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c ha p t e r 4
Going for Gold
In the spring of 1581 the English merchant and explorer Francis
Drake held a banquet on-board his ship, the Golden Hind. The
Hind had just taken Drake and his crew around the world and
survived a dangerous three-year voyage. Now docked on the River
Thames, the ship had been scrubbed and decorated with banners
in preparation for the arrival of the guest of honour and Drake’s
patron, Queen Elizabeth I. As soon as the queen stepped aboard
she ordered Drake to kneel in front of her. An attendant touched
him on both shoulders with a gilded sword, making common
Francis Drake – born poor and brought up by pirates – into Sir
Francis, thereby securing his position as a symbol of England’s
great military power at sea.
Elizabeth had sent Drake off on his expedition instructing
him to seek revenge on her enemy, King Philip of Spain. Cunning
Drake had done his best, attacking Spanish ships around the
globe. He returned home with a huge haul of booty including gold,
silver and pearls – now under royal safekeeping in the Tower
of London.
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A L I T T L E H I S T O RY O F E C O N O M I C S
At that time, the monarchs of Europe were creating modern
nations out of the medieval patchwork of lands under the control
of different princes and dukes. The nations competed with each
other to be the strongest. Spain was Europe’s leading power and
now the Dutch and the English were coming up behind. At that
time, too, merchants like Drake were gaining power and influence
like never before. Merchants helped to enrich their monarchs, and
monarchs paid for the merchants’ voyages. Elizabeth’s knighting of
Drake on the deck of his ship symbolises the alliance between the
rulers and the merchants.
The alliance came to be called ‘mercantilism’ (from the Latin
word for merchant). It emerged when thinkers began to turn away
from medieval religion towards reason and science. In earlier
times, writers on economic questions had been monks who were
rather removed from the hurly-burly of commerce, but now new
economic thinkers appeared who were less interested in religion.
They were practical people, often merchants or royal officials, who
wrote about how kings and queens could best look after the wealth
of their nations. One of them was a merchant named Gerard de
Malynes (c.1586–1641) to whom Drake once sold pearls looted
during a battle with the Spanish. The most famous was the
Englishman Thomas Mun (1571–1641) who as a young man
carried out trade around the Mediterranean. Once, near Corfu, he
was captured by the Spanish and his colleagues feared that he was
going to be burnt at the stake. Luckily they managed to get him
released and Mun went on to become a wealthy, influential man.
The mercantilists held a hodgepodge of beliefs rather than a
fully developed economic theory. Economists nowadays often ridicule them for not understanding the most basic economic truths.
For example, what do you actually mean when you say that a
country is rich? A basic version of mercantilism says that wealth is
gold and silver, so a rich country is one with a lot of it. Here the
criticism is that the mercantilists commit the ‘Midas fallacy’. In
Greek legend, the god Dionysus granted King Midas a wish. Midas
asked that everything he touched would turn to gold; when he
tried to eat, his food did exactly that, and hunger threatened. The
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Going for Gold
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story tells us that it’s foolish to see wealth in the glitter of gold
rather than in loaves and meat. You could end up starving, or like
Smaug, the dragon in J.R.R. Tolkien’s The Hobbit, dazzled into
sitting on a pile of gold, doing nothing all day except counting
coins and breathing fire at treasure hunters.
Even so, for centuries explorers looked for gold and monarchs
tried to build up their stocks of it. Europe’s original explorers, a
century before Drake, were the Portuguese and Spanish, and one of
them, Hernán Cortés, knew a thing or two about the attraction of
gold when he said, ‘We Spaniards suffer a sickness of the heart that
only gold can cure.’ They opened Europe’s gates to a golden flood
from the late 1400s when their explorers sailed across the Atlantic
and discovered the New World of the Americas. There they found
ancient civilisations chock-full of gold and silver. The explorers
attacked the cities, murdered their inhabitants and brought the
treasure back to Spain. They ruled over the new lands to keep the
gold flowing. Spain built up a mountain of treasure and became the
mightiest nation in Europe. To the English, Spain became something like Smaug: a fierce hoarder of riches, with an apparently
invincible skin but with weak points that could be attacked. Men
like Drake made a living out of trying to pierce Spain’s hide.
Eventually it turned into all-out war.
Modern economists criticise the mercantilists for being obsessed
with gold instead of the goods that we need to live. Today we
measure how rich a nation is in terms of the amount of food, clothes
and other goods that its businesses produce. We no longer pay for
things using gold. Instead we use ‘paper money’: pound notes and
dollar bills which in themselves are worthless. Our coins, too, are
made out of cheap metals worth much less than the actual value of
the coins. Notes and coins are valuable simply because we all agree
that they are. But in the days of the mercantilists gold was the only
way of buying things, and as commerce expanded more of the
useful things that people needed, whether food, land or labour, had
to be bought with it. Nowadays governments can create money by
printing more of it; back then kings and queens had to find actual
gold to pay for the armies and castles needed to defend their
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A L I T T L E H I S T O RY O F E C O N O M I C S
borders. So in their love of gold the mercantilists weren’t as
misguided as they’re sometimes made out to be. Economic ideas are
to do with the circumstances that societies find themselves in, and
long ago those circumstances were quite different from our own –
something that’s easy to forget when we look back into the past.
Malynes wrote a book entitled A Treatise of the Canker of
England’s Common Wealth which followed the mercantilist line
that the nation needed a healthy stock of gold. To Malynes,
England’s economic disease (its ‘canker’) was too many purchases
of foreign goods and too few sales of English goods to foreigners.
People in England buy wine from winemakers in France using
gold; they earn gold when they sell their wool to the French. When
England buys many foreign goods and doesn’t sell many of its own
goods to foreigners, the country’s stock of gold shrinks. Malynes’s
cure was to put restrictions on the outflow of gold to preserve the
nation’s stock. They were common policies at the time; some
governments, like that of Spain, made the taking of gold and silver
out of the country punishable by death.
But in his most famous book, England’s Treasure by Forraign
Trade, Mun said that the best way for England to get gold was not
by restricting the flow of treasure or, indeed, by Drake’s method of
stealing from foreign ships, but rather by selling to foreigners as
many goods as possible. Countries do well at this when they get
good at making things. The aim was to achieve a favourable
‘balance of trade’ in which the value of exports (goods going out)
exceeded that of imports (goods coming in). From the sixteenth
century, with sturdier, faster ships, the Spanish, Portuguese, English,
Dutch and French competed for dominance in foreign trading to
improve their balance of trade. Their crafts travelled back and forth
along new routes, transporting sugar, cloth and gold across the
Atlantic Ocean, and capturing millions of Africans to be sold as
slaves to plantation owners in the Americas.
Governments took steps, supported by the mercantilists, to
encourage exports and to discourage imports. Imported goods were
subject to taxes, making them more expensive, which made people
buy more locally produced goods. There were ‘sumptuary’ laws,
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Going for Gold
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too, which banned expensive (sumptuous) products. In England,
show-offs could be put in the stocks for wearing silks and satins;
many of the illegal luxuries were foreign imports.
As explorers and armies conquered new lands, rulers gave
merchants the right to trade with the territories. Sea voyages were
risky, so a single person wouldn’t want to finance them alone.
Rulers allowed the merchants to set up special companies in which
a group of investors each contributed money and each received a
share of the profits. The companies led the push into the foreign
lands, earning wealth and fame for themselves and their rulers. The
English East India Company, founded in 1600, of which Mun was
an official, was one of them. The company turned into a powerful
organisation and helped England to establish an empire in India.
By protecting them from imported goods and helping them to
export their own goods, governments helped the merchants get
rich. The mercantilist writers argued that what was good for the
merchants was good for the nation. Here we see how economic
ideas sometimes end up favouring certain groups in society. By
restricting imports, mercantilism favoured businesspeople over
workers. When imports are taxed, the country’s businesses make
more money, but ordinary people end up paying more for the food
and clothes that they need. This is another reason why later
thinkers thought the mercantilists were wrong. In a few chapters
we’ll meet Adam Smith, who is often considered to be the father of
modern economics. He thought that the task of economists was to
uncover objective laws about how the economy worked and he said
that the mercantilists failed to do this because they mainly argued
for their own interests. What was good for merchants wasn’t always
good for the nation, said Smith.
The mercantilists thought that imports were bad, though economists today think that’s nonsense. Back then, the view was that if
England sells nails to the Dutch then England’s gain (payment for
the nails) is Holland’s loss. But imports aren’t bad if what Dutch
people want is English nails – or Russian caviar and French cheese.
Often imports are essential to economic progress, for example if
strong foreign nails are used to build the carriages needed to
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transport food from the countryside to the towns. So if England
sells nails to the Dutch then both England and Holland gain:
England earns money and Holland obtains good cheap nails.
Smith attacked mercantilism at the end of the eighteenth century.
At the same time it suffered another blow when Britain’s American
colonies broke away. Britain’s control of the colonies had given its
merchants a guaranteed market in which to sell their goods, but
this came to an end when the colonies rebelled against British rule
and declared themselves independent.
Thinkers like Mun straddled two ages. At one end was the medieval era in which economic life was local and shaped more by
religion and personal ties than by money. At the other was the
coming of an industrial age in which money ruled and economic
life expanded across regions and the globe. The mercantilists
linked the two. They were some of the first to emphasise concerns
about resources and money over moral ones, the hallmark of much
economic thought after them. They didn’t worry about whether
the pursuit of wealth was allowed by biblical teaching. To them,
money was the new god. As the men of commerce became more
powerful, others mourned the passing of old ways of life in which
what was valued wasn’t trading and making money, but chivalry:
the honour and bravery of knights and kings. ‘The age of chivalry
is gone,’ said the Irish statesman and writer Edmund Burke in
1790. ‘That of . . . economists and calculators has succeeded; and
the glory of Europe is extinguished for ever.’
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