Tea Act: May 10, 1773

In December, 1773, one of the most famous events of the American revolutionary period occurred, the Boston Tea Party. What triggered that event? Today, we look at the Tea Act, an Act by the British Parliament approved by King George III on May 10, 1773.

The Tea Act sought to both help the East India Company and to assert Parliament’s authority to tax the American colonies. To understand the Tea Act, we first must know a little about the East India Company, also commonly called the English East India Company or the British East India Company, and where it came from. We will then look at the Act, what it did (and didn’t) do, and the impact in the colonies of the Tea Act.

Prelude to The East India Company

Expedition of Sir Francis Drake

In 1527, King Henry VIII sought to have Pope Clement VII annul his marriage to Catherine of Aragon. What was his dissatisfaction with Catherine? She failed to give him a male heir, something today’s understanding of human reproduction tells us was absolutely not her fault. The Pope refused to annul the marriage, as doing so would have violated Catholic teachings on marriage. The ultimate result was the formation of the Church of England under royal control and a split from the Catholic Church.

Spain and Portugal became adversaries of England in part because of this religious split. As major Catholic nations, Spain and Portugal sought to bring England back into the Catholic fold.

In 1577, Sir Francis Drake launched a mission to raid Spanish settlements in South America. These settlements were major sources of gold and silver which had been flowing into Spain. So successful was the Spanish exploitation of precious metals in the Americas that the massive inflation it caused would ultimately damage the Spanish economy for centuries, but that is a story for another time.

After raiding the Spanish territories, Drake sailed around the world, returning to England in 1580. This was the third time explorers circumnavigated the world. It was the first time by an Englishman. While on this voyage, he traded for spices in the East Indies. This voyage exposed England to the potential value of these exotic goods from the East upon his return in 1580.

The Spanish Armada

In 1580, Spain annexed Portugal, thus forming a united front against England. Spain was a major European land power, and also had extensive overseas territories, as Spain and Portugal had been successful colonizers in many parts of the world.

In 1588, Spain sent the great Spanish Armada to invade Britain, depose Queen Elizabeth I, and return England to Catholicism. The invasion plan failed, as did a retaliatory attack the following year by England and additional (though smaller) Spanish naval expeditions against England over the next several years.

By the end of the war between Spain and England in 1601, the British had captured many Spanish ships. These newly acquired ships allowed the English to more aggressively explore the world and to indulge their own colonial ambitions. It also allowed them to challenge Spanish and Portuguese commercial activity in the East Indies.

The East India Company

Formation

In 1591, Queen Elizabeth I granted permission to a group of English merchants to sail to the East. The goal was to challenge Portuguese trading efforts in the area. The expedition captured a large Portuguese vessel and returned to England in 1594. The voyagers returned with an array of goods, including jewels, precious metals, and an array of exotic spices. Along with the physical cargo, they returned with information about trade routes in the Far East.

In 1599, another group of English merchants met to discuss forming a trading venture under a royal charter. Their initial attempt was unsuccessful, but the Queen accepted a petition on December 31, 1600. The Queen granted a charter, and a corporation formed. It was named the Governor and Company of Merchants of London Trading in the East Indies. We know this company more commonly as the East India Company. We will use the shorter, less formal, name here.

The royal charter granted the East India Company a monopoly on trade with India. The company did not act as we might expect a company today to act. From its very early days, this was not a regular business venture. It was an extension of rising British imperial power. The East India Company negotiated treaties with local nobility in India on behalf of the British monarchy. Its early revenue came more from sanctioned piracy than from free exchange of goods.

Not Just a Company

The East India Company developed many aspects other than a commercial organization. Unlike a purely business organization, the East India Company controlled territory and negotiated treaties with local governmental authorities. The company had its own military forces, at times larger than the official British military. It had its own judicial facilities (courts and prisons). The East India Company had heavily armed trading ships. It prosecuted its own wars against rivals such as the French East Indies Company and Dutch East India Company.

There can be no question that the East India Company was an agent of British mercantilism and British imperialism. In a very real sense, the East India Company was a state within a state.

Trade

The general flow of goods through the East India Company looked something like this. The company used gold and silver to purchase products such as textiles and opium from India. These goods were then traded in the East Indies for spices which had great value in London. As the company grew and evolved additional products like salt and tree became key factors in the company’s profits.

The value of the tea trade drove the East India Company’s decision to sell opium in China. China was the major or sole source of tea. Opium was a valuable commodity to exchange for Chinese Tea. In the 1790s, the Chinese outlawed the opium trade. Continued smuggling of opium into China by the company led to the Opium Wars, beginning in 1839.

Tea, the Seven Years War, and Financial Challenges

The Seven Years War was fought between 1756 and 1763. It pitted England and her allies against France and her allies. The war was fought around the world, including India and Britain’s American colonies. The end result was victory for Britain, and in India, the war blunted the threat from France.

The victory in the war, likely coupled with stock manipulation, helped drive up the price of East India Company stock. Major short-selling of the stock and the consequent losses by short sellers led to the British credit crisis of 1772. Large company debts threatened the survival of the company itself. The Bank of England refused to extend the term of a large loan when it came due and the company could not pay.

The company had assets to sell. Most prominent among those assets was 17-18 million pounds of tea sitting in London warehouses. The company sought two things from the British government: (1) a loan, and (2) better access to the American tea market.

The Tea Act

The Tea Act was the government’s answer to the second request by the company. The basic plan was to change the tax structure surrounding the sale of tea in the colonies. If the company could sell the tea sitting in London, it would be able to pay its debts.

The Colonial Tea Trade Before the Tea Act

Prior to passage of the Tea Act, the East India Company had to sell all of their tea at auction in London. At this sale, the government would collect taxes on the tea. The merchants specializing in the colonial tea trade would then send the tea to the colonies and sell it there.

In the colonies, the tea faced another tax. Following the Seven Years War, the British parliament passed the Townshend Acts. These were a series of taxes on goods in the colonies. The proceeds from these taxes were used to pay some of the British officials in the colonies. Parliament intended to assure their loyalty to Parliament, rather than to the colonists. They repealed all of the taxes imposed by the Townshend Acts, except the tea tax. Parliament left this tax in place as a symbol of its authority to tax the colonies without direct colonial consent.

Acts of Parliament guaranteed that the East India Company had a legal monopoly on the tea trade in the colonies. Despite that, colonists were buying very little British tea. Smuggled Dutch tea, though considered to be of lower quality, had two advantages over British tea. First, it cost less. Second, the colonists did not have to pay the offensive tax on the smuggled tea.

Direct vs Virtual Representation

The colonial perspective on the tea tax was that it violated the rights of the colonists under the English Constitution. Both sides agreed that it was impermissible to tax someone who was not represented in the taxing decision. The colonists claimed that since they did not elect representatives to parliament, they were not represented. If they were not represented, the tax violated their rights as Englishmen.

Many in parliament would answer that parliament represented the interests of everyone in the British realm, whether they directly elected representatives or not. Competing notions of direct versus virtual representation represent the divide between the colonies and the mother country.

The theoretical arguments which could be made on either side are beyond the scope of our discussion here. It is, however, worth noting that we see the same fundamental argument appear later in American history. This is especially true regarding women’s suffrage.

The Tea Act Provisions

The Tea Act made several favorable changes for the East India Company and its ability to sell tea in the American colonies. One change that the company wanted was not granted, however. The company wanted Parliament to repeal the Tea Tax imposed by the Townshend Acts. Parliament declined, preferring to keep the tax in place to continue to assert its authority to tax the colonies directly. This would turn out to be a fateful decision.

First, the East India Company would no longer be required to sell its tea at auction in London. Instead, the company could ship tea headed for colonies, particularly the American colonies, directly there. In addition, the company could directly export the tea it had sitting unsold in London warehouses. This eliminated the London middlemen from the supply chain, lowering the cost of legal British tea getting to America.

Second, the government would refund, or not collect at all, duties charged on East India Company tea in Britain for export to the colonies. The duties paid as tea passed through Britain were steep. Eliminating this cost could lower the price charged for the tea without reducing the company’s potential profit.

Third, the Act required the company to establish relationships with consignees. In a sale on consignment relationship, a seller leaves goods with the consignees. In turn, the consignees sell the product. After the sale, the consignee pays the seller of the goods, often a percentage of the sale price. The Tea Act, however, required the consignees to pay a deposit upon delivery of the goods. This reduced the financial risk to the East India Company that the tea might not be sold.

The Tea Act’s Impact

The Tea Act accomplished its main goal – sort of. It sought to lower the price of tea in the colonies. A lower price would make it competitive with the black market Dutch tea. The price of East India Company tea did fall to be below the price of the Dutch tea. You might expect that colonists would start buying the cheaper, superior product over the more expensive, inferior product.

Such pure economic reasoning is sound in and of itself. There were, however, major non-economic reasons for not buying British tea. Most important was that the colonial tea tax was still in place. Many colonists saw the Tea Act as a way to trick the colonists into accepting parliamentary authority to tax them. They really weren’t wrong in that assessment.

Instead of opening up a market to British tea, the Tea Act led to resistance. Angry colonists forced consignees in most ports authorized to receive the tea to resign. In others, colonists prevented ships carrying tea from landing. The exception was Boston. The colonial governor was determined to bring the tea in and sell it. It is likely no coincidence that he had family members acting as consignees.

Ultimately, the Tea Act failed in its political goals in the colonies. The Tea Act led to the Boston Tea Party in December 1773. The Boston Tea Party, in turn, led to Parliament passing the Coercive Acts (known as the Intolerable Acts in the colonies) to punish Boston specifically and Massachusetts generally. This, in turn, led many in other colonies to fear the same thing happening to their colonies. Revolutionary sentiment grew, until war erupted in April 1775 with the Battle of Lexington and Concord.

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