A Middle Age Transition: The Economic System of Mercantilism, Ca. 1500-1800

George Frideric Handel: Water Music, Suite No. 2 

The Early Modern Economy

Western Europe’s transition from the Middle Ages to what historians commonly call the “Early Modern Period” was not simple and there is no specific point where it began or ended. The Black Plague of the fourteenth century did much to sweep away the old order and by the late fourteenth century the feudal system was being gradually wiped away as it was seen by most as archaic and inefficient. The Reformation of the sixteenth century brought ideas that challenged the status quo and also in the same century European explorers first began to discover, explore, and eventually exploit the New World. Because of these great changes, the sixteenth century is viewed as the start of the Modern era; but politics and religion were not the only things that changed in Western Europe during the sixteenth century – a new economic system was ushered in that is today known as mercantilism.

Mercantilism was a simple, nationally and colonially based economic system that dominated not just Western Europe, but because of the West’s political hegemony it came to be ascendant over the entire world. Dozens of government subsidized companies with names like the Dutch East India Company and the British East India Company competed for control of various markets in an economic war that was a microcosm of the larger colonial wars that were taking place between the most powerful nations of Europe. Eventually, the mercantile economic system gave way to the Classical Gold Standard and modern capitalism, but for 300 years it was the core of the world’s economy.

The Emergence of Mercantilism and Its Salient Features

Mercantilism can most simply be defined as an economic system that was driven by the duel forces of monopolization and colonization and largely supported by the gold and silver bullion reserves. As stated above, the Early Modern period was one of great discoveries and exploration, which brought a surplus of commodities into Europe. The discovery of the New World brought new commodities into Europe such as tobacco, maize, potatoes, and indigo, while the establishment of new shipping lanes allowed merchants to bypass the Silk Road and bring spices, tea, and silk via the seas to Europe. The discovery of large gold and silver deposits in the New World, which were shipped back to Europe, allowed Europeans purchase exotic items and it also allowed European governments to establish the mercantile system.

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Although the Spanish were fortunate enough to control most of the land where gold and silver deposits were discovered, the bullion they brought back to Spain eventually made its way throughout Europe where the different governments then used it to fund their mercantile economies. One of the most essential elements that all mercantilist nations shared was the existence of government subsidized monopoly companies. The mercantile companies were incorporated in a way that was truly unique to this period because there was a clear separation between ownership of capital and management. Most managers, or secretaries, in the mercantile companies were government officials and often, especially in the case of Britain, the companies could call on government military support for their endeavors. The monopoly companies were often given simple names that referred to region they traded in and controlled, thus the British India Company, Dutch India Company etc. All of the mercantilist nations also shared similar colonial aspirations, which also contributed to the spread of the mercantile economy.

Every European colonial power in the Early Modern period – whether it was in the New World, Africa, or Asia – sought to exploit its colonies to their full potential in order to bring back exotic goods to Europe. Since most of these colonies had little to no modern infrastructure when the Europeans first conquered them, they employed the monopoly companies to build essential roads, railroads, telegraph lines, hospitals, etc. Since these monopoly companies acted as imperial vanguards, the governments in the mother countries were happy to subsidize these ventures since they viewed such investments from a long-term perspective – the returns would come decades or more later when the colonies were “tamed” and the resources were flowing into Europe. Many of these companies were given military support and in the case of the British East India Company, it essentially controlled its own army. The colonies would also provide a market for the finished, manufactured goods made in Europe; the more colonies a European power controlled the less it had to deal with trading with other European powers, who were almost always viewed as potential adversaries.The agents behind the mercantile system clearly saw it as a long-term process, but its emergence was also a gradual evolution.

As stated above, the mercantile economic system gradually came about as the medieval feudal system faded away in Western Europe. The feudal system was largely barter based and centered on local community involvement in the economy. The Catholic Church also played a large role in the medieval European economy as it amassed fortunes in bullion, art, and real estate throughout Europe. By the beginning of the sixteenth century the Church’s influence had waned tremendously as large parts of Western Europe were developing new Christian sects such as the Lutherans, Calvinists, and Huguenots to name a few. The overall economy of Western Europe consequently also saw tremendous changes at the beginning of the sixteenth century as business became more secular and more men were able to get involved as the feudal system decayed and the Church’s influence decreased. Major technical and scientific discoveries in the late fifteenth century also paved the way for long distance trade and the eventual discovery of the New World, which subsequently brought a surplus of bullion and other exotic goods to Europe. Some of the discoveries included the following: the lateen sail, magnetic compasses, the astrolabe, and knowledge of ocean currents and prevailing winds. It did not take long for leaders of the Western European countries to see the benefits of supporting mercantilism.

European leaders saw mercantilism as an effective way to consolidate the power of their central governments. Although most European countries still had monarchal governments in the Early Modern period, representative bodies were gaining more control and so the governments were no longer as autocratic as they were in the Middle Ages. The mercantile system helped to concentrate the power of the central governments by controlling coinage and carrying out national trade and industry policies. The Western European governments could control the currency much easier by setting limits on how much bullion was allowed to leave the mother country and by setting exchange rates. Mercantilism also allowed for countries to focus their economic energies on certain priorities. For instance, if a country controlled large gold and silver deposits in its colonies, as Spain did, then its economic policy would be focused on mining. In the mercantilist system the governments of Europe were also able to regulate the trade sectors by controlling emigration and ultimately “brain drain” from the mother countries. Finally, the major European nations supported the mercantile system because it was a perfect way, and sometimes a reason in itself, to fund wars. Since the government and the economy were so closely intertwined wars affected the monopoly companies as much as the governments and vice versa, which in the end could result in more colonies for the mother country.

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Another factor that played a role in the early emergence of the mercantile system was subset of the overall mercantilist economic philosophy known as “bullionism.” Bullionsim was a theory that was articulated in writing during the early sixteenth century by Thomas Milles and Gerard de Malynes that argued a country’s wealth can be gauged by its gold and silver resources. Although the mercantile system was before the Classical Gold Standard, Europeans had been using various gold and silver backed currencies intermittently since the Roman Empire. In the mercantile system, Europeans first learned the idea of capital flows in and out of a country and so sought to fix exchange rates and promoted exports in order to amass bullion. Of course bullionism was not always a successful philosophy; large surpluses of gold and silver that were imported into Europe after the discovery of the New World actually depressed the price on those commodities for several decades. Although most of the above factors played a role in the emergence of the mercantile system throughout Western Europe, since it was a nationally based system its details and nuances varied from country to country. The two most successful mercantile economies were those of Britain and the Netherlands.

A Study of Two Mercantile Economies: Great Britain and the Netherlands

Both Great Britain and the Netherlands became wealthy through their mercantile economic policies during the sixteenth and seventeenth centuries. Although the British Empire was much larger, the Dutch managed to find success by following some of the same policies as the British, but also by creating ones that were unique to their national situation. The Netherlands was not a country until the Early Modern period when it broke from the Spanish Hapsburgs; but by the early seventeenth century the Netherlands was an economic powerhouse, despite its small size, due to its formidable navy and the government subsidized Dutch East Indian Company. The Dutch East India Company led the way in Dutch colonization of the region that would later become Indonesia, which brought numerous spices and other exotic commodities into the Netherlands. These aspects of Dutch mercantilism were very similar to those of the other European countries, but the Dutch enacted a number of unique policies in their brand of mercantilism.

Under Dutch mercantilism the city of Amsterdam became a major trade center as it was the central market of the European grain trade. Because of Amsterdam’s new economic position, Dutch farmers became increasingly influenced by international markets and in turn the Netherlands took on a more cosmopolitan composition. It is no coincidence that the renowned Dutch trait of tolerance happened to manifest itself during the seventeenth century when Dutch mercantilism opened the Netherlands to the world, and the world to the Netherlands. The Dutch government also took a more active role in domestic projects that related to the economy.

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The Dutch government subsidized and outright funded the extensive system of dykes and levees that still protect the below sea-level Netherlands from the Atlantic Ocean. The Dutch were also much less restrictive than other Europeans towards the export of domestically manufactured products to non-Dutch colonies and even allowed bullion to flow out from its borders. The most important feature of Dutch mercantilism that helped its early success was the involvement by local leaders in business. City governments often supported local merchants through business loans, grants, the awarding of monopolies, and tax deductions. In no other European country during the Early Modern period did local governments do as much as the Dutch did for local businesses, which many scholars point out was the base of the Netherlands’ successful form of mercantilism. Despite finding incredible economic success during the seventeenth century, the Netherlands began to falter later in the century. The Anglo-Dutch War (1664-1667) and the War of the Spanish Succession (1701-1714) greatly damaged the Netherlands naval capabilities and therefore, since it was such a small country dependent on imports, greatly hurt its economy as well. When the Netherlands economic power diminished in the eighteenth century, its greatest rival, Great Britain, was there to pick up the reigns.

Although the British got off to a later start than the Spanish, Portuguese, and Dutch, they made up for lost time by quickly building the strongest of all mercantile economies. For the British it began during the reign of Henry VIII (1509-1547), who is best known for being a playboy but also for having the foresight to establish the Royal navy. The British navy and the mercantile economy had a symbiotic relationship as the navy was used to conquer new colonies and transport goods throughout the empire while the economy was the fuel that kept the navy alive. Because the British Empire became the largest in the world, British mercantilism was much more far flung and was comprised of many different government subsidized monopoly companies.muscovyseal

One of the earlies British monopoly companies was the Muscovy Company, which was established in 1553 to facilitate trade in Russia. After the Muscovy Company the Levant Company was chartered in 1592, the Hudson Bay Company in 1670, and the Royal Africa Company in 1672. The Royal Africa Company was established after the Company of Royal Adventurers was destroyed during the Anglo-Dutch War and was largely responsible for the majority of the trans-Atlantic slave trade. Of all the British royal monopoly companies the best known and most lucrative was the British East India Company, which was founded in 1600. The East India Company’s headquarters were first established in the city of Surat, near the Arabian Sea coast and would control most of India for over 200 years. The Company carried out its conquest of India in a piecemeal fashion by a combination of exploiting ethnic, religious, and regional differences of the Indians while utilizing a state of the art military against any resistance that it found. The Company built infrastructure in India while exporting spices, silks, and other commodities back to Britain. The Company’s control of India came to an end in 1858 when it was forced to turn over control to the Crown as a result of the Sepoy Rebellion of 1857-1858. The British East India Company’s loss of India represents the end of the mercantile economic system, but the system collapsed due to a number of factors.

The Decline of Mercantilism and the Rise of Modern Capitalism

More than any rebellion or wars, the end of the mercantile economic system was the result of new ideas that were becoming popular in Europe – both economic and political. The eighteenth century is known as the Enlightenment as new ideas pertaining to political freedom began to permeate throughout Europe and eventually to the Americas. As writers such as Voltaire questioned the old political order, other writers such as Adam Smith questioned the old economic order of mercantilism. Adam Smith’s book The Wealth of Nations is seen today as the fundamental treatise on modern capitalism, but modern scholars will also point out that it was just as much an attack on the mercantile economic system. Smith argued that in order for a greater number of people to attain political freedom, then they must also be economically free and that could only be carried out by eliminating the arcane mercantile system just as the mercantile system eliminated the feudal system. Truly, Smith’s ideas influenced legions of merchants and political leaders who believed that mercantilism was not the economic future for Europe.

One European leader who was ahead of the times in many ways and was also responsible for hastening the downfall of mercantilism was Napoleon Bonaparte (1769-1821). Although Napoleon is not known to be much of an adherent of Smith’s economic philosophies, his conquest of much of Europe in the early nineteenth century damaged the mercantile system as much as the words in The Wealth of Nations. During Napoleon’s hegemony over Europe the mercantile system declined partly because there were no national economic policies to pursue as Napoleon was the sole ruler, but also because the dictator allowed nascent capitalists to carry out their trade. Napoleon also closed all European ports in his control to British merchants, which further impeded the mercantile system.

In the end it was the British who put the final nail in the coffin of the mercantile system. By 1797 Britain’s economy was operating under the gold standard, which would evolve in the early nineteenth century to become the Classical Gold Standard. The first successful modern capitalist emerged in Britain during the late eighteenth century, which proved to be too much competition for the government subsidized monopoly companies. Finally, the mercantile system became a victim of its own success. The monopoly companies were very efficient and successful at opening up new colonies, but once the world was effectively colonized there was little need for governments to keep subsidizing these companies. The writing was on the wall: the drive for colonization was over and along with it the mercantile system, which was quickly replaced by modern capitalism and the Classical Gold Standard.

Bibliography

Bulut, Mehmet. “Reconsideration of Economic Views of a Classical Empire and a Nation-State during the Mercantilist Ages.” American Journal of Economics and Sociology 68 (2009): 791-828.

Dalziel, Nigel. The Penguin Historical Atlas of the British Empire. London: Penguin, 2006.

Mueller, Franz H. “Economic History and History of Economics.” Review of Social Economy 46 (1988): 164-179.

Nachane, D.M, and H.R. Hatekar. “Ricardo Versus Tooke: An Old Controversy Revisted.” Economic and Political Weekly 31 (1996): 65-73.

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