Merchantile Theory Essay
What Is Mercantilism, Define Mercantilism Mercantilism is the name given to the economic literature and practice of the period between 1500 and 1750 - Merchantile Theory Essay introduction. Although mercantilist literature was produced in all the developing economies of Western Europe, the most significant contributions were made by the English and the French. Whereas the economic literature of scholasticism was written by medieval churchmen, the economic theory of mercantilism was the work of merchant businessmen.
The literature they produced focused on questions of economic policy and was usually related to a particular interest the merchant-writer was trying to promote. For this reason, there was often considerable skepticism regarding the analytical merits of particular arguments and the validity of their conclusions. Few authors could claim to be sufficiently detached from the issues to render objective analysis. However, throughout the mercantilistic period, both the quantity and the quality of economic literature grew.
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The mercantilistic literature from 1650 to 1750 was of distinctly higher quality; scattered throughout it are nearly all the analytical concepts on which Adam Smith based his Wealth of Nations, which was published in 1776. Every Person His Own Economist The age of mercantilism has been characterized as one in which every person was his own economist. Since the various writers between 1500 and 1750 held diverse views, it is difficult to generalize about the resulting literature.
Furthermore, each writer tended to concentrate on one topic, and no single writer was able to synthesize these contributions impressively enough to influence the subsequent development of economic theory. Perhaps this was because economics as an intellectual discipline had not yet found a home in the university; rather, it was largely studied by men of affairs who wrote pamphlets about the particular economic problems that concerned them. Power and Wealth Mercantilism can best be understood as an intellectual reaction to the problems of the times.
In this period of the decline of the manor and the rise of the nation-state, the mercantilists tried to determine the best policies for promoting the power and wealth of the nation. Just as Machiavelli, the Italian statesman, political theorist, and author of The Prince (1513), had advised rulers about expedient political policies, the mercantilists advised them about the economic policies that would best consolidate and increase the power and prosperity of the developing economies. The mercantilists proceeded on the assumption that the total wealth of the world was fixed.
Using the same assumption, the scholastics had reasoned that when trade took place between individuals, the gain of one was necessarily the loss of another. The mercantilists applied this reasoning to trade between nations, concluding that any increase in the wealth and economic power of one nation occurred at the expense of other nations. Thus, the mercantilists emphasized international trade as a means of increasing the wealth and power of a nation and, in particular, focused on the balance of trade between nations.
The goal of economic activity, according to most mercantilists, was production—not consumption, as classical economics would later have it. For the mercantilists, the wealth of the nation was not defined in terms of the sum of individual wealth. They advocated increasing the nation’s wealth by simultaneously encouraging production, increasing exports, and holding down domestic consumption. Thus, the wealth of the nation rested on the poverty of the many. Although the mercantilists laid great stress on production, a plentiful supply of goods within a country was considered undesirable.
High levels of production along with low domestic consumption would permit increased exports, which would increase the nation’s wealth and power. The mercantilists advocated low wages in order to give the domestic economy competitive advantages in international trade. Also, they believed that wages above a subsistence level would result in a reduced labor effort: higher wages would cause laborers to work fewer hours per year, and national output would fall. Thus, when the goal of economic activity is defined in terms of national output and not in terms of national consumption, poverty for the individual benefits the nation.
Balance of Trade According to mercantilistic thinking, a country should encourage exports and discourage imports by means of tariffs, quotas, subsidies, taxes, and the like, in order to achieve a so-called favorable balance of trade. Production should be stimulated by governmental interference in the domestic economy and by the regulation of foreign trade. Protective duties should be placed on manufactured goods from abroad; and the importation of cheap raw materials, to be used in manufacturing goods for export, should be encouraged.
Historians of economic thought disagree over the nature and significance of the balance of trade doctrine in mercantilist literature. It is clear, however, that many early mercantilists, who defined the wealth of a nation not in terms of the nation’s production or consumption of goods but in terms of its holdings of precious metals, argued for a favorable balance of trade because it would lead to a flow of precious metals into the domestic economy to settle the trade balance. The first mercantilists argued that a favorable balance of trade should be struck with each nation.
A number of subsequent writers, however, argued that only the overall balance of trade with all nations was significant. Thus, England might have an unfavorable balance of trade with India, but because it could import from India cheap raw materials that could be used to manufacture goods in England for export, it might well have a favorable overall trade balance when all nations were taken into account. A related issue concerned the export of precious metals or bullion. The early mercantilists recommended that the export of bullion be strictly prohibited.
Later writers suggested that exporting bullion might lead to an improvement in overall trade balances if the bullion were used to purchase raw materials for export goods. The mercantilists’ persistent advocacy of a favorable balance of trade raises some perplexing questions, which are best handled by examining the mercantilists’ views about money. Money and Mercantilism, Economic Mercantilism Adam Smith devoted nearly two hundred pages of Wealth of Nations to a harsh and only partly justifiable criticism of mercantilistic theory and practice, articularly its equating of the wealth of a nation with the stock of precious metals internally held. Early mercantilists were very impressed with the significance of the tremendous flow of precious metals into Europe, particularly into Spain, from the New World. However, later mercantilists did not subscribe to this view and were able to develop useful analytical insights into the role of money in an economy. The relationship between the quantity of money and the general level of prices was recognized as early as 1569 by the Frenchman Jean Bodin.
He offered five reasons for the rise in the general level of prices in Western Europe during the sixteenth century, the most important being the increase in the quantity of gold and silver there resulting from the discovery of the New World. Nonetheless, in the early 1500s there was little comprehension of the consequences of trade balances between nations and almost no understanding of the consequences of increases in the money supply. By the middle of the eighteenth century, however, considerable analytical progress had been made in understanding these issues.
During the intervening period, there was a fairly steady increase of analytical insight into the operation of a market economy. Development during the period from 1660 to 1776 was particularly noteworthy. A central feature of mercantilist literature is its conviction that monetary factors, rather than real factors, are the chief determinants of economic activity and growth. Mercantilists maintained that an adequate supply of money is particularly essential to the growth of trade, both domestic and international.
Changes in the quantity of money, they believed, generate changes in the level of real output—in yards of cloth and bushels of grain. All this would change with the advent of Adam Smith and classical economics, which would contend that the level of economic activity and its rate of growth depend upon a number of real factors: the quantity of labor, natural resources, capital goods, and the institutional structure. Any changes in the quantity of money, classical economists averred, would influence the level of neither output nor growth, but only the general level of prices. Modern Analysis of Mercantilism
Evaluating past writers raises a number of difficult but interesting issues. There are always differences of opinion about what particular writers really meant by what they said. Imprecise language can make interpretation difficult. When J. M. Keynes discussed the mercantilists in a section of his General Theory titled “Notes on Mercantilism,” he credited them with having had insight into an acceptable policy by which to stimulate economic development. But Adam Smith, other classical economists, and the orthodox line of economic thinkers from 1776 until the time of Keynes found little of merit in much of the mercantilist literature.
This divergence of opinion is understandable, though, when we compare some aspects of classical and Keynesian thought. Because Smith and other classical economists stressed the real forces that determine the level of output, their theories focused almost exclusively on supply. However, because Keynes emphasized the role of aggregate demand, he found some common bonds between his theory and that of the mercantilists. He was sympathetic to their underconsump-tionist views and declared sound their belief that increases in the quantity of money would increase output.
The mercantilists, Keynes said, held that a favorable balance of trade would increase domestic spending and thereby raise the level of income and employment. Another problematical aspect of evaluating the contributions of past writers lies in the need to assess their intellectual achievement. Should this judgment be based wholly on modern standards, or should it be kept strictly in the context of the analytical apparatus of their times? Even though most historians of ideas take a position between these polar views, a good deal of controversy as to the relative merits of past economists still results.
Another attitude toward mercantilism deserves mention. Some assessments of mercantilism have scrutinized not the ideas of its proponents but their motivations. The mercantilists, in the jargon of modern economics, were “rent-seekers. ” They were driven by profit motives to use government to gain economic privilege for themselves. They were generally merchants who favored government granting of monopolies that would enable the merchant-monopolists to charge higher prices than would have been possible without monopoly privileges. Theoretical Contributions of the Mercantilists
The study of mercantilism by historians of economic theory demonstrates that from about 1660 to 1776 the quantity and quality of economic analysis increased. The improvement in the quality of economic analysis during the later part of the mercantilistic era was so pronounced that the period has been characterized as a transitional time containing the origins of scientific economics. Possibly the most significant accomplishment of the later mercantilists was the explicit recognition of the possibility of analyzing the economy. This development represented a transfer to the social sciences of attitudes then prevalent in the physical sciences.
It reached its full fruition after the time of Isaac Newton (1642-1727), and its impact is still felt today. The substitution of cause-and-effect analysis for the moral analysis of the scholastics does not represent a clear break with the past, however, because logical analysis was used by some of the scholastics and moralizing still exists in modern economic literature. But the view that the laws of the economy could be discovered by the same methods that revealed the laws of physics was an important step toward subsequent developments in economic theory.
Many mercantilists saw a highly mechanical causality in the economy and believed that if one understood the rules of this causality, one could control the economy. It followed that legislation, if wisely enacted, could positively influence the course of economic events and that economic analysis would indicate what forms of government intervention would effect a given end. Mercantilists realized, however, that government interference must not be haphazard or complicate basic economic truths such as the law of supply and demand.
Some of them correctly deduced, for example, that price ceilings set below equilibrium prices lead to excess demand and shortages. The later mercantilists frequently applied the concepts of economic man and the profit motive in stimulating economic activity. Governments, they said, cannot change the basic nature of human beings, particularly their egoistic drives. The politician takes these factors as given and attempts to create a set of laws and institutions that will channel these drives so as to increase the power and prosperity of the nation.
As we will see, many of the later mercantilists became aware of the serious analytical errors of their predecessors. They recognized, for example, that specie is not a measure of the wealth of a nation, that it was not possible for all nations to have a favorable balance of trade, that no one country could maintain a favorable balance of trade over the long run, that trade can be mutually beneficial to nations, and that advantages will accrue to nations that practice specialization and division of labor.
An increasing number of writers recommended a reduction in the amount of government intervention. Thus, the literature included statements of incipient classical liberalism. Yet none of the preclassical writers was able to present an integrated view of the operation of a market economy—the manner in which prices are formed and scarce resources are allocated. This failure of the mercantilists to reach the understanding eventually achieved by Adam Smith and subsequent classical economists may be attributable to one important difference between classical and mercantilistic theory.
The mercantilists believed there was a basic conflict between private interests and the public welfare. Therefore, they considered it necessary for government to channel private self-interest into public benefits. Classical economists, on the other hand, found a basic harmony in the system and saw public good as flowing naturally from individual self-interest. Even the later mercantilists who advocated laissez-faire policies lacked sufficient insight into the operation of the market to make an adequate argument to support them.
Still, the writings of the later mercantilists were used by Smith to develop his analysis. What is Physiocracy, Inversion Of Mercantilism and Physiocracy Adam Smith was influenced during his travel in France by a group of French writers who have become known as the physiocrats. They perceived the interrelatedness of the sectors of the economy and analyzed the working of nonregulated markets. Although mercantilism was much in evidence in eighteenth-century France, a new but short-lived movement called physiocracy began there around 1750.
Because it provided significant analytical insights into the economy, its influence on subsequent economic thought was considerable. Scholars of economic ideas often arbitrarily group people with divergent ideas into a school of thought, usually on the basis of a single similarity. However, the writings of the physio-cratic school express remarkably consistent views on all major points. There are three reasons for this. (1) Physiocracy developed exclusively in France. (2) The ideas of the physiocrats were presented over a relatively short period of time, from about 1750 to 1780. It has been said that no one was aware of physiocratic ideas before 1750, and after 1780 only a few economists had heard of them. ) (3) Physiocracy had an acknowledged intellectual leader, Francois Quesnay (1694-1774), whose ideas were accepted virtually without question by his fellow physiocrats. Their own writings were mainly designed to convince others of the merit of Quesnay’s economics. Natural Law The physiocrats, like the later English mercantilists, developed their economic theories in order to formulate correct economic policies.
Both groups believed that the correct formulation of economic policy required a correct understanding of the economy. Economic theory was therefore a prerequisite of economic policy. The physiocrats’ unique idea concerned the role of natural law in the formulation of policy. They maintained that natural laws governed the operation of the economy and that, although these laws were independent of human will, humans could objectively discover them—as they could the laws of the natural sciences. This idea contributed significantly to the development of economics and the social sciences.
The Interrelatedness of an Economy Even though physiocratic theory was deficient in logical consistency and detail, the physiocrats did determine the necessity for building theoretical models by isolating key economic variables for study and analysis. Using this process, they achieved significant insights into the interdependence of the various sectors of the economy on the levels of both macro- and microeconomic analysis. The major concern of the physiocrats was with the macroeconomic process of development. They recognized that France was lagging behind England in applying new agricultural techniques.
Some areas of northern France were introducing advanced techniques, but most of France was maintaining its old ways; thus, the country was developing unevenly. To cope with this problem, the physiocrats, like the English and French mercantilists, wished to discover the nature and causes of the wealth of nations and the policies that would best promote economic growth. French” mercantilism had been even more thoroughgoing in its regulation of domestic and foreign economic activity than its British counterpart, and physiocracy was an intellectual reaction to this regulation.
The physiocrats focused not on money but on the real forces leading to economic development. In reaction to the mercantilistic notion that wealth was created by the process of exchange, they studied the creation of physical value and concluded that the origin of wealth was in agriculture, or nature. In the economy of their time, more goods were produced than were needed to pay the real costs to society of producing those goods. Therefore, a surplus was generated. Their search for the origin and size of this surplus led them to the idea of the net product. The agricultural production process provides a good example of a net product.
After the various factors of production—seed, labor, machinery, and the like—are paid for, the annual harvest provides an excess. The physiocrats regarded this as resulting from the productivity of nature. Labor, according to them, could produce only enough goods to pay the costs of labor, and the same held true for the other factors of production, with the exception of land. Therefore, production from land created the surplus that the physiocrats called the net product. Manufacturing and other nonagricultural economic activities were considered “sterile,” because they created no net product.
The belief that only agricultural production was capable of returning to society an output greater than the social costs of that output may seem quaint today, but it may be explained by the fact that the physiocrats focused on physical productivity rather than value productivity. Also, because large-scale industry had not yet developed in France in the middle of the eighteenth century, the productivity of industry was not apparent in the economy of the physiocrats. The small employer with only a few employees did not seem to be making any surplus, and his standard of living was not significantly different from that of his employees.
Having established that the origin of the net product was in land, the physiocrats concluded that land rent was the measure of the society’s net product. Physiocratic Economic Policy The physiocrats’ contributions to microeconomic theory were not as significant as their contributions to macroeconomic theory. They believed that the basic motivation for the economic activities of human beings was the desire to maximize gain. Prices were formed in the market by economic activity; and the formation of these prices could be studied, because it was governed by natural laws independent of human will.
Although the physiocrats did not develop a coherent theory of prices, they concluded that free competition led to the best price and that society would benefit if individuals followed their self-interest. Furthermore, believing that the only source of a net product was agriculture, they concluded that the burden of taxes would ultimately rest on land. A tax on labor, for example, would be shifted to land, because competition had already ensured that the wage of labor was at a subsistence level.
Perhaps most important, the physiocrats began to be aware of the function of prices in integrating the activities of the various factors in the economy. Like the more perceptive mercantilists, they recognized that an individual who appears to be working independently in a market economy is actually working for others and that these independent activities are integrated by the price system. Their microeconomic analysis tended to lack detail. For example, they offered no detailed argument that free competition would result in an optimum allocation of resources.
But they did have some notion of the nature and function of relative price, an idea subsequently used by Adam Smith. Because the physiocrats believed that a natural order existed that was superior to any possible human design, they conceived of the economy as largely self-regulating and thus rejected the controls imposed by the mercantilist system. The proper role of government was to follow a policy of laissez faire—to leave things alone. In the hands of Adam Smith and subsequent economists, this idea was of tremendous importance in shaping the ideology of Western civilization.
Certain English writers were also advocating nonintervention as a general policy at the time, and they, too, influenced Smith. The physiocrats maintained that the primary obstacles to economic growth proceeded from the mercantilist policies regulating domestic and foreign trade. They objected particularly to the tax system of the mercantilists and advocated that a single tax be levied on land. Of course, according to their theory, all taxes would ultimately fall on land anyway, but only after causing much friction in the economic system.
The most unfortunate of the many governmental regulations, according to the physiocrats, was the prohibition on the export of French grain. It kept down the price of grain in France, they said, and was therefore an obstacle to agricultural development. Because the physiocrats did not foresee the development of manufacturing, they concluded that a laissez-faire policy would produce tremendous growth in French agriculture as the small-scale agriculture of the feudal economy was replaced by large-scale agriculture. Thus, the wealth and power of the French economy would be increased.
The mercantilists had, in effect, found the source of the net product to be exchange—particularly exchange in the form of international trade—and therefore advocated policies designed to foster a favorable trade balance. The physiocrats, who considered the source of the net product to be agriculture, maintained that laissez faire would lead to increased agricultural production and ultimately to greater economic growth. Mercantilism As The Economic Aspect Of Absolutism Mercantilist System, Age Of Mercantilism By the beginning of the seventeenth century, royal absolutism had emerged victorious all over Europe.
But a king (or, in the case of the Italian city-states, some lesser prince or ruler) cannot rule all by himself. He must rule through a hierarchical bureaucracy. And so the rule of absolutism was created through a series of alliances between the king, his nobles (who were mainly large feudal or post-feudal landlords), and various segments of large-scale merchants or traders. ‘Mercantilism’ is the name given by late nineteenth century historians to the politico-economic system of the absolute state from approximately the sixteenth to the eighteenth centuries.
Mercantilism has been called by various historians or observers a ‘system of Power or State-building’ (Eli Heckscher), a system of systematic state privilege, particularly in restricting imports or subsidizing exports (Adam Smith), or a faulty set of economic theories, including protectionism and the alleged necessity for piling up bullion in a country. In fact, mercantilism was all of these things; it was a comprehensive system of state-building, state privilege, and what might be called ‘state monopoly capitalism’.
As the economic aspect of state absolutism, mercantilism was of necessity a system of state-building, of Big Government, of heavy royal expenditure, of high taxes, of (especially after the late seventeenth century) inflation and deficit finance, of war, imperialism, and the aggrandizing of the nation-state. In short, a politico-economic system very like that of the present day, with the unimportant exception that now large-scale industry rather than mercantile commerce is the main focus of the economy.
But state absolutism means that the state must purchase and maintain allies among powerful groups in the economy, and it also provides a cockpit for lobbying for special privilege among such groups. Jacob Viner put the case well: The laws and proclamations were not all, as some modern admirers of the virtues of mercantilism would have us believe, the outcome of a noble zeal for a strong and glorious nation, directed against the selfishness of the profit-seeking merchant, but were the product of conflicting interests of varying degrees of respectability.
Each group, economic, social, or religious, pressed constantly for legislation in conformity with its special interest. The fiscal needs of the crown were always an important and generally a determining influence on the course of trade legislation. Diplomatic considerations also played their part in influencing legislation, as did the desire of the crown to award special privileges, con amore, to its favorites, or to sell them, or to be bribed into giving them, to the highest bidders. In the area of state absolutism, grants of special privilege included the creation by grant or sale of privileged ‘monopolies’, i. . the exclusive right granted by the Crown to produce or sell a given product or trade in a certain area. These ‘patents of monopoly’ were either sold or granted to allies of the Crown, or to those groups of merchants who would assist the king in the collection of taxes. The grants were either for trade in a certain region, such as the various East India companies, which acquired the monopoly right in each country to trade with the Far East, or were internal – such as the grant of a monopoly to one person to manufacture playing cards in England.
The result was to privilege one set of businessmen at the expense of their potential competitors and of the mass of English consumers. Or, the state would cartellize craft production and industry and cement alliances by compelling all producers to join and obey the orders of privileged urban guilds. It should be noted that the most prominent aspects of mercantilist policy -taxing or prohibiting imports or subsidizing exports – were part and parcel of this system of state monopoly privilege.
Imports were subject to prohibition or protective tariff in order to confer privilege on domestic merchants or craftsmen; exports were subsidized for similar reasons. The focus in examining mercantilist thinkers and writers should not be the fallacies of their alleged economic ‘theories’. Theory was the last consideration in their minds. They were, as Schumpeter called them, ‘consultant administrators and pamphleteers’ – to which should be added lobbyists. Their ‘theories’ were any propaganda arguments, however faulty or contradictory, that could win them a slice of boodle from the state apparatus.
As Viner wrote: The mercantilist literature… consisted in the main of writings by or on behalf of ‘merchants’ or businessmen, who had the usual capacity for identifying their own with the national welfare… The great bulk of the mercantilist literature consisted of tracts which were partly or wholly, frankly or disguisedly, special pleas for special economic interests. Freedom for themselves, restrictions for others, such was the essence of the usual program of legislation of the mercantilist tracts of merchant authorship. Mercantilism in Spain, Spanish Mercantilism
The seeming prosperity and glittering power of Spain in the sixteenth century proved a sham and an illusion in the long run. For it was fuelled almost completely by the influx of silver and gold from the Spanish colonies in the New World. In the short run, the influx of bullion provided a means by which the Spanish could purchase and enjoy the products of the rest of Europe and Asia; but in the long run price inflation wiped out this temporary advantage. The result was that when the influx of specie dried up, in the seventeenth century, little or nothing remained.
Not only that: the bullion prosperity induced people and resources to move to southern Spain, particularly the port of Seville, where the new specie entered Europe. The result was malinvestment in Seville and the south of Spain, offset by the crippling of potential economic growth in the north. But that was not all. At the end of the fifteenth century, the Spanish Crown cartellized the developing and promising Castilian textile industry by passing over 100 laws designed to freeze the industry at the current level of development.
This freeze crippled the protected Castilian cloth industry and destroyed its efficiency in the long run, so that it could not become competitive in European markets. Furthermore, royal action also managed to destroy the flourishing Spanish silk industry, which centred in southern Spain at Granada. Unfortunately, Granada was still a centre of Muslim or Moorish population, and so a series of vindictive acts by the Spanish Crown brought the silk industry to its virtual demise.
First, several edicts drastically limited the domestic use and consumption of silk. Second, silks in the 1550s were prohibited from being exported, and a tremendous increase in taxes on the silk industry of Granada after 1561 finished the job. Spanish agriculture in the sixteenth century was also crippled and laid waste by government intervention. The Castilian Crown had long made an alliance with the Mesta, the guild of sheep farmers, who received special privileges in return for heavy tax contributions to the monarchy.
In the 1480s and 1490s, enclosures that had been made in previous years for grain farming were all disallowed, and sheepwalks (cahadas) were greatly expanded by government decree at the expense of the lands of grain farmers. The grain farmers were also hobbled by special legislation passed on behalf of the carters’ guild – roads being in all countries special favourites for military purposes. Carters were specially allowed free passage on all local roads, and heavy taxes were levied on grain farmers to build and maintain the roads benefiting the carters.
Grain prices rose throughout Europe beginning in the early sixteenth century. The Spanish Crown, worried that the rising prices might induce a shift of land from sheep to grain, levied maximum price control on grain, while landlords were allowed unilaterally to rescind leases and charge higher rates to grain farmers. The result of the consequent cost-price squeeze was massive farm bankruptcies, rural depopulation, and the shift of farmers to the towns or the military.
The bizarre result was that, by the end of the sixteenth century, Castile suffered from periodic famines because imported Baltic grain could not easily be moved to the interior of Spain, while at the same time one-third of Castilian farm land had become uncultivated waste. Meanwhile, shepherding, so heavily privileged by the Spanish Crown, flourished for the first half of the sixteenth century, but soon fell victim to financial and market dislocations. As a result, Spanish shepherding fell into a sharp decline.
Heavy royal expenditures and taxes on the middle classes also crippled the Spanish economy as a whole, and huge deficits misallocated capital. Three massive defaults by the Spanish king, Philip II – in 1557, 1575 and 1596 -destroyed capital and led to large-scale bankruptcies and credit stringencies in France and in Antwerp. The resultant failure to pay Spanish imperial troops in the Netherlands in 1575 led to a thoroughgoing sack of Antwerp by mutinying troops the following year in an orgy of looting and rapine known as the ‘Spanish Fury’.
The name stuck even though these were largely German mercenaries. The once free and enormously prosperous city of Antwerp was brought to its knees by a series of statist measures during the late sixteenth century. In addition to the defaults, the major problem was a massive attempt by the Spanish king, Philip II, to hold on to the Netherlands and to stamp out the Protestant and Anabaptist heresies. In 1562, the Spanish king forcibly closed Antwerp to its chief import – English woollen broadcloths.
And, when the notorious duke of Alva assumed the governorship of the Netherlands in 1567, he instituted repression in the form of a ‘Council of Blood’, which had the power to torture, kill, and confiscate the property of heretics. Alva also levied a heavy value-added tax of 10 per cent, the alcabala, which served to cripple the sophisticated and interrelated Netherlands economy. Many skilled woollen craftsmen fled to a hospitable home in England.
Finally, the breakaway of the Dutch from Spain in the 1580s, and another Spanish royal default in 1607, led to a treaty with the Dutch two years later which finished Antwerp by cutting off its access to the sea and to the mouth of the River Scheldt, which was confirmed to be in Dutch hands. From then on, for the remainder of the seventeenth century, decentralized and free market Holland, and in particular the city of Amsterdam, replaced Flanders and Antwerp as the main commercial and financial centre in Europe. Mercantilism France, French Mercantilism
In France, which was to become in the seventeenth century the home par excellence of the despotic nation-state, the promising cloth trade and other commerce and industry in Lyons and the Languedoc region in the south were crippled by the devastating religious wars in the last four decades of the sixteenth century. In addition to the devastation and the killing and emigration of skilled Huguenot craftsmen to England, high taxes to finance the war served to cripple French economic growth. Then, the politique party, riding to power on the promise of ending religious strife, ushered in the unchecked reign of royal absolutism.
Crippling regulation of French industry had begun in the late fifteenth century, when the king issued scores of guild charters, conferring the power to control and to set standards of quality in the different occupations upon urban guilds and their officials. The Crown conferred cartellizing privileges on the guilds while levying taxes upon them in exchange. A major reason why Lyons had flourished during the sixteenth century was that it was granted a special exemption from guild rule and guild restrictions. By the end of the sixteenth century and the religious wars, the old regulations were still in place, ready to be enforced.
The new absolute monarchy was ready to enforce them and carry them further. Thus, in 1581, King Henry III ordered all the artisans of France to join and group themselves into guilds, whose orders were to be enforced. All except Parisian and Lyonnaise craftsmen were forced to confine their activity to their current towns; in that way, mobility in French industry was brought to an end. In 1597, Henry IV re-enacted and strengthened these laws, and proceeded to enforce them thoroughly. The result of this network of restriction was the total crippling of economic and industrial growth in France.
The typical ploy of preserving ‘standards of quality’ meant that competition was hobbled, production and imports limited, and prices kept high. It meant, in short, that consumers were not allowed the option of paying less money for lower-quality products. State-privileged monopolies grew as well, with similar effects; and upon the guilds and the monopolies the state levied increasing and stifling taxes. Growing inspection fees for quality also exacted a great burden on the French economy. Furthermore, luxury production was particularly subsidized, and the profits of expanding industries diverted to subsidize the weak.
Capital accumulation was thereby slowed and the growth of promising and strong industries crippled. The subsidizing and privileging of luxury industries meant a shift of resources away from cost-cutting innovations in new mass-production industries, and towards such areas of high-cost craftsmanship as glass and tapestries. The increasingly powerful French monarchy and aristocracy were large consumers of luxury goods and were therefore particularly interested in fostering them and maintaining their quality. Price was no great object since the monarchy and nobility lived off compulsory levies in any case.
Thus, in May 1665, the king established monopoly privileges for a group of French lace manufacturers, using the transparently canting argument that this was done to prevent ‘the export of money and to give employment to the people’. Actually, the point was to prohibit anyone other than the privileged licensees from making lace, in return for hefty fees paid to the Crown. Domestic cartels are worthless if the consumer is allowed to buy cheaper substitutes from abroad, and so protective tariffs were levied on imported lace.
But apparently smuggling abounded, and so in 1667, the government made enforcement easier by prohibiting all foreign lace whatsoever. In addition, to prevent unlicensed competition, it was necessary for the French Crown to prohibit any lace work at home, and to force all lace work to occur at fixed, visible points of manufacture. Thus, as the finance and commerce minister and general economic czar Jean-Baptiste Colbert wrote to a government lace supervisor: ‘I beg you to note with care that no girl must be allowed to work at the home of her parents and that you must oblige them all to go to the house of the manufactures… Perhaps the most important of the numerous mercantile restrictions on the French economy imposed in the seventeenth century was the enforcing of ‘quality’ standards on production and trade. This tended to mean a freezing of the French economy at the level of the early or mid-seventeenth century. That coerced freeze effectively hobbled or even prevented the innovation – new products, new technologies, new methods of handling production and exchange – so necessary to economic and industrial development.
One example was the loom, invented in the early seventeenth century, at first used principally for the production of the luxury item, silk stockings. When looms began to be applied to relatively mass-consumption woollen and linen goods, the hand-knitters balked at the efficient competition, and persuaded Colbert, in 1680, to outlaw the use of the loom on any article except silk. Fortunately, in the case of the loom, the excluded woollen and linen manufacturers were politically powerful enough to get the prohibition repealed four years later, and to get themselves included in the protectionist/cartellist system of advantage.
All these tendencies of French mercantilism reached a climax in the era of Jean-Baptiste Colbert (1619-83), so much so that he gave the name Colbertisme to the most hypertrophied embodiment of mercantilism. The son of a merchant born at Reims, Colbert early in life joined the French central bureaucracy. By 1651, he had become a leading bureaucrat in the service of the Crown, and from 1661 to his death 22 year later, Colbert was the virtual economic czar – absorbing such offices as superintendent of finance, of commerce, and secretary of state – under the great Sun King, that epitome of absolutist despotism, Louis XIV.
Colbert engaged in a virtual orgy of grants of monopoly, subsidies of luxury, and cartellizing privilege, and built up a mighty system of central bureaucracy, of officials known as intendants, to enforce the network of controls and regulations. He also created a formidable system of inspections, marks and measurements to be able to identify all those straying from the detailed list of state regulations. The intendants employed a network of spies and informers to ferret out all violations of the cartel restrictions and regulations. In the classic mode of spies everywhere, they also spied on each other, including the intendants themselves.
Penalties for violations ranged from confiscation and destruction of the ‘inferior’ production, to heavy fines, public mockery, and deprivation of one’s licence to stay in business. As the major historian of mercantilism summed up French enforcement: ‘No measure of control was considered too severe where it served to secure the greatest possible respect for the regulations. Two of the most extreme examples of the suppression of innovation in France occurred shortly after the death of Colbert during the lengthy reign of Louis XIV. Button-making in France had been controlled by various guilds, epending on the material used, the most important part belonging to the cord- and button-makers’ guild, who made cord buttons by hand. By the 1690s, tailors and dealers launched the innovation of weaving buttons from the material used in the garment. The outrage of the inefficient hand-button-makers brought the state leaping to their defence. In the late 1690s, fines were imposed on the production, sale, and even the wearing of the new buttons, and the fines were continually increased. The local guild wardens even obtained the right to search people’s houses and to arrest anyone in the street who wore the evil and illegal buttons.
In a few years, however, the state and the hand-button-makers had to give up the fight, since everyone in France was using the new buttons. More important in stunting France’s industrial growth was the disastrous prohibition of the popular new cloth, printed calicoes. Cotton textiles were not yet of supreme importance in this era, but cottons were to be the spark of the Industrial Revolution in eighteenth century England. France’s strictly enforced policy made sure that cottons would not be flourishing there.
The new cloth, printed calicoes, began to be imported from India in the 1660s, and became highly popular, useful for an inexpensive mass market, as well as for high fashion. As a result, calico printing was launched in France. By the 1680s, the indignant woollen, cloth, silk and linen industries all complained to the state of ‘unfair competition’ by the highly popular upstart. The printed colours were readily outcompeting the older cloths. And so the French state responded in 1686 by total prohibition of printed calicoes: their import or their domestic production.
In 1700, the French government went all the way: an absolute ban on every aspect of calicoes including their use in consumption. Government spies had a hysterical field day: ‘peering into coaches and private houses and reporting that the governess of the Marquis de Cormoy had been seen at her window clothed in calico of a white background with big red flowers, almost new, or that the wife of a lemonade-seller had been seen in her shop in a casquin of calico’. Literally thousands of Frenchmen died in the calico struggles, either being executed for wearing calicoes or in armed raids against alico-users. Calicoes were so popular, however, especially among French ladies, that the fight was eventually lost, even though the prohibition stayed on the books until the late eighteenth century. The smuggling of calicoes simply could not be stopped. But it was of course easier to enforce the prohibition against domestic calico manufacture than against the entire French consuming population, and so the result of the near-century of prohibition was to put a total stop to any domestic calico-printing industry in France.
The calico entrepreneurs and skilled craftsmen, many of them Huguenots oppressed by the French state, emigrated to Holland and England, strengthening the calico industry in those countries. Furthermore, pervasive maximum wage controls discouraged workers from moving or, in particular, entering industry, and tended to keep workers on the farm. Apprenticeship requirements of three or four years greatly restricted labour mobility and prevented entrance into crafts. Each master was limited to one or two apprentices, thereby preventing the growth of any single firm.
Before Colbert, most French revenue came from taxation, but grants of monopoly proliferated so much during the Colbert regime to try to pay for swelling expenditures, that monopoly grant revenue came to more than one-half of all state income. Most onerous and strictly enforced was the government’s salt monopoly. Salt producers were required to sell all salt produced to certain royal storehouses at fixed prices. The consumers were then forced to purchase salt and, to expand state income and deprive smugglers of revenue, to purchase a fixed amount at four times the free market price and divide it among the inhabitants.
Despite the enormous increase in monopoly grant revenue, taxes rose greatly in France as well. The land tax, or taille rielle, was the single largest source of revenue for the state, and in the early part of his regime, Colbert tried to expand the burden of the taille still further. But the taille was hampered by a network of exemptions, especially including all the nobility. Colbert tried his best to spy on the exempt, to ferret out ‘false’ nobles, and to stop the network of bribes of the tax-collectors.
An attempt to lower the taille slightly and greatly to increase the aides – indirect internal taxes at wholesale and retail, particularly on beverages – came a cropper on the bribery and corruption of the tax farmers. And then there was the gabelle (tax on salt), revenue from which rose tenfold in real terms between the early sixteenth and mid-seventeenth centuries. During the Colbert era, gabelle revenues rose not so much from an increase in tax rates as from the tightening of enforcement of the existing steep taxes.
The land and consumption taxes fell heavily upon the poor and upon the middle class, gravely crippling saving and investment, especially, as we have seen, in the mass-production industries. The parlous state of the French economy may be seen by the fact that, in 1640, just as King Charles I of England was facing a successful revolution largely brought about by his imposition of high taxes, the French Crown was collecting three to four times as much taxes per capita as did King Charles.
As a result of all these factors, even though the population of France was six times that of England during the sixteenth century, and its early industrial development had seemed promising, French absolutism and strictly enforced mercantilism managed to put that country out of the running as a leading nation in industrial or economic growth. Mercantilism in England: Textiles and Monopolies English Mercantilism,English Mercantilists It was in the sixteenth century that England began its meteoric rise to the top of the economic and industrial heap.
The English Crown in effect tried its best to hobble this development by mercantilist laws and regulations, but was thwarted because for various reasons the interventionist edicts proved unenforceable. Raw wool had for several centuries been England’s most important product, and hence its most important export. Wool was shipped largely to Flanders and to Florence to be made into fine cloth. By the early fourteenth century, the flourishing wool trade had reached a height of an average annual export of 35 000 sacks.
The state naturally then entered the picture, taxing, regulating and restricting. The principal fiscal weapon to build the nation-state in England was the ‘poundage’, a tax on the export of wool and a tariff on the import of woollen cloth. The poundage kept increasing to pay for continuing wars. In the 1340s King Edward III granted the monopoly of wool exporting to small groups of merchants, in return for their agreeing to collect the wool taxes on the king’s behalf.
This monopoly grant served to put out of business Italian and other foreign merchants who had predominated in the wool export trade. By the 1350s, however, these monopoly merchants had gone bankrupt, and King Edward finally resolved the issue by widening the monopoly privilege and extending it to a group of several hundred called the ‘Merchants of the Staple’. All wool exported had to go through a fixed town under the auspices of the company of the Staple, and be exported to a fixed point on the Continent, by the end of the fourteenth century at Calais, then under English control.
The monopoly of the Staple did not apply to Italy, but it did apply to Flanders, the major place of import for English wool. The Merchants, of the Staple soon proceeded to use their privileged monopoly in the time-honoured manner of all monopolists: to force lower prices upon English wool growers, and higher prices upon Calais and Flemish importers. In the short run, this system was quite pleasant for the Staplers, who were able to more than recoup their payments to the king, but in the long run the great English wool trade was crippled beyond repair.
The artificial gap between domestic and foreign wool prices discouraged the production of English wool, while it also injured the demand for wool abroad. By the mid-fifteenth century, average annual exports of wool had fallen greatly to only 8 000 sacks. The only benefit to Englishmen from this disastrous policy (apart from the joint short-term gains to King Edward and to the Staplers) was to give an unintended boost to the English production of woollen cloth. English cloth-makers could now benefit from their artificially lower prices of wool n England, coupled with the artificially high prices of wool abroad. Once again, the market managed to get a leg-up in its unending, zig-zag struggle with power. By the mid-fifteenth century fine, expensive, broadcloth ‘woollens’ were being produced abundantly in England, centring in the West Country, where swift rivers made water plentiful for fulling the woven cloth, and where Bristol could serve as the major port of export and entry. During the mid-sixteenth century, a new form of woollen cloth manufacture sprang up in England, soon to become dominant in the textile industry.
This was the ‘new draperies’, or worsteds, cheaper and lighter-weight cloth that could be exported to warmer climates and far more suitable for dyeing and decoration, since each individual strand of yarn was now visible in the cloth. Since the worsted was not fulled, the draperies did not need to be situated near running water, and so new textile manufacturers and workshops sprang up in the countryside – and in new towns such as Norwich and Rye -all round London.
London was the largest market for the cloths, so transportation costs were now cheaper, and furthermore, the south-east was a centre for sheep bearing the coarse, long stapled wool particularly suitable for worsted production. The new rural firms around London were also able to hire skilled Protestant textile artisans who had fled the religious persecution in France and the Netherlands. Most important, going to the countryside or to new towns meant that the expanding and innovating textile industry could escape from the stifling guild restrictions and frozen technology of the old towns.
Now that over 100 000 cloths were exported annually compared to a few thousand two centuries earlier, sophisticated production and marketing innovations took place. Establishing a ‘putting-out’ system, merchants paid artisans by the piece to work on cloth owned by the former. In addition, marketing middlemen sprang up, yarn brokers serving as middlemen between spinners and weavers, and drapers specializing in selling the cloth at the end of the production chain.
Seeing the rise of effective new competition, the older urban and broadcloth artisans and manufacturers turned to the state apparatus to try to shackle the efficient upstarts. As Professor Miskimin puts it: ‘As often happens during an evolutionary period, the older, vested interests turned to the state for protection against the innovative elements within the industry and sought regulation that would preserve their traditional monopoly. ‘ In response, the English government passed the Weavers’ Act in 1555, which drastically limited the number of looms per establishment outside the towns to only one or two.
Numerous exemptions, however, vitiated the effect of the act, and other statutes placing maximum controls on wages, restricting competition in order to preserve the old broadcloth industry came to naught from systemic lack of enforcement. The English government then turned to the alternative of propping up and tightening the urban guild structure to exclude competition. These measures succeeded, however, only in isolating and hastening the decay of the old urban broadcloth firms. For the new rural firms, especially the new draperies, were beyond guild jurisdiction.
Queen Elizabeth then went national, with the Statute of Artificers in 1563, which placed the nation-state squarely behind guild power. The number of apprentices each master could employ was severely limited, a measure calculated to stifle the growth of any one firm, and to decisively cartellize the wool industry and cripple competition. The number of years of apprenticeship, before the apprentice could rise to become a master, was universally extended by the statute to seven years, and maximum wage rates for apprenticeships were imposed throughout England.
Beneficiaries of the Statute of Artificers were not only the old, inefficient urban broadcloth guilds, but also the large landlords, who had been losing rural workers to the new, high-paying clothing industry. One announced aim of the Statute of Artificers was compulsory full employment, with labour directed to work according to a system of ‘priorities’; top priority was accorded to the state, which attempted to force workers to remain in rural and farm work and not leave the farm for glittering opportunities elsewhere.
To enter commercial or professional fields, on the other hand, required a graded series of qualifications such that the occupations were happy in having entry restricted by this cartellizing statute, while the landlords were delighted to have workers forced to remain on the farm at lower wages than they could achieve elsewhere. If the Statute of Artificers had been strictly enforced, industrial growth might have been permanently arrested in England.
But fortunately, England was far more anarchic than France, and the statute was not well enforced, particularly where it counted, in the new and fast-growing worsted industry. Not only was the countryside beyond the grasp of the urban guilds and their nation-state ally, but so too was fast-growing London, where custom decreed that any guild member could engage in any sort of trade, and no guild could exercise restrictive control over any line of production.
London as the great export centre for the new draperies – largely to Antwerp – partially accounted for the enormous growth of this city during the sixteenth century. London’s population grew at three times the rate of England as a whole over the century, specifically from 30—40 000 at the beginning of the sixteenth century to a quarter of a million early in the next. The London merchants were not, however, content with free market development, and power began to move in on the market.
Specifically, the London merchants began to reach for export monopoly. In 1486 the City of London created the Fellowship of the Merchant Adventurers of London, which claimed exclusive rights to the export of woollens to its members. For provincial merchants (outside of London) to join required a stiff fee. Eleven years later the king and parliament decreed that any merchant exporting to the Netherlands had to pay a fee to the Merchant Adventurers and obey its restrictionist regulations.
The state tightened the monopoly of the Merchant Adventurers in the mid-sixteenth century. First in 1552, the Hanseatic merchants were deprived of their ancient rights to export cloth to the Netherlands. Five years later, customs duties were raised on the import of cloth, thereby conferring more special privileges on the domestic cloth trade and increasing the financial ties of the Crown to the cloth merchants. And finally, in 1564, in Queen Elizabeth’s reign, the Merchant Adventurers were reconstituted under tighter and more oligarchic control.
In the late sixteenth century, however, the mighty Merchant Adventurers began to decline. The English war with Spain and the Spanish Netherlands lost the Adventurers the city of Antwerp, and at the turn of the seventeenth century, they were formally expelled from Germany. The English monopoly of woollen exports to the Netherlands and the German coast was finally abolished after the revolution of 1688. It is instructive to note what happened to printed calico in England as compared to the supression of the industry in France.
The powerful woollen industry managed to get the importation of calicoes banned from England in 1700, a decade or so after France, but in this case domestic manufacture was still permitted. As a result, domestic manufactures of calico spurted ahead, and when the woollen interests managed to get a prohibition of calico consumption act passed in 1720 (The Calico Act), the domestic calico industry was already powerful and could continue to export its wares. In the meanwhile, calico smuggling continued, as did domestic use – all stimulated by the fact that prohibition was not enforced nearly as strictly in England as in France.
Then, in 1735, the English cotton industry won an exemption for the domestic printing and use of ‘fustians’, a mixed cotton and linen cloth, which were the most popular form of calico in England in any case. As a result, the domestic cotton textile industry was able to grow and flourish in England throughout the eighteenth century. Prominent in English mercantilism was the pervasive creation by the Crown of grants of monopoly privilege: exclusive power to produce and sell in domestic and in foreign trade.
The creation of monopolies reached its climax in the reign of Queen Elizabeth (1558-1603), in the latter half of the sixteenth century. In the words of historian, Professor S. T. Bindoff: ‘… the restrictive principle had, like some giant squid, fastened its embracing tentacles round many branches of domestic trade and manufacture’, and ‘in the last decade of Elizabeth’s reign scarcely an article in common use – coal, soap, starch, iron, leather, books, wine, fruit – was unaffected by patents of monopoly’ . In sparkling prose, Bindoff writes how lobbyists, using the lure of monetary ain, obtained royal courtiers to sponsor their petitions for grants of monopoly: ‘their sponsorship was usually a mere episode in the great game of place-and-fortune-hunting which swayed and swirled incessantly around the steps of the throne’. Once granted their privileges, the monopolists got themselves armed by the state with powers of search-and-seizure to root out all instances of now illegal competition. As Bindoff writes: The ‘saltpetre men of the gunpowder contract dug in every man’s house’ for the nitrate-laden soil which was their raw material.
The minions of the playing-card monopoly invaded shops in search of cards lacking its seal and browbeat their owners, under threat of summons to a distant court, into compounding for their offences. The search-warrant was, indeed, indispensable to the monopolist if he were to eliminate competition and leave himself free to fix the price of his wares. 7 The result of this expulsion of competition, as we might expect, was the lowering of quality and the raising of price, sometimes by as much as 400 per cent. England was pre-eminently the home of foreign trade companies receiving grants of monopoly for trade with portions of the globe.
The granddaddy of the English foreign trade companies was the Muscovy Company, chartered in 1553, and granted a monopoly of all English trade with Russia and Asia through the White Sea port of Archangel. In the late 1570s and early 1580s, Queen Elizabeth granted trading privileges to a spate of new monopoly companies including the Barbary, Eastland, and Levant Companies. A small group of politically powerful men, centred originally in the Muscovy Company, was at the core of every one of these monopoly companies.
The Muscovy Company, for a while, held a monopoly on all exploration and trade with North America. Further, when in the 1580s the Muscovy Company’s trade with Russia was severely injured by the Cossacks’ disruption of the Volga trade route from Asia, Muscovy Company leaders formed both the Turkey Company and the Venice Company in 1581 for trading with India. The two companies merged in 1592 into the Levant Company, which enjoyed a monopoly grant trade with India through the Levant and Persia. Running like a powerful thread through all these interlocking monopoly ompanies was the person and the family of Sir Thomas Smith (1558-1625). Smith’s grandfather, Andrew Judd, was a principal founder of the Muscovy Company. His father, Sir Thomas Smith, Sr (1514-77), attorney, had been an architect of the Tudor system of royal absolutism, high taxation, and economic restriction. By the 1590s, the junior Smith was the governor – the head – of literally every single monopoly company concerned with foreign trade and colonization. These included the Muscovy Company, which held the monopoly charter for the colonization of Virginia.
But the climax of Smith’s career came when, to all his other posts, was added governor of the mighty East India Company, chartered in 1600 with a monopoly of all trading to the East Indies. Enserfdom in Eastern Europe What happened in eastern Europe was even worse than mercantilism. There, absolutism by the kings and the feudal nobility was so rampant and unchecked that they decided to crush nascent capitalism. Former serfs, now free, had been moving from the rural lands to the towns and cities, there to work for higher wages and better opportunities in emerging capitalist production and industry.
By the beginning of the fifteenth century, eastern Europe, specifically Prussia, Poland and Lithuania, had a freed peasantry. Towns and monetary exchange flourished, and clothmaking and manufacturing grew and prospered. In the sixteenth century, however, the state and the nobility of eastern Europe reasserted themselves and re-enserfed the peasantry. In particular, a rise in the price of grain (mainly rye) in Europe in the early sixteenth century made grain farming more profitable, spurring the socializing of cheap labour in service of the noble landlords.
The peasants were forced back on to the land, and compelled to remain there, and were also coerced into corvees (periodic forced labour for the nobility). The peasants were forced into large manorial estates owned by the nobles, since large estates meant cheaper costs of supervising and coercing peasant labour on the part of the nobility. In addition, in Poland, the nobles induced the state to pass further laws, severely restricting the activities of urban merchants. Polish merchants now had to pay higher tolls for shipping produce on the Vistula River than did landlords, and Polish merchants were prohibited from exporting domestic products.
Moreover, the repression of the formerly free peasantry greatly lowered their money income for purchasing goods. These policies combined to destroy the Polish towns, the urban economy, and the internal market for Polish goods. As Professor Miskimin writes, ‘Out of self-interest the nobles successfully contrived to crush Polish economic development in order to reserve for themselves the rich grain trade and to assure adequate supplies of agricultural labor for the maximum exploitation of their estates’.
In Hungary, a similar process of re-enserfment occurred, but in the service of cattle-raising and wine-growing rather than rye production. In the later Middle Ages, rents by the peasantry had been converted from payments in kind to monetary payments. Now, in the sixteenth century, the nobles markedly increased the rents and reconverted them into payments in kind. Taxes on peasants were raised substantially and the burden of forced corvee labour was increased greatly in one area ninefold from seven days per year to 60.
The lords got themselves granted a tight monopoly of wine sales, as well as exemptions from heavy export taxes on cattle payable by merchants. In that way, the landlords gained themselves privileged monopolies of buying and selling for the vital wine and cattle trades. Mercantilism and inflation, Mercantilism Effect The post-medieval state acquired most of its eagerly sought revenues by taxation. But the state has always been attracted by the idea of creating its own money in addition to plundering directly the wealth of its subjects.
Before the invention of paper money, however, the state was limited in money creation to occasional debasements of the coinage, of which it had long managed to secure a compulsory monopoly. For debasement was a one-shot process, and could not be used, as the state would always like, to create money continually and feed it into state coffers for use in building palaces, pyramids, and other consumption goods for the state apparatus and its power elite. The highly inflationary instrument of government paper money was first discovered in the Western world in French Quebec in 1685.
Monsieur Meules, the governing intendant of Quebec, pressed as usual for funds, decided to augment them by dividing some playing cards into quarters, marking them with various denominations of French currency, and then using them to pay for wages and materials. This card money, later redeemed in actual specie, soon became repeatedly issued paper tickets. The first more familiar form of government paper began five years later, in 1690, in the British colony of Massachusetts. Massachusetts had sent soldiers on one of their customary plunder expeditions against prosperous French Quebec, but this time had been beaten back.
The disgruntled Massachusetts soldiery was even more irritated by the fact that their pay had always come out of their individual shares of French booty sold at auction, but that now there was no money for them to collect. The Massachusetts government, beset by demands for payment of their salary by a mutinous soldiery, was not able to borrow the money from Boston merchants, who shrewdly considered its credit rating unworthy. Finally, Massachusetts hit upon the expedient of issuing 7 000 pounds in paper notes, supposed to be redeemable in specie in a few years.
Inevitably, the few years began to stretch out on the horizon, and the government, delighted with this new-found way of acquiring seemingly costless revenue, poured on the printing presses, and quickly issued 40 000 more paper pounds. Fatefully, paper money had been born. It was to be two decades before the French government, under the influence of the fanatically inflationist Scottish theoretician John Law, turned on the taps of paper money inflation at home. The English government turned instead to a more subtle device for accomplishing the same objective: the creation of a new institution in history: a central bank.
The key to English history in the seventeenth and eighteenth centuries is the perpetual wars in which the English state was continually engaged. Wars meant gigantic financial requirements for the Crown. Before the advent of the central bank and government paper, any government not willing to tax the country for the full cost of war relied on an ever more extensive public debt. But if the public debt continues to rise, and taxes are not increased, something has to give, and the piper must be paid.
Before the seventeenth century, loans were generally made by banks, and ‘banks’ were institutions in which capitalists lent out funds that they had saved. There was no deposit banking; merchants who wanted a safe place to keep their surplus gold deposited them in the King’s Mint in the Tower of London – an institution accustomed to storing gold. This habit, however, proved highly costly, for King Charles I, needing money shortly before the outbreak of the civil war in 1638, simply confiscated the huge sum of 200 000 pounds in gold stored at the Mint – announcing it to be a ‘loan’ from the depositors.
Understandably shaken by their experience, merchants began depositing their gold in the coffers of private goldsmiths, who were also accustomed to the storing and safe keeping of precious metals. Soon, goldsmiths’ notes began to function as private bank notes, the product of deposit banking. The Restoration government soon needed to raise a great deal of money for wars with the Dutch. Taxes were greatly increased, and the Crown borrowed extensively from the goldsmiths. In late 1671, King Charles II asked the bankers for further large loans to finance a new fleet.
Upon the goldsmiths’ refusal, the king proclaimed, on 5 January 1672, a ‘stop of the Exchequer’, that is, a wilful refusal to pay any interest or principal on much of the outstanding public debt. Some of the ‘stopped’ debt was owed by the government to suppliers and pensioners, but the vast bulk was held by the victimized goldsmiths. Indeed, of the total stopped debt of 1. 21 million pounds, 1. 17 million was owned by the goldsmiths. Five years later, in 1677, the Crown grudgingly began paying interest on the stopped debt.
But by the time of the eviction of James II in 1688, only a little over six years of interest had been paid out of the 12 years’ debt. Furthermore, the interest was paid at the arbitrary rate of 6 per cent, even though the king had originally contracted to pay interest at rates ranging from 8 to 10 per cent. The goldsmiths were even more intensively thwarted by the new government of William and Mary, ushered in by the Glorious Revolution of 1688. The new regime simply refused to pay any interest or principal on the stopped debt.
The hapless creditors took the case to court, but while the judges agreed in principle with the creditors’ case, their decision was overruled by the Lord Keeper, who candidly argued that the government’s financial problems must take precedence over justice and property right. The upshot of the ‘stop’ was that the House of Commons settled the affair in 1701, decreeing that half of the capital sum of the debt be simply wiped out; and that interest on the other half begin to be paid at the end of 1705, at the remarkable rate of 3 per cent.
Even that low rate was later cut to two-and-a-half. The consequences of this declaration of bankruptcy by the king were as could be predicted: public credit was severely impaired, and financial disaster struck for the goldsmiths, whose notes were no longer acceptable to the public, and for their depositors. Most of the leading goldsmith-creditors went bankrupt by the 1680s, and many ended their lives in debtors’ prison. Private deposit banking had received a crippling blow, a blow which would only be overcome by the creation of a central bank.
The stop of the Exchequer, then, coming only two decades after the confiscation of the gold at the Mint, managed virtually to destroy at one blow private deposit banking and the government’s credit. But endless wars with France were now looming, and where would government get the money to finance them? Salvation came in the form of a group of promoters, headed by the Scot, William Paterson. Paterson approached a special committee of the House of Commons formed in early 1693 to study the problem of raising funds, and proposed a remarkable new scheme.
In return for a set of important special privileges from the state, Paterson and his group would form the Bank of England, which would issue new notes, most of which would be used to finance the government’s deficit. In short, since there were not enough private savers willing to finance the deficit, Paterson and company were graciously willing to buy interest-bearing government bonds, to be paid for by newly created bank notes, carrying a raft of special privileges with them. As soon s Parliament duly chartered the Bank of England in 1694, King William himself and various MPs rushed to become shareholders of this new money-creating bonanza. William Paterson urged the English government to grant Bank of England notes legal tender power, but this was going too far, even for the British Crown. But Parliament did give the bank the advantage of holding deposits of all government funds. The new institution of government-privileged central banking soon demonstrated its inflationary power.
The Bank of England quickly issued the enormous sum of 760 000 pounds, most of which were used to buy government debt. This issue had an immediate and substantial inflationary impact, and in two short years, the Bank of England was insolvent after a bank run, an insolvency gleefully abetted by its competitors, the private goldsmiths, who were happy to return to it the swollen Bank of England notes for redemption of specie. At this point, the English government made a fateful decision: in May 1696, it simply allowed the bank to ‘suspend specie payment’.
In short, it allowed the bank to refuse indefinitely to pay its contractual obligations to redeem its notes in gold, while at the same time continuing blithely in operation, issuing notes and enforcing payments upon its own debtors. The bank resumed specie payments two years later, but this act set a precedent for British and American banking from that point on. Whenever the bank inflated itself into financial trouble, the government stood ready to allow it to suspend specie payments.
During the last wars with France, in the late eighteenth and early nineteenth century, the bank was allowed to suspend payments for two decades. The same year, 1696, the Bank of England had another scare: the spectre of competition. A Tory financial group tried to establish a national land bank, to compete with the Whig-dominated central bank. The attempt failed, but the Bank of England moved quickly to induce Parliament, in 1697, to pass a law prohibiting any new corporate bank from being established in England.
Any new bank would have to be either proprietary or owned by a partnership, thereby severely limiting the extent of competition with the bank. Furthermore, counterfeiting of Bank of England notes was now made punishable by death. In 1708, Parliament followed up this set of privileges by another crucial one: it now became unlawful for any corporate bank other than the Bank of England, and for any bank partnership over six persons, to issue notes. And, moreover, incorporated banks and partnerships over six were also prohibited from making any short-term loans. The Bank of England now only had to compete with tiny banks.
Thus, by the end of the seventeenth century, the states of western Europe, particularly England and France, had discovered a grand new route towards the aggrandizement of state power: revenue through inflationary creation of paper money, either by government or, more subtly, by a privileged, monopolistic, central bank. In England, private banks of deposit were inspired to proliferate (especially checking accounts) under this umbrella, and the government was at last able to expand the public debt to fight its endless wars; during the French war of 1702-13, for example it was able to finance 31 per cent of its budget via public debt.
Critics of Mercantilism, Theories Of International Trade The mercantile system was the dominant form of economic thought in the 17th century, and it was clearly the pattern of the practical statesmanship of the times. Nevertheless, another system of thought hostile to Mercantilism was growing increasingly popular. While the origin of the new ideas was in England (for at least the first hints of the new doctrine appear in English literature) France was the first nation to adopt them as a natural philosophy and to give them practical expression.
Some writers in economic history look upon Petty, Locke, and North as the authors who laid the foundations for the revolutionary doctrine of freedom in trade. Although Petty is usually classified as a Mercantilist because of his general acceptance of the philosophy of Mercantilism, his greatest contribution was a destruction of the mercantile theory of money and prices. Hence his inclusion among the forerunners of free trade. He understood that a nation needed money, but he believed there could be too much or too little f it, thus affecting price levels. Although the idea of an automatic control of the quantity of money in a nation was not yet developed, Petty advocated the removal of all restrictions upon the export of money. His work in statistics on the commerce of Ireland showed that an abundance of exports under certain circumstances was actually harmful, and that other things than goods and money influenced a nation’s economic position. Locke’s importance lay not in his economic ideas, but in the philosophical support he gave to the search for freedom generally.
As a matter of fact, a survey of his purely economic writings might lead one to label him as a Mercantilist. He believed in the importance of a nation having a greater abundance of the precious metals than its neighbors, and maintained that in the absence of mines such abundance of gold and silver could be acquired only through conquest or commerce. But in his opposition to arbitrary authority and his explanation of the advantages of individual liberty he challenged the basic assumptions of Mercantilism.
For purely economic criticism of mercantilist ideas of trade no one in the 17th century surpassed the directness and forcefulness of the writings of Sir Dudley North. In his Discourse upon Trade, published in 1691, he showed that wealth could exist independently of gold or silver. Agriculture and industry were the true sources of wealth. Money he conceded was one element of wealth, and it performed invaluable services in facilitating the exchange of goods. The quantity of money in a country might be in excess or less than the requirements of the nation’s trade but this was something which would regulate itself without human interference.
North’s belief in the importance of domestic trade was extraordinary in a world so dominated by the concern over foreign trade, but it was quite logical considering the emphasis he placed upon domestic agriculture and industry. He condemned the practice of granting business privileges and concessions to one particular group of merchants, saying that every such exclusive privilege was to the public’s disadvantage. North stands out as an independent thinker, as a herald of the new economic era that was ushered in nearly a century later by Adam Smith.
The names of Roger Coke, Nicholas Babton, and Charles Davenant should be added to the list of critics of Mercantilism. Their work kept aflame the smoldering fires of discontent that were threatening to destroy the doctrine of foreign trade operated under government control for the sake of more metal. Coke pointed out the probable reaction of foreign nations to the tight-fisted money policy. He foresaw the diminution of England’s foreign trade as rival countries refused to trade with a nation that would not reciprocate, just as he foresaw the stagnation of domestic industries when freed from competition.
Babton showed how trade might increase rather than diminish if restrictions against imports were removed; and Davenant expressed the opinion that trade was self regulating and would prosper better if freed from control. The reaction against Mercantilism was particularly strong in France where the evils of an exaggerated mercantilist policy had brought financial ruin to the country. The unrest among the people, oppressive taxes, and a depressed condition of agriculture led to violent protests against the financial administration of Jean Baptiste Colbert.
Unwittingly Colbert became the chief exponent of Mercantilism in Europe to such an extent that the system became known on the continent as Colbertism. The extravagant demands of Louis XIV forced Colbert to find new and fruitful sources of revenue. He developed the pattern of Mercantilism in France not as a studied purpose but as the inevitable result of hundreds of independent moves to increase the revenues of the state. Pierre Boisquillebert wrote voluminously in opposition to the mercantile school of thought. In his various works he insisted that national wealth did not consist in an abundance of precious metals, but in useful things.
He protested against restrictions on both domestic and foreign commerce. Such artificial control of trade as occurred through government regulations was harmful, since there were natural laws of the economic order which could not be violated without undesirable consequences. To Boisquillebert the world was a unit. Economic prosperity could result only as commercial relations between all peoples were allowed to develop naturally. For France, he believed, the way to economic well-being lay along the road of a revived and prosperous agriculture. Mercantilism, International Trade Theory
When Adam Smith was searching for a name to identify the body of economic ideas generally accepted in the century or two before he wrote, he called it Mercantilism, because of the emphasis placed upon trade. In earlier chapters we have already encountered the outstanding representatives of this general theory of economic life: Mun, Petty, Child, Steuart, Montchretien, and von Hornick. Briefly stated the Mercantile doctrine identified wealth with money. It therefore emphasized the necessity of a community so conducting its affairs as to acquire an abundance of precious metals.
The surest method of doing this, especially for those countries without mines, was to export the utmost quantity of its own manufactures, and to import the absolute minimum from other nations. The excess of exports over imports would be paid for in gold and silver. A favorable balance of trade, that is, when more coin is received than is paid out, was considered the only satisfactory condition of commerce. The establishment and maintenance of such a favorable balance was not alone the responsibility of individual merchants; the government carried a heavy obligation as well.
It was agreed that by prohibitions against foreign goods, subsidization of exports, restriction upon the export of precious metals, and the creation of monopolies among the trading companies, the government might assure the nation of a steady influx of gold—as the means of making the state strong and powerful. While most economists of the period must be classed as Mercantilists, not all of them would subscribe to the above summary of Mercantilist ideas. Many of them were too clear sighted to be trapped by certain obvious errors in the Mercantilist line of reasoning.
However, these men were in a sense merely expressing in terms of ideas what was the actual practice of the times. In spite of variations similar conditions gave birth to similar ideas. The growth of commerce and discoveries of the New World led to the rapid development of a common medium of exchange. Feudalism, with its barter and general self-sufficiency, gave way to an economy where buying and selling was important. The men of the time were impressed with the power of money. Money was always in demand. The more of it one had, the more goods he could control.
Money would last. Tomorrow, or the next day, or years hence, money represented the power to acquire goods. The formation of great states, with powerful governments, great armies, luxurious courts, and hosts of officials, required the expenditure of vast sums of money. Dense populations and industry seemed better able to produce revenue-getting conditions than sparsely settled regions dependent upon agriculture. Hence industry and trade received the favors of government, while agriculture was left to seek its own survival.
Colonies were sought as markets for goods, while severe laws restricted their economic freedom and made them dependent upon the grudging purchases of the mother country alone for commerce and trade. Duties on imports, barriers to the export of gold, and great trading monopolies were characteristic of every nation. These things were not theories; they were the most important facts of the times. The economists either summarized what was happening and found reasons to justify it, or they took issue with the turn of events and suggested alternatives.
Such ideas compose the theory of Mercantilism. Whatever one may think of its practicability as an economic system, the theories of Mercantilism were truly representative of the times. One of the early exponents of Mercantilism was Edward Misselden, a merchant of the first part of the 17th century. His two pamphlets, Free Trade, or The Means to Make Trade Flourish (1622) and The Circle of Commerce (1623) were written not as detached expositions of prevalent theory, but as tracts designed to secure favorable action on several proposals sponsored by the author.
He wanted above all to curtail the activities of the East India Company, which he claimed was draining the country of its specie. Because the Company had a governmental concession to export large quantities of bullion on each voyage provided a similar amount was returned in six months, Misselden was led to believe that in being taken from the country economic depressions were the inevitable result.
In later years Misselden became a business associate of the East India Company and consequently discontinued his attacks upon that Company’s privileges in his later work, The Circle of Trade. While recognizing the importance of rates of exchange as indices of the various market conditions for money, he did not believe that the balance of trade was dependent upon favorable exchange rates. He believed rather that one had first to determine whether a favorable or unfavorable balance existed between one nation and another.
Once determined, it was the business of government to take proper measures to secure a favorable balance. Thomas Mun (1571-1641), perhaps the ablest exponent of Mercantilism, began his explanation of that doctrine while endeavoring to justify the practices of the East India Company, of which he was a director, against such attacks as those of Misselden. A Discourse of Trade from England into the East Indies (1621), Mun’s first work, was not his best.
It was a polemic against attacks on his Company, with an abundance of charges and counter charges and a minimum of considered thought. It was in his England’s Treasure by Forraign Trade, or The Balance of Our Forraign Trade Is the Rule of Our Treasure, written about 1830 but published posthumously by his son in 1864, that Mun gave his most lucid explanation of the mercantile philosophy and presented a comprehensive plan to increase the wealth and treasure of England.
The merchant, according to Mun, . was a most important figure in the community since he was responsible for enriching the kingdom, for providing the king with revenue and maintaining his treasure. Although an academic education was not necessary for the merchant, he should be well versed in language and skilled in ship building and navigation. Mun accepted in principle the mercantile idea of a favorable balance of trade.
The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein we must observe this rule; to sell more to strangers yearly than wee consume of theirs in value . . . because that part of our stock which is not returned to us in wares must necessarily be brought home in treasure. How clearly dependent the nation’s welfare was upon foreign trade in Mun’s opinion was indicated in the closing pages of his book.
So much Treasure only will be brought in or carried out of a commonwealth as the Forraign Trade doth over or under ballance in value. . . . Behold then the true form and worth of forraign Trade, which is the great Revenue of the King, The honor of the Kingdom, The noble profession of the merchant, The School of our Arts, The supply of our wants, The Employment of our poor, The Improvement of our Lands, The Nurcery of our Mariners, The walls of the Kingdoms, the means of our Treasure, The Sinnews of wars, The terror of our Enemies.
In addition to his elaborate praise of foreign trade, Mun made some practical suggestions as to how a favorable balance was to be maintained. The third chapter of England’s Treasure by Forraign Trade was devoted to cataloguing the devices which might be used for this purpose.
He advised England to cultivate waste lands, refrain from exclusive consumption of imported goods, set prices on exports as high as the traffic would bear, sell scarce necessities dear and plentiful goods cheap, ship only in English bottoms, be conserving in the domestic use of natural resources, compete with the Dutch in exploiting the fisheries off the English coasts, develop the carrying trade by creating facilities for storing and transshipment of goods, encourage the purchase of materials at their source of supply rather than through middle men, allow the export of money itself when used as stock, remove taxes on imports of raw materials used in manufacturing of later exports, and, finally, to make domestic goods serve the needs of the population. Such a program of industry and frugality seemed almost infallible as a guide to national wealth and power. Thomas Mun was not uncritical of the system he so well described. For example, his proposal for the export of bullion was not readily accepted by his contemporaries.
To them no bullion should leave the country save in payment of debts. Mun saw beyond the immediate present. He believed that the use of bullion to foster a carrying trade established by Englishmen abroad was a legitimate excuse for shipping gold out of the country, since a prosperous trade would in time return more bullion to the country than was taken out. The analogy Mun used to drive home his point has become famous: A farmer viewed only at seed time when he scatters his seed over the ground seems wasteful; but when his harvest is considered, the worth of his action becomes apparent. Thus Mun at this early date pleaded the cause of all foreign investors.
The economic history of England amply proved his point. On other aspects of mercantile theory and practices Mun was in advance of the men of his own time. He did not fall completely into the fallacy of thinking that wealth and money were identical. It was what money could buy that was important. Furthermore he denied the idea that in order to secure a favorable balance of trade it was essential for each merchant to have a favorable balance. The sum total of exports and imports for a given period was the important consideration. It was a hundred years or more before this last consideration led to a complete reappraisal of the idea of foreign trade.
There was great similarity between Mun’s exposition of Mercantilism and that presented by Philipp von Hornick, an Austrian whose works appeared a half century later. His Oesterreich Vber Alles, Wann Es Nur Will (Austria above all others, if it wants to be) was published in 1684. A greater interest in national self-sufficiency and power pervaded his work. The very emphasis upon the supremacy of Austria which appeared in the title gives a clue to the viewpoint expressed inthe book. There are of course a great many writers who m one way or another accepted the idea of a favorable balance of trade being essential to national strength. These men are frequently noted for the new lines of thought they opened up and have consequently been discussed in other chapters.
Sir William Petty emphasized the monetary aspect of foreign trade; Sir Josiah Child, who venerated Dutch industry and Dutch moral character, saw economic success as dependent upon low interest rates; Sir James Steuart, whose excellent Inquiry into the Principles of Political Economy, had the misfortune of supporting a moderate mercantilism just nine years before The Wealth of Nations by Adam Smith appeared, nevertheless contributed greatly to latter theories of value and population. http://www. economictheories. org/2008/07/what-is-mercantilism-definition-theory. html prison. Private deposit banking had received a crippling blow, a blow which would only be overcome by the creation of a central bank. The stop of the Exchequer, then, coming only two decades after the confiscation of the gold at the Mint, managed virtually to destroy at one blow private deposit banking and the government