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.
• System of political organization prevailing in
Europe from the 9th to about the 15th
• Relation of lord to vassal
• Resulted from isolated areas of control
• Inability to create a centralized political or
economic structure.
• 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.
• Productivity and available resources
• Investments in
– Labor
– Infrastructure
– Capital goods
Principles of Mercantilism:
• A favorable balance of trade is required
Purchase of products/resources from
external sources allowed specie to leave the
Principles of Mercantilism:
• Economic self sufficiency is vital. It demands
increasing domestic production, new domestic
• Protection for infant industries.
– Jefferson vs. Hamilton
– North vs. South
– Business vs. consumer gains from trade
Principles of Mercantilism:
• 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:
• 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:
• Provides raw materials necessary to produce
manufactured goods.
• Provides a constant market for manufactured
• Continuing debate on the role of developing
nations today
Principles of Mercantilism:
• Provide a source of labor for domestic
• Provide a source of labor for settlement of
• Issue of immigration today
Principles of Mercantilism:
• Appropriate for the government to be heavily
involved in directing economic activity.
• change from a military presence to a policy
presence which protects economic
Global Conditions
Spain/Portugal 1500’s
Portugal rules the high seas
Exploration of South America/Mexico
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
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
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
• 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
• To profit from the gains in specialization would
require that materials/labor were free to
move where they were most effectively
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
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
• Protection of industry no longer necessary
• Gains from “free trade” surpassed those of
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
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
• 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
– 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
– Emphasis on protection for small businesses
– Creates favoritism and opportunities for political
Questions ?

Mercantilism - Federal Reserve Bank of Dallas