Q. Consider the following statements: American Civil War (1861-1865) boosted the demand of Indian Cotton The boost in the demand of Indian cotton ultimately led to failure of Bank of Bombay in 1866 Which among the above statements is / are correct?
Answer: Both 1 & 2
Notes: Statement 1: American Civil War (1861-1865) boosted the demand of Indian Cotton. Correct

• During the American Civil War, cotton exports from the Confederate states to Europe stopped due to the Union blockade.
• This caused a huge shortage of cotton supplies in the British textile mills.
• To meet the demand, British mills turned to imports of cotton from India.
• Prices of Indian cotton consequently rose sharply, as demand surged.
• Many Indian cotton traders and farmers increased cotton production to capitalize on the high prices.

Statement 2: The boost in the demand of Indian cotton ultimately led to failure of Bank of Bombay in 1866 Correct

• The cotton boom encouraged Indian producers to borrow heavily from banks like Bank of Bombay to expand production.
• When the American Civil War ended in 1865, cotton prices crashed as Confederate cotton could again reach Europe.
• Indian cotton producers suffered huge losses and defaulted on the loans taken from banks.
• This caused substantial losses to banks like Bank of Bombay who had lent heavily to cotton traders.
• In 1866, Bank of Bombay failed due to these bad loans given during the cotton boom, along with poor management.

The cotton boom during the American Civil War led to over-borrowing by Indian producers, which ultimately resulted in defaults and failure of Bank of Bombay when prices collapsed in the war's aftermath.

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