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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

III. Some Modern Interpretations of English Mercantilism

There has been a marked tendency in recent years, more especially perhaps on the part of German economists and of economic historians, toward a more favorable appraisal of English mercantilist doctrine than has prevailed among the economic theorists of the English classical tradition. Much of this tendency can be explained away as due to participation in the interventionist, protectionist, or aggressively nationalistic sentiments of the mercantilist writers, to misconceptions of what the economic doctrines of the English mercantilists really were, or to absence of knowledge of, or interest in, the grounds for rejecting the mercantilist doctrines afforded by modern monetary and trade theory. To those apologists who defend the mercantilist doctrines on the ground either that they were not what their critics allege them to have been, or that the theoretical objections of the critics can be successfully refuted, the foregoing presentation of the mercantilist reasoning must suffice as an answer.

The modern apologies for mercantilism, however, are also supported by several arguments which do not clash directly with the propositions of modern trade and monetary theory, and these arguments are entitled to more respectful treatment. The economic historians, for instance, seem to derive from their valid doctrine, that if sufficient information were available the prevalence in any period of particular theories could be explained in the light of the circumstances then prevailing, the curious corollary that they can also be justified by appeal to these special circumstances. There are some obvious obstacles to acceptance of this point of view. It would lead to the conclusion that no age, except apparently the present one, is capable of serious doctrinal error. It overlooks the fact that one of the historical circumstances which has been undergoing an evolution has been the capacity for economic analysis. More specifically, to be involved successfully in defense of mercantilist doctrine it needs to be supported by demonstration that the typical behavior of merchants, the nature of the gains or losses from trade, the nature of the monetary processes, and the economic significance of territorial division of labor have changed sufficiently since 1550, or 1650, or 1750, to make what was sound reasoning for these earlier periods unsound for the present-day world.

It has been claimed also for the mercantilists that they were presenting short-run doctrines and proposals, whereas their later critics had only long-run considerations in mind. It must be conceded that some of the mercantilist doctrine would not be quite so absurd if appraised from the short-run point of view. But I have found no evidence that the mercantilists intended their analysis and proposals to be regarded as holding true for the short run only, and there is abundant evidence that they were ordinarily not aware of any distinction between what was desirable monetary or trade practice, to meet a temporary situation, on the one hand, and as permanent policy, on the other.

It has been argued also, in answer to the criticisms of mercantilist doctrine by economic theorists, that the primary objective of mercantilist policy was not economic prosperity but national unity and power. In dealing with this interpretation of mercantilism, it is important to distinguish between the official and the unofficial expositions of the doctrine, between the actual policies and the reasoning by which they were supported, and between Continental and English mercantilism. In each case, it is only the latter with which this essay is concerned. Government policy, no doubt, was never governed solely by economic considerations, but for the unofficial writers this was a subject for complaint rather than for approval. Even in the unofficial literature, however, political and religious considerations were mingled with the economic to a degree without parallel in modern economic literature. But in England a strong and centralized government and an aggressive national spirit had been established long before the appearance of an important mercantilist literature, and whatever may have been the situation on the Continent the primary emphasis of the English mercantilist writers was on the means by which England's wealth could be augmented. Many writers, it is true, urged in support of the measures which they advocated that they would not only contribute to England's prosperity but would also promote her prestige and power, injure her rivals, and protect her national faith against its enemies, internal and external. But the appeal to political and religious considerations seems often to have been intended to win the support of the less commercial-minded official and landed classes for the proposals of the “merchants” or businessmen, and seems only rarely to have expressed what was really the primary concern of their authors. Especially important as a safeguard against applying erroneously to the English mercantilist literature generalizations which may be true of the Continental writers, it should be borne in mind that English mercantilist doctrine was the product of merchants to an extent without parallel on the Continent. On economic matters even the landed classes in England found their ablest spokesmen in merchants such as Child and North. And the merchants were typically impatient of official policy when it failed to place primary emphasis on the economic aspects of the matters with which it dealt, and especially when it appeared to subordinate economic to political or religious considerations.

Even if it be granted, however, that the principal objective of the English mercantilist writers was a great and powerful England rather than a prosperous England, it does not follow that appraisal of their reasoning on strictly economic grounds is unwarranted or irrelevant. It would be difficult to find convincing evidence that any of the prominent mercantilists regarded power and prosperity as generally conflicting and inharmonious objectives of national policy. On the contrary, it was a matter of general agreement among them that for England the only certain path to national power and glory was through promotion of trade and increase of wealth. Child's formula, which was often quoted approvingly, expresses accurately the mercantilist position: “Foreign trade produces riches, riches power, power preserves our trade and religion.” 1 After the Revolution, in fact, trade and wealth seem to have become almost an obsession of the mercantile classes, and the emphasis which they placed on the economic phases of national policy was, if anything, excessive. I suspect that the “trade wars” of the seventeenth and eighteenth centuries were such more in the imagination of the mercantile writers than in the intent of the governing classes who embarked upon them, and that just as the merchants appealed to non-economic considerations to make their proposals attractive to the landed classes, so the government appealed to the cupidity of the merchants to win their support for wars embarked upon for dynastic or political reasons.2 Even the official classes in England, however, were probably more trade-minded, and probably gave greater weight to economic considerations, than the corresponding classes on the Continent. Such, at least, appears to have been the opinion of eighteenth-century Continental observers.3

Not only is there little evidence that the mercantilist writers were prepared to sacrifice national economic to political interests, but a good deal of the mercantilist literature can be plausibly explained as special pleading for limited economic interests. The most ardent advocates in the seventeenth century of the revival or enforcement of the bullionist restrictions had a personal interest of one sort or another in these regulations. Malynes is said to have had expectations of getting a remunerative contract in connection with the currency if the office of the Royal Exchanger were revived. Milles was a customs official among whose duties would be the enforcement of any bullionist regulations. Violet had been a “searcher” and informer in connection with the regulations prohibiting the export of bullion, and his appeals for stricter enforcement were accompanied by pleas that he again be employed to discover violations of the regulations.4 Wheeler was secretary and Misselden an important member of the Merchant Adventurers, and their tracts were written in defense of their exchange transactions against the attacks of Milles and Malynes. The East India Company, in its charter of 1600, was granted the right to export a limited amount of bullion, and in its early as in its later operations bullion constituted the bulk of its exports from England. This led to attacks on the company of which Robert Keales' The Trades Increase (1615) was typical. Digges, a member of the company, wrote his Defence of Trade (1615) as a reply to Keales, and Mun, an officer of the company, wrote his tracts and presented a “remonstrance” to the government primarily to ward off hostile measures against the company. Throughout the history of the company its officers and employees were publishing tracts in its defense which were important contributions to the literature of mercantilism. Toward the end of the seventeenth century, when attacks on the company turned mostly on its monopolistic character, its imports of East Indian silks and calicoes to the alleged injury of English industry, and its unfavorable balance of trade, Child and Papillon, officers of the company and with much of their private fortunes invested therein, wrote in its defense. Much of the mercantilist literature from 1670 on, written in opposition to the company, was the work of rival merchants who wanted to participate in the East India trade or of persons connected in some way with the domestic textile industries which were feeling the effects of East Indian competition. Tracts were written by factors in the woolen industry urging or supporting the prohibition of the export of wool and were answered by spokesmen for agricultural interests. John Houghton, Charles Smith, Arthur Young, and many others wrote in support of the bounties on the export of corn with an evident agrarian bias. The literature on taxation consisted in large part of tracts written by traders who wanted the main burden of taxation to rest on land, or by landed men who wanted it to rest on trade. There were contemporary charges that some of those who were urging the legal limitation of the rate of interest were rich merchants who had ample funds to finance their own activities and hoped that the reduction of the rate of interest by law would make it impossible for their poorer competitors to borrow the funds necessary for the conduct of their affairs. Pleas for special interests, whether open or disguised, constituted the bulk of the mercantilist literature. The disinterested patriot or philosopher played a minor part in the development of mercantilist doctrine.5

After the Revolution, when control of commercial policy had definitely passed from the crown to Parliament, commercial affairs became the football of party politics, and factional rivalries and conflicting economic interests were likely to be involved in any important issue of commercial policy in a complex way. If I may venture to take the controversy waged around the commercial clauses of the Treaty of Utrecht (1713) as an illustrative instance, the situation seems to have been somewhat as follows:6 From the early decades of the seventeenth century, the trade between England and France had been greatly restricted by both countries, either by discriminatory duties of prohibitive severity or by absolute embargoes. When in 1713 a Tory government concluded peace with France, it proposed also to reestablish open trade with France. The Tories represented the landed classes and the Anglicans, and also received the support of the surviving Catholics as being less hostile to them than the Whigs. The Whigs in the unreformed Parliament of the time were also predominantly members of the landed gentry, but in order to secure a popular footing they had sought the support of the nonconformist or Low Church yeomen by adopting a policy of tolerance to dissenters and extreme opposition to Catholics, of the moneyed classes by their support of the Bank of England, and of the independent merchants and the manufacturers by opposition to the monopoly companies and by support of extreme mercantilism. The Tories, on the other hand, came to terms with the East India Company, whereby in return for support of the endeavors of the company to preserve its monopoly privileges and to be allowed to import East Indian cloth, the latter gave financial support to the crown through loans, and to its defenders in Parliament through private bribes.

On the specific issue of the resumption of trade relations with France, the Tories were favorable and the Whigs opposed. In so far as it was not a matter merely of factional rivalry, this alignment seems to have followed economic interests fairly closely, although other considerations were also important. Support for the resumption of freer trade appears to have been confined to the landed classes and to have been due mainly to three considerations: a greater trade with France would mean greater custom revenues to the crown, of which they were at the time the supporters; it would mean cheaper claret and silks; and, as a minor factor, it would be a check to the growing power of the trading classes, who were objectionable as “upstarts” and as Whigs, as enemies of the landed interest, and as exponents of a trade policy which made the cost of luxurious living higher for the country gentleman. The Whigs opposed the commercial treaty in part to embarrass the crown, in part because they were traditionally hostile to France as the leading Catholic monarchy.7 They were supported by the independent “merchants” 8 and by the domestic manufacturers of liquors and cloth. The Whigs succeeded in stirring up violent opposition to ratification of the commercial treaty. In the controversies at the end of the seventeenth century, when the Tories supported both the continuance of monopoly control by the East India Company of the trade with East India and the limitation of the restrictions and duties on East Indian cloth to modest proportions, they had found in the ranks of the company itself and elsewhere able advocates, including such men as Child, North, Davenant, and Barbon. In the controversy about the Treaty of Utrecht, however, the level of argument on both sides was low. Daniel Defoe was allegedly hired by the Tories to defend the treaty in a periodical, Mercator, established for the purpose, and the Whigs replied in another periodical, the British Merchant, to which the principal contributors were prominent merchants with extreme mercantilist views. Defoe was too much of a believer in the mercantilist doctrines himself to be able effectively to meet criticism of the treaty on mercantilist grounds, and as far as public opinion was concerned the British Merchant had much the best of the argument. Whether or not the battle in the periodicals and tracts had much to do with the outcome, the commercial treaty failed of ratification in Parliament by a narrow margin of votes, and its defeat tended to strengthen the hold of mercantilist doctrine on the English merchant classes, and to sharpen the conflict of interest and opinion between the landed classes and the trading and industrial classes.9

While non-economic considerations unquestionably played an important part in this controversy, no one, as far as I could discover, conceded that these considerations clashed with the economic ones. On the basis of modern theory, the Tories had the stronger economic case. But the country gentlemen who constituted that party had no effective reply to mercantilist doctrine, and at this critical stage were without competent aid from the ranks of other classes. The ignorance and inarticulateness of the English landed classes made them impotent in 1713 to prevent their victimization by a mercantilist policy which they vaguely sensed to be hostile to their interest, although they were in overwhelming control of Parliament. Over a century later, when the change in the status of English agriculture had made them the beneficiaries instead of the victims of mercantilism, their failure to produce spokesmen able to cope with the orators of the merchant class was a factor in their failure, in a Parliament in which they were still in the majority, to prevent the spectacular overthrow of mercantilism. Anyone who attempts an interpretation of the evolution of English trade theory solely in terms of objective historical circumstances faces the task of reconciling his account with the part played by the evolution of capacity for economic analysis. Objective fact played its part. But if the Tories had had the services of North and Barbon in 1713, they might have dealt a fatal blow to mercantilism then by showing that what was in their private interest was also in the national interest. And if Peel had been less public-spirited and intelligent in 1846, or if there had been among the back-bench squires men able to cope in debate with Cobden and Bright, the reign of mercantilism in England might not have had its 1846 to 1916 intermission.

Chapter III

THE BULLIONIST CONTROVERSIES: I. THE INFLATION PHASE

• What must we for a standard own,
• By which the price of things are known?
• ‘Twas thought, time past, by men of sense,
• ‘Twas guineas, shillings, pounds and pence;
• The Bank has said, and says so still
• ‘Tis nothing but a paper bill;
• ‘Tis in Sir Francis Burdett's head
• The standard is a loaf of bread,
• Whilst Adam Smith did always say,
• It was the labor of a day.

—(“William Pitt,” The bullion debate; a serio-comic satiric poem, 1811, p. 7.)

[1]Cf. also, James Whiston, A discourse of the decay of trade, 1693, p. 3: Neither will the pursuing these proposals, augment the nation's wealth and power only, but that wealth and power will also preserve our trade and religion, they mutually working for the preservation of each other....

[2]A striking instance is the following passage from a tract which is clearly the product of a writer not familiar with, nor really interested in, commercial matters, but who sensed the need for an appeal to economic considerations if his plea for the continuance of the war with France then under way was to have weight with its readers: “To proceed now to the second head I proposed, namely, that this war has produced great and lasting advantages to the people over and above liberty, and a security of our properties. The advantages I propound to speak to shall be confined to the article of wealth, as being that which most generally affects; for to talk to the common people of the great honor our nation will gain by a happy issue of this war, is to speak to little purpose.” —The taxes not grievous and therefore not a reason for an unsafe peace, 1712, p. 15. The views of the mercantilists as to the efficacy of war as an instrument to procure economic advantages would be an interesting topic for investigation. It would be wrong to attribute to them without exception the view that trade wars, even if successfully prosecuted, promoted the national wealth, and some of them anticipated the modern argument that even a victorious war costs more than it returns in economic benefits. Others, however, looked upon trade wars as so essential to commercial prosperity that the Turkey Company tried to exclude a Quaker from its councils in 1759 as professing opinions hostile to the waging of such wars. See G. B. Hertz, The old colonial system, 1905, p. 10.

[3]Cf. Montesquieu, De l'esprit des lois [1748], Bk. xx, chap. vii: “D'autres nations ont fait céder des intérêts du commerce à des intérêts politiques: celle-ci [i.e., England] a toujours fait céder ses intérêts politiques aux intérêts de son commerce.” —Œuvres complètes, Paris, 1877, IV, 371.

Cf. also Quesnay, “Remarques sur l'opinion de l'auteur de l'esprit des lois concernant les colonies” [Journal de l'agriculture, January, 1766], in Oncken ed., Œuvres de ... F. Quesnay, 1888, p. 429: “... en Angleterre ... où les lois du commerce maritime ne se prêtent point aux lois de la politique; où les intérêts de la glèbe et de l'Êtat sont subordonnés aux intérêts des négociants; où le commerce des productions de l'agriculture, la propriété du territoire et l'Êtat même ne sont regardés que comme des accessoires de la métropole, et la métropole comme formée de négociants.”

[4]Violet had himself been convicted of, and punished for, violation of the laws against the export of bullion, and one of his arguments in support of his reinstatement was that “an old deer-stealer is the best keeper of a park.” —A true discoverie to the commons of England [1651], 1653, p. 79.

[5]This interpretation of the literature of the period as consisting mainly of briefs for special interests is intended to apply to the writings of the moderate as well as of the extreme mercantilists. Child, infact, presents one of the most glaring instances of special pleading. See Sven Helander, “Sir Josiah Child,” Weltwirtschaftliches Archiv, XIX (1923), 233–49, and for closely similar exposure of Child by contemporaries, A discourse concerning the East-India trade [ca. 1692], in Somers' tracts, 2d ed., X, 634–47; The interest of England considered: in an essay upon wooll, 1694.

[6]Cf. the excellent account in Jehan Maintrieu, Le traité d'Utrecht et les polémiques du commerce anglois, 1909.

[7]By the Whigs, willingness to trade with France was accepted as proof of hostility to trade. Cf. the interesting pamphlet, Torism and trade can never agree (ca. 1713), which accused the Tories of having always been hostile to trade, and attacked Mercator as being anti-trade, because it supported open trade with France.

[8]“‘Merchants’ in the eighteenth century meant business men, and the term was as wide as ‘trade’ is even now; bankers and manufacturers were included in it.” L. B. Namier, The structure of politics at the accession of George III, 1929, I, 61, note.

[9]It is of interest that the French government, on sober second thought of the mercantilist variety, had also lost its seal for the treaty, and felt relieved when the English Parliament rejected it. See E. Levasseur, “Les traités de commerce entre la France et l'Angleterre sous l'ancien régime,” Revue d'économie politique, XV (1901), 971.