Mercantile system.

In the Middle Ages most feudal lords, especially sovereigns owned a “war chest” which was literally a huge armored chest in which they accumulated coins and bullion to finance both anticipated and unexpected hostilities. By the sixteenth century the methods of government finance were somewhat more sophisticated, but the preoccupation with plentiful stocks of gold and silver persisted. This gave a rise to a crude form of economic policy known as bullionism.

Bullionism was the belief that the economic health of the nation could be measured by the amount of precious metals, gold or silver, which it possessed. The rise of money economy, the stimulation produced by the influx of bullion from America, the fact that the taxes were collected in money, all seemed to support the view that hard money was the source of prosperity, prestige and strength. Bullionism dictated a favorable balance of trade. That is for the nation to have a gold on hand at the end of the year, it must exports more than it imports. Exports were later defined to include money spent on freight, insurance and or travel.

Each nation tried to achieve economic self-sufficiency. Those who founded new industries should be rewarded by the state. Thriving agriculture should be carefully encouraged. Domestic production not only precluded imports of food, but farmers also provided a base for the taxation. Regulated commerce could produce a favorable balance of trade. In general, tariffs should be high on imported manufactured goods and low on imported raw material.

Sea power was necessary to control foreign markets. A powerful merchant fleet would obviate the necessity of using the ships of another nation and becoming dependent on foreign assistance. In addition, a fleet in being could add to a nation’s prestige and military power.

Colonies could provide captive markets for manufactured goods and sources of raw material. A large population was needed to provide a domestic labor force to people in colonies. Luxury items are to be avoided because they took money out of the economy unnecessarily. State action was needed to regulate and enforce the above policies. One might add that there was nothing logical or consistent about mercantilism and that it displayed, in fact, enormous variation.

Gold and silver had been a rare commodity in the middle ages. The average man never saw a gold piece as long as he lived. Only the inhabitants of the large cities were familiar with the silver coins. The discovery of America and exploitation of Peruvian mines changed all of this. The center of trade was transferred from the Mediterranean to the Atlantic seaboard. The old commercial cities of Italy lost their financial importance. New commercial nations took their place and gold and silver were no longer a curiosity. Through Spain, Portugal, England and Low Countries precious metals began to find their way to Europe. Gold and silver were considered as actual wealth. It was believed that the country with the largest supply of cash in the vaults of its treasury and its banks was at the same time the richest country. And since money meant armies, it followed that the richest country was also the most powerful and could rule the rest of the world.

Adam Smith’s invisible hand and liberal theory of economics gradually put an end to the dominance of mercantilism. Liberalism and mercantilism were fundamentally at odds on one key issue. Mercantilism stated that all the world’s people must compete for the world’s limited wealth. Adam Smith believed that wealth and trade was a non-zero-sum game, which essentially means that because needs are different, two parties involved in the transaction could each actually gain, because the exchanged items were more valuable to their new owners. Bullionism dictated that gold was gold-period. Thus, what one party gained, the other party had to give up (i.e. the zero-sum game assumption). Smith felt that gold was really nothing more than a yellow rock that was valuable only because there wasn’t much of it. Most economists now agree with Smith.

        3. MERCANTILISM: A MISNOMER

        When I studied at my home university the general economic theory, the history of economy was mentioned only very briefly. The period of Europe’s second logistics was mentioned only very briefly and named mercantilism. Mercantile system was considered to be some kind of hinder to free trade because it promoted export and hindered import to get a favorable balance of trade. When looking closer at this period there is couple of things to be mentioned to get a deeper view of what was really happening at that time.

        First of all when considering mercantilism as something good or bad, we have to take a look, where it came from. Mercantile system was firstly mentioned by Adam Smith in his epochal Inquiry into the Nature and Causes of the Wealth of Nations in 1776. Adam Smith was a liberal economist (among with David Ricardo, T.R. Malthus, etc.) and like this great supporter to free trade and to limitation of the role of the government in economic life. According to Smith, there were three main roles of government:

• To protect the independent society from the attack and oppression from another independent society
• To protect each individual in the society from attack and oppression from each other member of the society
• To build and maintain the items of general interest, such as roads, public toilets, public buildings, etc.

Anything beyond this was considered to be protective and against the principle of natural liberty. For more than a century after Smith published his Wealth of the nation, the term mercantile system had a pejorative connotation. In the later part of the nineteenth century, however, a number of German historians and economists, notably Gustav von Schmoeller, radically reversed that notion. For them, nationalists and patriots living in the wake of the unification of Germany under Prussian hegemony, merkantilismus was above all a policy of state making (Staatsbildung) carried out by wise and benevolent rulers, of whom Frederick the Great was the principal exemplar. In Schmoeller’s words, mercantilism “in its innermost kernel is nothing but state making-not state making in a narrow sense but state making and national economy making at the same time.”

When looking at the sentence below we have to take into consideration that Prussia in that time was pretty close to police state and that this notion was done under strong influence of those days political situation, but for me personally a word policy of state making sounds better and more accurate than mercantilism.

The period of mercantilism has its bad and its goods sides just like any other period in the history and nowadays. It is true that the policy in some states resulted in heavy burden for living for common people (with Spain as the best example), it made the natives in the colonies the victims of a most shameless exploitation, it exposed the citizens of the home country to an even more terrible fate. It helped in a great measure to turn every land into an arm camp and divided the world into little bits of territory, each working for its own direct benefit, while striving at all times to destroy the power of its neighbors and get hold of their treasures.

On the other hand, the mercantile system undoubtedly encouraged the development of young industries in certain countries where there never had been any manufacturing before. It built roads and dug canals and made for better means of transportation. It demanded greater skill among the workmen and gave the merchant a better social position, while it weakened the power of the landed aristocracy.  

The period of mercantilism can’t be seen only from the liberal point of view. As mentioned in previous text, the beginning of mercantile era collides with the Europe’s second logistics. As was mentioned in book from Rondo Cameron, each period, in which the growth of the population occurred, was accompanied with economic growth. It is not random that something like this happened in mercantile period.

As an example I can mention the policy of Jean-Baptiste Colbert (1619-1683), which led to increase of the population in France. Colbert established that all workers who married under the age of twenty were exempt from taxes (tailles and other public charges) for a period of five years and four years if they married at twenty-one. The very same advantages were extended to older workers who had ten children, including those who died in combat. As of July 1667, all workers who had ten children could receive a pension of 1,000 pounds a year, and 2,000 pounds a year, if they had twelve children. After 16 years of such regime, from 1667 to 1683, the French population had reached a level of 20,000,000, the largest national population in all of Europe. The policy was called Colbert’s “revenge of the cradles” (revanche des berceaux). The same policy was established in the French colony of Canada.

In England mercantilist policies were effective in creating a skilled industrial population and a large shipping industry. Through a series of Navigation Acts, initially designed to cut Dutch carrying trade, England did promote the growth of the English merchant marine and maritime trade. These acts were admired even by the father of liberalism, Adam Smith (but on the grounds of national defense).

4. VARIOUS APPLICATIONS OF MERCANTILISM

        In this part I would like to describe the situation in mercantile period among the leading trading nations. Because of lack of space I will take a closer look at the situation in France and give a brief picture how the mercantilism influenced the imperial policy of Spain in Spanish America.

        Spain exercised rigid control of her empire’s commerce and industry. England also tried to do so. Mercantilist policies adopted during the reign of Elizabeth were continued in the seventeenth century under the Stuarts and Oliver Cromwell. Elizabethan laws were passed to discourage idleness, to reward industrial enterprise with monopolies and to control the commerce by the means of Navigation Acts. Elizabeth gave her justices of the peace the authority to fix prices, regulate hours and compel every able-bodied subject to work at some useful trade.

        German mercantilism was concerned primarily with increasing the economic power of the state by internal regulation. It heralded later attempts at economic nationalism and a planned society. Because they aimed primarily at increasing national revenue, German mercantilists were known as cameralists, from Kammer, the royal treasury.

        The United Netherlands, governed by and for the wealthy merchants who controlled the principal cities, followed a more informed economic policy. Living principally by trade, they could not afford the restrictive, protectionist policies of their larger neighbors. They established free trade at home, welcoming to their ports and markets the merchants of all nations. On the other hand, in the Dutch empire the monopoly of the Dutch traders was absolute.

        

        France displayed perhaps the most thoroughgoing mercantilism. Jean Baptiste Colbert, chief minister of Louis XIV from 1661 to 1683, was a great exponent of economic regulation. However, Colbert was a practical politician intent on the welfare of the middle class to which he belonged, not a doctrinaire theorist; for him mercantilism was the most convenient method of attaining his goals. He prohibited the export of money, levied high tariffs on foreign manufacturers and gave liberal bounties to encourage French shipping. Colbert also tried to make certain that French manufacturers purchased raw materials from French or French colonial sources only, and provided France with a merchant marine of nearly three hundred vessels. To encourage the French imperialism, he purchased Martinique and Guadeloupe in the West Indies, encouraged settlement in Santo Domingo, Canada and Louisiana and established trading factories in India and Africa.

        Colbert’s industrial protectionist system is generally known for four major reforms that marked the beginnings of the modern industrial state:

• He organized and funded a system of industrial corporations and infrastructure projects that provided job security for all types of skilled and non-skilled labor, that is, workers of all types of arts et métiers;
• He established protectionist measures for all standardized French clothing products, such as that no dumping of foreign goods was allowed in France, except at very high costs;
• He funded and supported population growth, considering that war and ignorance were the two main causes of population reduction;
• He accompanied industrial measures with a reform of civil justice that became the first Civil Code of France, lasting 130 years until it was destroyed by the imperialist code of Napoleon at the turn of the eighteenth century.

The Spanish in America

The Spanish in America are a good example of how mercantilism worked itself out in the colonial empires. The Spanish attention was riveted on the New World because of the gold and silver wrested from the Aztecs and the Incas. After the initial exploitation of mines in Mexico and Peru, land became an equally great lure. The ambition was to duplicate the great estates of the Castilian nobility. The Spanish society was based on a native working class, as there was no Spanish working class in America.

The Spanish used three mercantilist devices to protect their commercial monopoly in the New World:

• They prohibited foreign ships from entering Spanish colonial ports and no foreigner could send goods to the colonies or to take gold bullion out of Spain in payment for goods sold to Spanish merchants without having a special license. Thus the Spaniards gained the middlemen’s profit on all European goods to their colonies since such goods had to be funneled through Spain
• Theoretically, the colonies were designed to be economically complementary to Spain. Manufacturing was forbidden in certain colonies to keep the market open for imports. The economic health of the colony was always a secondary consideration.
• All colonial trade was channeled through a single port, first Seville until 1720 and then Cadiz. After 1765this policy was relaxed to allow trade by other Spanish ports.

Spanish mercantilist regulation was extreme almost to the point of absurdity. Smuggling could not be controlled since it was in the interest of too many Spaniards on both sides of the Atlantic to participate in illicit trade.

Colonial policy had obvious shortcomings. The interests of the colonists were sacrificed to those of the home country; the colonists had little to say in their own government; and Indians were exploited without mercy. It is needed to say that no colonial commercial system was liberal in the eighteenth century and that in its ability to function, the Spanish empire was more impressive than any other of its time. Spanish colonial society was more sophisticated than that produced abroad by either Britain or France. Spain was the leading colonial power as late as the eighteenth century, as Britain was to become after 1815.

5. REMINDERS OF MERCANTILE SYSTEM IN THE LATER CENTURIES

Elements of the mercantilist theory have still remained in economic discourse throughout the years, despite the general demise of mercantilism on the whole. One still cannot dispute that there is a limited amount of gold in the world and, more importantly today, a limited amount of oil. A key motivator of Japan’s World War II expansionism, for example, was the need to acquire control of natural resources such as minerals, timber, oil and rubber, which the Japanese islands lacked in bulk. Latin America’s Cold-War populism and import substitution economic schemes along with past and present Marxist’s theories rest on the belief that the colonial economic structures still remain in place, with a raw goods-exporters.

The noted economist John Maynard Keynes also saw a great deal of good in mercantilism. While Adam Smith rejected the idea of bullion being more than just another commodity, Keynes saw an inflow of gold and silver as being beneficial. He argued that greater gold reserves would lead to increased borrowing and lower rates of interest that would both stimulate the growth and aid government borrowing.  Keynes also adopted the essential idea of mercantilism that government intervention in the economy was the necessity. A number of political parties embraced Keynes’ theories and they came into force under Franklin Roosevelt’s New Deal program in the United States and also under Britain’s Labor government after the send World War.

Mercantilist theory also influences the notion that trade surpluses are automatically good and that trade deficits are automatically bad. Some economists argue that Japanese trade policy in the 1970s and 1980s was in large part based on mercantilist concepts and that these policies form one of the causes of Japanese economic stagnation in the 1990s.

        

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