From mercantilism to the wealth of nations

We live in an era when continual economic growth is almost considered a birthright, at least in the developed world. It has become the benchmark of the health of a society, guaranteeing an ever-expanding prosperity. The current president of the United States even finds that his extensive misbehavior is overlooked by a majority of Americans because he happens to be presiding over an extended period of economic growth and optimism. If annual growth drops below about 2 percent, planners and politicians start to get nervous, while a recession (negative growth) is considered a serious crisis. Where will it all end? Can such growth continue-with periodic setbacks, of course-indefinitely? We do not know and usually do not care to ask.

One thing is clear, however. It was not always so. For most of human history it has not been so. In western Europe in the period 1500–1750, output increased by a mere 65 percent, by one estimate, or an average of 0. 26 percent a year, even though the population grew about 60 percent. For most of this period, 80 percent or more of the population worked the land. Studies of wage rates in England and France suggest that the working poor had to spend a full four-fifths of their income on food alone.

So this was not an economically dynamic society. There was relatively little disposable income, that being enjoyed by the prosperous elite of landed aristocracy and, increasingly in this period, merchants. Consequently, there was no prospect of creating a mass domestic market for new products. Most wealth was still tied up in the relatively static commodity of land, and agriculture was the major measure of a country’s wealth.

Yet in the period from the voyages of discovery in the late fifteenth and early sixteenth centuries [see ” Columbus and the Age of Exploration,” The World & I, November 1998, p. 16] up till the Industrial Revolution there occurred what has been called a ” commercial revolution.”

The story of that revolution, which I will tell here, weaves together a number of significant themes. The upshot of the Age of Discovery was the emergence of a network of global trade. The consequences of that trade, and the measures taken by increasingly centralized European governments [see ” The Ascent of the Nation-State,” The World & I, March 1999, p. 18] to control and direct it, produced the system later labeled, most notably by Adam Smith, mercantilism. This was the practice of imperial rivalry between European powers over global trade, and it gave impetus to the disagreements between Britain and its American colonists that led to the American Revolution. Critical consideration of these issues gave birth to Smith’s theoretical study of economics, which culminated in the publication of his masterwork The Wealth of Nations.

Protecting Bullion Reserves

Smith wrote: ” The discovery of America and that of a passage to the East Indies are the two greatest and most important events recorded in the history of mankind.” No doubt he exaggerated, but nothing was more important in the unfolding of this story. The Spanish conquistadores went to the New World in search of El Dorado. They found little gold but plenty of silver at Potosi in Peru and in northern Mexico. This silver became the lubricant of the machinery of an emerging global economy.

It flowed into Spain, from where much of it went to the rest of Europe, especially Holland, to pay the debts the Hapsburg rulers had incurred through the religious and dynastic struggles in their German possessions and in the Spanish Netherlands. Some of it then flowed to the Baltic to pay for the timber, rope, and other shipbuilding materials that the region supplied, especially to Holland and Britain. The bulk of it, though, went to Asia to satisfy the growing European demand for spices, silk, Indian calico, and later, Chinese tea.

Without the silver that demand could not have been satisfied: Europe had nothing that Asia wanted to import in exchange. That situation would not change until after the Industrial Revolution, when clothing from the Lancashire cotton industry in the north of England found a market in Asia. Even then problems remained. The economic reason for the shameful opium trade in the early and mid-nineteenth century, when opium grown in India was exported illegally to China, was to earn exchange to pay for tea without having to export silver.

Silver was not without problems. So much of it flowed into Europe in the sixteenth century that it caused serious price inflation. The Spanish economy, in particular, was considerably disrupted, a significant factor in Spain’s gradual decline. During the seventeenth century, from a peak around 1600, the supply of silver began to decrease. The demand for goods from Asia, however, did not. The result was a net outflow of silver bullion from Europe, a shrinkage of the money supply, and as a result, economic recession.

No economic theory existed at the time, and no contemporary thought argued that governments should not regulate such matters affecting national wealth in the national interest. So they did. The ad hoc system of tariffs and other measures influencing trade and manufactures that came to be known as mercantilism began to emerge.

The context in which this happened was one of increasingly centralized emerging nation-states that were spending a greater portion of the total national income than in the past, especially in the frequent times of war. They exercised closer control over more aspects of life in pursuit of national policy than in the past, especially through the taxation needed to fund wars. Trade with the New World nurtured the idea that commerce could be a source of national wealth and strength just as much as agriculture and should be developed to that end.

Spain, Britain, and France all banned the export of gold or silver bullion, but this proved to be like trying to stop water from running downhill. The belief was that bullion represented the national wealth or treasure, and that trade should be conducted so as to amass a surplus of it. A country would then have a reserve to cushion itself from the economic effects of adverse fluctuations in the supply of gold and, especially, silver.

Underlying this thinking was the assumption that markets and the amount of trade were relatively fixed, and that gaining a larger share of the pie necessarily meant depriving another country of part of its share. Trade was thus conceived as an arena of national competition and even conflict, a form of war by other means.

Colbert and French Mercantilism

Advocates of free trade in the late eighteenth and the nineteenth centuries strongly criticized this aspect of mercantilist policy. They proposed that peace was one of the benefits of free trade, since it tied trading partners in mutually beneficial exchanges that could only be lost through war. Neither side was totally right. Circumstances always affect cases, and the mercantilist policymakers were pragmatists who reacted to the situation before them.

The most systematic practitioner of mercantilist policies was undoubtedly Jean-Baptiste Colbert, finance minister for France’s Louis XIV in the later seventeenth century. Colbert used the considerable power of the Sun King’s state to increase its wealth through the promotion of French trade and manufactures. He certainly banned the export of bullion, but his policy was aimed at replacing bullion as the means of payment for necessary imports with the earnings from the export of French manufactures.

To that end he developed selected industries by state subsidies and bringing in skilled foreign artisans. He particularly encouraged high-value products such as quality furniture, glass, and tapestries, and the quality of French workmanship in these areas became legendary throughout Europe. He used tariff barriers to protect industries that faced serious foreign competition. Wanting to develop the French cloth industry in the face of the well-established British cloth trade, he doubled the duty on imports.

Thus emerged the classic mercantilist pattern that, because it came about in a piecemeal, pragmatic manner, has only existed in its complete form in the writings of historians. The export of domestic raw materials was largely discouraged, so that domestic manufacturers could enjoy their use. The export of sheep and raw wool from Britain, for example, was heavily regulated for the benefit of the domestic textile industry. The export of manufactures was encouraged as the means to a favorable balance of trade and the bullion inflows that came with it.

The import of foreign manufactures was restricted since this adversely affected the balance of trade. Raw material imports were looked on favorably to the degree that they could be used in or support domestic manufactures, although a large agricultural country like France, under Colbert, aimed at as much self-sufficiency as possible.

Colbert realized that encouraging French industry had little point if its products could not then be exported. That meant commercial shipping and a navy to protect it. Colbert had before him the example of the Dutch. They were the dominant economic power in Europe in the early and mid-sixteenth century through their skills in trade and shipping.

The Dutch dominated North Sea fishing, annoying the British by taking huge catches of herring from Britain’s east coast, developing a factory-style industry for salting the catch, and then exporting it throughout Europe. They dominated the carrying trade from the Baltic to western Europe, were major carriers of imports to Europe from the Americas and from the East, and grew rich through their control of the lucrative reexport of those imports throughout Europe from their initial port of entry in Amsterdam.

To support these efforts the Dutch dredged and improved their rather shallow harbors and developed specialized forms of shipping, both for fishing and for moving bulk materials. They also developed financial instruments to ease the flow of trade and extend the use of credit. Most notably, they established the Bank of Amsterdam, a public bank that offered a source of capital very different from the government funding of chartered companies that had marked the enterprise of discovery and trade in the sixteenth century.

Colbert built up a merchant marine to rival that of the Dutch and ensure that French trade was carried in French ships. Under his direction the merchant fleet grew from a mere 60 ships of 300 tons or more to over 700 ships of that size. He provided for the protection of French maritime commerce by building up the French navy from 20 ships to 250 by the time of his death in 1683.

He always viewed commerce as an instrument of national policy, and merchants had little say in his decisions. This was unlike the situation in England, where various merchant groups formed influential lobbies on the Crown’s commercial policies. The prizes of commerce remained for him a zero-sum game: France’s gain must be someone else’s loss. He created a successful glass industry in Paris by inviting Venetian glassblowers to teach their skills. He later boasted that the successful royal mirror factory that resulted was depriving Venice of one million livres a year.

Commerce and Conflict

Colbert’s attitude was much derided by the later free-trade economists, most notably Smith. The Scottish philosopher David Hume, a contemporary and good friend of Smith’s, wrote on the subject: ” I shall therefore venture to acknowledge that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy and even France itself.”

It was an irony, too, and one that later critics did not fail to point out, that a considerable contribution was made to the growth of French transatlantic exports by industries that did not receive Colbert’s nurturing support. Iron and coal, hardware, and the cheaper cloths produced by the textile industry in Normandy all developed through their own enterprise.

Nevertheless, Colbert’s legacy was a foundation for rapid and successful French commercial development in the eighteenth century. Between 1715 and 1771 the total value of French foreign trade grew eightfold until it almost matched British trade. The value of French exports multiplied more than four times between 1716 and 1789. Colbert must have been doing something right.

Nor were the policymakers of the time completely wrong in their view of commerce as conflict to gain the largest share of a fixed prize. It is certainly true that bilateral trade is mutually beneficial. If a country wants to export its goods, its potential trading partners must have the means to pay for those goods. So it is in the exporter’s interest that partners have their own successful export markets, perhaps in the original country’s own home market, to generate the revenue needed to buy its exports.

This is not true of the carrying and reexport trade, however. The Dutch had grown rich on this trade, and the British and French set out to take it away from them. Both ended up fighting trade wars with the Dutch over the issue. In the second half of the seventeenth century, Britain passed a series of Navigation Acts, which required that goods shipped in and out of British ports, and to and from British colonies, had to be carried in British ships.

This struck at the heart of the Dutch trade, hence the tensions that led to war. At issue was who would distribute the new colonial imports throughout the rest of Europe. The Dutch gradually lost out to the French and British. Between the 1660s and 1700 British exports grew by 50 percent. Half of that increase came from the reexport of colonial imports, mostly to Europe.

As a result, the eighteenth century was the Anglo-French century in terms of commerce. I have already mentioned the spectacular growth in French trade. The value of British trade grew threefold between 1702 and 1772, and British shipping grew at a similar rate, reaching over one million tons by 1788. This phenomenal growth represented a tremendous amount of new wealth, most of it associated with colonial trade, especially that of the New World.

The bulk of British trade in 1700 was still with Europe, but by 1776 two-thirds of its overseas trade was outside Europe. Between 1700 and 1763 the value of British exports to America and the West Indies multiplied fivefold, while the value of imports from those areas grew fourfold. Anglo-French rivalry resulted in a number of wars throughout the century. It is small wonder, given the importance of colonial trade, that parts of those wars were fought in North America and in India, over strategic control of its sources.