Ec 224/ 324 History of Economic Thought Germelino M.

Bautista, PhD First Semester 2013 The Development of Mercantile Capitalism and Mercantilist Thought (16th - 18th century) Historical Background the disintegration of the Roman Empire into feudal manors within the European continent; the discovery of the new world of America and the establishment of colonies by some European states in the 15th century resulting in a large flow of gold and silver into Europe from Mexico and Peru; and the tripling of prices in Europe from 1500 to 1650; the eventual impact on the incomes of the aristocratic and clerical classes, on one hand, and the mercantile class, on the other; the limited size of local markets in the rural economy of the feudal period, concentrated in the fairs in neighboring cities; and the gradual decline of semibarter exchanges with the more widespread use of money; the rise of longdistance commerce and the formation of commercial centers; the decline of Venetian sea power by the 1550s partly as a result of the timber shortage; the rise of Dutch ship building and trade, with timber sources from Germany, Scandinavia, Russia, Latvia, and Poland; Dutch control of the Baltic trade by the 16th century the source of grain, timber, iron, and copper; the struggle between the free cities, the papacy and the Holy Roman Empire; completion of the national unification process in Spain, England and France by the start of the 16th century; the Renaissance scientific revolution (Copernicus, Galileo, Descartes, et al); the disintegration of the more or less uniform version of Christian religion through the reformation (Luther in 1517), accompanied by the 16th and 17th centuries shedding of blood; the consolidation by nobles of their feudal domains, and the emergence of monarchical nation-states during the 16th and 17th centuries; the importance and preoccupation with taxation for the treasury (e.g. German Kammer) of the sovereign the colonial trade and wars between the nation states of Europe England ultimately emerged the victorious, imperialist country, after the defeats of Spain and Portugal in the 16th century, of Holland in the late 17th and France in the 18th century.

Allied with merchants/ financiers and public administrators, the king tried to unify the country and quell the resistance of nobles and landlords. To secure and strengthen the states power internally vis--vis particularistic institutions, like the Church and feudal aristocracy, the monarch seized Church lands and tried to integrate the feudal nobility 1

into the state apparatus or provided them economic opportunities within the bureaucracy or trade. The new mercantile bourgeoisie allied itself with the state in order to better exploit the growing possibilities of international commerce. At the beginning of the 17 th century this alliance culminated in the formation of the first big merchant and trading companies of the modern world: the British East India Company in 1600 and the Dutch EIC in 1602. The alliance between the crown, merchants, professionals (lawyers, public administrators) also resulted in national economic policies, an integral part of mercantilism. In the early part, the king as the dominant/ supreme feudal lord lived on his own. With extensive states, servants and slaves, taxation played a relatively minor part in household management. With the emergence of nationality and the superior power of the monarch in such States, however, taxation became more important. How to make great revenues hence became an urgent preoccupation of civil servants. Power was the first interest of the state. The classic means to attain this end was force. The crown had to secure monopoly over the means of violence and control over lands. The nation-state defined its territorial boundaries through force, conquest, and military power. The extent of territorial control or rule was crucial because land defined the natural perimeter of its power. This was also reflected in the competition with other emergent nation-states for trade markets and colonies. Its shipbuilding capacity, military/ naval power, and bullions were the measures of state power. The available money and credit were only in the form of gold and silver coins. What is mercantilism? the basis of State policy/ action? Is mercantilism a formally defined school of thought? A set of homogeneous economic ideas focusing on national concerns applicable to different European states? There was no Mercantilist school of thought, as a label or organized formal proponent group. Even if focused on national concerns, there were debates on economic/ state policies. There emerged, however, a set of economic beliefs or proposals, state programs and policies enunciated in different periods -- the 17th and 18th centuries in England and the late 17th up to the early 19th centuries in France. Mercantilism was hence defined in national terms, nation-specific (see List). But they had common/ similar objectives, such as the removal of internal barriers to commerce or resource movements, integration of the domestic economy, promotion of the internal market, and mobilization of natural resources for productive ends. Externally, their common object was to promote favorable trade balance/ surplus; develop industry in order to reduce imports or increase exports. Mercantilism was hence an approach to the economic problems of a particular European country in its stage of nation-state development. With its pragmatic concerns, there were 2

no major theoretical treaties; only tracts with the practical rules and norms of commerce and debates on how best to promote national wealth. The important authors in this period were merchants and royal ministers/ civil servants, and their works consisted of short pamphlets aimed at advising the monarch or convincing parliament to implement policies most favorable to the monarchy/ realm or the national trading company. The debates and discussions moved the policy perspective from the purely ethical and normative approach of medieval/ scholastic time to more empirical discourse based on figures, facts and calculation, and natural law/ science. Adam Smith gave the formal label, and defined the mercantile system in a narrow sense as a set of policy prescriptions for a favorable balance of trade or payments that encouraged exports, discouraged imports, imposed regulations on colonial trade, or regulated policies on commerce and money. It may also be extended to cover the regulation of industry. Later English classical economists (Senior, McCulloch) accepted this definition, and reiterated its essence as the accumulation of wealth in the form of precious metals through a system of policy recommendations for the various items in the balance of payments. von Schmoller (German historical school in the latter half of the 19 th century) gave a profound meaning, a more wide-embracing application than recommendations with respect to the regulation of the balance of payments. In his book The Mercantile System and Its Historical Significance (1884), he wrote What was at stake was the creation of real political economies as unified organisms, the centre of which should be, not merely a state policy reaching out in all directions, but rather the living heartbeat of a united sentiment in its innermost kernel it is nothing but state making (but) not state making in a narrow sense, but state making and nationaleconomy making at the same time; state making in the modern sense, which creates out of the political community an economic community; The essence of the system lies not in some doctrine of money; or of the balance of trade; not in tariff barriers, protection duties, or navigation laws; but something greater the total transformation of society and its organizations, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the nation state. Other economic historians (Archdeacon Cunningham, Ashley, Eli Heckscher) shared this broader perspective. To Heckscher, a Scandinavian, Mercantilism (1935) is a body of thought concerned with nation-building, specifically the transformation of the system of the Middle Ages into the system of national States. It is a monetary system combined with a system of economic protection, power, and military. And the task of the state was to promote the accumulation and management of wealth and power of the nation. To the German historical economists, mercantilism is a broad school of thought and economic policy with an aim to promote economic growth and modernization through means of protection and economic nationalism. Applied to a historical period, the thrust 3

of state consolidation goes beyond the territorial boundaries, thereby depending more on the states external program. Mercantilism is thus a historical process of state-building, consolidation of state power, and a program of state formation (e.g. the establishment of the English trade empire, the consolidation of the French monarchy or the ideals of the French revolution, or the unification efforts of Germany under Frederick the Great or the centralization of the Prussian administrative power from 1680 to 1786). Specifically, it was a period of policy making and economic management of the state in order to realize nation-state interests, and national economic progress. If according to Schmoller, Mercantilism seemed like a revolution of sorts directed or initiated by the monarchy towards the consolidation of the nation state and its evolution to an ideal state. This required a definition of the State that the English, French and German philosophers would later articulate in various ways. Early mercantilist assumptions 1. Power is essential as a means for the acquisition and retention of wealth. 2. Wealth is absolutely an essential means to power whether for security or for aggression. 3. Wealth and power are each proper ultimate ends of national policy, and there is longrun harmony between these ends. The objective of mercantilist policies is to strengthen the external power of the state. The goal of economic means, such as protectionism and the monetary system is to bolster the political strength of the state. Wealth, trade and war are interlocked. Wealth could be raised through state-sponsored trade and war, while trade and war depend greatly on state resources. Also, there was no conflict between trade promotion and war, with trading companies serving as a reserve army. Trade, war or conquest had the same objective. In his remark to the founder of the French cotton industry, Napoleon stated We both are fighting the English, but yours is the better war. The living standards of the population could only then be raised by weakening the economic power of other countries. The world market, in other words, consisted of a given fixed size and stock of money. And exporting nations competed to increase, if not just maintain their share of the market. This was a zero-sum game. The richness of one state was thus measured in terms of having more gold/ bullions than the rest of the world. And the wealth or power of the state can only be improved at the expense of another The French Colbert (1669): Commerce is carried on by 20,000 vessels, and that number cannot be increased. Each nation strives to have its fair share and to get ahead of the others. The Dutch now fight this war (of commerce) with 15,000 to 16,000 vessels the British with 3,000 to 4,000 and the French with 500 to 600. The last two countries can improve their commerce only by increasing the number of their vessels and can increase their number only by pairing away from the 15,000 to 16,000 Dutch ships. 4

In order to increase the power of the state relative to that of all other states, it must have a trade surplus with each country. On the offensive tack, exports must be encouraged; new trade routes and products must be discovered or taken away from the control of another state the number of ships of another state must be physically reduced gold mines, new territories or markets must be conquered. On the defensive side, the export of bullions/ gold or silver coins must be banned. The consumption of both imported necessaries and luxuries must also be restricted. The domestic market of local merchant-manufacturers must be protected. To increase its trade share, subsidies must be provided to infant and ailing industries, as well as raw material imports. The outflow of precious metals also had to be prevented because its circulation within the national borders was considered to guarantee an extensive tax base. Another measure to prohibit the export of gold/ silver was to raise the purchasing power of foreign currencies (i.e. depreciate the local currency) so as to induce an inflow of money from abroad. Thomas Mun (1571 1641) on the Netherlands: it is a small country having little natural wealth, .. timber, necessary ammunitions (but) possess them all besides their own wants, they can serve and sell to other Princes, ships, ordinance, cordage, corn, powder, shot and what not Reasons for its prosperity 1. Holland (has) grown rich (not) by any native commodities, but by force of Industry; by improvements and manufacture of all foreign growths; by using the general magazine of Europe, and furnishing all parts with whatever the market wants or invites. 2. It has sound political institutions with a free constitution. There is mutual trust among private men and confidence in public and private safety. There is trust in government, its strength, wisdom and justice. These are necessary for trade and growth 3. Its large population and need for necessaries induce parsimony and industry. 4. Trade and commerce provide a mental framework for mutuality and cooperation. Specific basic policies of nationalism, self-sufficiency, and national power Mun and Phillip von Hornick (1638-1712), an Austrian civil servant articulated the principal rules of national economy (1684) 1. natural resource policy: the state must take control over what it considers as part of nations resource. the Fishing in his Majesties seas of England, Scotland, and Ireland is our natural wealth, and would cost nothing but labour, which the Dutch bestow willingly, and thereby draw yearly a very great profit to themselves by serving many places of Christendom with our fish.

2. Develop existing resources so that they become productive. although this Realm be already exceeding rich by nature, yet might it be much increased by laying the waste grounds into such employments as should no way hinder the present revenues as should no way hinder the present revenues of other manure lands, (and thereby) prevent the importation of hemp, flax, cordage, tobacco, and divers other things which now we fetch from strangers to out great impoverishing. We must also inspect the countrys soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered Agriculture was also promoted by taxing food imports (England) while French exports of agricultural products were taxed to keep domestic production at home. 3. Build roads, bridges, canals and other infrastructure to improve the domestic flow of goods and communication. 4. Attention should be given to the population, that it may be as large as the country can support. The emigration of skilled labor was prohibited 5. Promote economic unification; eliminate internal custom barriers, feudal tolling network, and other commercial restrictions by establishing common currencies, common weights, and measures; and establish a postal and banking system. 6. On domestic industries: grant patents, special privileges, monopolies to specific industries, e.g. those vital for national defense, like the munitions industries (guns, gunpowder, ships, supplies) and the monopolies in copper, saltpeter. Subsidize new industries, and establish royal manufacturing concerns in order to improve quality and promote new products. Use available local raw materials in domestic manufacture because finished goods have a higher value. In France under minister Colbert (1619 1683), national guilds were established to regulate major industries and improve product quality. 7. On trade and naval policy: regulate trade and determine who are allowed to trade and how. Establish a trade monopoly in particular towns and cities. Foreign trade was stimulated by acquisition of colonies, low wages, tariff regulations, navigation laws, and trade restrictions. On exports: constantly seek opportunities to sell countrys surplus manufactures to foreigners for gold or silver. Restrict or embargo shipments of coins or bullions; all domestic money must be kept in circulation. On imports: imports of foreign goods must be discouraged. No imports must be allowed if such goods are supplied locally. As much as possible, imports must be confined to raw materials that can be processed at home. If particular imports are indispensable, obtain them first in exchange/ barter, instead of gold or silver payments. Increase duties on imported goods in order to protect local industries and markets. In the case of England, trade was the basis for wealth and national power. Monetary expansion was a stimulus to economic growth because cash holdings at low interest for business and rulers were limited, the banking system was still at its infancy, and the available supply of money and credit was only in the form of gold and silver coins. The purpose of this export thrust and trade regulation was to accumulate bullion. Bullion served not only as medium of exchange or purchasing power but as working capital and 6

investment. It met the nations growing transaction/ trade requirements, the purchase of imported inputs while stimulating domestic commercial activity and developing export capacity and industry. In other words, money inflows had a multiplier-employment effect. Thus, the policy challenges were to make easy money available and prevent inflation; and avoid increasing the wedge between prices and wages, and fomenting social, political unrest. Rising prices meant lower sales of exports that would result in worsening economic conditions unfavorable balance of trade, money supply contraction, and economic decline. The indicator of its political and economic success: through its policies, the mercantilist state partially if not critically performed the function of primitive accumulation, a necessary stage for the eventual triumph or expansion of capitalism. Questions/ issues raised: On money debasement, value, interest, wealth As the monetary/ exchange medium, gold and silver with its intrinsic value is wealth. The accumulation of wealth naturally meant the accumulation of these precious metals/ bullions. Should net outflow and debasement of money not be allowed? With regards to money debasement (change in the volume of money) Nicholas Oresme (?1320-?1382) a French monk author of De Moneta; A treatise on the Origin, Nature, Law and Alterations of Money (1360?) Preface: Some men hold that any king or prince may, of his own authority, by right or prerogative, freely alter the money current in his realm, regulate it as he will, and take whatever gain or profit may result: but other men are of the contrary opinion. I have therefore determined to write down from a philosophical and Aristotelian point of view, beginning with the origin of money. I make no rash assertions, but submit everything to the judgment of my seniors. Perhaps my words will rouse them finally to settle the truth of this matter so that the experts may all be of one mind, and come to a conclusion which shall be profitable to both princes and subjects, and indeed to the State as a whole Chapters 1. Why money was invented; 2. The material of money; 3. Of the variety of materials and of alloys; 4. Of the form or shape of money; 5. Who has the duty of coining? 6. Who owns the money? 7. who bears the expense of coining? 8. On alterations in coinage in general; 9 14 Changes of form, ratio, name, weight, materials; compound changes; 15. That the profit accruing to the Prince from alteration of the coin age is unjust; 16. That such profit is unnatural; 17. That profit from the change of money is worse than usury; 18. That such alterations of money are essentially not permissible; 19. Of certain disadvantages to the prince resulting from alterations of the coinage; 20. Of other disadvantages to the community as a whole; 21. of certain disadvantages to part of the community; 22. 23. 24. 25. That a tyrant cannot be lasting; 26. That the taking of profit from alteration of the coinage injures the whole Royal Succession. 7

Argument: debasement means diminishing the amount of precious metal in the coin and calling it by the same name. It doesnt represent the same purchasing power. In effect, debasement is a tax on the people. And it confers a profit to the prince. Disquisition on debasement Le Branchu (1934); Copernicus (1538?, but only published in 1810) argues against debasement; he provides a primitive version of Greshams law: that bad money drives out good. The public would tend to use the debased/ bad money for internal payments while hoarding, melting down or using the good money (with greater intrinsic value). Relationship of money to prices in general With the discovery and conquest of North America and the Caribbean, precious metals flowed into Spain. Azpilcueta de Navarro enunciates the quantity theory of money Other things being equal, in countries where there is great scarcity of money, all other saleable goods, and even the hands and labour of men, are given for less money than where it is abundant. Thus we see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth and labour are worth much less. Investigating on the cause of the rise of prices, Malestroicts Paradox on the course of the Value of Money (1566) argues that if you take the real value of gold and silver, as distinct from the value of the debased coins, the real values of exchange between gold/ silver and other commodities had not changed. It was just the debasement that had caused the rise in prices, but the real value of gold/ silver had not changed. The Response of Jean Bodins to the paradoxes of Monsieur de Malestroict: He doubts the later assertion there was no change in the relation between commodities in general and gold and silver. Doesnt deny there has been debasement of the currency, but does deny that there have been changes in the relative prices of some goods and bits of land which cannot be explained only in terms of debasement. He gives other causes for the rise in prices other than debasement; some valid causes: monopolies, waste on the part of various people, lavish expenditures on particular commodities or bits of land, etc The principal reason which raises the price of everything, wherever one may be, is the abundance of that which governs the appraisal and price of things. much gold and silver (were brought) to Rome that the people were freed from paying taxes, & the price of lands rose so much wealth (was brought) from Egypt that usury fell,& the price of lands was a good deal higher than formerly. Now it was not the scarcity of lands, which can neither increase nor diminish, or monopoly which cannot exist in such a case: but it was the abundance of gold & silver which causes the depreciation of these & the dearness of the things priced.

It is therefore necessary to demonstrate that there was not much gold& silver in this Kingdom three hundred years ago, the time of which Melestroict speaks, as there is now: which is evident at a glance The quantity of money in relation to GNP, whether the money be metallic or paper, has something to do with the purchasing power, and this is sometimes forgotten by people who are high in public esteem. Should the movement of money, exchanges be regulated/ controlled? In the debate of English writers (Gerrard Malynes versus Misselden and Mun both connected with EIC), Malynes, the Commissioner of Trade in the Low Countries (1586), published in 1601 A treatise of the Canker of Englands Commonwealth. He recognized that plenty of money maketh generally things deare, and scarcitie of money maketh likewise generally things good cheape. Also, things particularly are also deare or goods cheape according to plentie or scarcitie of the things themselves, or the use of them. Malynes also recognized the effect of abundance or scarcity of the precious metals, but thought that the national position in regard to the limited stock of precious metal depended essentially on the position created by speculation in the foreign exchanges. What was desirable was some inflow which would make the exchanges slightly favorable, implying an improvement of the terms of trade. Malynes wrote at a time there was a fear of scarcity of money. Hence, there were strict regulations of the movement of gold and silver out of the country. There was also legislation focusing on trade with particular countries, such that if the balance of payment was not favorable with those countries, then regulations were passed to hamper trade with them. He viewed the insufficiency of inflow to be due to the manipulation of bankers who gained by rigging the exchange market. They were said to manipulate and make profit by putting their money anywhere where they thought they could make a profit without regard to the national interest. Hence, he advocated the restoration of the Kings Exchanger to maintain a rigid path, and the enforcement of the Statues of Employment compelling payments by foreigners for exports in specie. He also advocated exchange control and prohibition of speculation in the exchanges which caused foreign exchanges to deviate from a fixed norm. In 1621 the Commission on Exchange was set up with critics of Malynes Misselden, Mun. One policy issue it addressed was the EIC net outflow of gold and silver to India and the East. The Commissions proposal: EIC operations should be limited, as tending to the scarcity of inflow of money into England. Misselden specifically emphasized the desirability of an increased supply of money; he advocated debasement from time to time supposedly to stimulate exports. While he agreed that debasement made things dear,

That will be abundantly recompensated unto all in the plenty of Money, and quickening of Trade in every mans hand And it is much better for the Kingdome, to have things deare with plenty of Money, whereby men may live in their several callings: then to have things cheape with want of money, which now makes every man complaine. Thomas Mun (1571-1641), a successful merchant and director of the East India Company was a member of committee of merchants to examine problem of depreciation of Britains exchange rate (1615). He wrote the pamphlet A Discourse of Trade from England into the East Indies (1621) which argued that England gained from the operations of the EIC despite the net outflow of gold/ silver payments to India because the EIC brought back from India and the Indies spice and cloth of various kinds which were sold at great profit in continental Europe and the Mediterranean area so that on balance the flow of money into England was enhanced. He also wrote Englands Treasure by Forraign Trade, or the Balance of our Forraign Trade is the Rule of our Treasure about the end of the 1620s or 1630s (but published in 1664 by his son). In Chapter 2: The means to enrich this Kingdom, and to encrease our treasure Although a kingdom may be enriched by gifts received, or by purchase taken from some other Nations, yet these are things uncertain and of small consideration when they happen. The ordinay means therefore to encrease our wealth and treasure is by Forraign Trade, where wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value Chap 3: ways and means of policy. Mun recommends the development of natural resources so that England doesnt have to import so much, together with the development of national industries, and so on and so forth. Chapter 4: The Exportation of our Moneys in Trade of Merchandise is a means to encrease our Treasure. Same as the above argument on EIC trade with India Thus we may plainly see, that when this weighty business is duly considered ., as all our human actions ought to be well weighed, it is found much contrary to that which most men esteem thereof, because they search no further than the beginning of the work, (i.e. the exportation of gold & silver by the EIC) which mis-informs their judgments, and leads them into error: For if we only behold the actions of the husbandman in the seed-time when he casteth away much good corn into the ground, we will rather accompt him a mad man than a husbandman: but when we consider his labours in the harvest which is the end of his endeavours, we find the worth and plentiful encrease of his actions. He goes on to attack the policy involving the regulation of expenditure abroad, either in relation to balances with particular countries or the balance in general.

10

Also, he argues against keeping money at home on grounds which almost anticipate the idea of the quantity theory. In the latter part, he acknowledges that the Princes wealth will be increased by the inflow of money, and he may put aside a certain amount if the inflow is liberal, but he must be careful not to put aside too much, otherwise there would be an embarrassment of trade (deflationary influences). And he mustnt spend too much of it; otherwise, the reverse situation would follow. In other words, the nation must avoid keeping its stock of money idle. It had to reinvest it in the form of stock (e.g. imports to produce new goods), thereby increasing sales (exports) and profits (trade surplus) How should the State spend its money? Mercantilism was not the narrow view that gold and silver were the only forms of wealth. Though certain protective measures might conceivably turn the factorial terms of trade in favour of the country, mercantilists attached importance to the accumulation of a war chest. Nation states were actuated/ motivated in their policy not only by considerations of plenty (industry, employment ) but also by the necessity of covering themselves against attack or possibly of pursuing aggressive wars. For both of these, immediate finance was needed. Why should money be regulated? Mercantilism needed to be rationalized. It was motivated by the fear of a downward pressure on employment caused by an outflow of precious metals. In the 17th and 18th century the writer John Law noted that trade was increasing more rapidly than money. This implied that money should be based upon something other than precious metals. Also, money should be regulated because of speculations, like the land banks to the great catastrophe of the Mississippi boom and the collapse of France in the 18th century. How should the State spend its money? Sir William Petty (1623-1687) was a graduate of a Jesuit college (high school). He joined refugees of civil war in Holland in 1643; read with philosopher Thomas Hobbes; returned to England in the latter half of the 1640s; had a teaching post in medicine (1648); was a physician in Cromwells army in Ireland. He was promised patches of land without any proper land survey. He undertook the supervision of the survey, and became Commissioner for the distribution of the land. he was one of the founders of the Royal Society He also undertook a survey of mortality in London, a survey of economic conditions in England, Ireland, and termed his surveys as political arithmetic. He subscribed to Baconian philosophy on empiricism -- that if you collect enough facts, they then suggest a series, and hence a systematic science.

11

Pettys Treatise of Taxes and Contributions (1662), Chapter 1: various Publick Charge/ expenditures (defence, justice); third branch the Pastorage of mens Souls, and the guidance of their Consciences If we consider how easie it is to elude the Laws of man, to commit unproveable crimes, to corrupt and divert Testimonies, there follows a necessity of contributing towards a publick Charge, wherewith to have men instructed in the Laws of God, that take notice of evil thoughts and designs, and much more of secret deeds, and that punisheth eternally in another world, what man can but slightly chastise in this. He also suggests that there must be a Charge of highways, navigable rivers, aqueducts, bridges, havens etc. Also, a charge of schools and universities, and the maintenance of orphans and the maintenance of the poor. If (the people) think it just to limit the wages of the poor so as they can lay up (save?) nothing against the time of their impotency and want. The law of nature obliges States not to let people starve. Chapter 2: discusses the causes which encrease and aggravate the several sorts of Publick Charges and the unwillingness of people to pay them is not confined to contemporary times. (It is) arising from an opinion, that by delay and reluctancy they may wholly avoid them Another Cause which aggravates Taxes is, the force of paying them in money at a certain time. Also, there are Obscurities and doubts concerning the right of imposing. The Causes of encreasing the Military Charge are the same as those that encrease Wars, or fears of Wars, which are Forreign or Civil. He distinguishes between offensive wars (not agreeable) and defensive wars those that are forced upon one by the nature of the world as he saw it. The causes of Civil Wars in Europe (i.e. the 30 Years War) proceed very much from Religion namely, the punishing of believers heterodox from the Authorized way. He finds that there too many people in the Church that there should be national planning of these people instructed to teach the laws of God. How? Through an amalgamation of various curacies that would saving on public expenditures. Also, he recommends employment of the unemployed (in public works). Why? (F)or at worst this would keep their mindes to discipline and obedience, and their bodies to a patience of more profitable labours when need shall require it. Chapter 3. The various ways of lessening the disquiet of paying taxes. If people understood the magnitude of the value of products and so on, then they might be less disinclined to pay their taxes. Also, he pointed out that metallic money constituted a small part of wealth. Chapter 4: Of the several wayes of Taxe. The need to put aside a proportion of the whole territory for publick uses is an enlightened view. He notes the necessity of taxation, specifically real property (land), and makes a suggestion with regards to 12

economic analysis. Based on some observations and predictions, houses are taxed disproportionately, especially on new foundations. London citys future movement would be westward where the Windes blowing near of the year from the West, the dwellings of the West end are so much the more free from the fumes, steams, and stinks of the whole Easterly Pyle. Hence, (if) the pallaces of the greatest men will remove Westward, it will also naturally follow, that the dwellings of others who depend upon them will creep after them why should we trouble our selves what shall be five hundred years hence, not knowing what day may bring forth; and since tis not unlikely, but that before that time we may be all transplanted from hence into America, those Countreys being overrun with Turks, and made waste, as the Seats of famous Eastern Empires at this day are. Pettys economic analysis: before we talk too much of Rents, we should endeavour to explain the mysterious nature of them, with reference as well to Money, the rent of which we call usury; as to that of lands and Houses afore-mentioned. In Economic Works, Petty discusses rents as a surplus. Suppose a man could with his own hands plant a certain scope of Land with Corn, that is could Digg, or Plough, Harrow, Weed, Reap, Carry home, Thresh, and Winnow so much as the Husbandry of this Land requires; and had withal Seed wherewith to sowe the same. I say, that when this man hath subducted his seed out of the proceed of his Harvest, and also, what himself hath both eaten and given to others in exchange for Clothes, and other Natural necessaries; that the remainder of Corn is the natural and true Rent of the Land for that year; and the medium of seven years, or rather of so many years as makes up a Cycle, within which Dearths and Plenties make their revolution, doth give the ordinary Rent of the Land in Corn. A collaterall question may be, how much English money this Corn or Rent is worth? I answer, so much as the money, which another single man can save, within the same time, over and above his expence, if he imployed himself wholly to produce and make it; viz. Let another man go travel into a Countrey where (there) is Silver, there Dig it, Refine it, bring it to the same place where the other man planted his Corn; Coyne it, &c. the same person, all the while of his working for silver, gathering also food for his necessary livelihood, and procuring himself covering, &c. I say, the silver of the one, must be esteemed of equal value with the Corn of the other: The world measures things by gold and silver, but principally the latter and consequently the better of many must be the onely of all; that is, by fine silver of a certain weight: but now (its) hard to measure the weight and fineness of silver. (Expatiating on correctly valuing the silver) .. that which I would say upon this matter is, that all things ought to be valued by two natural denominations, which is Land and Labour. we ought to say, a ship or garment is worth a measure of Land, with such another measure of Labour; forasmuch as both Ships and Garments were the creatures of Lands and mens Labours thereupon: This being true we should be glad to finde out a natural Par between Land and Labour, so as might express the value by either of them 13

alone. Wherefore we would be glad to finde the natural values of the Fee simple of Land, though but no better then we have done that of the usus fructus abovementioned. (Petty is leading up to the capital value of land, the value of the fee simple of land.) Having found the Rent or value of the usus fructus per annum (of land), the question is, how many years purchase (as we usually say) is the Fee simple naturally worth? (Petty has moved from the exchange value of commodities to what is the value of the services of land and labour, and the natural path between them. He is now moving on to the capitalization problem the value of rents stretching indefinitely into the future. If there is no discounting of the future rents of land, and it is assumed that the land continued to be kept up at its usual rate of fertility, i.e. there were an infinite number of rents.) then an Acre of Land would be equal in value to a thousand Acres of the same Land: which is absurd, an infinity of unites being equal to an infinity of thousand. Wherefore, we must pitch upon some limited number, and that I apprehend to be the number of years, which I conceive one man of fifty years old, another of twenty eight, and another of seven years old, all being alive together may be thought to live; that is to say, of a Grandfather, Father and Childe; for if a man be a great Grandfather, he himself is so much the nearer his end, so as there are but three in a continual line of descent usually coexisting together; and as some are Grandfathers at forty years, yet as many are not till above sixty Wherefore I pitch the number of years purchase, that any land is naturally worth, to be the ordinary extent of three such persons their lives. (In 1903 Cassels downward limit of real interest was set at about 2 percent. Why? Because if it were to fall below that figure very much, then instead of turning income into capital it would be worthwhile turning capital into income and living on ones capital, provided that one were taking into account three generations) Should interest be charged? How much? In approaching the usury problem, Petty dismisses the problem of usury as a sin/ offence. As for Usury, the least that can be, is the Rent of so much Land as the money lent will buy, where the security is undoubted; but where the security is casual, then a kinde of ensurance must be enterwoven with the simple natural Interest, which may advance the Usury very conscionably unto any height below the Principal itself. (Referring back to the price of land near towns) Parrallel unto this, is something which we omit concerning the price of Land; for as great need of money heightens Exchange so doth great need of Corn raise the price of that likewise, and consequently of the Rent of the Land that bears Corn, and lastly of the Land it self; as for example, if the Corn which feedeth London, or an Army, be brought forty miles thither, then the Corn growing within a mile of London, or the quarters of such Army, shall have added unto its natural price, so much as the charge of bringing it 39 miles doth amount unto. Recalling past views on the interest on loans. There was Aristotles disapprobation of trade in money. The most unnatural is interest on loan, according to Thomas Aquinas. 14

As time went on, and commercial institutions developed, various concessions were made. In the catholic tradition, interest is justifiable if loss is incurred by lending money at zero interest, or when using the money oneself, one might have secured profit. According to Calvin, there is no harm in honest charging for loans; but Luther was against it. In the 17th century, very few were against the charging of interest. The controversy centered on what the legal rate of interest should be and whether it should be reduced. The legal rate in the teens of the 17th century was 6 percent. In the late 1660s, Josiah Child proposed that the legal rate should be reduced. He argued that the prosperity of the Netherlands was due to its low interest rate; when the legal rate of interest was reduced in the past, the country was said to have prospered. During Lockes time in the 1680s and 1690s, there were 2 policy views with respect to the debased currency: either to re-coin/ mint the silver currency and restore its metallic value, or to accept its debased value or devaluation. Locke was against the lowering of the interest rate because: 1. It will make the difficulty of borrowing and lending much greater, whereby trade will be obstructed. 2. It will be a prejudice to none, but those who most need assistance and help (widows, orphans, uninstructed in the arts, others whose estates lying in money) 3. It would increase the advantage of bankers (scriveners?) who know how to get round all the sort of thing. 4. It may increase crime. The evils of administrative acts are an incentive to other crimes. Therefore, interest is low in Holland because of the abundance of stock and because she is prosperous. Holland is not prosperous because interest rates have been forced down. What then is the natural rate of interest?

15