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Mercantile System

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The name given to the economic policy which developed in Europe at the close of the middle ages. The doctrine of the mercantile system, stated in its most extreme form, made wealth and money identical, and regarded it therefore as the great object of a community so to conduct its dealings with other nations as to attract to itself the largest possible share of the precious metals. Each country's interest was to export the utmost possible quantity of its own manufactures and to import as little as possible of those of other countries, receiving the difference of the two values in gold and silver. This difference is called the balance of trade, and the balance is favourable when more money is received than is paid. Governments might resort to all available expedients - prohibition of, or high duties on, the importation of foreign wares, bounties on the export of home manufactures, restrictions on the export of the precious metals - for the purpose of securing such a balance.

But this statement of the doctrine, though current in textbooks, does not represent correctly the views of all who belonged to the mercantile school. Many members of that school were much too clear-sighted to entertain the belief that wealth consists exclusively of gold and silver. The mercantilists may be best described, as W. G. F. Roscher remarked, not by any definite economic theorem which they held in common, but by a set of theoretic tendencies, commonly found in combination, though severely prevailing in different degrees in different minds. The underlying principles may be enumerated as follows: (1) the importance of possessing a large amount of the precious metals; (2) an exaltation (a) of foreign trade over domestic, and (b ) of the industry which works up materials over that which provides them; (3) the value of a dense population as an element of national strength; and (4) the employment of state action in furthering artificially the attainment of the ends proposed.

The discoveries in the New World had led to a large development of the European currencies. The old feudal economy, founded principally on dealings in kind, had given way before the new "money economy," and the dimensions of the latter were everywhere expanding. Circulation was becoming more rapid, distant communications more frequent, city life and movable property more important. The mercantilists were impressed by the fact that money is wealth sui generis, that it is at all times in universal demand, and that it puts into the hands of its possessor the power of acquiring all other commodities. The period, again, was marked by the formation of great states, with powerful governments at their head. These governments required men and money for the maintenance of permanent armies, which, especially for the religious and Italian wars, were kept up on a great scale. Court expenses, too, were more lavish than ever before, and a larger number of civil officials was employed. The royal domains and dues were insufficient to meet these requirements, and taxation grew with the demands of the monarchies. Statesmen saw that for their own political ends industry must flourish. But manufactures make possible a denser population and a higher total value of exports than agriculture; they open a less limited and more promptly extensible field to enterprise. Hence they became the object of special governmental favour and patronage, whilst agriculture fell comparatively into the background. The growth of manufactures reacted on commerce, to which a new and mighty arena had been opened by the establishment of colonies. These were then viewed simply as estates to be worked for the advantage of the mother countries, and the aim of statesmen was to make the colonial trade a new source of public revenue. Each nation, as a whole, working for its own power, and the greater ones for predominance, they entered into a competitive struggle in the economic no less than in the political field, success in the former being indeed, by the rulers, regarded as instrumental to pre-eminence in the latter. A national economic interest came to exist, of which the government made itself the representative head. States became a sort of artificial hothouse for the rearing of urban industries. Production was subjected to systematic regulation, with the object of securing the goodness and cheapness of the exported articles, and so maintaining the place of the nation in foreign markets. The industrial control was exercised, in part directly by the state, but largely also through privileged corporations and trading companies. High duties on imports were resorted to, at first perhaps mainly for revenue, but afterwards in the interest of national production. Commercial treaties were a principal object of diplomacy, the end in view being to exclude the competition of other nations in foreign markets, whilst in the home market as little room as possible was given for the introduction of anything but raw materials from abroad. The colonies were prohibited from trading with other European nations than the parent country, to which they supplied either the precious metals or raw produce purchased with home manufactures.

That the efforts of governments for the furtherance of manufactures and commerce under the mercantile system were really effective towards that end is admitted by Adam Smith, and cannot reasonably be doubted, though doctrinaire free-traders have often denied it. Technical skill must have been promoted by their encouragements; whilst new forms of national production were fostered by attracting workmen from other countries, and by lightening the burden of taxation on struggling industries. Communication and transport by land and sea were more rapidly improved; and the social dignity of the industrial professions was enhanced relatively to that of the classes before exclusively dominant.

The foundation of the mercantile system was at the time when it took its rise inspired by the situation of the European nations. Such a policy had been already in some degree practised in the 14th and 15th centuries, thus preceding any formal exposition or defence of its speculative basis. At the commencement of the 16th century it began to exercise a widely extended influence. Charles V. adopted it, and his example contributed much to its predominance. Henry VIII. and Elizabeth conformed their measures to it. The leading states soon entered on a universal competition for manufacturing and commercial preponderance. Through almost the whole of the 17th century the prize, so far as commerce was concerned, remained in the possession of Holland, Italy having lost her former ascendancy by the opening of the new maritime routes, and Spain and Germany being depressed by protracted wars and internal dissensions. The admiring envy of Holland felt by English politicians and economists appears in such writers as Raleigh, Mun, Child and Temple. Cromwell, by his Navigation Act, which destroyed the carrying trade of Holland and founded the English empire of the sea, and Colbert, by his whole economic policy, domestic and international, were the chief practical representatives of the mercantile system.

See G. Schmoller, The Mercantile System (Eng. trans., 1896); also the articles, Balance Of Trade; Free Trade; Protection; Physiocratic School, &C.