrialization began to abut its Malthusian trap. Their population doubled again, this time outpacing their agricultural yields, causing economic stagnation, food shortages, and regular peasant rebellions[6].

Simultaneously, a glut of applicants into its Confucian civil service system caused widespread levels of corruption and governmental malfeasance throughout the country as government posts increasingly became attainable only through bribery.

To more concretely explain the scale of the difference. Before the Divergence and the process of industrialization it catalyzed in the West, China routinely produced 30% of the World’s GDP and Western Europe hovered between 10% and 20%

The relative increased productivity of the West at the time of the events described in this essay, inverted those figures.

The story of this essay is how political realities quickly shifted to reflect the new economic reality, which then further accelerated the shift in the balance of power between East and West throughout the 20th Century.

The Antebellum, The First Embassy, and Ramifications

It is impossible to understate the degree of Chinese xenophobia when East and West first met. China’s moniker for itself is the Middle Kingdom, and its subjects addressed and recognized the Emperor as the Son of Heaven, ruling under a Mandate from Heaven.

The Mandate is the Eastern equivalent of the divine right of kings, but the Emperor was viewed as the ruler of everything under heaven. All foreign lands and peoples were considered vassals, appraised by the Chinese on a spectrum from civilized to barbarous predicated on how closely their culture reflected China’s own.

Western merchants had severely limited access to trade in Chinese markets through an arrangement that slowly evolved through the 17th and 18th centuries. Those who came to trade were not permitted entry into mainland China. They were consigned to an isolated community known as the factories in Canton. Western merchants were permitted to live there for six months out of the year, on a patch of land 300 yards long and 200 yards wide, conducting trade solely with specially permitted Chinese counterparts called Cohongs, who secured their own special licenses for this lucrative business through bribery.

A trip home for these merchants would take a year in the age of sail, later shortened to six months when faster clipper ships were invented, so in between trading seasons, they would retreat to their own community in Macao.

They were not permitted to bring their families into the factories and it was illegal for them to learn Chinese.

In the middle 18th century, a merchant named James Flint, broke the law and learned the language. He was sent by his compatriots on an arduous journey to petition officials in Ningbo, to improve their living conditions by allowing greater freedom of movement, and to redress the corruption of the local customs official in Canton known as the Hoppo.

He was imprisoned for three years for his insolence and his language tutor was executed.

The British government later tried to improve relations through official channels by sending an Embassy to negotiate a treaty in 1793. The expedition was led by George Macartney, a distinguished diplomat, former envoy to the Court of Catherine II, and former Governor of Madras.

The Embassy carried gifts for the Chinese emperor of British manufactures, sought to establish free trade between the two nations, and permanent mutual embassies between Beijing and London.

To say it was rebuffed would be putting it mildly. The Chinese understood embassies to be trips of vassals paying tribute.

Macartney was sent away with an edict that read in part:

“ [The Chinese Capital is] the hub and center about which all quarters of the globe revolve…The subjects of our dependencies have never been allowed to open places of business in Peking[Beijing]… it is your bounden duty to reverently appreciate my feelings and obey these instructions.”

As the West grew into its power and China declined, this state of affairs would not be allowed to stand.

The First Opium War and the Unequal Treaties

Opium became the basis of the Canton trade. The emperor’s missive, insulting as it was, was accurate in one respect.

There was no domestic demand for British goods in China. Britain in the meantime developed a fiscally crippling tea habit that caused a massive trade deficit. They exchanged their gold for silver which was the basis of China’s currency and sent it over by the shipload for the beverage, which at the time only grew in Asia.

The British penchant for tea is proverbial and was as strong then as it is now. At the height of the trade British duties on imported tea comprised 10% of government revenues and they would keep a year’s supply in strategic reserve much like we do with oil today.

Hard currency flowed out of Britain and in return they received a consumable good. Their unquenchable thirst for tea would have driven Britain to bankruptcy.

If it wasn’t for drugs.

And unintuitively, history being just one damned thing after another, Napoleon set the stage for the whole thing.

We numbered our World Wars, and it gives us the illusion that we’ve only had two, but the Napoleonic Wars were a conflagration that completely altered the face of the Earth in their own time.

European powers were so distracted fighting each other on the continent that colonial insurgencies to establish independent republics took advantage of their enemies’ scattered resources and emerged victorious in wars that otherwise would have been unwinnable.

And both main participants waged peripheral wars and proxy wars to gain resources to win the main conflict as well.

Napoleon’s Peninsular campaign distracted the Spaniards and gave the Bolivarian revolutions their chance at success. They distracted the French and gave Haitians a similar opportunity.

The War of 1812 between Britain and America was largely fought over the forcible impressment of American sailors into the British Navy. A practice they persisted in because they needed to man the Channel Fleet and keep their own home island safe from Napoleon.

But no peripheral theater of war underwent as much change in the balance of power as India.

The charter for the East India Company was signed by Queen Elizabeth in 1600. For the first century and a half of its existence, it actually was mostly a trading company. It had offices or factories as they were then called in Bombay, Madras, and Calcutta, but would exercise no sovereignty over any significant portion of Indian soil until the Battle of Plassey in 1757.

But even then, its territory only extended over a small part of India, the major power on the subcontinent over this interval being in turn, first the Mughals and then the Maratha Confederacy.

There were other European powers vying for influence in the subcontinent at the time. The French were at Pondicherry and the Portuguese were at Goa. So the conflict between the powers on the continent replicated itself on the subcontinent as well.

It was always Napoleon’s design to drive the British out of India because as per the thesis of this piece, to weaken a nation economically, weakens it militarily as well. This was the central aim of his disastrous Egyptian campaign of 1798, which he undertook with the ultimate aim of reaching India and forming an alliance with the Tipu Sultan of Mysore. It ended in abject failure, with Napoleon absconding back to France alone to proclaim a false victory and mount a coup while leaving his entire army completely stranded.

Having failed to accomplish this goal directly, he later pursued it indirectly, providing French military advisors to the Marathas during the Second Anglo-Maratha War. Britain in turn consolidated its hold over India, partly to protect itself, and partly as a prize for the blind ambition of two administrators then in country.

The British Governor-General Richard Wesley and his brother. A formerly ne-er do well musician called Arthur, who first rose to prominence and General rank with brilliant victories at Assaye and Gawilghur during the Maratha campaign, and who decades later would be ennobled as the Duke of Wellington and ultimately defeat Napoleon at Waterloo.

In this time of global war, when communication between faraway outposts and the homeland took the better part of a year and local governance was largely delegated to officials on the scene with little oversight, and access to Indian trade becoming strategically essential for the larger war effort, they conquered a continent almost on their own initiative.

The Napoleonic Wars’ proxy theaters and the Bolivarian Revolutions provided the conditions that necessitated and then facilitated the Opium trade.

For centuries Spain’s colonies in the New World had been Europe’s main supply of silver, the precious metal on which Chinese currency is based. Bolivar’s victories cut off this source of funds, making silver relatively scarce and the Chinese goods more expensive to Westerners.

In turn, the British found out that while their manufactured goods were not wanted in China, there was one commodity that the Chinese would purchase. One that grew in plentiful quantities in the Indian territories they had just conquered.

Opium.

It was illegal, but this was a formality. Local officials were widely susceptible to bribery, and the vast expanse of Chinese coastline made running in smuggling boats fairly easy.

They had no moral scruples about the consequences.

So the trade imbalance shifted from West to East. And the Chinese Emperor was faced with a growing proportion of his population consigned to the depths of drug addiction.

Beginning in the 1820s, the volume of opium smuggled into China began to rise exponentially.

It is estimated that at the height of the trade roughly 14 million Chinese were addicted to opium. Although this burden did not fall equally on the whole population because it is also estimated that over a quarter of the men in China were addicted.

As Americans have experienced over the last 20 years, opiate addiction on this scale tears at the fabric of a society. Drastic measures had to be taken.[7]

The Emperor sent an official named Lin Zexu to suppress the trade. He laid siege to the Western factories, ultimately seizing and burning 20,000 chests of opium and expelling all foreigners from Canton.

The traders used their wealth and influence to lobby the British Parliament for retribution and reparation for this “mistreatment.”

The British sent a fleet and the First Opium War began. It was a predictably one-sided affair.

The British came on steamships, with cannon and percussion-lock muskets. The technological gulf between the combatants was so immense that resistance quickly proved futile.

The Emperor capitulated at gunpoint or near enough and signed the Treaty of Nanking. The first of what became known as the unequal treaties.

This treaty ceded Hong Kong to the British and established the principle of extraterritoriality. Essentially extending the principle of diplomatic immunity to all British subjects living in China.

Other Western powers would rush to negotiate similar privileges for their citizens and each accord they negotiated included a most favored nation principle so that any concession won by one would automatically apply to all the others.

While opium was still technically illegal, Chinese law would no longer apply to Westerners and they could now engage in the trade with impunity. Trafficking volumes exploded, and it would remain an active and lucrative trade until the early 20th century.

Americans in the China Trade

The China Trade in America is intimately tied with the class and families of “old money” we refer to as the Boston Brahmins[8].

The British trading houses were the largest participants in the China trade, but their American cousins did manage to capture 15% of the market. And the peculiarities of simultaneous American expansion at this time made their share of the trade extraordinarily lucrative.

Wealth would pour into the coffers of America from every avenue connected with this business.

The first American to enter the trade was Thomas Handasyd Perkins. A former slaver and fur trader from Boston.

He returned from his first voyage an enormously wealthy man. Capitalism being an economic system predicated on human incentive his friends, family, and neighbors, soon clamored to emulate his example.

Through ties of business partnership and intermarriage, this extended clan of sea-going New England Yankees would become the wealthiest community in America.

Perkins employed his nephew Cushing, who later started the career of their common relative Russell Sturgis. The firm would later also be responsible for the career of their distant cousins the Forbes. Perkins would partner with Samuel Russell to found the largest American firm in the trade Russell and Company. This company would merge with competitor Perkins and Company to dominate the American portion of the trade.

These are just some of the most illustrious names involved in the firm, but throughout its history attaining a partnership in Russell and Company was strongly correlated with being some distant relation of an existing partner, and a history of the firm reads like an extended genealogy of nephews and in-laws[9].

Periodically throughout this period, disputes would break out between the partners of Russell and Co. and some partners would leave to found their own firms, but they all shared ties of business and background.

The men from this extended family came to China to rise through the ranks and earn what they termed a “competence”. A sum of money that would allow them to return home and live the rest of their lives as men of leisure.

The minimum sum for this figure was widely understood to be around $100,000. Suffering the isolation of the factories for this privilege became a rite of passage to enter the moneyed class.

Their trade route ran south out of New England, around the tip of South America, then up the West Coast into the Pacific Northwest. Here they would trade East Coast manufactures for furs and otter skins, then sail to Malaysia for sandalwood, thereafter acquiring Turkish opium through intermediaries and onto Canton where they would trade these goods for tea and porcelain, then back home again.

In 1848, gold was discovered at Sutter’s mill in California setting off the largest mass migration in American history and bringing 300,000 migrants to California. This would add an extremely lucrative leg to their trade for the next decade.

California’s domestic economy could not support all these gold bugs. All their goods had to be imported from the East Coast and were sold at exorbitant prices. Since the Opium merchants’ ships were already running up the coast of California to reach the Pacific Northwest, this was an easy way to add extreme profits to a voyage.

It is estimated that for the decade it lasted until the Gold Rush subsided and California’s domestic economy developed, returns on capital from this leg of the voyage alone could reach as high as 150% even when you accounted for the cost of building the ship.

This accounting adjustment is less ridiculous than it seems because it was common for entire crews of sailors at the time to desert their ships at the San Francisco wharf to join the Gold Rush for themselves. Even with this risk, the light was more than worth the candle.

Abandoned Ships in San Francisco wharf.

Britain and America had been enemies through the early years of the Canton trade. The Revolution ended only in 1783 and they warred again in 1812 during which the British burned the American capital to the ground.

The special relationship did not exist, there was then animosity between English-speaking peoples.

But enforced proximity makes strange bedfellows, and the cramped and difficult living conditions of the Canton factory mended fences, at least, between the British and American traders residing there.

They formed bonds that would otherwise be unthinkable. These relationships had commercial benefits.

After Russell Sturgis retired from the trade he was invited to become a partner at Baring’s Brothers, the preeminent British investment bank, later rising to be its managing director. [10]

Through him and others like him, British capital markets became willing to finance American economic development.

This nexus of families also poured their personal capital into the burgeoning industrialization of America. Their various trusts and corporate entities provided a large part of the financing for The Panama Pacific Railroad, the Pacific Mail Steamship Company, the first transatlantic telegraph cable, and the textile mills of their native New England.

Warren Delano, one of the most successful American traders ever, came back from the East and built himself a palatial estate on the Hudson called Algonac, and invested his wealth into coal mines, railroads, and Manhattan real estate.

His fortune would finance his grandson’s political career.

FDR

32nd President and grandson of an opium smuggler

Chinese money too crept into American capital markets. Foremost among the Hong merchants that acted as Chinese counterparts to Western traders in Canton was Howqua. He was probably the richest man in the world at the time.

His fortune was estimated to be worth 26 million dollars. For reference, John Jacob Astor, the next wealthiest private citizen on Earth at the time had a fortune of 20 million dollars.

Wealthy Chinese citizens appear to have been as fearful of government expropriations then as they are now. As a safeguard, he allocated 500,000 dollars of capital to be secretly invested in America under a trust managed by John Murray Forbes.

This money was funneled into financing the Michigan Central Railroad, Chicago Burlington and Quincy Railroad, the Dixon Peoria and Hannibal, the Carthage and Burlington, the Illinois Grand Trunk Railway, and the American Central Railroad.

Balzac once remarked that behind every great fortune lies a great crime.

The truth is that a large part of the capital base that funded the early stages of American industrialization was funded and facilitated by the narco-trafficking of its day.

Conclusion

The Opium War was the beginning of what China refers to as its Century of Humiliation. It proceeded to include a Second Opium War, instigated by the West on a flimsy pretext to extract greater concessions, two civil wars, a Japanese incursion, and the tragedies of the Cultural Revolution and the Great Leap forward.

The Chinese see the First Opium War as the beginning of their subjugation. It presents an asymmetry I find fascinating because this is an episode in our shared history that we largely do not remember and they cannot forget.

Chinese primary schools still have posters on their walls reminding their students to never forget national humiliation[11].

China’s government policies are motivated by the drive to reclaim what they see as their rightful place among the nations of the world and reassert their preeminence. Its statecraft is driven by realpolitik and given its history, they have no moral qualms about subterfuge.

The development of modern China since the reforms of Deng Xiaoping in the 1970s has been the greatest economic miracle in the history of the world, lifting hundreds of millions of people out of poverty.

It has been largely predicated on the theft of Western intellectual property and violation of every agreement China made to join the WTO in 2001.

International relations at their core are best summarized by the most famous line in Thucydides’ Melian dialogue.

The strong take what they can and the weak suffer what they must[12].

From their perspective, there is an element of counterbalance to their national policy. The ascendant West grew richer still exploiting China, leveraging its economic and military power to violate their sovereignty and dictate terms.

A rising China now responds in kind.

This essay is not an attempt to draw a moral equivalence between past Western and current Chinese policy.

I don’t believe two wrongs make a right or in the doctrine of collective guilt. The sins of the dead are theirs to bear alone.

This essay, as many that I write are, is an attempt to investigate facts and perspectives that seem to exist outside of our collective memory and public discourse to better understand the present.

Understand and nothing more.

The world we inherited is largely a product of contingency, but that doesn’t mean it’s entirely random.

Our ancestors made choices and we live with the benefits as well as the repercussions. This is my examination of some of them.

Endnotes and Sources:

[1]https://www.dea.gov/sites/default/files/2020-03/DEA_GOV_DIR-008-20%20Fentanyl%20Flow%20in%20the%20United%20States_0.pdf

https://nida.nih.gov/research-topics/trends-statistics/overdose-death-rates

https://www.brookings.edu/research/china-and-synthetic-drugs-control-fentanyl-methamphetamines-and-precursors/

[2] Chinese culture is even older at around 4000 years. The Yellow River basin is one of the cradles of civilization where agriculture emerged independently.

[3]http://afe.easia.columbia.edu/songdynasty-module/tech-rice.html

[4] https://www.unodc.org/documents/wdr/WDR_2008/WDR2008_100years_drug_control_origins.pdf

[5] Readers interested in learning more about the factors that contributed to this should read:

The Birth of Plenty by William Bernstein

The Wealth and Poverty of Nations by David S. Landes

How the World Became Rich by Jared Rubin and Mark Koyama

Civilization: The West and the Rest by Niall Ferguson

The Greatest Idea in the World by William Rosen

[6]The Taiping rebellion would run concurrently with a lot of the events described in this essay. Perhaps the most curious civil war in history, it was brought on by a man who failed the Chinese civil service examination which caused him to have a nervous breakdown and develop a delusion that he was Jesus Christ’s little brother. He and his cult of followers would grow to govern a quarter of Chinese territory over a period of fourteen years while fighting a war against the Imperial government that would result in an estimated 20-30 million dead.

[7]https://www.wbur.org/news/2017/07/31/opium-boston-history

https://www.thecrimson.com/article/2017/3/30/opium-at-harvard/

https://tuftsobserver.org/hidden-in-smoke-a-forgotten-history-of-opium-opioids-and-tufts/

[8] As an example of these ties there is a famous limerick about the Boston Brahmins:

This is good old Boston, The home of the bean and the cod, Where the Lowells talk to the Cabots And the Cabots talk only to God.

Samuel Cabot Jr was Thomas Handasyd Perkins son-in-law and both families in the verse intermarried.

[9]In 1865 the Western traders founded their own bank to finance the trade. The Hong Kong and Shanghai Banking Corporation or HSBC, is still in business today. Interestingly in 2012, the bank had to pay a 1.9 billion dollar fine because it was caught returning to its roots and laundering money for Latin American drug cartels.

https://www.investopedia.com/stock-analysis/2013/investing-news-for-jan-29-hsbcs-money-laundering-scandal-hbc-scbff-ing-cs-rbs0129.aspx

[10] A translation of the phrase wu wang guo chi. This fact is reported in Jonathan Kaufman’s The Last Kings of Shanghai.

[11] I don’t speak ancient Greek but from what I have read, this most famous translation of the phrase does not reflect the tone of the original. A more literally accurate translation seems to be "the strong do what they have the power to do and the weak accept what they have to accept."It may be truer to the original, but I think the version used in this essay is truer full stop.

Readers interested in reading more about the topic of this essay should read:

Barons of the Sea by Steven Ujifusa

When America First Met China by Eric Jay Dolin

Imperial Twilight by Stephen R. Platt