Mercantilism
Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
Feudalism
• System of political organization prevailing in
Europe from the 9th to about the 15th
centuries
• Relation of lord to vassal
• Resulted from isolated areas of control
• Inability to create a centralized political or
economic structure.
Mercantilism
• Economic belief system that served an
underlying motivation for military actions
Level of gold viewed as fixed
Protection of resources/standard of living
Zero sum game
Principles of Mercantilism:
National Wealth
• The economic health or wealth of nation can
be measured by the amount of precious
metal, gold, or silver it holds.
vs.
• Productivity and available resources
• Investments in
– Labor
– Infrastructure
– Capital goods
Principles of Mercantilism:
Trade
• A favorable balance of trade is required
Purchase of products/resources from
external sources allowed specie to leave the
country
Principles of Mercantilism:
Self-sufficiency
• Economic self sufficiency is vital. It demands
increasing domestic production, new domestic
industry.
• Protection for infant industries.
– Jefferson vs. Hamilton
– North vs. South
– Business vs. consumer gains from trade
Principles of Mercantilism:
Agriculture
• Sufficient agricultural production to support
the domestic population.
• Agricultural products can be imported but
they will be traded for manufactured goods.
Principles of Mercantilism:
Tariffs & Subsidies
• High on imported manufactured goods.
– Republicans from Lincoln forward
– Subsidies in the form of land and money for
infrastructure (railroads)
• Low on imported raw materials
Principles of Mercantilism:
Ships
• Merchant fleet is a necessity to facilitated the
flow of goods in and out of a nation.
• Naval fleet assures protection of transport.
• Focus changes from the protection of
resources through military might to
protection/ support through regulation
Principles of Mercantilism:
Colonization
• Provides raw materials necessary to produce
manufactured goods.
• Provides a constant market for manufactured
goods.
• Continuing debate on the role of developing
nations today
Principles of Mercantilism:
Population
• Provide a source of labor for domestic
production
• Provide a source of labor for settlement of
colonies
• Issue of immigration today
Principles of Mercantilism:
Government
• Appropriate for the government to be heavily
involved in directing economic activity.
• change from a military presence to a policy
presence which protects economic
development
Global Conditions
Spain/Portugal 1500’s
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Portugal rules the high seas
Exploration of South America/Mexico
Cortes
Pizarro
Gold/Silver exported to Europe
• Elizabeth I – develop navy
• Sir Francis Drake
• 1580 – Dutch vs. Portugal (trade with Germany)
Characteristics of VOC & East India
• Privately held, multinational companies
• Guaranteed monopolies in exchange for rights
paid to government
• Develop trade links – utilized their own ships
and military
• Development of colonial outposts
Dutch East India Company
VCO; Verenigde Oost-indische Compagnie
• Took over trade routes from Portugal
• Dominated the spice trade throughout the
1600’s and early 1700’s
• Sri Lanka (Ceylon), Batavia(Indonesia), Cape
Town (Africa)
• Sophisticated shipping system
• Political and military powers given to
companies
Dutch vs. ……….
• Anglo-Dutch Wars
– 1652-1654
– 1665-1667
– 1672-1674
– 1781-1784
Dutch had 4,785 ships
East India Company had 2,690 ships with about 1/5
of the tonnage
• Franco-Dutch Wars
Navigation Laws 1600’s
• Protect the wealth of the British Empire
– profits from shipping
– value added to manufactured goods
– require all natural/raw resources to be sold to
England
Regulating Commerce
• Navigation Act 1651 – all crews ½ English, goal to
eliminate Dutch competition from colonial trade
• Navigation Act 1660- all colonial trade on English
ships, ¾ English
• Staple Act 1663- All goods bound for colonies
from Africa, Asia or Europe must first land in
England
• Plantation Duty Act 1673 – All colonial ship
captains to guarantee that they would deliver
enumerated goods to England
Regulating Commerce
• Navigation Act 1696 – Created admiralty courts to
enforce trade regulations and punish smugglers,
authority to board ships and search cargo
• Woolens Act 1699 – Prohibited colonial export of
woolen cloth
• Hat Act 1732 – Prohibited export of colonial
produced hats
• Molasses Act 1733- All non – English molasses
taxed heavily
• American Revenue Act (Sugar Act) 1764 –
Enforcement of acts to reduce smuggling
Adam Smith 1776
• Corruption inherent in mercantilism was
inefficient
• To profit from the gains in specialization would
require that materials/labor were free to
move where they were most effectively
utilized
United States
• Hamilton
Support of policies which would provide the
necessary infrastructure to protect industry
– Banking, infrastructure, tariffs, subsidies
• Jefferson
Support of policies which provided for agrarian
markets that functioned with minimal government
intervention
US Tariffs
• 1790’s 15%
• 1830’s 60%
• 1833 Compromise Tariff of 1833
– Phased out tariffs over 20% over 9 years
• 1830-1860 alliances for legislation
– North High tariffs
– South Low tariffs
– West swing area
England and “free trade”
• England supported “free trade” beginning in
1840’s
• Protection of industry no longer necessary
• Gains from “free trade” surpassed those of
protectionism
Post Civil War
• High tariffs maintained to protect US industry
• McKinley Tariff on tinplate 1890
– No measureable production of tinplate
– Tariffs for six years
– Domestic production must equal 1/3 of imports
– 1910 domestic price of US tinplate were below
those produced in UK
Neo-Mercantilism
Focus on increasing production, employment,
and thus standard of living through trade
restrictions and commercial development
Significant export industries provide the
necessary tools for economic development
International Trade Agreements
• GATT -Created in 1948 to promote/ liberalize
trade globally
• NAFTA – 1994 US/Canada/Mexico
– Agricultural support for 10 – 15 years
WTO
• Replaced GATT in 1995 as a part of the
Marrakesh agreement.
• Supported the liberalization of trade and
created a forum for enforcement of global
trade discussions
• Continues the debate over the developmental
role of policy to support/detract from growth
Current debate
• Developmentalism
– Basic unit of the economy is the nation-state
– Competition between countries is the central
focus
– Governments are responsible for facilitating
favorable conditions to encourage this.
Current debate
• Producerism
– Central role of the government is to support the
utopia that is created through free trade.
– Act to remove barriers to trade and serve as a
umpire
– Emphasis on protection for small businesses
– Creates favoritism and opportunities for political
corruption.
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Mercantilism - Federal Reserve Bank of Dallas