Mercantilism

Disclaimer: 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 fixed
Protection of resources/standard of living
Zero 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 facilitate 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
 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
• Jefferson
Support of policies which provided for agrarian
markets that functioned with minimal government
intervention
 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.