THE KING, THE WHIGS, AND CHATHAM.Both for public and personal reasons George was anxious to get rid of his ministers. Unlike them, he appears as early as the spring of 1765 to have considered the discontent of his American subjects a serious matter, and he blamed them for it.[68] In other respects, too, he was dissatisfied with their public conduct, and he complained bitterly of their behaviour towards himself. In spite of some outward agreement in action, he and Grenville, who without the name retained nearly all the authority of prime minister, pursued fundamentally different systems. Grenville, though not less ready than the king to meet opposition with violent measures, was imbued with whig theories. While George sought to rule by securing the support of parliament, Grenville tried to use that support to enable him to rule the king. He was a pedant, and lectured the king on his duty like a schoolmaster. Bute stood in his way as the king's ally and secret counsellor. His victory over him was partial and short-lived. While Bute was in the country the king corresponded with him, and he returned to London in the spring of 1764. His return made the ministers uneasy, and Grenville's lectures became intolerable. "When he has wearied me for two hours," George complained, "he looks at his watch to see if he may not tire me for an hour more." Bad as their public conduct was, he and his colleagues owed their fall chiefly to their unbecoming behaviour to their sovereign.

Early in 1765 the king had a severe illness and showed signs of the insanity from which he suffered later. He recovered in March, and as he believed that his life was not likely to be prolonged, he was anxious to provide for a possible regency. Constitutional usage pointed to the queen as the proper person to be regent during the infancy of her son. George, however, wished to have the power to nominate a regent by an instrument revocable at pleasure. Grenville dissuaded him from this idea, and, with his ministers' consent, he announced from the throne that a bill would be laid before parliament restricting the regency to the queen and other members of the royal family usually residing in England. When the bill was proposed in the lords the question was raised whether the king's mother was a member of the royal family, or only those in the order of succession. If the Princess of Wales became regent, Bute would probably regain power. In order to prevent this dire possibility, Bedford sacrificed decency and common sense by successfully opposing a motion that the princess's name should expressly be included in the bill. While the matter was pending, on May 3, Halifax and Sandwich went to the king and persuaded him that the bill would not pass the commons unless the princess was excluded. Anxious to save his mother from insult, George authorised Halifax to move an amendment that only the queen and those descended from George II. should be capable of the regency. Halifax, in moving the amendment, announced that he did so with the king's sanction, and it was adopted by the lords.

George soon learnt that he had been deceived, that people were scandalised at his appearing to cast a slur upon his mother, and that the opposition in the commons would move to include her name. In great agitation he appealed to Grenville to help him by announcing a message from the crown to the commons recommending the inclusion of the princess. Grenville, though he had had no part in the trick of the two secretaries, refused his request on the ground that it would stultify the ministers, nor would he give way though the king actually wept with mortification. An amendment to insert the princess's name was proposed in the commons, was carried by 167 votes to 37, and was accepted by the lords. George determined to shake off Grenville's yoke. He called on his uncle, Cumberland, to find him new ministers, and the duke, though he had been treated unkindly by his nephew, loyally came to his help. Evidently by Bute's advice, the king authorised him to treat with Pitt and Temple. Pitt was living in retirement, and in October, 1764, told Newcastle that he intended to remain unconnected. He was willing to accept office in a comprehensive administration on the understanding that the officers who had been dismissed for their votes in parliament should be restored, that the new ministers should be at liberty to propose a resolution declaring general warrants illegal, and that a continental alliance should be formed against the Bourbon powers.Temple, however, refused office, and Pitt would not come in without him. As Temple was on the eve of a reconciliation with his brother Grenville, with whom he had quarrelled over the Wilkes affair, it was thought that his refusal was due to an ambitious idea of a family administration of himself, his brothers, and Pitt. Be this as it may, he probably suspected that Bute would have an influence in the proposed administration. Pitt allowed himself to be swayed by gratitude for help which Temple had given him in the days of his poverty. During this negotiation a riot broke out in London. The silk manufacture was depressed owing to foreign competition, and thousands were consequently almost starving. A bill to check the importation of silk by the imposition of fresh duties was laid before the lords; it was opposed by Bedford, who was averse from restraints on commerce, and it was rejected. On this a large number of Spitalfields weavers went to Richmond, on May 14, to seek help from the king in person. They met him on Wimbledon common. He received them kindly, but could not, of course, give them the help they wanted. The next day many thousands gathered in Spitalfields and Moorfields at beat of drum, marched to St. James's and Westminster, and stopped members on their way to parliament. Bedford was assaulted and wounded, and on the 17th a determined attack was made upon his house on the north side of Bloomsbury Square. It was garrisoned by soldiers and others, but the attack was only defeated by the arrival of fresh troops. When the disturbances were at last quelled, a large collection was made for the relief of the immediate distress, which was further mitigated by a sudden fall in the price of bread.[69] The affair increased the king's discontent with his ministers and embittered the feelings of anger between the Bute and Bedford factions.[70]

On Pitt's refusal to take office, Cumberland tried Lord Lyttelton and Charles Townshend, but they declined the king's offer because they believed that no strong administration was possible without Pitt. George was forced to beg his ministers to continue. They took full advantage of his humiliation. Pitt had asked for assurances on matters of public policy; they made stipulations which chiefly concerned persons. The king must promise never again to consult Bute, and must deprive his brother Mackenzie of the office of privy seal of Scotland. As regards Bute, George at once gave the required promise, and though he was afterwards constantly suspected of consulting with him, there is good reason to believe that he loyally kept his word, and that Bute never again offered him any advice.[71] He had promised Mackenzie his office for life, and declared "that he should disgrace himself" if he took it from him. Nevertheless Grenville forced him to give way. His relations with his ministers were naturally strained; they complained that he did not support them, and on one occasion Bedford remonstrated with him in insolent terms. Again George requested Cumberland to treat with Pitt, who had two interviews with the king and was anxious to accept his offer, but Temple peremptorily refused to take any office, even the treasury, and Pitt with deep regret again followed his lead. The king found no way of escape, save by authorising Cumberland to turn to the great whig families. Grenville was dismissed, and an administration formed under the leadership of the Marquis of Rockingham took office on July 16. It must have been a bitter humiliation to George after all that had passed. Yet, though for the moment he was defeated, he did not mean to give over the rule of his kingdom to the whigs, and for the present anything was better than Grenville's tyranny. George respected his character, but said he, "I would rather see the devil in my closet than Mr. Grenville".The weakness of the Rockingham administration was patent from the first. Charles Townshend, who succeeded Holland as paymaster, called it "a lutestring ministry, fit only for summer wear"; Pitt was expected to supply one of more durable material before the winter. The old phalanx of the whigs, tried hands at political business, was broken up by death and desertion; their successors lacked experience and authority. Rockingham, a man of thirty-five, a prominent figure on the turf, of vast wealth and irreproachable character, was a wretched speaker, and had neither genius, knowledge, nor industry. The Duke of Grafton, the secretary of state for the northern department, was even younger, and, like Rockingham, a great racing man. His public spirit made him a politician, but he cared so much more for pleasure than for politics that he was apt to be content so long as any immediate difficulty was tided over, and he suffered in public estimation from the scandal caused by his dissolute life. The southern department was taken by Conway. Dowdeswell, the chancellor of the exchequer, was a sound financier, but a dull man. Newcastle, who was privy seal and again had charge of church patronage, was no longer so powerful as in earlier days. Nor were the ministers unanimous in feeling. Grafton was far more at one with Pitt than with the Rockingham party; and the chancellor (Henley) Lord Northington, Egmont the first lord of the admiralty, and Barrington the secretary-at-war were included to please the king. Another cause of weakness was George's notorious dislike of his new ministers, which encouraged his "friends," the court party, to intrigue against them.

Most serious of all was the attitude of Pitt. He was pressed to join the government; its policy was in many respects such as he could approve, and in other matters he could almost have made his own terms. Nevertheless he refused to take office and openly declared his lack of confidence in the ministers, though they tried to satisfy him in various ways, such as by obtaining a peerage for Pratt, who was created Baron Camden. Magnificent as he had shown himself as a dictator, he was unfitted by temperament to work with others, and his natural defects were aggravated by his constant attacks of gout. At the same time his present attitude was to a large extent also a matter of principle. He would willingly have taken office if he could have simply been the king's minister, unconnected, without belonging to any party. The Rockinghams, as they were called, were a party connexion, and under Rockingham's leadership would remain so, and their character was emphasised by the inclusion of Newcastle, the chief representative of a system which Pitt hated, government based on the influence of the whig houses and not on the good-will of the crown and the people. Pitt plainly declared that he would not sit at council with Newcastle. Nor would he take office under Rockingham. Without him the ministry had neither an original policy nor a chance of permanence. Called into existence by Cumberland, it leant on him for support; he was present at all cabinet meetings, and they were sometimes held at his house. His sudden death on October 31 was a severe shock to the stability of the government. Pitt would not advise the ministers. Grafton urged that he should again be invited to take office, but the king would not enter on a fresh negotiation with him, for he had refused his former overtures and held very different views from his regarding the American stamp act.

For months the ministers paid no heed to American discontent, save that Conway wrote rather feebly to some of the colonial governors with reference to the disorders. Parliament was not summoned until December 17, and though the king's speech directed attention to the late occurrences in the colonies, the ministers had not decided on a policy. They ascertained Pitt's opinion, and so gained a lead. When parliament assembled in January, 1766, after the recess, Pitt spoke warmly against any attempt to enforce the stamp act. He avowed his distrust of the government in a characteristic fashion: "Pardon me, gentlemen," said he, bowing towards the ministers, "confidence is a plant of slow growth in an aged bosom; youth is the season of credulity". He thought that he saw "traces of an overruling influence," a dark saying which probably referred to Newcastle.[72] While he asserted the sovereignty of Great Britain over the colonies in legislation, he maintained that parliament had no right to tax them; taxation, according to him, was "no part of the governing or legislative power". He regarded the tax as an infringement of constitutional liberty, and rejoiced that the Americans had resisted it. Such a matter, he urged, was not to be decided by text-books; he had not come down to the house "armed with the statute-book, doubled down with dog's-ears, to defend the cause of liberty". America might be crushed, but if she fell, she would fall like Samson, embracing and pulling down the pillars of the state, the constitution, along with her. Let them bind her commerce and restrict her manufactures, but abstain from demanding money without the consent of her people. His words had a great effect; they put enforcement out of the question.A few days later Edmund Burke made his first speech in parliament, recommending the house to receive a petition from the colonies, and was at once recognised as a new power. He was an Irishman, and was already known as a writer. He became Rockingham's secretary in 1765, and a seat was provided for him. Unsurpassed in his mastery of English prose, he exhibits to the full the splendour of the English language in his speeches and pamphlets. Nor is his thought unworthy of the gorgeous attire with which it is invested. His power and constant habit of discerning and expounding the principles which were involved in questions of the moment, give him a supreme place as a teacher of political wisdom. In character he was pure, generous, and tender-hearted. His fervid imagination extended the area of his sympathies, and sometimes prejudiced his opinions. As a speaker he was eloquent, and now and again carried his audience completely with him, but he never caught the tone of the house of commons; his longer speeches were too much of the nature of exhaustive treatises to be acceptable to its members; he had little tact, an impatient temper, and often spoke with execrable taste. The chief article in his political creed was his belief in the excellence of the constitution. He was an ardent reformer of abuses, but with the constitution itself he would have no meddling. Unlike Pitt, he saw that the only effectual check to corrupt influence was to be found in government by a party united for the promotion of national interests upon some common principle. Such a party might, he believed, be based on the whig families, if only they would keep themselves free from court intrigue and selfish jealousies. He was a whig of a different type from Newcastle and Bedford; he built his hopes on the Rockinghams and inspired their policy. That he never sat in a cabinet was chiefly because in those days such a distinction was confined to men of higher birth.

Decided action with regard to America was a pressing necessity. The measures of retaliation adopted by the colonists were depressing trade at home. Petitions against the stamp act were presented from the merchants of London, Liverpool, Glasgow, and other towns, setting forth the loss inflicted on manufacturers and their work-people by the stoppage of the American trade, and the difficulties arising from the non-payment of debts due from America, which amounted to £4,000,000. The ministers resolved on the repeal of the act, and on a bill declaring the right of parliament to legislate for the colonies on all matters whatsoever. Some of the king's household having voted against the government, Rockingham went to the king to remonstrate with him. George told him that he was for repeal, and that Rockingham might say so. Two days later the ministers heard that Lord Strange, one of the court party, was saying that the king was against repeal, and wished it to be known. This made a great stir, and the "ministerial lives were thought not worth three days' purchase". Rockingham went to the king for an explanation. George acknowledged that he had told him that he was for repeal, but said that they had been speaking only of the choice between the repeal and the enforcement of the act, that of the two he was for repeal, but that he desired that the act should be modified and not repealed. The ministers had therefore "to carry on a great public measure against the king's declared sentiments, and with a great number of his servants acting against them".[73] Nevertheless the bill for the repeal of the act was carried in the commons on March 11 by 275 votes to 167, and a week later in the lords by 105 to 71. It was a signal victory; but, apart from the interests of commerce, it was due rather to Pitt than to the government. The declaratory bill also passed; its chief opponents being Pitt and, in the upper house, Lord Camden, who on this question, as well as on that of repeal, talked much trash about a fundamental law of nature and the limits of the power of parliament, more in place in the mouth of an American demagogue than of an English judge. An address was also carried recommending that the colonial governors should be instructed to require compensation to be made to those who had suffered during the late disturbances.

Both in England and America the repeal of the stamp act was hailed with rejoicing. American discontent was hushed, and the public manifestations of gladness were accompanied by expressions of loyalty and affection for the mother-country. The colonists, however, knew that they had won a victory over parliament, and they did not forget it. Their substantial grievance, the commercial regulations, still remained; they soon saw that they must go further, and that Pitt's distinction between a direct money-tax and duties on merchandise, though it had served their immediate purpose, would no longer be useful. The declaratory act was regarded as a menace, and kept alive their feelings of suspicion and irritation. Their temper was shown by the delay of many of the colonies to vote the required compensation. In Massachusetts, where the vote was passed in December, it was insolently accompanied by a vote of indemnity to all concerned in the riots. The repeal of the stamp act needs no defence; a mistake had been made which was leading to serious consequences, and in such a case it is a statesmanlike policy to retrace the false step. The declaratory act was passed to save the dignity of parliament. In spite of Burke's admiration for this act, it may be suggested that the assertion of a right by a party which at the same time declines to enforce it, is neither a dignified nor a wise proceeding. Its only, and sufficient defence is that without it the repeal of the tax would have been impossible. The Americans' denial of the right of parliament, accompanied as it was by violence of word and action, roused much indignation in England and involved every supporter of the repeal in the imputation of betraying its dignity. If repeal was to be carried it was necessary to satisfy men's minds by a declaration of the right of parliament to tax the colonies.

Some good work was done in other directions; the cider-tax was repealed, a commercial treaty was made with Russia, and the house of commons came into agreement with the judges on the question of general warrants by resolving that general warrants being illegal, except in the cases provided for by act of parliament, the arrest of any of its members on such a warrant would be a breach of privilege. The administration, however, was enfeebled by the unconcealed dislike of the king, the hostility of Pitt, and the general belief that it was keeping him out of office. Pitt was extremely anxious for office, but would not accept it unless a "transposition of offices" was made; unless, in fact, Rockingham was got rid of. To this Rockingham would not consent; he wanted Pitt to take office as his ally, not as his successor. There were differences in the cabinet on the matter. The king's section wished to gain Pitt for their master; Rockingham was upheld by his friends; Grafton wanted Pitt as prime minister, and Conway, though less decided, agreed with him. Pitt became querulous and unreasonable, and in April violently attacked the ministers, specially excepting Grafton and Conway.[74] All attempts at negotiation having failed, Grafton made his choice for Pitt and resigned office. It was not easy to fill his place, for the ministry was regarded as moribund, and finally the king was forced to give the seals to Rockingham's friend, the young Duke of Richmond. The chancellor, Northington, a strong supporter of the king, saw that the end was not far off, and apparently determined to make sure of a place in the next administration by sacrificing his colleagues. He quarrelled with them in the cabinet on a question relating to the administration of law in Canada, and early in July told the king that he must resign office, and that the ministry was too weak to go on. George eagerly seized the opportunity for getting rid of it and replacing it by a more comprehensive ministry with Pitt at its head. The difficulties which had stood in Pitt's way were removed; the American question seemed to be settled; he had made it known that he would not again be guided by Temple, and he was delighted to be the king's minister, avowing his determination "to defend the closet against every contending party"—against, that is, the great whig houses and their connexions.

The satisfaction consequent on Pitt's accession to power faded at the news that he had accepted a peerage as Earl of Chatham. It was unjustly considered as a bribe, and lost him much of his popularity. A more serious consequence was that it left the leadership of the house of commons to weaker hands. Though prime minister, he took for himself the unimportant office of privy seal. His course was probably determined by a consciousness of failing health. Conway became northern secretary of state, with the leadership of the commons, and Shelburne secretary for the southern department. In spite of Temple's opposition to the repeal of the stamp act, Pitt offered him the treasury, but that vain man would not enter the cabinet except as Pitt's equal, and a quarrel ensued between them. The treasury was then accepted by Grafton; and, unfortunately, by his advice, Charles Townshend was made chancellor of the exchequer. Camden was appointed chancellor, Northington president of the council, and they, with Granby as commander-in-chief, and Sir Charles Saunders, who succeeded Egmont at the admiralty, completed the cabinet. Besides Conway and Saunders, some other Rockinghams had inferior offices, but Rockingham himself and most of his party considered that Chatham had treated them badly, and repelled his advances. The ministry was unfortunate in being represented in the house of commons by the irresolute Conway and the unprincipled Townshend. Worse still, Chatham, whose arrogance increased with his disease, alienated adherents, and treated his colleagues with reserve and disdain.Chatham at once pursued the foreign policy which he had consistently recommended by seeking a continental alliance to counterbalance the alliance of the Bourbon powers. The family compact did not lose its importance at the peace of Paris. Choiseul in France and Grimaldi, who succeeded Wall in Spain, worked together heartily in promoting a Bourbon policy, and looked forward to the reconquest of the lost possessions of France and Spain. The allies were strengthened by the good-will of Austria. Schemes of aggrandisement were formed, which included the acquisition of Corsica by France and of Portugal by Spain. There were unsettled causes of dispute between them and England touching the fortification of Dunkirk and the Manila ransom, and Spain was also aggrieved by a British settlement in the Falkland islands. Against France the natural ally of England was Russia, for she had a strong interest in opposing French influence in Denmark and Sweden; while on the side of England a Russian alliance would, in the event of war, secure her Baltic trade and enable her fleet to act elsewhere, and would be a defence for Hanover. An alliance with Russia had already been discussed, but Catherine II. had far less interest in the matter than England, and insisted that any alliance should include her Turkish war, to which England would not consent. Catherine was in alliance with Frederick of Prussia, and Chatham, hoping that the adhesion of England would be welcomed, designed a defensive alliance between Great Britain, Prussia, and Russia, which might take in Denmark, Sweden, the States-General, and any other power interested in withstanding Bourbon aggrandisement. To Catherine her alliance with Prussia was much more important than anything which she could obtain from England, and Chatham's design therefore depended on Frederick's good-will. He declined the proposal of Great Britain: he had not forgiven the ill-treatment which he believed he had received from Bute; he admired Chatham, but had no assurance that he would remain in power; and he considered any possible danger to himself from the Bourbon alliance to be too remote to make it advisable for him to join in a concert to prevent it. He was already meditating the partition of Poland, and the proposed combination would have been contrary to his policy. Chatham's great design was consequently defeated.

His arbitrary temper soon brought him into difficulties. He desired to reward a new adherent with the office of treasurer of the household, then held by Lord Edgcumbe, and on Edgcumbe's refusal to vacate the office, he deprived him of it. Edgcumbe was connected with the Rockingham party, and, with the exception of Conway, all the more important members of it who had joined the new ministry, the Duke of Portland, Saunders, and others, resigned office. Conway was almost persuaded to follow their example, for Chatham treated him with haughty coldness, but he yielded to the urgent advice of his friend Horace Walpole, and remained in the ministry, uneasy and vacillating. Any alliance with the Rockinghams being out of the question, Chatham was driven to make overtures to the Bedford party, which failed because they asked more than he would grant. Finally, Saunders's place at the admiralty was supplied by the famous admiral, Sir Edward Hawke, and the other vacancies were filled by tories and courtiers.The harvest of 1765 was bad, and that of the present year promised to be no better. The price of wheat rose rapidly, and in July reached 44s. a quarter. The poor were distressed, worse times seemed to be ahead, and the dealers were believed to be keeping back supplies in the expectation of higher prices. Riots of a more or less serious character broke out in some fifty places; bakers' shops were pillaged, mills and barns were fired, and dealers and tradesmen were forced to sell provisions at prices fixed by the people. It was not until September 10, when wheat had again risen, that the ministers, in accordance with the economic ideas of the time, issued a proclamation against forestalling and engrossing. It had no effect; the price reached 49s., and on the 26th the council laid an embargo on exportation. By law the ministers had no right to take such a step until wheat was at 53s. 4d. As, however, prices were rising, all parties agreed that the embargo was in itself a justifiable measure. It was, however, objected that the ministers should have summoned parliament to meet at an earlier date, and have acted with its authority. When parliament met on November 11, the opposition insisted that the ministers needed a bill of indemnity for having set aside the law by a proclamation of council. Chatham defended their action on the constitutional ground of necessity. His colleagues and supporters were not all equally wise. Northington declared that the proclamation was legally, as well as morally, justifiable; and the chancellor, Camden, the assertor of popular liberties, that "it was at most a forty days' tyranny". His foolish speech was severely handled by Mansfield. In the commons Alderman Beckford, a hot-headed admirer of Chatham, said that "if the public was in danger the king had a dispensing power," and was forced by Grenville to retract his words. The debates on this matter injured the reputation of the ministry though they did not endanger its stability.

When parliament rose in December Chatham went to Bath for the sake of his health. In February, 1767, he had a severe attack of gout, and in March the disease began to affect his mental powers. For the next two years he was unable to take any part in politics. His effacement left the ministry without a head. Before his retirement a difference arose in the cabinet on the affairs of the East India Company. From a simple trading company it had been raised by the victories of Clive and his generals to the position of a territorial power. Its affairs were managed by a court of directors elected annually, and consequently under the control of the court of proprietors in which every holder of £500 stock had a vote. It proved itself unequal to its new position. Clive returned to England in 1760, the possessor of a princely fortune, and in 1762 was created Baron Clive of Plassey in the Irish peerage. He was opposed in the court of directors by a party headed by Sullivan. In India he was succeeded by Vansittart, and there troubles soon arose, chiefly from the greed of the company's servants. MÍr Jafar, the NawÁb of Bengal, a self-indulgent and unpopular ruler, was deposed by the council in 1761, and his son-in-law, MÍr KÁsim, was made nawÁb in his place. It was a profitable business, for MÍr KÁsim spent £200,000 in presents to the council and ceded to the company the revenues of three districts, amounting to some £500,000 a year. Yet the exchange of nawÁbs proved an unwise step, for MÍr KÁsim was able and active. He moved his court from MurshidÁbÁd to Monghyr, at a greater distance from Calcutta, organised an army, and showed that he was ready to resist oppression.The revenues of the Indian princes were largely derived from tolls on the transit of merchandise. The company, which had the right of free exportation and importation, passed its goods free inland under the certificate of the head of a factory. The system was abused. The company paid its servants insufficient salaries, and they made up for it by engaging in private inland trade, using the company's passes to cover their goods. Armed with its power, they forced the natives to deal with their native agents, to buy dear and sell cheap; they monopolised the trade in the necessaries of life, and grew rich upon the miseries of the helpless people. Private trade and extorted presents enabled many a man who as a mere youth had obtained a writer's place to return to England after a few years with a handsome income. MÍr KÁsim saw his people starving, his officers ill-treated, and his treasury robbed, and prepared for revolt. Conscious of the impending danger, Vansittart made an agreement with him as to tolls. The council at Calcutta indignantly repudiated the agreement, and MÍr KÁsim was furious. Open hostilities began in June, 1763. One of the council, who was sent on an embassy to KÁsim, was killed by his troops. PatnÁ was seized by the English; it was retaken, and some 200 English were made prisoners. A little army under Major Adams, routed the nawÁb's forces, and on October 11 Monghyr was taken. MÍr KÁsim caused all his prisoners, save five, to be massacred, and fled for refuge to ShujÁ-ud-DaulÁ the nawÁb wazÍr of Oudh. PatnÁ was taken by storm and Bengal was completely subdued.MÍr Jafar was again made nawÁb, and paid large sums both to the company and its servants as compensation for their losses. The war, however, was not over, for the nawÁb wazÍr espoused the cause of MÍr KÁsim, and, in conjunction with the Mughal emperor, ShÁh Alam, threatened Bengal. Major Hector Munro took command of the British army, and found it in a mutinous condition; desertions to the enemy were frequent. He captured a large body of deserters, caused twenty-four of the ringleaders to be blown from guns, and by his dauntless conduct restored discipline among the troops. With about 7,000 men, of whom only some 1,000 were Europeans, he inflicted a crushing defeat on the allied forces, 50,000 strong, at BaxÁr on October 23, 1764. The enemy lost 6,000 men and 167 guns. Oudh lay at the disposal of the English, and ShÁh Alam sought refuge with the conquerors. Early in 1765 MÍr Jafar died, and the council at Calcutta, without consulting the emperor, appointed his son to succeed him, receiving in presents from him £139,357, besides money unaccounted for. These revolutions and wars cost the company much money, and, while its servants were enriching themselves, it incurred heavy debts. Clive was called upon to put an end to the maladministration of Bengal. He refused to return to India while Sullivan was chairman of the court of directors. After a sharp contest, in which large sums were spent, the proprietors put his party in power. He was invested with full authority as commander-in-chief and governor of Bengal to act in conjunction with a select committee.

He landed in India in May, 1765. During his administration of about eighteen months he secured for the company the virtual sovereignty over its conquests without dispossessing the nominal rulers, and he took measures for the reformation of the company's service. Averse from a forward policy of conquest, he restored Oudh to the nawÁb wazÍr on payment of £500,000. AllahÁbÁd and Kora were assigned to the emperor, together with a tribute from Bengal, and in return ShÁh Alam granted to the company the right of levying and administering the revenues of Bengal, Behar, and Orissa, together with jurisdiction in the Northern Circars. The nawÁb of Bengal received an annual pension of £600,000, and surrendered all his power to the company, except the right of criminal jurisdiction. Clive reorganised the army, and stopped the double batta, or allowance, granted by MÍr Jafar after the battle of Plassey. He forbade illicit trade and the receipt of presents, and secured the company's servants increased salaries. These reforms were effected in the face of violent opposition, both in civil and military quarters. Two hundred officers conspired to resign their commissions on the same day. Clive faced the mutiny successfully; he cashiered the leaders and accepted the submission of the younger men. Ill-health obliged him to return to England in January, 1767.

The enormous private fortunes made in India led people to believe that the company was far richer than it really was. During the late wars the dividend was 6 per cent. In 1766 the proprietors urged an increase. To this the directors objected that the debts of the company were heavy, and that a premature increase would raise the price of stock to a point at which it could not be maintained, and might end in a disaster like that of the South Sea Company. The ministers sent a message of warning, announcing that the affairs of the company would probably be considered in parliament. They concerned the public, for the company enjoyed protection and privileges granted by the nation. Nevertheless the proprietors carried their point, and a dividend of 10 per cent. was declared. Chatham held that the time had come for parliament to inquire by what right the company administered its territorial revenues. He considered that it had no right to its new position of a virtually sovereign power, that the sovereignty of the crown should be asserted, and that in return for the privileges which it enjoyed it should contribute a portion of its revenues to the national treasury. The company should apply to parliament to make good its defective title, and parliament should then settle what portion of its revenues should be assigned to it by way of favour. His ideas were based on an imperial policy. As early as 1759 he held that the territorial acquisitions of the company should be claimed for the nation. With him it was a matter not merely of revenue but of government, and though his ideas are indistinctly indicated, and were perhaps vaguely formed, it is probable that he had in his mind some idea of making the government of India an imperial matter. Yet, sharing as he did the general belief as to the wealth of the company, he certainly attached much importance to the possibility of obtaining from it an increase of the public revenue.

A special reason may be discerned for his desire to obtain such an increase at the end of 1766. The government wanted money; there was a heavy debt on the civil list, and the navy needed a large grant. An increase of taxation was inadvisable, for corn was dear. Various schemes for the increase of revenue were in the air. Many members of parliament, the court party, the country interest, and the Grenville and Bedford connexions were regretting the repeal of the stamp act. "We must look to the East and not to the West," wrote Beckford to Chatham,[75] and he spoke the mind of his leader. The cabinet was divided. Grafton and Shelburne agreed with Chatham that the question of the company's rights should be decided by parliament. Townshend declared that it would be "absurd" to force the company to share its power with the crown, and both he and Conway desired that the question of right should be waived and that its relations with the government should be settled by amicable arrangement. In May, 1767, the proprietors insisted on a dividend at the rate of 12½ per cent. A motion was carried to bring the affairs of the company before parliament. Townshend, as Chatham said, "marred the business"; he managed to open the door for negotiation, and to make it a mere matter of money. In June, 1767, a bill was passed, based on an agreement with the company, which in return for the confirmation of its territorial revenues, bound itself to pay the government £400,000 a year for two years; and parliament prohibited a higher dividend than 10 per cent. The bill was violently opposed, specially by the Rockingham party, on the ground that it was an unjustifiable interference with the rights of property. In 1769 the agreement with the company was renewed, and permission was given for a dividend of 12½ per cent, on certain conditions. The company was then in debt over £6,000,000.

A new and formidable enemy had arisen in Southern India. In 1767 Haidar (Hyder) AlÍ, the ruler of Mysore, made war upon the English in conjunction with the NizÁm of HaidarÁbÁd. The allies were defeated, and the nizÁm made peace. Haidar, however, continued the war. He had a large force of cavalry which he brought to great perfection, and, as the English were deficient in that arm, he was able to do much mischief in the Karnatic. In April, 1769, having previously drawn the English army away from Madras by skilful manoeuvres, he suddenly appeared in the immediate neighbourhood of the town. The English were forced to make a treaty with him on his own terms. The news sent the company's stock down 60 per cent. The same year the crops failed in Bengal, and in 1770 there was a grievous famine which is said to have carried off a third of the inhabitants. Yet in spite of the decreasing revenue and the heavy debts of the company, the proprietors were receiving dividends of 12 and 12½ per cent.

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