 the European demand for precious metals, which were used to mint new coins; this increasing need for hard currency to remain in circulation in Europe reduced the supply of bullion available for trade in China, driving up costs and leading to competition between merchants in Europe and European merchants who traded with the Chinese. This market force resulted in a chronic trade deficit for European governments, who were forced to risk silver shortages in their domestic economies to supply the needs of their merchants in Asia (who as private enterprises still turned a profit by selling valuable Chinese goods to consumers in Europe). This gradual effect was greatly exacerbated by a series of large-scale colonial wars between Great Britain and Spain in the mid 18th century; these conflicts disrupted the international silver market and eventually resulted in the independence of powerful new nations, namely the United States and Mexico. Without cheap silver from the colonies to sustain their trade, European merchants who traded with China began to take silver directly out of circulation in the already-weakened economies of Europe to pay for goods in China. This angered governments, who saw their economies shrink as a result, and fostered a great deal of animosity towards the Chinese for their restriction of European trade. The Chinese economy was unaffected by fluctuations in silver prices, as China was able to import Japanese silver to stabilize its money supply. European goods remained in low demand in China, ensuring the longstanding trade surplus with the European nations continued. Despite these tensions, trade between China and Europe grew by an estimated 4% annually in the years leading up to the start of the opium trade.
Opium as a medicinal ingredient was documented in Chinese texts as early as the Tang dynasty, but the recreational usage of narcotic opium was limited. As with India, opium (then limited by distance to a dried powder, often drunk with tea or water) was introduced to China and Southeast Asia by Arab merchants. The Ming dynasty banned tobacco as a decadent good in 1640, and opium was seen as a similarly minor issue. The first restrictions on opium were passed by the Qing in 1729 when Madak (a substance made from powdered opium blended with tobacco) was banned. At the time, Madak production used up most of the opium being imported into China, as pure opium was difficult to preserve. Consumption of Javanese opium rose in the 18th century, and after the Napoleonic Wars resulted in the British occupying Java, British merchants became the primary traders in opium. The British realized they could reduce their trade deficit with Chinese manufactories by counter-trading in narcotic opium, and as such efforts were made to produce more opium in the Indian colonies. Limited British sales of Indian opium began in 1781, with exports to China increasing as the East India Company solidified its control over India.
The British opium was produced in Bengal and the Ganges River Plain. Rather than develop the Indian opium industry themselves, the British were able to inherit an existing opium industry from the declining Mughal Empire, which had for centuries profited by selling unrefined opium inside the empire. However, unlike the Mughals the British saw opium as a potentially valuable export. The East India Company itself neither produced nor shipped opium, but did set the horticultural laws allowing for opium cultivation and actively facilitated the transport of the drug to company-controlled ports. From Calcutta, the company's Board of Customs, Salt, and Opium concerned itself with quality control by managing the way opium was packaged and shipped. No poppies could be cultivated without the company's permission, and the company banned private businesses from refining opium. All opium in India was sold to the company at a fixed rate, and the company hosted a series of public opium auctions every year from November to March. The difference of the company-set price of raw opium and the sale price of refined opium at auct