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Notes on Economic History (2)

The Mercantile System

This was the beginning of the modern era. A new form of economic practice was developing, and new theories made their appearance in the form known as Mercantilism. This term (introduced by Adam Smith) is, however, a little misleading for its advocates were quite as concerned with industrial development as with the exchange of merchandise.

The term "Mercantile system" is loosely used to denote all the principles applied by the governments and traders of those days—though it is a fact that these principles have a general conformity. Mercantilism was a growth of its time. It was a system of political absolutism and centralization in favour of the burghers and mobile capital, to the detriment of the lords of the soil. To throw light on this we must glance at the economic process of this period.

The economic organisation of the Middle Ages was disrupted mainly by those political changes which led in Western Europe to the formation of the national states (France, Spain, Portugal and England); and in Germany, later in, to the formation of territorial princedoms. As a result, the Mediaeval economy, with its urban units, was replaced by larger units of different kind—the unified national economic areas. Political concentration in these areas resulted in money and wealth becoming elements of political power in a way very different from of old.

The idea of money as the nerve of the State was in many respects new. The State, which had been constitutional (in the Feudalist sense) became absolute; a State army replaced the Feudal militia; and the centralisation of the administration established a paid civil service, judiciary, etc., where Feudal methods of self government had previously prevailed. The result was that military and civil concerns, taxation, and the processes of State credit, tended more and more to be carried on upon a monetary basis instead of by the payments in kind of the earlier economy. Money acquired a significance that was quite new.

These changes were accompanied by the economic upheavals that followed the discovery of America (1492) and the opening of the sea route to the East Indies (1498). New possibilities of world trade came into being, giving power to those traders situated on Western seaboards (the Spanish, the Portuguese, the Dutch and the English) but weakening those cut off from the new commerce. Trade, and the money standing behind trade, became important as sources of wealth and political power.

The effects of these displacements of wealth was reinforced by a new process. Soon after the discovery of the New World a vast amount of gold and silver began to move from Spain across Europe. As a result, the purchasing power of these metals fell enormously, with a consequent tremendous rise in prices. It is true that the rise in prices began about 1510, whereas the increase in gold and silver began to make itself felt about 1520. This was the result of famine, plague, and other causes, but nonetheless, the superabundance of gold was a factor, and a major one, in the rise of prices. The influx of gold played a great part in undermining the foundations of the old feudal economy, for it favoured the diffusion of the means of credit, and laid the ground for the development of the capitalist system.

All these circumstances tended to emphasize the importance of money, to stress the importance of commercial wealth as compared with the wealth that changed hands in kind during the feudal period. Thus, whereas in earlier times there had been the endeavour to check the growth of a monetary economy, the opinion now was that money, of not the only source of wealth, was certainly of decisive importance.

The primary aim of the mercantilists was to achieve a favourable balance of trade. When exports exceed imports, when the value of the goods sold to buyers abroad exceeds the value of the goods purchased from such buyers, the amount of money entering a country will exceed the amount of money leaving it. Then the balance of trade is said to be favourable to the country in which money thus accumulates. To achieve this favourable balance (which was the desire of the mercantilists) it was necessary to stimulate export trade. With that end in view, it was essential to foster industries that created commodities for export and, on the other hand, to check as far as possible the import of commodities.

But if home industry was to be fostered, special attention had to be paid to internal communications. It was necessary to abolish or reduce tolls and the like, and to break down the barriers erected by the urban economy of the Guilds. Good roads had to be built, canals dug, internal communications facilitated, home markets established. Customs policy was, therefore, of supreme importance in the mercantile system. The champions of that system wanted to abolish export duties, and if necessary stimulate exports by subsidies; at the same time they aimed at reducing imports by a high import tariff, or by actual prohibition. Instances are in France, the unified import tariff in 1664, and the development towards such a tariff in England after 1692. As corollaries to the restriction of imports, there had to be freedom for the import of raw materials needed by home industries and prohibition of the export of such materials.

Bob Ambridge