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OSU ECON 4130 - ECON 4130 Topic 7

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Topic 7: Mercantilism and Economic Nationalism I. Mercantilism A. Basic principles. A collection of vague, amorphous ideas that evolved over time. The central feature was that money= power. The power of the state was seen as a function of its wealth, as measured in gold and silver. Mercantilist policies focused on the acquisition and retention of gold and silver, which is why it is often labeled “bullionism”.B.Mercantilism and trade: “Beggar-thy-neighbor” policies Exploration of the New World motivated to increase their stock of gold, but Europeans also sought to increase their wealth throughtrade.1. Nations sought to increase their stocks of silver and gold by maintaining a favorable balanceof payments. That is, they tried to export more than they imported, and thus have a net inflow of gold and silver.2. Mercantilism implied that trade wasa zero-sum game: one country’s gain was another’s loss. Obviously the pursuit of this goal by manycountries simultaneously led to trade disputes, which often degenerated into military struggles. C. Mercantilism vs. Neoclassical Economics. 1. Gains of trade. Mercantilism saw trade as a zero- sum game; modern economic theory asserts that there are mutual gains from trade.2. Measuring national wealth. Mercantilism measured a nation’s wealth by its stock of gold and silver; modern economic theory measures wealth as the flow of productive capacity of a nation andits people (GDP) D. Mercantilism and national economic policy. Governments actively intervened in the economy, encouraging exports and discouraging imports. What were some of these policies?1. Subsidies and tax rebates to exportindustries.2. Tariffs and quotas on imports.3. Sumptuary laws restricting the consumption of foreign goods.4. Navigation laws restricting carriageof imports and exports to native ships. Americans are most familiar with Britain’s Navigation Acts. This law was intended to boost shippingrevenues to Britain.In addition, they were supposed to lower the shipping costs for domestic exporters, but as they created monopoly, had the opposite effect. Policy also meant to foster the rise of a large merchant marine which could be converted into naval forces during wartime. 5. Colonies (see below).E. Mercantilism and colonization. Colonies played an important role in mercantilist policy: 1. Provided supplies of goods that otherwise would have had to be imported from outside empire2. Generated export earnings by the production and sale of a product in high demand outside the empire.3. Provided market for mother country’s products.F. Expediency and mercantilist policies. While mercantilist objectives were the underpinning of many policies, so was the fact that most governments were in need of a lot of cash.There was frequent warfare and preference for lavish courts.Tariffs & custom duties were very important revenue sources. (In the early years of the American republic over 99% of federal revenues were from tariff).III. Spain--absolute monarch. King had the sole power to tax..A. Financing the state. Spain had very high levels of expenditure: it was engaged in almost constant warfare. Moreover, it spent large sums on monuments and court ceremonies.1. Taxation. Large landholders were exempt from taxation, and they held most of the wealth. 2-3% offamilies (include the Church) owned 97% of the land in spain at the end of the 15th century. In the 16th century, the Spanish people were the most heavily taxed in Europe, despite being poor relative to other populations.1. Gold and silver from her colonies. In 1540, about 1 Million ducats per year (legally) flowed in to Spain; by the 1590s, that figurewas up to more than 8 million. The government got about 40%of these legal imports. However, this accounted for a relatively small fraction of governmental revenues. At the end of the 16th century, only 20%-25% of govt revenues came from specie imports fromthe New World.1. Borrowing. Inadequacies of the revenues to cover expenditure led to borrowing. First, the majorlenders were German and Italian bankers; grew to include Flemish and Spanish bankers and nobles and merchants.a. By 1544, two-thirds of the regular annual revenues were pledged to pay the Crown’s debt.b. In 1552, the Spanish Crown suspended all interest payments.c. In 1557, it repudiated a substantial portion of its debt. “Repudiatingthe debt” is like declaring bankruptcy. A nation cannot be liquidated. Instead short- term debts were reorganized as long-term debt, interest suspended, and principle written down.d. The Spanish Crown declared bankruptcy 8 times between 1557 and 1680. Each time, it caused a disruption of financial markets and hence many commercial transactions. When the Crown repudiated it’s debt, creditors lost assets; some of them went bankrupt; the supplyof capital fell off and there wereless funds available for commercial. Even without repudiation, the excessive borrowing would have hurt financial markets due to crowding out (See graph). Higher interest rates discouragebusinesses from borrowing.A. Trade policy. Trade with colonies was monopoly of Casa de Contracion in Seville. In 1501, foreigners, whichincluded the Catalan and Aragonese, were prohibited from settling in or trading with the new colonies. The incentives to evade this prohibition were great and created a tremendous trade in summgled goods. Colonies were prohibited from producing goods that competed with native Spanish industries.A. Other interference in the economy.1. Mesta and transhumance. The sheepowners guild a great deal of influence b/ they were an important revenue source for the Crown. The Mesta followed the practice of transhumance-- the movement of flocks b/t summer pastures in the mountains and winter pastures in the lowlands. Along the way, sheep were taxed at toll stations. In addtion,the wool the sheep produced was valuable and also taxed at export. So the Crown favored the sheep owners at the expenseOf farmers. In 1501, the Crown reserved in perpetuity all land on which all sheep had ever grazed was reserved in perpetuity. In addition, the rent that sheepowners had paid was frozen at 1501 rates in perpetuity..1. Consulado of Burgos and the monopolyof trade in raw wool. Ferdinand and Isabella had given the monopolyto this merchant guild. Burgos is 100 miles from any port. All wool had to pass through Burgos and then to the coast for shipment to Northern Europe.1. Maximum prices on


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