5.3.1 The Rise of Mercantilism

Much European exploration was driven by an economic theory known as mercantilism, a name given to the theory by later historians. According to this theory, a nation’s power depended on the amount of gold and silver it held. The wealthier the nation, the larger the armies and navies it could support in its conflicts with rival powers. Amassing national wealth, in turn, depended on maintaining a favorable balance of trade, a situation in which a country exports goods of greater value than it imports. Mercantilism also assumed that the world’s wealth as measured in gold and silver was finite, so a gain for one nation was a loss for another. To surpass other nations in power, a country must possess more gold and silver than others. According to mercantilism, there could be only one victor in economic competition.

When a nation sold goods abroad, it accumulated gold and silver, but when it imported foreign products, it had to transfer gold and silver to other nations as payment. Thus, at the heart of mercantilism lay the need for a nation to maximize its exports and minimize its imports. Indeed, the ideal was to import nothing and produce everything in the home country, including agricultural produce. A nation that could not supply all its own needs should import raw materials, transform them into finished products, and sell them abroad for more money than it had cost to produce them. Any raw materials a nation possessed should be reserved for domestic manufacturing.

In the sixteenth and seventeenth centuries, mercantilist theory was embraced by most European nations, especially France and England. Perhaps as much as religious fervor and a thirst for knowledge, this premise drove exploration and the establishment of colonies. Mercantilists believed a colonial empire was necessary for economic domination. Colonies could supply raw materials for domestic consumption, so there was no need to purchase these resources from others. Colonial populations, in turn, provided a ready market for goods made in the home country. To ensure that colonies added to their national wealth, European countries that established them usually required that they trade only with the home country. Thus, for example, England’s colonies in North America could sell what they produced only in England.

Most mercantilist theorists believed government regulation of the economy was necessary to maximize wealth. Governments commonly prohibited certain imports to prevent them from competing with domestic industry. In 1539, for example, to protect domestic textile manufacturing, France banned the import of goods made of wool. Governments also imposed high tariffs, or taxes on imported goods. These made foreign products more expensive and thus promoted development of a nation’s own industries. Governments might also grant firms monopolies over certain kinds of domestic production, establish and provide financial support for certain industries to ensure domestic self-sufficiency, and pay for internal improvements, such as new roads, to promote domestic manufacturing and commerce. They also maintained large navies to protect international trade and defend foreign colonies.

France provides perhaps the preeminent example of the mercantilist theory in practice. France was an absolute monarchy. Absolute monarchies appeared in Europe in the sixteenth and seventeenth centuries as feudalism declined and new countries arose from medieval kingdoms. These new nation-states were characterized by centralized administrations and codified laws. They were guarded by professional standing armies, not noble vassals at the head of their own private armies.

At the head of the state stood a monarch (usually a king) who claimed a divine right to rule. The medieval concept of monarchy had regarded kings as subservient to the pope, but absolute monarchs considered themselves subordinate to no one. They could rule as they wished with no need to confer with or seek the consent of others, or to share power with the noble class as medieval monarchs had done. Absolute monarchs proclaimed their own laws, formulated foreign policy, administered justice (or appointed those who did so), and imposed taxes as they wished. They were the sole source of authority in their lands and often took steps to weaken the power of their nobles so they did not pose a threat to their rule.

The most powerful of the absolute monarchies was France, and Louis XIV, who became king of France in 1643, was the epitome of a divine-right monarch. Unwilling to share power with the higher-ranked members of the French nobility, who had been responsible for numerous revolts against the French monarchy in the decades before he came to the throne, Louis deprived them of any role in governing or administering the state. He required that they live with him at his magnificent palace in Versailles, where they were invited to spend their time and money (which might otherwise have been used to plot revolts) in putting on displays of ostentatious living and competing with one another for the king’s favor—favor that might mean they were allowed to hold the king’s shirt as he dressed in the morning. All state matters were rigorously scrutinized by Louis, and he spent hours planning troop movements, overseeing the building of roads and canals, and promulgating legal codes for France’s colonies. “L’état, c’est moi” (“I am the state”), he once famously proclaimed.

France’s absolute monarchy made it possible for the nation to regulate economic life as countries with less powerful rulers and less centralized governments could not. France embraced mercantilism under the guidance of Jean-Baptiste Colbert, who became Louis XIV’s chief minister in 1661. As the controller-general of finances, Colbert sought to promote French manufacturing and foreign trade and decrease imports. Under his direction, the government increased tariffs on foreign-made goods and completely banned the importation of some such as lace. Colbert established royal manufacturing and glass works and granted private companies monopolies on lace manufacture (Figure 5.17). Reasoning that the higher the quality of a product, the more could be charged for it, Colbert enacted strict quality-control standards so French products would bring high prices overseas, and he punished those who tried to avoid these regulations. To increase the government’s wealth, he also sought to tax the French nobility, though unsuccessfully.

Colbert established a merchant marine to carry French goods abroad for trade, reducing the nation’s reliance on ships from other countries. By ensuring that the pay for transporting these goods went to the ships’ French captains and owners, he helped to keep wealth within the nation. Because the merchant marine could be called upon in time of war, Colbert had thus also strengthened France’s ability to engage in armed conflict with foreign powers.

Mercantilist theory influenced England and the Netherlands too. Although England’s Parliament did not exert as much control over its economy as the monarchy exerted in France, it nevertheless took steps to promote English trade and discourage the importation of foreign goods. Tariffs were placed on foreign products, and in the second half of the seventeenth century, laws were passed requiring that all ships bringing goods to England have English owners and a predominantly English crew. The Dutch adopted the mercantilist strategy of exporting high-quality goods, especially cloth, iron tools, and guns, to make up for the money the resource-poor country spent on raw materials supplied by other nations.

Like France, both England and the Netherlands granted monopolies on foreign trade to private companies—the British East India Company and the Dutch East India Company. The purpose was to prevent competition among merchants that might drive up the prices they were willing to pay for foreign goods and drive down the prices they charged for domestic goods sold abroad. To increase their access to raw materials and establish new markets for their goods, the Dutch, English, and French, noting the success of Spain and Portugal, also set out to establish colonies in the Americas. A colonial empire seemed essential to securing national wealth and power.