Mercantilism and the pre-modern world economy

Inter-continental trade

• The impact of Christopher Columbus and Vasco de Gama– Opening of trade with the West Indies and the passage of the

Cape of Good Hope– Smith: “two of the greatest and most important events recorded in

the history of mankind”– Relatively rapid growth of world trade in 16th century (1.3 ppa)

• The Portuguese early leaders in exploration and trade• Spanish conquests in the Americas, in pursuit of gold and

silver; also in East Asia• The Dutch emergent from the end of 16th century on• The British gain primacy in the 18th century• Between 1500 and 1800, international trade grew roughly

at double the rate of income (GDP)—1% versus 0.4%

Major trade routes, 1400-1800

Source: Jean-Paul Rodrigue

Outline

• The Hudson’s Bay Company: a chartered trading company

• Other major chartered trading monopolies• Mercantilism: the thinking behind it all• The heritage of mercantilism

Beavers, the fur trade, and beaver hats

• Great demand for beaver in 17th century, considered at the time the most valuable fur

• Fur traditionally supplied by Russia, through the Baltic

Fur trade in 1660s• With the discovery of America and

large supply of beavers in the North, an alternative source of beaver fur is established

• Fur trade dominated by the French monopoly and the land route in “New France”

• Fur brought to French towns by Indians themselves

• Two frustrated traders/adventurers, shut out by the French, look for alternative route, through Hudson’s Bay to reach Indians directly

• They travel to London and convince Prince Rupert, the cousin of King Charles II, to take an interest and sponsor a ship to sail through Hudson’s straits and establish a fort on the shore of Hudson’s Bay (named Fort Rupert)

Radisson and des Groseilliers

The Hudson’s Bay Company established

• The Nonsuch sails from London on the morning of June 3rd, 1668, with des Groseilliers on board

• It spends the winter on Hudson’s Bay, where des Groseilliers makes contact with the natives and makes his first purchases

• Upon its return, the King grants a charter and monopoly rights to “The Company of Adventurers of England tradeing into Hudsons Bay” which is established on May 6, 1670

• The company is given property rights over the entire land whose rivers drain into Hudson’s Bay, which came to be named Rupert’s Land

Prince Rupert

The first public sale of beaver furs in London from the Company

The royal charter

Whereas Our Deare and entirely Beloved cousin Prince Rupert [and others] … have at theire owne great cost and charge undertaken an Expedicion for Hudsons Bay in the North west part of America for the discovery of a new Passage into the South Sea and for the finding some Trade for Furrs Mineralls and other considerable Commodityes and by such theire undertaking have already made such discoveryes …

whereof there may probably arise very great advantage to us and our Kingdome …

Doe give grant and confirme … the sole Trade and Commerce of all those Seas Streightes Bayes Rivers Lakes Creekes and Soundes in whatsoever Latitude they shall bee that lie within the entrance of the Streightes commonly called Hudsons Streightes together with all the Landes and Terriroryes upon the Countryes Coastes and confynes of the Seas Bayes Lakes Rivers Creekes and Soundes aforesaid that are not already actually possessed by or granted to any of our Subjectes or possessed by the Subjectes of any other Christian Prince or State

And further We doe .. create and constitute the said .. Company for the tyme being and theire successors the true and absolute Lordes and Proprietors of the same Territory lymittes and places aforesaid

The rights granted under the Charter

• The charter granted a monopoly over trade• It also gave ownership of vast tracts of land

(40% of today’s Canada) directly to the company• It gave the right to make laws and administer

justice in the territories over anyone living there (not just the Europeans but the Natives as well!), to wage war and military campaigns (against non-Christians)

• The company eventually became a state in all but name, even issuing its own coins, which were accepted as a medium of exchange over its territories

Hudson’s Bay Company territory 1670 to 1763

Why grant a monopoly?• des Groseilliers and company undertook an investment with high

risks, the (possible) benefits of which could be easily dissipated by imitators and later entrants:– Establishing the possibility and safety of the naval route to Hudson’s

Bay– Undertaking exploration inland– Building forts and trading posts– Establishing relationships with the Indians– Providing knowledge about the types of goods Indians were interested

in buying in exchange (“market research”)– Pacifying and making treaties with the Indians

• In other words, the Company made investments in knowledge, security and contract enforcement which made ongoing trade possible

• The initial voyage of Nonsuch was unprofitable. Subsequent profits were handsome and the corporations’s members were richly rewarded.

The quid pro quo

• Monopoly rights were awarded in exchange for private firms undertaking quasi-public functions– Early case: In 1468, the Portuguese grant Fernao

Gomes a 5-year monopoly of trade with Africa on condition that “he extend the exploration of the coast southwards by one hundred leagues (a little over three hundred miles) each year.” (FO, 146)

– Similar quid pro quo evident in the history of the English East India Company

The costs of monopoly: the terms of trade

The company paid for fur purchases by selling arms, ammunition, and various manufactures from Britain. Trade was done on a take-it-or-leave-it basis.

“That the prices charged the Indians for the goods was as large as the price paid for furs was small, is quite likely to have been true.” Civilized traders all the world over, dealing with ignorant and dependent tribes, follow this policy. No doubt the risks of life and limb and goods in remote regions are great, and great profits must be made to meet them.”

(George Bryce, The Remakable History of the Hudson’s Bay Company, 3rd ed., Sampson Low,

Marston & Co., Ltd, 1910.)

Example:

The Atlantic triangular trade

The monopoly argument in the slave trade (1)

A paper in 1680 regarding the Royal African Company of England summarizes the argument as follows:

“firstly, experience demonstrated that the slave trade could not be carried on without forts on the West African Coast costing ₤20,000 a year, too heavy a charge for private traders and it was not practicable to apportion it among them; secondly, the trade was exposed to attack by other nations, and it was the losses from such attacks prior to 1663 which had resulted in the formation of the chartered company; thirdly, the maintenance of forts and warships could not be undertaken by the Company unless it had exclusive control; fourthly private traders enslaved all and sundry, even Negroes of high rank, and this led to reprisals on the coast; finally, England’s great rival Holland, was only waiting for the dissolution of the English company to engross the entire trade.”

Williams. E, From Columbus to Castro: The History of the Caribbean 1492-1969, (Random House Inc, New York, 1984) 138-139.

• Who were the opponents on monopoly? the planter in the colonies the merchant at home, both of whom combined to advocate free trade.

• The planters complained of the insufficient quantity, the poor quality, and the high prices of the slaves supplied

• The British merchants claimed that free trade would mean the purchase of a larger number of Negroes, which would mean the production of a larger quantity of British goods for the purchase and upkeep of the slaves.

• The controversy ended in a victory for free trade. On July 5,1698, Parliament passed an act abrogating the monopoly of the Royal African Company, and throwing open the trade to all British subjects on payment of a duty of ten per cent ad valorem on all goods exported to Africa for the purchase of slaves.

Williams. E, From Columbus to Castro: The History of the Caribbean 1492-1969, (Random House Inc, New York, 1984) 138-139.

The monopoly argument in the slave trade (2)

The English East India Company

• Chartered in 1600 as a joint-stock company• Trade with Indian subcontinent and China (incl. opium monopoly)• In 1670, the Company received the the rights to autonomous territorial

acquisitions, to mint money, to command fortresses and troops and form alliances, to make war and peace, and to exercise both civil and criminal jurisdiction over the acquired areas

• Fought wars against the Mughal to establish control• Took on large administrative functions in India, which increased over time

(including public education)• Undertook infrastructure investments (transport and irrigation)• Collected land tax, which became a major source of revenue for the

company• Ruled both by direct government and through alliances with local princely

states• Trading monopoly with India abolished in 1813• Defunct in 1858, as a result of the Indian Mutiny, which leads to the

British crown to establish direct control

The Dutch East India Company

• Chartered in 1602• Provided a monopoly east of the Cape of Good

Hope and west of the Straits of Magellan for an initial period of 21 years

• Had powers of government in what eventually became the Dutch East Indies (the Indonesian archipelago)– As one of the company’s director-generals put it:

“we cannot make war without trade, and trade without war” (FO, 178)

• Bankrupted and dissolved in 1800

The idea of mercantilism

• Basic premise: exports good, imports bad– So policy must encourage exports and discourage imports

• Objective of commercial policy is to maximize trade surplus (or inflow of specie and bullion)– It is this inflow that is the source of the wealth of nations

• Some kind of trade is better than others– You should import raw materials, and export finished products

• Trade is a zero-sum game– Since not every country can run a trade surplus, or export the

same goods, at the same time

• Thomas Mun, England's Treasure by Foreign Trade (1664)

Mercantilism as a form of capitalism

• Mercantilists (such as Thomas Mun, a leading advocate) were strong proponents of capitalism

• But their vision of capitalism differed from one that prevailed later

• Based on close alliance between state and private business• The principle that the state ought to be promoting private business

was not commonly practiced– Cf. Ottoman and Chinese approach, much more hostile (or indifferent)

to commercial objectives– Ottoman empire founded on a model of economic self-sufficiency– China had turned inwards since the voyages of Zheng in early 15th

century • Underlying rationale attacked by Adam Smith and later liberal

thought• But has modern descendants: “neo-mercantilism”

Adam Smith on mercantilist thought

Don’t confuse wealth with money (bullion):

“Money in common language … frequently signifies wealth, and this ambiguity of expression has rendered this popular notion so familiar to us that even they who are convinced of its absurdity are very apt to forget their own principles, and in the course of their reasonings to take it for granted as a certain and undeniable truth. Some of the best English writers upon commerce set out with observing that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses, and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerce.”

The heritage of mercantilism

• Two models of state-business interactions– The liberal model: business at arms’ length– The corporatist model: close alliance

• A pro-business state?• Or, cronyism?

• Business as a tool of foreign policy– Sovereign wealth funds today

• A continuing dilemma: should the economy be driven by producer interests or consumer interests?– Should we favor high saving or high consumption? – Anglo-American versus Asian capitalisms– U.S.-China trade relationship

• Is exporting in potato chips equally valuable as trade in computer chips?– Contemporary debates on industrial policy

Long-term historical consequences of the mercantilist era

• The Acemoglu, Johnson, Robinson (2002) thesis• Inter-continental trade interacted with existing domestic

institutions to shape the evolution of subsequent political history– Among societies exposed to the Atlantic trade, those with non-

absolutist governments grew and developed, while others did not (Britain, Netherlands versus Spain, Portugal)

– In the former group, profits from Atlantic trade strengthened commercial/industrial interests vis-à-vis the crown and enabled them to demand and entrench institutions favorable to growth

– In the latter, profits went mainly to the crown (through monopoly trading companies) and did not result in institutional changes.

What did we learn?

• Global trade requires a set of supporting institutions– that provide for discovery, transport, security, “pacifying the

natives,” property rights and contract enforcement• These tend to have elements of “public goods”

– if you provide it for one trader, you provide it for others too• Under mercantilism, these functions were privatized, and

handed to private monopolies– Why did these have to be monopolies?

• The model created a peculiar relationship between state and business– With primacy fluctuating between one and the other partner

• Until the task became too onerous for private entities to carry it out– 1858 Indian mutiny as exemplar