Mercantilism

Mercantilism was an economic theory based on the idea that national WEALTH and power could be increased through the accumulation of precious metals (primarily gold) and by maintaining a favorable TRADE BALANCE (an excess of exports over imports). Mercantilism, the dominant political and economic philosophy in Europe from the 16th and 19th centuries, evolved along with the development of Europe from feudal communities to crowncontrolled nations. In mercantilist countries, state control of commerce expanded through granting corporate charters and trading companies. The royal “one-fifth” of PROFITs from any enterprise became part of the cost of doing business. Early North American Land grants to lords proprietors by English royalty were based on enriching the monarchy. In return the crown protected business interests through its armies and navies. Since a country’s wealth was associated with the amount of precious metals it acquired, mercantilist doctrine supported expansion by colonization. Colonies that produced and shipped gold and silver back to the mother country were of first importance. Other colonies were valuable only if they produced raw materials, which could then be used to create PRODUCTs for trade among European economies. In England the Navigation Acts required colonies to ship products only on British or colonial vessels, forced certain products to be sold to Britain, and required exports from European countries to pass through England. As a result, industrial production and shipping industries grew in mercantilist countries, but colonial economies had few choices and many restrictions. The famous Boston Tea Party was a response to new tax measures imposed by England on its colonies. As economists later pointed out, rapid expansion of a country’s MONEY SUPPLY can lead to INFLATION. Prices tended to rise in most European countries with each new shipment of gold and silver returning to port. Also, protectionist measures emphasizing EXPORTING over IMPORTS ignored the mutual benefits of trade based on COMPARATIVE ADVANTAGE. Later LAISSEZ-FAIRE economists, led by Adam Smith (Wealth of Nations, 1776), pointed out that trade, whether domestic or international, benefits both buyers and sellers.