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4.4.1 Overseas Trade
For the development of the pre-colonial economy in Europe overseas trade played a modest and epoch-making role. Primary products such as wool, tin, and lead were the mainstays of the English export trade. But the expansion of the growing proportion of wool exported as cloth had reached 50 per cent by the 1450s and was over 85 per cent by the 1550s. The English merchants began to exploit more distant markets when they got royal patronage for voyage and navigation extensively during the Tudor period. Henry VII equated overseas trade with an extension of his power. A successful trade policy that led to expansion abroad could only make England wealthier, and Henry knew that if he had more wealth, he could use it to expand his own power.
In 1486, Henry negotiated a treaty with France that removed all restrictions on Franco-English trade. His prime aim was to utilise every chance that would benefit his country financially from the agreement. Until the beginning of the 16th century, the treaty existed and the English merchants enjoyed unrestricted trade with France. Following Henry, the Elizabethan explorers undertook lengthy expeditions to discover new worlds. The story of competition for the overseas market began in 1494 when Spain and Portugal divided the New World between them. Soon the Portuguese sailor Vasco-da- Gama succeeded in discovering the sea route between Europe and India through the Cape of Good Hope in South Africa and reaching Kozhikode.
One of the first English explorers to mark a place in history was Martin Frobisher. He led three expeditions (1576–78) in search of the north-west passage which he was convinced existed around the north of the American continent and then west and south to the riches of Asia. Richard Chancellor had sailed to Archangel in 1553 and travelled overland to Moscow and Ivan IV gave him favourable trading terms. The Muscovy Company, incorporated in 1555 as the first English joint- stock company, started the English cloth trade in Persia. Another joint stock company, the Turkey Company, opened trading relations with Baghdad. The ‘Company of Adventure Merchants’ or the English East India Company, started in 1600 and reached India and the Spice Islands by sea.
As a reflection of an advancing economy, by the end of the 17th century, the exports roughly increased up to 5 per cent of the national income of England and Wales. The composition of overseas trade was organised in a manner that secured the interests of English merchants. Imports consisted mostly of raw materials and food whereas export consisted of manufactured goods only. There was both a substantial increase in overseas trade and a change in direction, which set the pattern for subsequent growth during the 18th and much of the 19th century, with India, Africa, and the North American colonies becoming significant partners. The East India Company by the 1750s secured the trade monopoly over India and the East Indies via the Cape of Good Hope.
4.4.2 Navigation Acts
Navigation Acts were introduced to regulate Britain’s overseas trade, which was extended to the British colonies as they developed. Parliament enacted the first Navigation Act in 1660. By the close of the seventeenth century, Parliament had put other Navigation Acts soon and enforced them through a system of admiralty courts. These Acts had jurisdiction in cases involving trade law. It was intended to promote the self-sufficiency of the British Empire by restricting colonial trade to England and decreasing dependence on foreign imported goods. There were two purposes behind the Navigation Acts. The first was to protect British shipping against competition from the Dutch and other foreign naval powers. The second was to grant British merchants a trade monopoly on colonial commodities. The Navigation Acts came about in the context of mercantilism, the dominant economic system of the time among the European powers. Under these acts, British colonies in Asia, Africa, and America could import and export goods only in English vessels, and three-fourths of each crew was to be English.
As per the other provisions, England could import products from its colonies in Asia, Africa, or America only on English vessels and the goods from foreign countries could arrive in England only on English vessels or on the vessels of the country from which the goods originated. In effect, the Navigation Acts gave English ships a legal monopoly of all trade between various colonial ports and between these ports and England. Even the trade between colonial ports and foreign countries was limited to English vessels. Thus, foreign vessels were excluded entirely from colonial ports and could trade only at ports in the British Isles. Thus, the overall navigation system was made more profitable to England than its colonies.
4.4.3 Growth of Mercantilism
Mercantilism was a popular economic philosophy in the 17th and 18th centuries. It is an economic policy that is designed to maximise exports and minimise imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. It helped Britain to increase its national wealth through exports between the 16th and 18th centuries. The concept got publicity in the 17th century through the efforts of Thomas Mun in England, Jean-Baptiste Colbert in France, and Antonio Serra in Italy. But it is interesting to see that they never used the term themselves; it was the Scottish economist Adam Smith in his Wealth of Nations (1776), who used the term precisely and exclusively.
The concept of Mercantilism contained many interlocking principles. The basic principle is that the trade balances must be favourable, which means that there should be an excess of exports over imports. For a Colonial master, their colonies should serve as markets for exports and as suppliers of raw materials to them. The process of production or manufacturing was forbidden in colonies, both in theory and practice. The mercantile relations between colonies and the mother country were regulated in a way that it would facilitate a monopoly of the mother country.
The designed policy to increase the nation’s wealth through exports thrived in Great Britain between the 16th and 18th centuries. England enjoyed the greatest benefits of mercantilism between 1640 and 1660 when they practised the theory that colonies should supply raw materials and resources to the mother country and subsequently serve as export markets for the finished products. This ‘favourable balance of trade’ policy was not practised by Great Britain alone but followed by other major European states as well. The French, Spanish, and Portuguese competed with the British for colonies under the belief that no great nation could exist without colonial resources. Because of this heavy reliance on its colonies, Great Britain imposed restrictions on how its colonies could spend their money or distribute assets.
The development of English Mercantilism has three distinctive phases. The crude “Bullionist” stage lasting roughly from the 1580s to 1620 was the first stage. The second phase is the “Traditional” stage lasting from 1620 to about 1700. The third phase is the “Liberal” stage which stretched from the 1680s to the 1750s and overlapped with the previous stage.
Money, in those days, was gold and silver. Thus, in order to increase national output, the early Mercantilists recommended the accumulation of these metals to the state. They followed every effort, fair or foul, along with the State to ensure that, whether bullion or coins, as much gold and silver as possible enters the country and as little as possible left the country. When the English East India Company developed extensive overseas trade with Asian colonies, there aroused the need for relaxation in gold export restrictions. The issue was raised before the English Court and an exchange ratio for English currency was regulated.
The second phase recommended restrictions on imports to the economy. A favourable balance of trade, overweight for export than imports, was introduced. During the third phase when the industrial production of Britain was at its highest, liberalised the import policy allowed the extensive import of basic raw materials from the colonies. England continued to tax the colonies. But since trade and taxation were difficult to control from far away, England made an agreement with the colonies. They would continue to regulate trade but allow colonists the right to levy their own taxes.
The Navigation Acts were passed by the influential economic theory of mercantilism, under which wealth was to be increased by restricting colonial trade to the mother country rather than through free trade. The Acts promoted the development of Britain’s shipping industry till the close of the 18th century. The Navigation Acts had made many advantages to British shippers by limiting the ability of Dutch ships to participate in the carrying trade to Britain. By reserving British colonial trade to British shipping, the Acts significantly assisted in the growth of London as a major entry port. The maintenance of a certain level of merchant shipping and of trade generally also facilitated a rapid increase in the size and quality of the Royal Navy. This led to Britain as a global superpower and it remained until the mid-20th century. But the Navigation Acts were repealed in 1849 under the influence of a free trade philosophy.
Overseas markets for manufacturers and sources of supply of raw materials were central factors in British industrialization. By 1800, exports represented 13 per cent of the national income of Britain and by the 1870s it reached around 22 per cent. Trade cycles brought periodic booms and slumps, but the British economy was becoming more dependent on overseas trade, including ‘invisible’ earnings from finance, insurance, and shipping. Though the volume of international trade had expanded, Britain’s share began to contract in the face of foreign competition from the USA, Germany, France, and other industrialising countries soon.
4.4.4 Features of Mercantilism
In the first place the mercantilists laid great emphasis on a ‘favourable balance of trade’. They held that the strength and richness of a country depend on two things – the possession of gold and silver mines and a favourable balance of trade. As all the countries did not possess mines of gold and silver, they could build up rich stocks of these metals by exporting the maximum of their manufactured articles and importing a minimum of commodities from other countries. For the maintenance of a favourable balance of trade, the mercantilists favoured commercial regulation. They insisted on discouraging imports through the imposition of heavy duties and prohibitions on foreign goods.
It also emphasised the principle of monopoly. In most European countries, the right to engage in foreign trade was vested only in a small privileged section of society. Thus the East India Company enjoyed a monopoly of trade with Asia, the Africa Company with Africa and the Levant Company with the Mediterranean.
Mercantilism attached great importance to money. It considered wealth as the source of all powers and laid great emphasis on the importance of gold, silver etc. It also considered money as a significant factor for commercial advancement. Further as the trade in those days was mostly carried on the basis of barter of goods, the people naturally preferred to keep gold and silver rather than commodities. The concept of interest formed an important part of mercantilism as it could be profitably employed in trade and enabled the borrower to make high profits.
The mercantilists considered land and labour as the sole factors of production. Most of the mercantilists laid emphasis on the need of increasing production with a view to attaining self-sufficiency in foodstuffs as well as the encouragement of exports. Emphasis was laid on the cultivation of wastelands to increase agricultural production.
Mercantilism emphasised the need of possessing a large population for increasing production and participation in the war. Highlighting the importance of a large population Davenant said, “The people are the real strength of the community; dense population made inventions”. It also developed industries which brought riches to the nation. In view of the importance of the population, Samuel Fortrey pleaded for freedom of immigration and granting of equal rights to the immigrants. Mercantilism emphasised the need for commercial regulation for the smooth working of the economy and the promotion of social welfare. Almost all the European countries framed regulations with a view to restrict the imports of foreign goods and encourage exports. Generally, the import of raw materials was preferred over the import of finished products because it helped the industrial development of the country. As the mercantilists believed that a country could obtain an advantage at the expense of another country only, the commercial regulations were framed keeping in view selfish national interests.
4.4.5 Effects of Mercantilism
When overseas trade became triangulated during the mid-1600s between the British Empire, its colonies, and foreign markets, it fostered the development of the slave trade by England in many colonies, including America. The colonies provided rum, cotton, and other products that were heavily demanded by imperialists in Africa. In turn, slaves were returned to America or the West Indies and traded for sugar and molasses. Not only did these new resources provide England with a large source of revenue, but so too did the slave trade. English company Royal Adventurers Trading to Africa and its successor, the Royal African Company were given a monopoly in the trade of slaves as early as the 1660s. By 1698, trading slaves was a right given to every Englishman, and the construction of large ships allowed as many as 40,000 slaves to be transported to and from English ports.
The British government demanded the trade of gold and silver bullion and was always seeking a positive balance of trade. As such, the colonies often had insufficient bullion left over to circulate in their own markets so they took to issuing paper currency instead. The mismanagement of printed currency resulted in periods of inflation.
In 1733, the British Empire enacted the Molasses Act, which imposed a tax of six pence per gallon on molasses, sugar and rum imported from non-British colonies into the North American colonies. The British raised more revenue by enacting the Sugar Act of 1764. Although it cut the tax on molasses by half, the law (also called the American Revenue Act or the American Duties Act) was enforced even more strictly. The Stamp Act of 1765 required all American colonists to pay a direct tax to England that would help pay for British troops in America. The act also required colonists to use stamped paper produced in England for any printed material. Other laws aimed at increasing revenue and ensuring the enforcement of trade regulations included the Commissioners of Customs Act of 1767 and the Indemnity Act of 1767.
England enacted new laws during the 17th and 18th centuries, putting tariffs on imports of foreign goods and restricting shipping through English channels. As such, mercantilism became the key economic model of the time. It encouraged the colonists to purchase goods from England rather than rival nations. The colonies sent raw materials to England where they were manufactured into finished products and sold to the colonists. This allowed Britain to monopolize the slave trade, transporting slaves from English ports to America. High inflation and heavy taxation on the colonies caused a rift between the colonists and the British.
Britain used mercantilism as a way to secure its interests in the new world. Raw materials were shipped back to England where they were converted to finished goods. These products were then shipped back to the colonies as exports, which the colonists purchased. In order to continue its stronghold in America, Britain had to ensure its military was paid for and did this by imposing a series of taxes on the colonists. This included taxes on goods like molasses, sugar, and tea. Angry at being taxed without representation and not being able to control their own resources, the colonists revolted. This eventually led to the American Revolution and independence.
British mercantilism flourished during the middle of the 17th century at the cost of her colonies. The idea behind this economic policy was that the colonies existed for the benefit of the Empire, providing a stream of revenue and much-needed resources. For this, England need to enforce its trade regulations and place in the world led to the slave trade and human rights violations in America. England would ultimately pay the price, though, after frustrated colonists who were unhappy about the lack of control on their own soil revolted against heavy taxation.
4.4.6 Trading Companies
The early seventeenth century saw the establishment of trading companies in European countries with exclusive rights over vast areas in various parts of all continents. These organisations were primarily merchant guilds to conduct large-scale overseas trade. They were created under royal patronage and state help. The main companies were the East India Company, or EIC (1600–1858), the Hudson’s Bay Company (founded in 1670 and still active) and the Royal African Company (1672–1750), all English, as well as the Dutch East India Company, or VOC (Vereenigde Oost-Indische Compagnie, 1602–1799) and the Dutch West India Company, or WIC (1621–1791). Imitation companies were established in numerous states, including Denmark, France, Genoa, Portugal, and Sweden.
The commercial success of Dutch fleets in Asia led to the foundation of the two foremost East India companies. The return of four Dutch ships from the Indian Ocean in 1599 laden with spices prompted the English Parliament to award a monopoly of trade with the East Indies to the EIC (31 December 1600).
4.4.7 The English East India Company
Fig 4.4.1 Drawing of The East India House, London, 1817
The English East India Company, generally known as the East India Company, was a British trading company in London. The East India Company (EIC) was also known as the John Company informally. Originally it was a ‘joint stock company’ established in 1600 with the purpose of trading with the East Indies, especially with China and India. On 31 December 1600, the Company secured a Royal Charter from the British queen Elizabeth I and then went on to colonise the Indian subcontinent. Initially, the charter gave the company a monopoly to trade with all oriental countries east of the Cape of Good Hope and west of the Straits of Magellan for a period of 15 years.
The opening voyage to India was in 1601 led by Sir James Lancaster and the company’s first factory was set up at Bantam on the island of Java in Indonesia. Surat, as a trade point of transit, was established in 1608. The next voyage was under Sir William Hawkins and he arrived as the commander of the first ship to set anchor at Surat in 1608. While Hawkins was in the court of the Mughal Emperor Jahangir for two years, his efforts to obtain trade concessions were in vain. But soon Sir Thomas Roe met Jahangir as the representative of British king James I and successfully secured exclusive rights to reside and set up factories in Surat.
The Company was engaged in frequent wars with the other European traders in India like the Portuguese and the Dutch, who had already established trade centres here. In the Battle of Swally (Suvali in Surat) in 1612, they defeated the Portuguese and this led to the rise of the Company as a mighty presence in India, and also to the end of Portuguese dominance. Finally, the company dominated other Europeans in India and established fully- fledged trading spots in Surat (1619), Madras (1639), Bombay (1668) and Calcutta (1690). Soon, the chief factories became walled forts like Fort St. George in Madras, Fort William in Bengal and the manor house Bombay Castle.
The English East India Company, whose owners were London businessmen, survived for more than 250 years. The effective and detailed administrative and organisational structure was the secret of the Company’s enduring presence. Scholars have accepted that regardless of its size, a business entity must have formal task completion, decision-making and communication systems, which are in line with its needs so as to operate in an efficient and effective manner (Sebastian Kortmann, 2012). The entire administration of the East India Company from England was managed by a body of 24 directors called the Court of Directors. The representatives in the Court of Directors were elected by shareholders of the company on an annual basis. The collective body of these shareholders, who participated in the election of Directors, was called the Court of Proprietors which comprised all the shareholders of the Company with voting rights. The Court of Directors consisted of a Governor, a Deputy Governor and twenty- four directors elected by the General Court. There were regular weekly meetings of the full Court of Directors and subcommittees which provided an opportunity for review of the functioning of the Company.
The colonial possessions and territories of the Company were administered by the Governor or Governor-General. The Court of Directors selected the Governors and it is the duty of the Governor to submit periodical reports regarding the administration before the Court. The governors were the representatives of the Company in the respective territories. The Company’s army was not the British Army but the private army of the East India Company, which accomplished the mission of colonisation. This army had the primary duty of protecting the trading empire, and also became the main tool in extending the British hegemony. ‘The soldiers of this private army’ were rightly professional and disciplined and fought persistently for more than a hundred years till the Great Rebellion resulted in its disbandment.
4.4.8 The Company of Merchants Trading to Africa
An act for extending and improving the trade to Africa, in 1750, the Company of Merchants Trading to Africa was established. It was a non-profit regulated company to “facilitate Britain’s African trade”. It was entrusted with the functions of governing and maintaining a series of trading establishments on the African coast. The main purpose of the company was to protect free trade and avoid competition between the company and private merchants. The company consisted of a governing Committee, in England, and a Council of governors on the coast led by the Governor of Cape Coast Castle. Although the company was independent of the state, the Board of Trade oversaw complaints levelled at the CMTA when they occurred and even launched several investigations. The forts were organised in a hierarchical fashion, when officers moved up in rank, they would move to the next fort in the hierarchy.
4.4.9 King George’s Sound Company
It was established in 1785 to engage in overseas trade with the northwest coast of North America. The King George’s Sound Company is also known as Richard Cadman Etches and Company as he was the investor in the company. The company had nine partners in 1785: Richard Cadman Etches (merchant of London), John Hanning (gentleman of Dowlich, Devon), William Etches (merchant of Ashbourne, Derbyshire), Mary Camilla Brook (tea dealer of London), William Etches (merchant of Northampton), John Etches (merchant of London), Nathaniel Gilmour (merchant of Gosport, Hampshire), Nathaniel Portlock (captain), and George Dixon (captain). Richard Etches and his associates were able to obtain licences from the South Sea Company and the East India Company for their overseas functions. The King George’s Sound Company merged with that of John Meares on 23 January 1789. But the vessels were seized by the Spanish Navy. After a treaty was eventually signed by the Spanish and British, the company tried unsuccessfully to obtain compensation for its losses from the Spanish.
4.4.10 End of Mercantilism
The introduction of free trade philosophy questioned the practice of restrictive trade policies of mercantilism. Adam Smith, David Hume, Edward Gibbon, Voltaire and Jean- Jacques Rousseau were the founding fathers of anti-mercantilist thought. Scholar critics like Hume, Dudley North and John Locke undermined mercantilism and it steadily lost favour during the 18th century. In 1690,Locke argued that prices vary in proportion to the quantity of money. Locke’s Second Treatise also points towards the heart of the anti-mercantilist critique: that the wealth of the world is not fixed, but is created by human labour. Mercantilists failed to understand the notions of absolute advantage and comparative advantage and the benefits of trade. It was a fact that mercantilism ended when major power shifts occurred. In Britain, mercantilism faded as the Parliament gained the monarch’s power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them because of the high cost of group decision-making. Soon Britain slowly embraced free trade and Smith’s laissez-faire economics.
Objective Type Questions
Answers to Objective Type Questions
1. Discuss the main features of Mercantilism.
1. Jones, Geoffrey. Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Centuries, OUP, 2000.