Q. Consider the following statements:

1. American Civil War (1861-1865) boosted the demand of Indian Cotton
2. 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.