The British Imperial Economic System

Mercantilism—or “State Capitalism”

(Note: The term “state capitalism” may in other areas of economic theory have a meaning different from what is described here: All that is implied for this portion of this course is that Mercantilism was essentially a capitalist system in which the mechanisms of trade were heavily controlled by the state rather than by market forces. Adam Smith’s The Wealth of Nations, published in 1776—a very interesting date in this context—was an argument against Mercantilism and in favor of free-market capitalism.)

Mercantilism was a system by which the government deliberately controlled the economic affairs of the state in order to accumulate national wealth. The ultimate purpose of mercantile policy was to enhance national strength, provide self-sufficiency, and pay for military power. Mercantile theory came to include the notion that no nation could be great without colonies as sources of markets and raw materials. The British became especially dependent upon their colonial empire.

WORLD International economics were seen as a zero sum game—at any given moment only a finite amount of wealth exists in the world; therefore, the only way for a nation to increase its wealth was to fight for bigger share. If one pictures all the wealth in the world or within a group of nations as a large pie chart, and acknowledges that while the whole pie may get larger, thereby increasing everyone's wealth, those changes are likely to be at best only incremental, at least in the short term. To rapidly increase one's wealth in the immediate future, one must accumulate new wealth at the expense of someone else.

Principles of Mercantilism

  • A “favorable Balance of Trade” is the major goal—more exports than imports to bring wealth to the home nation.
  • Nations should concentrate on producing marketable goods—cash products. (Adam Smith advocates national specialization in The Wealth of Nations.)
  • Nations should limit the importation of goods and services as much as possible so as to prevent the exporting of gold.
  • It is necessary to accumulate silver and gold as bulwarks of national wealth and power.
  • All the major nations were mercantilist; each European nation practiced some form of Mercantilism. Spain tried to control metals, France regulated internal trade, the Dutch controlled external trade, etc.

Great Britain had four major aims in its mercantile policy:

  • Encourage growth of a native merchant marine fleet (which would include colonial ships.)
  • Protect English manufacturers from foreign competition.
  • Protect English agriculture, especially grain farmers.
  • Accumulate as much hard money as possible. (Americans had to pay for everything with hard currency, which was scarce in the colonies. Instead, they often paid with tobacco or other goods in lieu of cash. Colonial paper was not legal tender in England. The coins that actually circulated in America were often Spanish or Dutch, if they could be obtained.)

The American colonies rarely doubted that they benefited from being part of the Empire, with all its protections. Even with the heavy hand of the British mercantile system above them, they benefited from the fact that many crops grown in the Americas were unknown in Europe, and exporting them became a very profitable business. The transfer of crops and animals, such as the horse, between Europe and the Americas known as the the Colombian Exchange has been widely explored by historians and economists. Among the crops that migrated from the Americas to Europe and eventually to Asia were potatoes, tomatoes, corn, tobacco, and sugar, all crops that came to have a high economic value. The potato in particular had a significant impact on world food production in that it provides more nutrition per acre than any other crop grown. The dependence of Ireland on the potato for food is well known, and the potato famine of the 1840s was a tragedy that nevertheless led to heavy migration to America.

The mercantile system was controlled through a series of Navigation Acts. The thrust of those Acts was to keep profitable trade under British control in order to bring as much wealth as possible into English pockets. In general the Acts said that insofar as possible, goods shipped to and from English ports must be carried in English ships. Within the Empire (i.e., between the colonies and mother country), foreign vessels were generally excluded. These Navigation Laws were not pointed at the colonists but rather at the Dutch and others who took trade away from the British.

The Navigation Acts also demanded that most raw materials be imported into England from the colonies in order to support British manufacturing. Conversely, the colonies were often prohibited from exporting manufactured goods to the mother country because they would compete with British manufactures. For a time, Virginia tobacco could be sold only in England, even though the Dutch might pay more for it. On the other hand, the growing of tobacco in England was prohibited.

The first major Navigation Acts of 1650 and 1651 forbade the importation into England of all goods except those carried by English ships or ships owned by the producing country, eliminating third-party carriers. Foreign ships were barred from trading in the colonies. It should be noted in all these acts that the colonies were part of the Empire, and thus colonial ships were British ships. Also, as stated above, these acts were not aimed against the colonies, but rather against the Dutch traders, who challenged British domination of the seas. Eventually these Acts led to war between the British and Dutch.

The second major Navigation Act of 1660 forbade the importing into or the exporting from the British colonies of any goods except in English or colonial ships (with one-fourth of the crew British) and it forbade certain colonial articles such as sugar, tobacco, wool, and cotton from being shipped to any country except to England or some English plantation in order to keep them from competitors.

Additional Acts passed in the 1660s and 1670s sought further control of the kinds of goods that could be shipped to and from the colonies and the methods by which they could be shipped. Some of the acts were also designed to tighten enforcement, as patrolling the lengthy coastline of America with its many bays and rivers was extremely difficult and costly. The net result was that the Navigation Acts, although rigorous on paper, were very loosely enforced, and the colonists became habitual offenders and smugglers.

In 1675 King Charles the second designated certain Privy Councilors as “Lords of Trade and Plantations” in order to make colonial trade more profitable. From then until 1696 the Lords of Trade handled most colonial matters.

The 1696 navigation act confined all colonial trade to English built ships and tried once again to toughen enforcement procedures in order to collect duties. In addition it voided this all colonial laws passed in opposition to the navigation acts, and the act created the Board Of Commissioners for Trade And Plantations. The Board's 15 members provided centralized control of colonial affairs.

Note: The colonists had no objection to the Navigation Acts in theory, as they were not directed against colonies, but against Britain’s competitors, and seen not so much as taxation as regulation. Nevertheless, they still found them an irritant because in practice they tended to work for the interest of the mother country at the expense of the colonies. So Americans avoided paying duties whenever they could get away with it, which in fact was most of the time. It was too expensive for the British to try to collect duties in lightly populated America.

1621 Virginia tobacco can be sold only in England. English tobacco crop prohibited.
1650-51  Navigation Acts forbid import of all goods except in English ships or ships owned by producing country (No third parties); foreign ships barred from the colonies. Acts are not anti-Colonial, but aimed at Dutch; Dutch War breaks out 1652; peace in 1654
1660 Provides for no goods in and out of colonies except in British ships or ships with 1/4 British crews; Certain goods (indigo, sugar, tobacco) may be shipped only to England.
1662 Goods may be imported in English-built ships only
1663 Staples Act: European goods bound for the colonies must go in English-built ships from England. Colonial governors may grant authority to naval officers.
1673 Duties are to be assessed at port of clearance to prevent plantation owners from evading laws; also, inter-colonial duties imposed on tobacco, sugar, etc.
1675 Charles II designates certain Privy Councilors as "Lords of Trade and Plantations"; seeks to make colonies more profitable; Lords of Trade handle virtually all colonial affairs.
1696 Act confines all colonial trade to English-built ships; toughens enforcement procedures to collect duties; voids colonial laws passed in opposition to the Navigation Acts; creates the  Board of Commissioners for Trade and Plantations. The Board’s 15 members provide centralized control.
1698 Wool Act. Prohibits export of colonial woolen cloth—raw wool only.
1732 Hat Act—no hats exported from colonies. Danbury, Connecticut, hit.
1733  Molasses Act—Protects West Indian planters; imposes duty on rum; virtually unenforceable in the colonies because of smuggling--Americans very adept.  Duty on rum is very high.
1750  Iron Acts ban iron finishing in colonies; ensures sufficient pig-iron supply to England.
1764 Sugar Act.  The beginning of the pre-revolutionary acts: See next section.

Additional navigation and Trade Acts in the 1700s raised further restrictions, and although not so intended, the Acts nevertheless alienated the colonists, who often suffered from them—in theory, if not in practice, because of lax enforcement. Colonial governors could enforce these acts only with difficulty, and even though various levels of authority were granted to naval officers, enforcement was expensive and, in the end, impractical. Although the seeds of revolution do not begin to take hold firmly until the 1760s, tension grew between the colonies and mother country throughout the early 1700s.

The English considered that their mercantile policies would benefit the Empire and necessarily all its many parts—(a rising tide lifts all boats)—and leaders were willing to sacrifice local interests for the broader market. This policy was not unreasonable in the main, and the colonists generally prospered under British Mercantilism, though they sometimes failed to understand that restrictions were aimed at others, not at them. Bottom line: When acts were passed that aided the mother country at the expense of the colonies, the colonists tended to take it personally. On the other hand, Mercantilism was practically impossible to enforce, especially in the thinly populated colonies. The volume of trade so small that aggressive enforcement of duties, for example, would not pay. Smuggling became a “respectable” profession in the colonies and paid off.

Summary of Mercantilism: Economic Imperialism vs. Free Enterprise: Mother Country vs. Colony. What’s good for the Empire is good for all its parts. Note: If a country exports five shiploads of grain but at the same time imports one shipload of expensive goods, it may still have a negative balance of trade.

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Updated January 18, 2017