Mercantilism and the Sea-borne Empires

modified from essay by Prof. emeritus Lynn Nelson, University of Kansas

In the years 1500-1775, European commerce was conducted according to the principles of an economic philosophy known as Mercantilism, and out of the application of this philosophy arose the sea-borne empires.

According to the tenets of Mercantilism, a country should sell as much as it can, and buy as little as possible. It then has a favorable balance of trade in which other countries are in debt to it, and it can collect the difference in cash -- gold or silver -- and save it up. The rulers of countries trying to achieve a favorable balance of trade organized their economies to meet that goal - maximizing gold and silver. They equated wealth with money.

First, countries had to encourage the pooling and investment of capital in profitable pursuits. Wealthy individuals, often with the participation of their ruler would form what were called joint stock companies, in which each participant would contribute a sum of money and would own a portion of the company, and of its revenues, proportionate to the amount that he had contributed. 

Governments would grant such companies special privileges. The companies were granted limited liability, which meant that the partners in a joint stock company could not be held responsible for any debt greater than the value of the portion of the company they owned. Governments would also grant such companies monopolies over certain industries and commercial pursuits, and would protect their operations with armed force, if necessary.

 They would also attract people with money to invest by exempting such people from paying taxes on their capital gains. If a company proved successful, someone who had originally invested the equivalent of $100,000 in the company might find that he could sell his "share" of the company to someone else for $250,000. That $150,000 difference would be his "capital gain".

Keep the Working Class Poor

That was not the end of it, however, the governments of mercantilist countries tried to keep the wages of their working class as low as possible. This kept the costs of producing export goods low and, just as important, keeping the consumption of the mother country's own population to a minimum so that a greater portion of the country's total production would be available for sale by export. They also kept the prices of foreign goods artificially high through tariffs, taxes paid by anyone attempting to import foreign goods for sale, or even embargoes that made it illegal to import certain goods or to import goods from certain foreign countries. 

This had the hidden benefit of encouraging smugglers, people who attempted to sneak such goods past the government agents and sell them at market value. The smugglers developed fast ships and personal cunning that were valuable to a country in case of war at sea.

Colonies Produce Raw Materials, The Mother Country Manufactures for Export

The joint stock companies of mercantilist countries attempted to establish colonies that would produce cheap raw materials and foodstuffs to ship back to the mother country. These companies would sell foodstuffs and other consumer goods at high prices, thus making a profit from the general population, and using the raw materials back in the mother country to produce their own trade goods as cheaply as possible. They would not allow their colonies to develop their own local industries, and sold them goods from the mother country at inflated prices. Neither would they allow them to develop their own shipping, at least for shipping to the mother country, and the companies developed what were, for the day, valuable merchant navies through their monopolies of shipping to and from their colonies.

Smuggling, Pirates and Navies

Of course, it was just as profitable for mercantilist countries to smuggle goods into another country's colonies, and mother countries being abused in such a fashion often responded by issuing letters of marque, official documents to private individuals allowing them to seize foreign ships engaged in smuggling and to sell them, often to the government that had issued them the letters, for a profit. Such privately-owned fighting ships, often themselves captained and manned by smugglers, were called privateers and played an important role in the battle for colonies and control of the sea-lanes.

Economic Troubles for Portugal and Spain

In the beginning, spices from southeast Asia were flowing into Portugal and, soon after, gold and silver into Spain. Neither country could hold on to its advantage, however. Portugal expended much of it wealth in fruitless attempts to conquer Morocco and was soon taken over by Spain. For its part, Spain poured its treasure into fighting the Turks, gaining control of Italy, and attempting to keep control of the Netherlands, which, at the time, included modern Belgium.

map 1205  Europe after the 4th Crusade, Breakup of the Byzantine Empire

map 1328  Europe, small Turkish States, Conquest of Wales, Expansion of Lithuania

map1430   Europe, height of the 100 yrs war, expansion of Ottoman

map 1493  Europe, union of Castile and Aragon, fall of Granada

* map 1530  Europe, expansion of Hapsburgs, fall of Mamalukes

map 1570  Europe, expansion of Ottomans

map 1618  Europe, independent Holland, Eve of 30 years war

 Even apart from this, Spain failed to invest its windfall wealth from the New World in building a manufacturing capacity sufficient to construct its own navies and supply its own colonies. Part of this was no doubt due to the fact that 2% of the population, the nobles, owned 90% of the country's landed wealth and looked down on commerce and manufacturing as menial. There were not a sufficient number of (middle class) men of wealth to form the joint stock companies and joint ventures that began to arise in other countries. Spain and Portugal did not completely accept the competition-based mercantilist economic model and used their wealth to hire armies with which they hoped to enforce a political unity on Europe by force. Genoa provided much of the capital and the expertise in the early Portuguese and Spanish colonial ventures.

They saw no problem in buying the needed supplies from foreign countries, and so English cloth, tar and pitch, and iron-goods were soon flowing into Spain in exchange for Spanish gold; the shipyards of the Netherlands grew to be the greatest in western Europe, using timber imported from Germany and Sweden, cannon made in France, and manned by Swiss and Flemish marines. As the sixteenth century progressed, the economies of the countries of northwestern Europe flourished while Spain found that shipments of gold from the Americas were beginning to dwindle. The privateers of other nations had begun smuggling needed goods into the Spanish colonies.

Conflict

By the mid-1500's, the situation had worsened. Spain had absorbed Portugal and was engaged in on-again-off-again wars with all of those countries which it had strengthened by its economic dependence on them. The Protestant Reformation, a rift in the Catholic Church that had up to then included all of the Christians of Western Europe, had led to armed conflict. Spain attempted to restore religious unity to Europe by forcing Protestant countries to return to obedience to Rome. 

This Age of the Religious Wars lasted until 1648, and altered the balance of power in Europe considerably. The Netherlands, which had been possessions of Spain, broke away and formed the Dutch Republic, England joined the Protestant group, and France, although remaining Catholic (after a bitter civil war), began to challenge Spain for power on the Continent.

Other Nations Get into the Act

Although the attention of history textbooks seems focused upon these great continental conflicts, the conflict was worldwide. The Dutch navy quickly seized the chain of coastal stations that it had taken the Portuguese a century to construct, and soon controlled the sea-lanes all the way to the East Indies, China and Japan. 

The English and French soon built their own chain of stations and concentrated on opening up India as a market rather than simply a supplier. 

All three nations noted the demand for African slaves in Brazil and the Caribbean and soon established a regular and increased trade in human chattels. 

Dutch, English, and French privateers were soon raiding Spanish shipping around the world, but this activity was nowhere so great as it was in the Caribbean. In time, these "freebooters", usually operating with their government's tacit approval, shifted from seizing Spanish cargo ships and began hunting down the yearly convoys by which the Spanish transported gold and silver from the Americas to the mother country.

The most famous of these raiders, Sir Francis Drake, beat out his competitors by not waiting for the gold fleets to sail, but attempted to seize the gold before it was loaded. He captured and plundered Cartagena, the capital of the Spanish Main, and went on to capture the gold shipments from Peru as they were being carried across the Isthmus of Panama on their way to the gold galleons. Spain grew steadily weaker and was eventually no longer able to protect her overseas discoveries.

By the early seventeenth century, trading companies of Spain's opponents took control of some of the Caribbean islands and established colonies elsewhere. France laid claim to what is now Canada and began a far-flung trade with the inhabitants for furs that Europe craved, the Dutch established their colony at what is now New York and developed an extensive and profitable fur trade with the interior of the continent via the Hudson River, the Swedes settled on the shores of Chesapeake Bay, the Scots in what is now the Central American republic of Belize, and the English all along the eastern coast of North America.

By the early eighteenth century, the Dutch, French, and English dominated the world's sea-lanes. Throughout the next fifty years, these nations developed the mercantile empires in the fashion we have already described. It was perhaps inevitable that these three should contend for supremacy

in 1756-1763, the French and English clashed in what is known in European history as The Seven Years' War and as The French and Indian War in North America. It was the first truly global conflict, and English and French fleets and armies clashed in places far removed from Europe. 

Although the British were victorious and managed to establish their complete control over trade with India, both the British and French were exhausted and their treasuries almost empty. The British government decided that British armies had fought to protect Britain's colonists from French domination, so it was only fair for those colonists to pay taxes as their share of the cost of the war. 

The colonists were well aware that they had been controlled and their development restricted by previous British governments so that Britain might gain as much profit from as them as possible. The North American colonists argued that, if they were to pay "their share" to defend Britain's empire, they should enjoy "their share" of the benefits of that empire. The British government refused them the full rights of English citizens, the colonists refused to pay the taxes demanded of them, and, in 1776, the colonists declared that they were now independent of British control.

In that same year, Adam Smith, a British political economist, wrote one of the most influential works of his time, The Wealth of Nations. Like other influential works, this was based upon the Realist view of the world, that things are controlled by laws that are not subject to human management. 

More specifically, he argued that economics -- trade and commerce -- are governed by natural laws, and that all human attempts to manage trade and commerce can do is interfere with the natural course of economic development. Moreover, he held, if those laws were allowed to operate without interference, a rational economy would emerge that would be more productive and equitable than anything achieved by the application of mercantilist principles. 

Although it took some time, most governments adopted this view and adopted Free Trade, the idea that trade and commerce should not be subject to governmental control except for the essential element of producing a modest revenue. 

Many governments adopted the same philosophy for their internal economies in the form of laissez-faire economics. This French phrase means, more or less, "let it work", and was the basis of governments refusing to regulate business and refusing to let workers attempt to regulate it through trade unions and collective bargaining. Although this soon led to disaster, most governments continued to apply this principle with only minor modifications.

Meanwhile, the American Revolution against England was only the first of a wave of colonial revolts. By 1825, the European powers had lost their sea-borne empires and had begun to construct new empires based upon free trade and made possible by the steam engine, quinine, and rapid-fire guns and cannons.