Volume #3: Case Study - The Age of Mercantilism and the Rise of Empires

Imagine a world where a monopoly on trade made you the richest country. Merchants and landowners? They would be the richest, forget the engineers, doctors, and scientists that work to improve quality of life and advance the scope of knowledge of mankind.

The only thing the government is worried about is gold, silver, and enslaving native populations overseas.

All of this sounds great and all, but you would be surprised at the lingering impacts this selfish system managed to creep into today’s world. Let me present to you the golden age of mercantilism in simple terms in the first edition of Money Trees case studies.

Origins: Birth in the 1500s France

Mercantilism is simple as a fundamental concept. More exports and less imports equals wealth. This resulted in what Europeans called a “balance of trade”, where essentially accumulating wealth in the form of wealth and silver was strictly the sole determinant in your status as a nation and how other monarchies respected you.

The beginnings of mercantilism can be traced back to the late Renaissance, when European nations were transitioning from feudal economies to centralized states, also known as nation-states where most of the population identified themselves with the same nationality. Let’s just say kings in medieval Europe were not the smartest. They believed global wealth was finite, and the only way to increase that wealth was to acquire it and hoard it before everyone else. Clearly they didn’t know about inflation back then. There was an impending sense of individuality yet a sudden spark of positive attitude towards international trade.

In 1539, one of the first protective policies was introduced in France, when a decree was passed banning the import of wool from the Spanish and some parts of Flanders (Belgium).

Then, a policy was passed to restrict the export of bullion, where we see the wealth storage concept being applied early on. The dependance on overseas trade really hurt localized agriculture and the outdated feudal system, killing the land-owning nobility that once reigned.

Power was shifted to the merchant elite and landowners now thrived from controlling access to raw materials to then selling them to the mother country for a profit colonization boomed as nations looked to find alternative sources of precious metals.

The term itself was coined by French economist Victor Riqueti in 1763 and popularized in Adam Smith’s depiction of this system as the “mercantile system” in his book Wealth of Nations a baker’s dozen years later in 1776.

Reign of the Mercantile System: Post-Renaissance Europe and Colonization

You can probably see this economic system to be a selfish and stubborn way to get rich, not malicious, at least not yet. That’s going to change once you see the cheeky ways king’s and nobles used manipulation to socially engineer their way to prosperity.

The first task many governments faced was to across the continent looked to protect their corporations through subsidies in order to artificially increase domestic competition and allow them to regulate prices in foreign markets. They could then alter those prices to undercut foreign competitors and then boom, more income because more people want to buy cheap. If they needed, they would use military force to get what they wanted, especially in naval combat to secure and monopolize vital trading routes. Tariffs were probably proportionally to now the highest they’ve ever been in order to discourage cheap goods from coming in.

Imperialism emerged as a result of this, like an owner telling his dog to go fetch and bring the ball back to him. Only that there are multiple dogs and on a much, much bigger scale.

Often times indigenous populations were caught in the crossfire of their mother nation’s interests. From Spain’s Encomienda System, established in 1502, thousands of natives across Mexico and Central America were forced to farm and extract these minerals all with the intent of bolstering the Spanish economy into one of Europe’s biggest. Their consolidation of Transatlantic trade routes brought in potatoes, tomatoes, and corn that changed Spanish society, but also led to a large influx of American exported metals that made them a leading European power by the mid-1500s.

Trading hubs in Netherlands with Amsterdam and in Italy with Venice and Genoa thrived in the 16th and 17th centuries. Both the Dutch and British East India Company were heavily involved in international trade and providing an essential instrument to the mercantilist era, securing monopolies on spices, silk, and cotton which allowed it to export more than import.

The British empire specifically however, had an interesting rise, with its colonialist tendencies fueled by mercantilist thinking. In the West Indies, they consolidated exclusive markets to sugar, and through their American colonies they became rich off the acquisition of tobacco, rice, and indigo. These raw materials were then turned into manufactured goods that were bought by these colonies, enforced by the Navigation Acts from 1651 to 1696 that required the colonies to exclusively trade with Britain.

I can just feel the excitement of British merchants licking their lips at the sight of this seemingly infinite loop of buying and selling that seemed like a cheat code to a luxurious lifestyle.

Sadly though, cruelties arose to meet the greedy demands of nations. The Triangular Trade between America, Africa, and Europe saw the brutalities of African rulers who forced their poor population to submit to slavery, all in the vain of providing a different ruler some extra cash, who just sit pretty while they did all the work.

It truly was an evil, yet effective form of obtaining resources and open up markets.

Basically the cycle was as follows: merchants establish colonies, raw materials are acquired, goods are made and sold, money is put into domestic industries, rinse and repeat.

Capitalism and Industrialism: The Bane of Mercantilism

Ah yes, the beautiful sunny skies of capitalism. Innovation, enterprise, and entrepreneurship. The previously mentioned Wealth of Nations called for a laissez-faire economy with little government intervention, opposing established beliefs that governments must dictate business activity.

This effectively hurt mercantilism and reinforced the ideas of natural market forces and free trade. Comparative advantage was brought up as a concept, where each nation would focus on sectors they specialized in and in turn become the top producers in that industry, leading to beneficial deals. This was seen in Portuguese wine production as well as the British industry of cloth.

The rise of industries that could mass produce goods at much lower costs (economies of scale) made countries less dependent on foreign trade and more self-sufficient. Higher tariffs were now obsolete and actually hurt countries in the Industrial Age, since it made the costs of machinery and other products that made manufacturing possible especially high.

Scholars, in fact, killed the idea that wealth was definite, and advocated that it could be created through correct methodology when it comes to the effective use of labor. Restrictive trade policies ultimately hindered technological development in the long run and hampered economic growth, so its decline was reasonable as more countries automated.

Despite these drawbacks and obvious flaws that are now apparent in the mercantile economic system, it still provided a constructive basis for colonialism and subsequent moves for independence, leading to the creation of new superpowers in the long term (looking at you USA) as well as industrialization through the accumulation of capital. I mean, that money had to go somewhere right?

Lasting impacts: Waves of Tariffs and Surfing the Subsidies

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Mercantilism now is seen as an out-of-date concept, but it is still seen in certain economic phenomenons today. Many critics even claim it to be “economically absurd and out of touch with reality”. Really goes a long way in showing you how inept we were in taking care of money.

It explains the devaluation of currency as the primary effect of inflating money supply and restricting trade through import tariffs. These are done to stimulate domestic production, seen today in the trade wars between China and the United States. Governments do also provide subsidies for financial industries such as nuclear energy and also another one that is kind of looked past: public college education.

You can go outside and kiss the ground, because the world we live in now, while somewhat a reflection of the past, is the collection of all of history’s lessons. Always be grateful and do what you love, as long as it’s not as crazy as invading indigenous lands and forcing them into slavery.

📩 Got thoughts? Share your take on how mercantilist strategies still influence global economies today! See you next week on Money Trees and make sure to share our newsletter to your friends!