MercantilismDisclaimer: 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 fixedProtection of resources/standard of livingZero 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 ConditionsSpain/Portugal 1500’s

• 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– 1781-1784Dutch 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

• JeffersonSupport 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.

Questions ?