Thoughts on economics and liberty

Reports of total integrity and honesty of the people in ancient India #7: The supreme honesty of its bankers

India was one of the innovators of banking, with the hundi system.

Here’s an extract from The Global World of Indian Merchants, 1750-1947 by Claude Markovits

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The record of the Shikarpuris remains nevertheless impressive: in spite of the losses suffered in the Russian debacle, they were able to reinvent themselves as the foremost community of `indigenous bankers’ in India, challenging Gujaratis and Marwaris on their own ground. Their major assets were their reputation for scrupulous honesty (no Shikarpuri banker ever defaulted on a hundi), which ensured wide acceptance for their bills, including from European banks, and their flexibility, their readiness to move hundis quickly from one place to another to take advantage of differences in interest rates. It explains largely how, in spite of their limited capital resources due to the relative poverty of their native town, they could play an important financial role in a very extended area over a long period of time: the rapidity of circulation of their hundis had a multiplier effect, allowing them to cover many transactions without mobilizing too much of their own capital. It is obvious that accounting skills were an important component of their expertise, although little is known in detail of the specifics of their accounting system. They com¬bined, to an astonishing degree, a strong conservatism with a remarkable capacity for adaptation to changing contexts and conjunctures.

FURTHER

it is necessary to dispel the widely held fallacy that family and kinship are privileged breeding grounds for trust. The history of Indian business enterprise is full of stories about disputes between members of the same family leading to the demise of once successful firms. Between brothers, in particular, sibling rivalry is a powerful inducement to quarrel and an antidote to trust. Between non-kin-related participants of a given trading network, trust is subject to the same limitations as between `ordinary’ traders. However, reputations are more credibly established in the context of a particular network than in other contexts, because of the speed and ease with which information circulates and can be checked. Between Sind merchants, a reputation for honesty was not simply established on the basis of bazaar gossip, but rested on a dense flow of accumulated information about past behaviour in transactions, of which there was often even a written record which was easily accessible. To sum up, a Sindwork merchant did not trust another Sindwork merchant simply because he was from Hyderabad; he trusted him if he had a clean record which could easily be checked. On the other hand, a reputation could easily be ruined by the disclosure of information about dishonest behaviour, and such damage, once inflicted, was difficult to repair.25 Trust within the community of Shikarpuri or Sind-work merchants was not an automatic outcome of kinship ties or solidarity between townsmen, but the result of a process in which information about past behaviour played a crucial role.

 

Sanjeev Sabhlok

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