By
Richard E. Caroll
Africa-Press – Lesotho. The election of Donald J. Trump to the Presidency of the United States has brought a dramatic change in the economic policy of the United States. Historically the United Sates has always espoused an economic policy of free trade, today under the economic policy of President Trump, that policy has changed to a policy of “Mercantilism.”
From 1945, when the United States established a policy of free trade worldwide, and policed the world’s oceans with its navy, trade between nations blossomed and created a thriving world economy based on free trade. President Trump’s use of tariffs, a key feature of mercantilism, threatens to undo the benefits of 80 years of free trade.
Mercantilist Policies From the 16th Century Until the 18th Century
It was during the 1500s that Mercantilism became the dominant economic system in
Europe. The theory of Mercantilism was based on the belief that the world’s resources are finite and static. This theory dictated that each government had to control trade to build the nation’s wealth and their national power. Additionally, there was a belief that a nation’s wealth depended heavily on a nation’s ability to control and maximize its capital. It should be noted here that the world’s economy today is based on a FIAT economic system rather that an economy based on precious metals such as gold or silver. We are in uncharted waters here.
Mercantilism was the dominant economic system from the 16th century to the 18th century.
Mercantilism was based on the idea that a nation’s wealth and power were best served by increasing exports and reducing imports.
It’s characterized by the belief that global wealth was static and that a nation’s economic health relied heavily on its supply of capital.
Due to the nationalistic nature of mercantilism, nations frequently used military might to protect local markets and supply sources.
See https://www.investopedia.com/terms/m/mercantilism.asp
With the belief in Europe that wealth was static, because of a finite supply of gold and silver, each nation-state tried to obtain these precious resources thru colonies, which Europe took by force. Each colony could only trade with the colonial power, thus restricting free world trade and economic efficiencies.
Again, this period of mercantilism depended on currency backed by gold and silver. Today the world’s currencies are based on Fiat money.
Adam Smith’s Thoughts on Mercantilism
Adam Smith, widely considered to be the “Father of Economics” was strongly against the Mercantilist theories and its restriction placed upon free trade and his philosophy of specialization. Adam’s Smith critique on “mercantilism” showed that mercantilism depended on coercion and political means. In his 1776 work “An Inquiry into the Nature and Causes of the Wealth of Nations” Smith showed that the forces behind mercantilism only benefitted the segment of society that controlled the government. The common folk suffered from poverty, hunger and disease.
“As mercantilism continued to dominate economic thought, its impact on global conflicts became increasingly evident.”
The Economic Policy of Mercantilism Caused 4 World Wars
With a belief that the world’s wealth is static, each nation-state sought to increase its wealth and security by prohibiting free trade. By prohibiting a free exchange of goods and services, the mercantilist economy led to violence between nation-states in competition for natural resources for their home industries. The 4 world conflicts that happened because of the policies of mercantilism are:
King William’s War or the War of the League of Augsburg in Europe was the firsts of these world conflicts. Set from 1689 to 1697, began because of several factors such as escalating tensions between English and French colonists
Competition of the fur trade
The involvement of the colonial powers in the political strife of each nation’s American Indian allies.
Rivalry between France and England
Queen Anne’s War from 1702 until 1711. This was a struggle between France, England and Spain for economic, political and military dominance on the North American continent. Under the terms of the Treaty of Utrecht (1713) Fance yielded Nova Scotia, Newfoundland and the Hudson River region to England.
The French and Indian War from 1754 to 1763. This war on the North American Continent was a part of the larger “Seven Years War” between France and England which was a world war.
At the conclusion of the French and Indian War, the American colonies economically suffered because of the mercantilist policies of England restricting their ability to trade with other markets. This policy will become the primary cause of the American Revolution, and the loss of England’s valuable colonies in America.
World War One and World War 2, while not happening during the time of mercantilism, it is an echo of the effects of mercantilism. Indeed, World War 2 can be viewed as the final note of mercantilism, as before the war began the major powers were colonial powers which restricted trade, as the colonies could only trade with the colonial power. By the late 1950s, colonialism was done, and free trade was the owner of the world economy.
The Beginning of the End of Mercantilism and the Beginning of Free Trade
The repeal of the “Corn Laws” by England in 1846 marked the end of mercantilism as an economic policy of England. It was the Great Irish Famine that convinced British Prime Minister Robert Peel to switch from mercantilism to free trade. In one of his speeches explaining his support for the repeal of the Corn Laws he commented…”If I could be induced to believe that an alteration in the Corn- laws would be an effectual remedy for those distresses [of the poor], I would be the first to step forward, and… I would earnestly advise a relaxation, an alteration, – nay, if necessary, a repeal of the corn laws.”
These moves away from a protected internal economy, opened the British economy to market forces and fueled the growth of England’s Industrial Revolution, which made the British Empire the largest empire in world history, dwarfing even the Roman Empire. Other nations not wanting to be left behind economically quickly shifted to the theory of free trade.
Mercantilism was finished, though its effects on shaping the world political scene would echo until the end of World War 2.
A Metal Based Currency and a Fiat Currency
The currency of the United States has at times been supported by bimetallism consisting of silver and gold. The United States ended its policy of bimetallism with the passage of Coinage Act of 1873, though it would not make the usage of silver illegal until the passage of “The Gold Standard Act” of 1900. This would lay the foundation of the American economy until 1971, when President Richard Nixon took the United States off the gold standard and made the US dollar currency by fiat.
There is no history of fiat currency being subjected to tariffs. With knowledge of what happened to US currency when backed by gold, one can infer what the damage by the President Trump’s tariffs will do the US dollar, which will be catastrophic. Since the beginning of President Trump’s tariffs, the dollar has fallen to a 3-year low., which feeds the increase of inflation.
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