Monopoly, or the exclusive control of a commodity, market or means of production, is an integral part of history. In a monopoly, all the power is concentrated in the hands of a select few. (See also: Economics Basics.)
Monopolies, in many cases, have been vital to getting large jobs done. Unfortunately, they also have been known for abusing the same power that makes them so effective. In this article, we'll take a walk through history to uncover the roots of this single-minded vision. (See also: Antitrust Defined.)
When All Business Was Small Business
Through most of human history, the formation of business monopolies, or even powerful monarchies, was precluded by the limitations of transportation and communication. Anyone can claim to rule a kingdom, but it comes to naught if you can't order your subjects around or send your soldiers to discipline them. In this same way, businesses were limited in most cases to the village or even the neighborhood in which they were physically located. Shipping by horse, boat or on foot were possible, but this added costs that made the shipped goods more expensive than locally produced products.
In this sense, many of these small businesses enjoyed monopolies within their own towns, but the extent to which they could fix prices was restricted by the fact that the goods could be bought from the next town over if prices went too high. Also, these small businesses were mostly family or guild operations that put the emphasis on quality rather than quantity, so there was no pressure to mass-produce and expand the market to other towns. The tools for mass production didn't become available until the industrial revolution, when cottage businesses were all but erased by factories and sweatshops. (See also: An Exploration of the Development of the Market and Financial Capitalism Opens Doors to Personal Fortune.)
The reign of the Roman Empire introduced the world to the best and worst of concentrated power. In the time of Tiberius, the second Roman emperor and the man who set the tone for debauchery that his successors Caligula and Nero took even further, monopolies (or monopolium) were given to senators and nobles by the empire. These included shipping, salt and marble mining, grain crops, public construction and many other aspects of Roman industry.
The senators who were granted monopolies were responsible for reporting revenues and assuring a steady supply, but they were not very involved in the business except to skim profits. In many cases, the labor and the management were supplied through slavery, with the highly educated slaves doing most of the administration. These slave-supported monopolies helped Rome expand its infrastructure at an amazing speed. (See also: Can Earnings Guidance Accurately Predict The Future?)
Toward the end of the Roman Empire, the increased infrastructure was all put at the disposal of a succession of unstable and corrupt emperors who used their excellent roads to drain conquered foes through taxation until they rebelled. The monopolies also caused problems as they granted too much power to citizens who used the proceeds to bribe their way up the ladder.
Monopoly and Monarchy
The first modern monopolies were created by the various monarchies in Europe. Charters written by feudal lords granting land holdings and the accompanying revenues to loyal subjects during the Middle Ages became the titles and deeds that landed nobles displayed to cement their status by right of lineage. In the late 1500s, however, royal charters extended into private business.
A number of monarchs granted royal charters that gave exclusive shipping rights to private firms. The majority of these firms had someone on the board with ties to nobility or some other connections with the crown, but the investors and venture capitalists that actually funded the firms were largely from the newly rich merchant classes (bankers, moneylenders, ship owners, guild masters, etc.). (See also: How Venture Capitalists Make Investment Choices.)
Royal charters allowed the Dutch East India Company to corner the spice market as well as later allowing the British East India Company to do the same in addition to giving them considerable power over shipping and trade regulations. The monopolies created by charters were, with the exception of the British East India Company, very fragile.
When royal charters expired, competing companies quickly undercut the established company. These price wars often cut too deep for all involved, depressing the whole industry until venture capitalists put up money to get fresh companies into the decimated market. (See also: The Birth of Stock Exchanges.)
Government and Business
The British East India Company was an exception because it was associated with the ascendant British government and acted like a nation, having an army unto itself. When China tried to stop Britain's illegal importation of opium into the country, the army of the British East India Company beat the country into submission, thus keeping the opium channels open and securing more free trading ports. Even when the charter expired, the ultra-wealthy company bought up controlling interests in any company that sought capital to compete with it.
The company and the British government grew almost indistinguishable from one another as many of its investors were also the business and political pillars of Britain. But the company, like the Roman Empire, suffered from its own success. Despite years of huge revenue, it was teetering on the edge of bankruptcy when its shoddy administration of countries under its imperial rule caused famines and labor shortages that the company lacked capital to cover. The corruption within the company led it to try and make up the difference by tightening its monopoly on Indian tea and driving up prices. This contributed to the 1773 Boston Tea Party and added to the fervor that lead to the American Revolution. (See also: What Is the History Behind Today's Bankruptcy Laws?)
The British government then formalized its relationship with the British East India Company by taking it over in a series of acts and regulations. The government administered the company's colonies, but modeled its civil service on the company's, and staffed it, in many cases, with the very same personnel. The main difference was that the colonies were now part of the United Kingdom and their revenues flowed into government coffers instead of to the company's. The company maintained some of its privileges by managing the tea trade for a few more decades, but it became a toothless lion lounging at the heels of the British Parliament, which began stripping the company of all its charters, licenses and privileges between 1833 to 1873. In 1874, the British East India Company finally dissolved.
The Bottom Line
Much of the economic prosperity enjoyed by England from the 1600s to the early 1900s was due to the one-way trading systems that the British East India Company imposed on its colonies around the world. The goods from the American colonies, for example, were in raw forms that were processed in English factories and sold back at a premium. It is hard to say the monopoly created the British Empire, but it certainly sustained it. And, although it was claimed that the sun never set on the British Empire, it eventually did.