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Tuesday, April 30, 2013

French mercantilist: Colbert and Louis XIV

Jean-Baptiste Colbert (1619–83) was no scholar or theorist, but he knew with firm conviction what ideas he liked, and these were the mercantilist notions that had filled the air in France and the rest of Europe for generations. Colbert's accomplishment, while functioning as the Sun King's economic czar, was to put this compendium of mercantilist ideas into effect on a grand scale. Colbert was convinced that the ideas were good, just and correct, and he fervently believed that any opponent was completely wrong, either ignorant or biased by personal motives and special pleading. His opponents, such as businessmen who preferred competition or free exchange, were narrow, short-sighted, and selfish; only he, Jean-Baptiste Colbert, had the long-run interests of the nation and the nation-state at heart. Merchants, he repeatedly declared, were little men with only ‘little private interests’. For example, they often preferred liberty to compete with each other, whereas it is in the ‘public interest’ and the ‘good of the state’ to see to it that all products are uniform in make-up and quality. Colbert was speaking here, of course, of the joint interests of the state, its rulers and bureaucracy, and of cartellists, all of whose private interests were in fact at stake. But although the myth of the ‘public’ was, as usual, a mask for particular individuals and groups, their interests were indeed far grander than those of ‘little’ individual merchants.

The mercantilist ideas of Colbert were familiar: encouraging and keeping bullion in the country so that it can flow into the coffers of the state; prohibiting the export of bullion; cartellizing through compulsory high standards of quality; subsidizing of exports; and restriction on imports until France became self-sufficient. Colbert's ideas on taxation were those of almost every minister of finance everywhere, except they were more clearly and far more candidly expressed: ‘The art of taxation’, he said, ‘consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing’. There is no more dramatic encapsulation of the inherently conflicting interests of the people vs the state. From the point of view of the state and its rulers, the people are but a giant goose to be plucked as efficaciously as possible.

Furthermore, that swelling the coffers of the king and the state was the simple reason for the otherwise silly ‘bullionist’ doctrines of the mercantilists can be seen in this revealing statement of Colbert's to the king: ‘The universal rule of finances should be always to watch, and use every care, and all the authority of Your Majesty, to attract money into the kingdom, to spread it out into all the provinces so as to pay their taxes’.

Like other mercantilists, Colbert warmly embraced the ‘Montaigne fallacy’ about trade. Trade was war and conflict. The total amount of trade in the world, the total number of ships, the total production of manufacturing, was fixed. One nation could only improve its trade, or shipping or manufactures, by depriving some other country of this fixed quantum. One nation's gain must be another's loss. Colbert gloried in the fact that French trade was growing, allegedly at the expense of misery inflicted on other nations. As Colbert wrote to King Louis XIV in 1669, ‘This state is flourishing not only in itself, but also by the want which it has inflicted upon all the neighbouring states’.

In reality, trade and conquest are not akin, but are diametric opposites. Each party to every exchange benefits, whether the exchange is between nationals of the same country or of different countries. Political boundaries have nothing to do with the economic gain from trade and markets. In exchange, one man's gain is only accomplished by contributing to the gain of someone else; just as both ‘nation’ (i.e. people living in certain countries or any other geographical area) mutually benefit from trade between them. Colbert's theories, however, fitted in with deep hostility toward all foreigners, particularly such prosperous nations as England and Holland.

Like other mercantilists, Colbert detested the idleness of others, and sought to force them into working for the nation and state. All vagabonds must be driven out of the country or put to forced labour as galley-slaves. Holidays should be reduced, so that people would work harder.

Colbert was unusual among mercantilists in giving especial care to bringing the intellectual and artistic life of the nation under state control. The object was to make sure that art and intellect served to glorify the king and his works. An enormous amount of money was poured into palaces and chateaux for the king, the mightiest of which was approximately 40 million livres on the great, isolated palace at Versailles. During Colbert's term, some 80 million livres were spent on royal edifices. Moreover, Colbert mobilized artists and intellectuals into academies, and supported them by grants and government projects. The French Academy, created shortly before as an uninfluential semi-private group, was nationalized by Colbert and put in charge of the French language. The Academy of Painting and Sculpture, founded under Mazarin and given a legal monopoly of art instruction, was reinforced by Colbert, who imposed strict regulations on these artists so that their work would be proper and orderly and always in service to the king. Colbert founded an academy of architecture to work on royal buildings and to inculcate the proper architectural principles.

Neither were music nor the theatre safe from the all-encompassing rule of Colbert. Colbert preferred the Italian opera form to the French ballet, and so doomed the latter to the benefit of the Italian import. In 1659, the Abbé Perrin produced the first French opera, and so a decade later, Colbert conferred upon the abbé a monopoly of all rights to present musical performances. Perrin, however, was a poor manager, and he went bankrupt. While in a debtor's prison, Perrin sold his monopoly right to Jean Batiste Lulli, an Italian musician and composer. Lulli was given the right to form the Royal Academy of Music, and Lulli's permission was necessary for any further musical performance with more than two instruments.

Similarly, Colbert created a theatrical monopoly. In 1673, he forced two existing theatres to unite: when a third troupe was later forced to join them, the Comédie française was thereby formed in 1680. The Comédie française was given a monopoly of all dramatic performances in Paris, was subjected to tight state regulation and control, and aided by state funds.

With regulation and monopoly came subsidy and subvention. Pensions, grants, no-show appointments as valets of the king, lucrative appointments as artists to the king, exemptions from taxes or from the wrath of creditors, all poured out into the arts. Similarly, for the theatre, writers, scientists, historians, philosophers, mathematicians and essayists. All manner of largesse poured out to them from the state trough. It was subvention that put to shame any contemporary national endowment for the humanities or national science foundation. The outpouring truly subverted any sort of spirit of independence that French intellectuals might have attained. The mind of a whole nation had been corrupted into the service of the state.

What manner of man was this, then, this grand bureaucrat who scorned the interests of mere individuals and merchants as petty and narrow, who presumed always to speak and act for the ‘national’ and even ‘public’ interest? Jean-Baptiste Colbert was born in Reims, into a merchant family. His father, Nicolas, purchased a minor government office in Paris; his more influential uncle, Odart Colbert, was a successful merchant-banker. Jean-Baptiste was an uneducated young man, but his uncle knew a banker for Cardinal Mazarin. More importantly, one of Odart's sons married the sister of an important government official, Michel Le Tellier. Uncle Odart got young Colbert a job working for Le Tellier, who had just been appointed to the post of secretary of state for military affairs. Jean-Baptiste's lifelong service in the top French bureaucracy had begun. After seven years in this post, Colbert married Marie Charon, after obtaining for her father, a wealthy financial official, an important tax exemption.
Soon Colbert became a counsellor of state, and then one of the top aides of Cardinal Mazarin. Soon after Mazarin's death, Colbert rose to become virtual economic czar of Louis XIV, keeping this status until his death.

Cold, humourless, hard and implacable, ‘a man of marble’ as he was called by a contemporary, Jean-Baptiste Colbert yet had the wit to engage in boundless flattery and demeaning personal service to his royal patron. Thus Colbert wrote to Louis on the occasion of a military victory: ‘One must, Sire, remain in silent wonder, and thank God every day for having caused us to be born in the reign of a king like Your Majesty’. And no service to the Sun King was too demeaning. Colbert searched for the king's missing swans, supplied Louis with his favourite oranges, arranged for the birth of the king's illegitimate children, and bought jewels for mistresses on the king's behalf. Colbert's personal philosophy was best summed up in his advice to his beloved son, Seignelay, on how to get ahead in the world. He told his son that ‘the chief end that he should set himself is to make himself agreeable to the king, he should work with great industry, during his whole life to know well what might be agreeable to His Majesty’.

Colbert was well rewarded for his life of hard work and abject sycophancy in the service of the king. Apparently only the interests of individual merchants and citizens were narrow and ‘petty’. Colbert had little difficulty in identifying the lucrative feathering of his own nest with the ‘public interest’, national glory, and the common weal. A stream of offices, benefices, pensions and grants streamed into his coffers from the ever grateful king. In addition, Colbert received special bonuses or ‘gratifications’ from the king; thus, in one order, in February 1679, Colbert received a gratification of no less than 400 000 livres. The overall sum poured into Colbert's coffers was immense, including lands, and bribes for subsidies and exemptions from grateful lobbyists and economic interests. All in all, he amassed at least 10 million livres, notable to be sure, but not the enormous extent of Cardinal Mazarin's boodle as prime minister.

Colbert also did extremely well by his extensive family. Brothers, cousins, sons and daughters of Colbert were showered with favours, and became bishops, ambassadors, military commanders, intendants, and abbesses of leading convents. The Colbert family certainly did well by doing ‘good’ on behalf of the sovereign and the ‘public interest’ of France.

After Colbert's death in 1683, his successors under Louis XIV developed and strengthened the policy of Colbertisme. Protective tariffs were greatly increased, imports of various goods limited to specific ports, quality regulations strengthened, and innovations hobbled for the protection of the industrial and occupational status quo. Colbertisme was frozen into the French political economy.

Austrian Perspective on the History of Economic Thought (2 volume set)

Monday, April 29, 2013

French mercantilist:The grandiose failure of François du Noye

François du Noyer, sieur de Saint-Martin, had a dream. It was a grandiose vision of the future. All around him, in the early seventeenth century, and in all major nations of the West, the state was creating monopoly companies. Then why not, du Noyer reasoned, go all the way? If monopoly companies for specific products or specific areas of trade were good, why not go one better? Why not one big company, one gigantic monopoly for virtually everything?
King Henry IV listened to du Noyer's schemes with interest. They were, after all, only logical conclusions of doctrines and notions that were everywhere in the air. But it was not until 1613 that du Noyer worked out his plan in detail, and set it before the council of state. It was to be an enormous, virtually all-inclusive company, to be called the French Royal Company of the Holy Sepulchre of Jerusalem. The company, to be headed of course by du Noyer himself, was to have either a privileged monopoly, or the right to regulate all other firms, in virtually every trade. Thus, the Royal Company was to make cloth, and regulate all other manufacture and preparation of all types of cloth; control all aspects of wine making, and all merchants and hotels buying wine would have to invest certain sums in the company, at a low fixed return; hold four privileged fairs a year in Paris; have a monopoly of all public coaches; control all mines in France; obtain gratis various unoccupied Crown lands and abandoned quarries; dig canals, erect mills; have a monopoly on sale of playing cards; make munitions; borrow and lend money; and numerous other activities. Furthermore, du Noyer would have the Royal Company obtain extraordinary powers from the Crown:

it would have the right to seize beggars and vagabonds and take them to the French colonies, which it would presumably run;
all convicted criminals would be sentenced to forced labor for the company in the colonies;
all bankrupts who had managed to save some money from their wreckage would be forced to invest that amount in the company;
all people exiled from France could be let back into the country by serving or paying money to the company;
all who conducted trade higher than their rank or privileges would be forced to join the company;
all business documents whatsoever would have to use stamped paper sold to them by the company.

The council of state was impressed by du Noyer's vision and ordered an investigation of the project. The following year, 1614, the Royal Company plan was approved by the states-general of France, and various generals, admirals, and other high-level officials joined in the praise. Du Noyer reached the peak of his influence, being given the old Laffemas post of controller-general of commerce. It seemed as if the grandiloquent Royal Company plan was actually going to be adopted. Du Noyer elaborated on his plan in a pamphlet which he presented to the king in 1615.
The king, or rather the regent, Marie de Medici, was impressed, and in 1616 recreated the old Commission of Commerce, formerly headed by Laffemas, with instructions to study the du Noyer project in detail. The commission met, and the following year approved the plan of the Royal Company, and urged that all persons carrying on trade be forced to invest their money exclusively in it. In short, the Royal Company would be the monopoly company to end all companies. The delighted du Noyer, in the meanwhile, seeing his cherished scheme close to fruition, published a longer pamphlet on the plan, urging his one big company upon France. Like the king himself, the Royal Company would be unique and universal, and its capital would come from both private and royal sources.
The Royal Company project seemed to keep barrelling along, the council of state granting its approval in 1618, and again in 1620, when King Louis XIII himself gave it his warm endorsement. In early 1621, public criers throughout Paris announced the glad tidings that the Royal Company had been formed, and was open to receive funds for investment.
The problem, however, was money. No one seemed to want to provide actual cash or even pledges to the new enterprise, however grandiloquent and privileged it appeared to be. The king urged every city in France to join, but the cities kept hanging back, pleading that they had no funds. In desperation, controller-general of commerce du Noyer scaled down the Royal Company to concentrate only on commerce and trade with the Indies and other overseas areas. Finally, du Noyer narrowed the scope of his beloved company's capital still further to just Paris and Brittany. But even the Bretons proved not to be interested.
The coming to power as prime minister of Cardinal Richelieu in 1624 put the du Noyer scheme into abeyance. But four years later, the project had its final fling. The king urged the commission of Commerce to act, and in the spring of 1629, it again approved the plan, this time adding to its original grandiose powers the right to make treaties with foreign countries, and to establish colonial islands for entrepôt trade.
After nearly three decades of planning and lobbying, du Noyer now needed only the simple signature of King Louis to put his hypertrophied vision into effect. But for some reason, the royal signature never came. No one knows quite why. Perhaps the powerful Richelieu didn't want a rival's scheme to be approved. Or perhaps the king was getting weary of the aging monomaniac and his untiring enthusiasm. Repeated entreaties and importuning, however, fell only on deaf ears. The Royal Company was at last dead, stillborn, and old du Noyer's loss was the French public's gain.

Austrian Perspective on the History of Economic Thought (2 volume set)

Sunday, April 28, 2013

The eccentric poet: Antoine de Montchrétien

One of the most bizarre characters in the history of economic thought was the poet and dramatist Antoine de Montchrétien (c.1575–1621). Born in Falaise, in Normandy, Montchrétian grew up in a middle-class household, his father probably having been an apothecary. He went to a fashionable school at Caen, and at the age of 20 began to write poetry and tragic plays, some of which, including Hector and L’Écossaise, are still considered classics of French literature. At 30 Montchrétien became involved in a scandalous duel, and fled to England. After travelling in Holland, he returned to France around 1610 and married a rich Norman widow, who financed his start in the hardware business. He thereupon set up a factory at Ousonne-sur-Loire, where he produced knives and scythes.

In 1615, at the age of 40, Antoine de Montchrétien published his one and only work on economics, the Traicté de I'Oeconomie Politique (Treatise on Political Economy). The only distinction of this book was its title, for it was the first time in history that the phrase ‘political economy’ had ever appeared. The Treatise is a rambling, disorganized account of the economic resources of the country, and a plea to the twin rulers of France (the young King Louis XIII and his Regent and Queen Mother, Marie de Medici) to impose order, rule with an iron hand, and advance the greatness of their nation-state, France. As Charles Cole puts it, the book ‘is based in large part on the tacit assumption that control and direction of the economic life of the country is one of the chief functions of government, and it is a plea for greater activity in economic matters on the part of the rulers’.1 One sentence from the work will convey its essential spirit: ‘Your Majesties possess a great state, agreeable in geographic situation, abounding in wealth, flourishing in peoples, powerful in good and strong cities, invincible in arms, triumphant in glory’. All France needs, Montchrétien opined, is ‘order’: ‘Order is the entelechy of states’.

The alleged need for a state-imposed order was linked neatly with Montchrétien's conscious echoing of the Montaigne fallacy: ‘It is said that no one ever loses without another gaining. This is true and is borne out in the realm of commerce more than anywhere else’.

For Montchrétien, the French Crown in particular was supposed to regulate and foster production and trade, and especially manufactures, so that France could become self-sufficient. Foreign goods and foreign manufacturers should be driven out of France. Thus Dutch linen manufacturers were at the time allowed to operate in France; that must be ended. English textiles should be banned. France must be made self-sufficient in silk, Montchrétien asserted, and he claimed that the fiasco of silk subsidy in the reign of Henry IV had come about only because of faithlessness on the part of the monarch's aides. Furthermore, since ‘whatever is foreign corrupts us’, foreign books should be prohibited, since they ‘poison our spirits’ and ‘corrupt our manners’.

Nor did Montchrétien neglect his own scythe business. It was a national tragedy, he warned, that German scythes were outcompeting French products, even though French scythes were superior. One wonders, then, why French consumers were perverse enough to prefer the German product – unless, of course, its price was lower.

Idleness, according to Montchrétien, was evil and had to be stamped out, by force if necessary. Man, to Montchrétien, is born to live in continual labour; the policy of the state should therefore be to make sure that no part of the population ever remains idle. Idle hands are the devil's hands; idleness corrupts the strength of men and the chastity of women. Idleness, in short, is the mother of all sins. The criminals and the unruly should, therefore, be made to work. As for so many other mercantilists, full employment for Montchrétien meant at bottom coerced employment.

The most pervasive motif in Montchrétien's work was his deep and abiding hatred and revulsion towards foreigners, towards their imported products and towards their persons. Foreigners, he fulminated, ‘are leeches who attach themselves to this great [French] body, suck out its best blood, and gorge themselves with it, then leave the skin and detach themselves’. All in all, France, ‘once so pure, so clean’, had been turned into ‘a bilge, a sewer, a cesspool for other countries’.

It is impossible to know if Montchrétien was hoping for great things from the French monarch, but in any case nothing happened, and so he began to ordain himself into the nobility, by simply calling himself the ‘sieur de Vateville’. And even though he implied in several spots in his Treatise that he was Catholic, and declared his adoration for the absolute monarchy often enough, yet he took part in a Huguenot uprising in Normandy in 1621, and was killed in battle. Four days later, a judicial tribunal condemned the dead man posthumously, dragged, broke and burned his body, and then scattered his ashes to the winds. Such was the punishment handed out to Antoine de Montchrétien by his much vaunted absolute rulers.

Austrian Perspective on the History of Economic Thought (2 volume set)

Saturday, April 27, 2013

French mercantilist:The first ‘Colbert’: the due de Sully

What Jean-Baptiste Colbert would be in the last half of the seventeenth century to Louis XIV, Maximilien de Bethune, Baron de Rosny, the due de Sully (1560–1641) was to Henry IV The young Bethune was born a Huguenot aristocrat, Baron de Rosny. Naturally, he too gravitated to the court of Henry of Navarre, and fought and was wounded during the religious wars. It is characteristic of Rosny that he urged Henry IV to turn Catholic in order to save his throne, although he himself refused to do so.

The arrogant and ruthless Rosny quickly became Henry IV's leading minister as superintendent of finance, and for his services was made by his master the due de Sully. Sully's own views stem from his Memoirs (1638), written in old age as a glowing apologia for his own term in office, for Sully had been forcibly retired to private life after the assassination of his royal patron. In his Memoirs, Sully claims to have opposed the more crackpot schemes of his fellow top bureaucrat Laffemas. Thus, he writes at length of his opposition to Laffemas's silk fiasco. Silk could not readily grow in the French climate, he had warned, and also it would lead Frenchmen into undue luxury.

It is not, of course, that Sully was not a mercantilist. It is just that, instead of proceeding with the folly of force-feeding domestic luxury industries, such as silk, he would have passed laws directly against luxurious consumption. He was eager to ban the export of gold and silver directly, paying fees to himself and others for ferreting out evaders of the law. Some of his specific views, of course, such as on the silk scheme, might be a rewriting of history to make himself look good to contemporaries; after all, neither Laffemas nor King Henry were then alive to verify his recollections. Others might be simply the product of bureaucratic infighting with his fellow economic czar.

A dedicated absolutist, who indeed did much to entrench centralized absolutism in France, the Due de Sully was basically as much a protectionist as his colleague Laffemas, despite the claim of some historians that Sully (and his monarch) was some sort of ‘free-trader’. The one significant case where Sully opposed a Laffemas protection scheme was the latter's proposal to ban all imports of textiles. But here the basic reason was his loyalty to the city of Lyons, the leading Protestant stronghold in south-eastern France, which would have suffered greatly from the prohibition of such trade. Throughout his career, Sully fought to uphold the fortunes and privileges of Lyons.
Austrian Perspective on the History of Economic Thought (2 volume set)

Friday, April 26, 2013

The first major French mercantilist: Barthélemy de Laffemas

The first French mercantilist of note was Barthélemy de Laffemas (1545–1612), an uneducated son of a very poor Protestant family in Dauphine. All his life he was the servitor of Henry of Navarre, the Protestant pretender, rising in 1582 to the exalted post of honorary tailor and valet to his master. When Henry of Navarre became King Henry IV, Laffemas's fortune was made, and he became in 1601 controller-general of commerce and head of the Commission of Commerce, to remain so until the king's death. Like a devoted dog who dies shortly after his master, Laffemas, now broken in power, died a year after Henry was assassinated in 1610. Laffemas comes to our attention because of the literally dozens of execrably written pamphlets he produced during his decades in power, on behalf of the mercantile system which he was helping to put into place in France.

Laffemas's focal point, his criterion for numerous economic policies, was whether or not they brought bullion into the kingdom. But note that these views need not necessarily be interpreted as dim-witted reliance on money-as-wealth; for when Laffemas wrote that gold and silver were ‘the sinews and support of kingdoms and monarchies... the true matter and substance which maintains the state against... enemies’, he was of course quite right. The more money kings can amass from their subjects, the wealthier and more powerful they would become. There is nothing odd or fallacious about that. The fallacy existed – should the argument be taken seriously – for anyone who identified the king's interest with that of all of French society.

The one spark of economic intelligence here came with the fact that Laffemas was one of the first mercantilists to shrewdly advise the king not to directly prohibit the export of bullion. Far better, he believed, to allow bullion to flow in and out of the country freely, and then strictly regulate commerce and industry in such a way that bullion would flow into the country.

Apart from that, Laffemas's economic advice was a dreary litany: prohibit all manufactured imports, prohibit fairs which drained money out of the kingdom and into the hands of foreigners, force merchants to buy only raw materials abroad and not manufactures, prohibit the export of raw materials. Guilds must be revived and used to regulate all urban work and to keep up the quality of products; committees of masters should supervise guilds; a bureau of manufactures should supervise them, and so on up to the royal court.

Promoting the usual mercantilist cant, Laffemas assured agriculture that it would benefit, not suffer, from the establishment of protected manufactures, since these would supply a home market for farm products. That this would be a highly inefficient and costly home market Laffemas did not bother to add.

Everyone who opposed his views, according to Laffemas, was selfish, ignorant, and/or a traitor, and should be dealt with accordingly. All who disobeyed the regulations and prohibitions should suffer confiscation of their goods as well as death.

Like most of his mercantilist confrères, Barthélemy de Laffemas was enamoured of the idea of full employment and the eradication of idleness. Full employment, of course, meant coerced employment, and Laffemas called for an end to idleness by putting the idle to work, the reluctant to be forced into it by ‘chains and prisons’. Taverns and cabarets were to be severely restricted, and confirmed drunkards arrested and put into the pillory.

Protectionism begins by trying to ensure national self-sufficiency in goods that can be made at home, and then continues by expanding the definition of what can indeed be made. For when profitability on the market is abandoned as a criterion, virtually every good in creation can be made – at some cost – at home. If Americans wanted to, they could undoubtedly grow all their bananas in hothouses in Maine or Montana at astronomical cost. But what would be the point, apart from subsidies to a few privileged hothouse growers?

One of Barthélemy de Laffemas's daftest projects, which as controller-general he did his best to put into effect, was to make France self-sufficient in one of her favourite luxury imports: silks. Many of his pamphlets and practical efforts were devoted to force-feeding an enormous expansion of the French silk industry, hitherto small and confined to the south of France.

Laffemas insisted that the climate of France was ideal for raising silkworms; any belief to the contrary, any subversive talk that France was largely too cold and stormy for silk growing, was merely propaganda spread by the ‘evil designs of certain French merchants, retailers of foreign silks’. Laffemas pointed to his own successful silk-growing, to King Henry's planting of mulberry trees (on which silkworms were fed). He advocated a law compelling all property owners, including the clergy and monasteries, to plant two or three mulberry trees per acre. He painted a beautiful picture of vast profits that were sure to flow from mulberry trees and silk culture. Laffemas also claimed magical medicinal properties for mulberries: they would cure toothache and stomach trouble, relieve burns, chase away vermin, and be an antidote to poisons.

Even though Laffemas persuaded the king to pour hundreds of thousands of livres into fostering the growth of mulberry trees and silk culture, and the king duly ordered each diocese in France to establish a nursery of 50 000 mulberries, the great silk experiment proved an abject failure. The climate of most of France indeed proved inhospitable, a product of hard reality rather than misinformation spread by selfish and traitorous importers. The mass of the French clergy understandably dragged their feet at suddenly being forced to become silk producers. France continued to be a heavy net importer of silks.
Laffemas's main if not only disciple was his son Isaac. At the tender age of 19, young Isaac de Laffemas (1587–1657), keen to become the heir of his powerful father in every sense, published a History of Commerce in France (1606). The History was scarcely a memorable work, distinguished mainly for the fawning praise which he lavished upon his father and on King Henry, and on the slavish repetition of his father's pet notions and nostrums. The tone of this work may be gauged from the fact that Isaac lauded Henry IV as the source of all that is good in France. Addressing his Majesty, young Isaac wrote that heaven ‘has favored my father in having let him live during your reign’.
With the fall of his father from grace and his subsequent death, Isaac's career as a political economist came to an untimely end, and he ended his days as a minor but faithful lieutenant of the chief minister, Cardinal Richelieu.

Austrian Perspective on the History of Economic Thought (2 volume set)

Thursday, April 25, 2013

French mercantilist thought in the seventeenth century

Building the ruling élite

The system of mercantilism needed no high-flown ‘theory’ to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favoured high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favoured alliances with nobles and with cartellizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries. Neither did the cartellizing companies need much of a theory to come out in favour of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles or favoured business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist ‘theory’ was a set of rationales designed to uphold or expand particular vested economic interests.

Many twentieth century historians have lauded the mercantilists for their proto-Keynesian concern for ‘full employment’, thus showing allegedly surprising modern tendencies. It should be stressed, however, that the mercantilist concern for full employment was scarcely humanitarian. On the contrary, their desire was to stamp out idleness, and to force the idle, the vagrant, and the ‘sturdy beggars’ to work. In short, for the mercantilists, ‘full employment’ frankly implied its logical corollary: forced labour. Thus, in 1545, the ‘sturdy beggars’ of Paris were forced to work for long hours, and two years later, ‘to take away all opportunity for idleness from the healthy’, all women able but unwilling to work were whipped and driven out of Paris, while all men in the same category were sent to the galleys as slave labour.

The class basis of this mercantilist horror of idleness should be instantly noted. The nobility and the clergy, for example, were scarcely concerned with their own idleness; it was only that of the lower classes that must be ended by any means necessary. The same is true of the privileged merchants of the third estate. The thinly veiled excuse was the necessity of increasing ‘the productivity of the nation’, but these classes constituted the ruling elite, and such forced ending of idleness, whether on public works or in private production, was a boon to the rulers. It not only increased production for the latter's benefit; it also lowered wage rates by adding to the supply of labour by coercion.
Thus, at the meeting of the states general, the parliamentary body of France, in 1576, all three estates united in their call for forced labour. The clergy urged that ‘no idle person... be allowed or tolerated’. The third estate wanted ‘sturdy beggars’ to be put to work, whipped or exiled. The nobles urged that ‘sturdy beggars and idlers’ be forced to work and whipped if they refused to comply.
The same states-general made their special pleading all too painfully clear in the matter of protective tariffs. The estates called for the prohibition of imports of all manufactured goods and the export of all raw materials. The purpose of both measures was to throw a wall of monopoly protection around domestic manufactures and to force producers of raw materials to sell their goods to those domestic businesses at an artificially low price. The excuse that such measures were necessary to ‘keep bullion’ or money ‘at home’ would seem patently absurd to any objective person. For if French consumers are to be prevented from buying imports in order to safeguard ‘their bullion’, what might happen otherwise? Was there really any danger of Frenchmen sending all their bullion abroad and keeping none for themselves? Clearly, such an event would be absurd, but even if it happened – the worst-case scenario – there is an evident hard maximum limit to any outflow of bullion from home. For where are the consumers bent on further importation going to get more bullion? Clearly, only by exporting other products abroad.

Consequently, the ‘keeping money at home’ argument is patently fraudulent, whether in seventeenth century France or in the twentieth century United States. The states-general were interested in protecting certain French industries, period.

The ‘keeping money at home’ argument was also a convenient stick to beat foreign businessmen or financiers who could outcompete natives. Thus the prospect of German bankers and Italian financiers flourishing in France gave rise to paroxysms of fury at the ‘ill-gotten gains’ of foreigners, taking money out of the country, fury that was of course fed by the typically mercantilist egregious ‘Montaigne fallacy’ that one man's (or one nation's) gain on the market was ipso facto another man's (or nation's loss). These disgruntled Frenchmen often suggested that foreign financiers be expelled from the country, but the kings were typically too bogged down in debt to afford such counsel.

Austrian Perspective on the History of Economic Thought (2 volume set)

Wednesday, April 24, 2013

Mercantilism and inflation

The post-medieval state acquired most of its eagerly sought revenues by taxation. But the state has always been attracted by the idea of creating its own money in addition to plundering directly the wealth of its subjects. Before the invention of paper money, however, the state was limited in money creation to occasional debasements of the coinage, of which it had long managed to secure a compulsory monopoly. For debasement was a one-shot process, and could not be used, as the state would always like, to create money continually and feed it into state coffers for use in building palaces, pyramids, and other consumption goods for the state apparatus and its power élite.

The highly inflationary instrument of government paper money was first discovered in the Western world in French Quebec in 1685. Monsieur Meules, the governing intendant of Quebec, pressed as usual for funds, decided to augment them by dividing some playing cards into quarters, marking them with various denominations of French currency, and then using them to pay for wages and materials. This card money, later redeemed in actual specie, soon became repeatedly issued paper tickets.
The first more familiar form of government paper began five years later, in 1690, in the British colony of Massachusetts. Massachusetts had sent soldiers on one of their customary plunder expeditions against prosperous French Quebec, but this time had been beaten back. The disgruntled Massachusetts soldiery was even more irritated by the fact that their pay had always come out of their individual shares of French booty sold at auction, but that now there was no money for them to collect. The Massachusetts government, beset by demands for payment of their salary by a mutinous soldiery, was not able to borrow the money from Boston merchants, who shrewdly considered its credit rating unworthy. Finally, Massachusetts hit upon the expedient of issuing 7 000 pounds in paper notes, supposed to be redeemable in specie in a few years. Inevitably, the few years began to stretch out on the horizon, and the government, delighted with this new-found way of acquiring seemingly costless revenue, poured on the printing presses, and quickly issued 40 000 more paper pounds. Fatefully, paper money had been born.

It was to be two decades before the French government, under the influence of the fanatically inflationist Scottish theoretician John Law, turned on the taps of paper money inflation at home. The English government turned instead to a more subtle device for accomplishing the same objective: the creation of a new institution in history: a central bank.

The key to English history in the seventeenth and eighteenth centuries is the perpetual wars in which the English state was continually engaged. Wars meant gigantic financial requirements for the Crown. Before the advent of the central bank and government paper, any government not willing to tax the country for the full cost of war relied on an ever more extensive public debt. But if the public debt continues to rise, and taxes are not increased, something has to give, and the piper must be paid.
Before the seventeenth century, loans were generally made by banks, and ‘banks’ were institutions in which capitalists lent out funds that they had saved. There was no deposit banking; merchants who wanted a safe place to keep their surplus gold deposited them in the King's Mint in the Tower of London – an institution accustomed to storing gold. This habit, however, proved highly costly, for King Charles I, needing money shortly before the outbreak of the civil war in 1638, simply confiscated the huge sum of 200 000 pounds in gold stored at the Mint – announcing it to be a ‘loan’ from the depositors. Understandably shaken by their experience, merchants began depositing their gold in the coffers of private goldsmiths, who were also accustomed to the storing and safe keeping of precious metals. Soon, goldsmiths’ notes began to function as private bank notes, the product of deposit banking.
The Restoration government soon needed to raise a great deal of money for wars with the Dutch. Taxes were greatly increased, and the Crown borrowed extensively from the goldsmiths. In late 1671, King Charles II asked the bankers for further large loans to finance a new fleet. Upon the goldsmiths’ refusal, the king proclaimed, on 5 January 1672, a ‘stop of the Exchequer’, that is, a wilful refusal to pay any interest or principal on much of the outstanding public debt. Some of the ‘stopped’ debt was owed by the government to suppliers and pensioners, but the vast bulk was held by the victimized goldsmiths. Indeed, of the total stopped debt of 1.21 million pounds, 1.17 million was owned by the goldsmiths.
Five years later, in 1677, the Crown grudgingly began paying interest on the stopped debt. But by the time of the eviction of James II in 1688, only a little over six years of interest had been paid out of the 12 years’ debt. Furthermore, the interest was paid at the arbitrary rate of 6 per cent, even though the king had originally contracted to pay interest at rates ranging from 8 to 10 per cent.

The goldsmiths were even more intensively thwarted by the new government of William and Mary, ushered in by the Glorious Revolution of 1688. The new regime simply refused to pay any interest or principal on the stopped debt. The hapless creditors took the case to court, but while the judges agreed in principle with the creditors’ case, their decision was overruled by the Lord Keeper, who candidly argued that the government's financial problems must take precedence over justice and property right.
The upshot of the ‘stop’ was that the House of Commons settled the affair in 1701, decreeing that half of the capital sum of the debt be simply wiped out; and that interest on the other half begin to be paid at the end of 1705, at the remarkable rate of 3 per cent. Even that low rate was later cut to two-and-a-half.
The consequences of this declaration of bankruptcy by the king were as could be predicted: public credit was severely impaired, and financial disaster struck for the goldsmiths, whose notes were no longer acceptable to the public, and for their depositors. Most of the leading goldsmith-creditors went bankrupt by the 1680s, and many ended their lives in debtors’ prison. Private deposit banking had received a crippling blow, a blow which would only be overcome by the creation of a central bank.
The stop of the Exchequer, then, coming only two decades after the confiscation of the gold at the Mint, managed virtually to destroy at one blow private deposit banking and the government's credit. But endless wars with France were now looming, and where would government get the money to finance them?

Salvation came in the form of a group of promoters, headed by the Scot, William Paterson. Paterson approached a special committee of the House of Commons formed in early 1693 to study the problem of raising funds, and proposed a remarkable new scheme. In return for a set of important special privileges from the state, Paterson and his group would form the Bank of England, which would issue new notes, most of which would be used to finance the government's deficit. In short, since there were not enough private savers willing to finance the deficit, Paterson and company were graciously willing to buy interest-bearing government bonds, to be paid for by newly created bank notes, carrying a raft of special privileges with them. As soon as Parliament duly chartered the Bank of England in 1694, King William himself and various MPs rushed to become shareholders of this new money-creating bonanza.
William Paterson urged the English government to grant Bank of England notes legal tender power, but this was going too far, even for the British Crown. But Parliament did give the bank the advantage of holding deposits of all government funds.

The new institution of government-privileged central banking soon demonstrated its inflationary power. The Bank of England quickly issued the enormous sum of 760 000 pounds, most of which were used to buy government debt. This issue had an immediate and substantial inflationary impact, and in two short years, the Bank of England was insolvent after a bank run, an insolvency gleefully abetted by its competitors, the private goldsmiths, who were happy to return to it the swollen Bank of England notes for redemption of specie.

At this point, the English government made a fateful decision: in May 1696, it simply allowed the bank to ‘suspend specie payment’. In short, it allowed the bank to refuse indefinitely to pay its contractual obligations to redeem its notes in gold, while at the same time continuing blithely in operation, issuing notes and enforcing payments upon its own debtors. The bank resumed specie payments two years later, but this act set a precedent for British and American banking from that point on. Whenever the bank inflated itself into financial trouble, the government stood ready to allow it to suspend specie payments. During the last wars with France, in the late eighteenth and early nineteenth century, the bank was allowed to suspend payments for two decades.

The same year, 1696, the Bank of England had another scare: the spectre of competition. A Tory financial group tried to establish a national land bank, to compete with the Whig-dominated central bank. The attempt failed, but the Bank of England moved quickly to induce Parliament, in 1697, to pass a law prohibiting any new corporate bank from being established in England. Any new bank would have to be either proprietary or owned by a partnership, thereby severely limiting the extent of competition with the bank. Furthermore, counterfeiting of Bank of England notes was now made punishable by death. In 1708, Parliament followed up this set of privileges by another crucial one: it now became unlawful for any corporate bank other than the Bank of England, and for any bank partnership over six persons, to issue notes. And, moreover, incorporated banks and partnerships over six were also prohibited from making any short-term loans. The Bank of England now only had to compete with tiny banks.

Thus, by the end of the seventeenth century, the states of western Europe, particularly England and France, had discovered a grand new route towards the aggrandizement of state power: revenue through inflationary creation of paper money, either by government or, more subtly, by a privileged, monopolistic, central bank. In England, private banks of deposit were inspired to proliferate (especially checking accounts) under this umbrella, and the government was at last able to expand the public debt to fight its endless wars; during the French war of 1702–13, for example it was able to finance 31 per cent of its budget via public debt.

Austrian Perspective on the History of Economic Thought (2 volume set)

Tuesday, April 23, 2013

Enserfdom in eastern Europe

What happened in eastern Europe was even worse than mercantilism. There, absolutism by the kings and the feudal nobility was so rampant and unchecked that they decided to crush nascent capitalism. Former serfs, now free, had been moving from the rural lands to the towns and cities, there to work for higher wages and better opportunities in emerging capitalist production and industry. By the beginning of the fifteenth century, eastern Europe, specifically Prussia, Poland and Lithuania, had a freed peasantry. Towns and monetary exchange flourished, and clothmaking and manufacturing grew and prospered. In the sixteenth century, however, the state and the nobility of eastern Europe reasserted themselves and re-enserfed the peasantry. In particular, a rise in the price of grain (mainly rye) in Europe in the early sixteenth century made grain farming more profitable, spurring the socializing of cheap labour in service of the noble landlords. The peasants were forced back on to the land, and compelled to remain there, and were also coerced into corvées (periodic forced labour for the nobility).

The peasants were forced into large manorial estates owned by the nobles, since large estates meant cheaper costs of supervising and coercing peasant labour on the part of the nobility. In addition, in Poland, the nobles induced the state to pass further laws, severely restricting the activities of urban merchants. Polish merchants now had to pay higher tolls for shipping produce on the Vistula River than did landlords, and Polish merchants were prohibited from exporting domestic products. Moreover, the repression of the formerly free peasantry greatly lowered their money income for purchasing goods. These policies combined to destroy the Polish towns, the urban economy, and the internal market for Polish goods. As Professor Miskimin writes, ‘Out of self-interest the nobles successfully contrived to crush Polish economic development in order to reserve for themselves the rich grain trade and to assure adequate supplies of agricultural labor for the maximum exploitation of their estates’.

In Hungary, a similar process of re-enserfment occurred, but in the service of cattle-raising and wine-growing rather than rye production. In the later Middle Ages, rents by the peasantry had been converted from payments in kind to monetary payments. Now, in the sixteenth century, the nobles markedly increased the rents and reconverted them into payments in kind. Taxes on peasants were raised substantially and the burden of forced corvée labour was increased greatly in one area ninefold from seven days per year to 60. The lords got themselves granted a tight monopoly of wine sales, as well as exemptions from heavy export taxes on cattle payable by merchants. In that way, the landlords gained themselves privileged monopolies of buying and selling for the vital wine and cattle trades.

Austrian Perspective on the History of Economic Thought (2 volume set)

Monday, April 22, 2013

Mercantilism in England: textiles and monopolies

It was in the sixteenth century that England began its meteoric rise to the top of the economic and industrial heap. The English Crown in effect tried its best to hobble this development by mercantilist laws and regulations, but was thwarted because for various reasons the interventionist edicts proved unenforceable.

Raw wool had for several centuries been England's most important product, and hence its most important export. Wool was shipped largely to Flanders and to Florence to be made into fine cloth. By the early fourteenth century, the flourishing wool trade had reached a height of an average annual export of 35 000 sacks. The state naturally then entered the picture, taxing, regulating and restricting. The principal fiscal weapon to build the nation-state in England was the ‘poundage’, a tax on the export of wool and a tariff on the import of woollen cloth. The poundage kept increasing to pay for continuing wars. In the 1340s King Edward III granted the monopoly of wool exporting to small groups of merchants, in return for their agreeing to collect the wool taxes on the king's behalf. This monopoly grant served to put out of business Italian and other foreign merchants who had predominated in the wool export trade.

By the 1350s, however, these monopoly merchants had gone bankrupt, and King Edward finally resolved the issue by widening the monopoly privilege and extending it to a group of several hundred called the ‘Merchants of the Staple’. All wool exported had to go through a fixed town under the auspices of the company of the Staple, and be exported to a fixed point on the Continent, by the end of the fourteenth century at Calais, then under English control. The monopoly of the Staple did not apply to Italy, but it did apply to Flanders, the major place of import for English wool.

The Merchants of the Staple soon proceeded to use their privileged monopoly in the time-honoured manner of all monopolists: to force lower prices upon English wool growers, and higher prices upon Calais and Flemish importers. In the short run, this system was quite pleasant for the Staplers, who were able to more than recoup their payments to the king, but in the long run the great English wool trade was crippled beyond repair. The artificial gap between domestic and foreign wool prices discouraged the production of English wool, while it also injured the demand for wool abroad. By the mid-fifteenth century, average annual exports of wool had fallen greatly to only 8 000 sacks.

The only benefit to Englishmen from this disastrous policy (apart from the joint short-term gains to King Edward and to the Staplers) was to give an unintended boost to the English production of woollen cloth. English cloth-makers could now benefit from their artificially lower prices of wool in England, coupled with the artificially high prices of wool abroad. Once again, the market managed to get a leg-up in its unending, zig-zag struggle with power. By the mid-fifteenth century fine, expensive, broadcloth ‘woollens’ were being produced abundantly in England, centring in the West Country, where swift rivers made water plentiful for fulling the woven cloth, and where Bristol could serve as the major port of export and entry.

During the mid-sixteenth century, a new form of woollen cloth manufacture sprang up in England, soon to become dominant in the textile industry. This was the ‘new draperies’, or worsteds, cheaper and lighter-weight cloth that could be exported to warmer climates and far more suitable for dyeing and decoration, since each individual strand of yarn was now visible in the cloth. Since the worsted was not fulled, the draperies did not need to be situated near running water, and so new textile manufacturers and workshops sprang up in the countryside – and in new towns such as Norwich and Rye – all round London. London was the largest market for the cloths, so transportation costs were now cheaper, and furthermore, the south-east was a centre for sheep bearing the coarse, long stapled wool particularly suitable for worsted production. The new rural firms around London were also able to hire skilled Protestant textile artisans who had fled the religious persecution in France and the Netherlands. Most important, going to the countryside or to new towns meant that the expanding and innovating textile industry could escape from the stifling guild restrictions and frozen technology of the old towns.
Now that over 100 000 cloths were exported annually compared to a few thousand two centuries earlier, sophisticated production and marketing innovations took place. Establishing a ‘putting-out’ system, merchants paid artisans by the piece to work on cloth owned by the former. In addition, marketing middlemen sprang up, yarn brokers serving as middlemen between spinners and weavers, and drapers specializing in selling the cloth at the end of the production chain.

Seeing the rise of effective new competition, the older urban and broadcloth artisans and manufacturers turned to the state apparatus to try to shackle the efficient upstarts.

As Professor Miskimin puts it: ‘As often happens during an evolutionary period, the older, vested interests turned to the state for protection against the innovative elements within the industry and sought regulation that would preserve their traditional monopoly.’

In response, the English government passed the Weavers’ Act in 1555, which drastically limited the number of looms per establishment outside the towns to only one or two. Numerous exemptions, however, vitiated the effect of the act, and other statutes placing maximum controls on wages, restricting competition in order to preserve the old broadcloth industry came to naught from systemic lack of enforcement. The English government then turned to the alternative of propping up and tightening the urban guild structure to exclude competition. These measures succeeded, however, only in isolating and hastening the decay of the old urban broadcloth firms. For the new rural firms, especially the new draperies, were beyond guild jurisdiction. Queen Elizabeth then went national, with the Statute of Artificers in 1563, which placed the nation-state squarely behind guild power. The number of apprentices each master could employ was severely limited, a measure calculated to stifle the growth of any one firm, and to decisively cartellize the wool industry and cripple competition. The number of years of apprenticeship, before the apprentice could rise to become a master, was universally extended by the statute to seven years, and maximum wage rates for apprenticeships were imposed throughout England. Beneficiaries of the Statute of Artificers were not only the old, inefficient urban broadcloth guilds, but also the large landlords, who had been losing rural workers to the new, high-paying clothing industry. One announced aim of the Statute of Artificers was compulsory full employment, with labour directed to work according to a system of ‘priorities’; top priority was accorded to the state, which attempted to force workers to remain in rural and farm work and not leave the farm for glittering opportunities elsewhere. To enter commercial or professional fields, on the other hand, required a graded series of qualifications such that the occupations were happy in having entry restricted by this cartellizing statute, while the landlords were delighted to have workers forced to remain on the farm at lower wages than they could achieve elsewhere.

If the Statute of Artificers had been strictly enforced, industrial growth might have been permanently arrested in England. But fortunately, England was far more anarchic than France, and the statute was not well enforced, particularly where it counted, in the new and fast-growing worsted industry.
Not only was the countryside beyond the grasp of the urban guilds and their nation-state ally, but so too was fast-growing London, where custom decreed that any guild member could engage in any sort of trade, and no guild could exercise restrictive control over any line of production.

London as the great export centre for the new draperies – largely to Antwerp – partially accounted for the enormous growth of this city during the sixteenth century. London's population grew at three times the rate of England as a whole over the century, specifically from 30–40 000 at the beginning of the sixteenth century to a quarter of a million early in the next. The London merchants were not, however, content with free market development, and power began to move in on the market. Specifically, the London merchants began to reach for export monopoly. In 1486 the City of London created the Fellowship of the Merchant Adventurers of London, which claimed exclusive rights to the export of woollens to its members. For provincial merchants (outside of London) to join required a stiff fee. Eleven years later the king and parliament decreed that any merchant exporting to the Netherlands had to pay a fee to the Merchant Adventurers and obey its restrictionist regulations.

The state tightened the monopoly of the Merchant Adventurers in the mid-sixteenth century. First in 1552, the Hanseatic merchants were deprived of their ancient rights to export cloth to the Netherlands. Five years later, customs duties were raised on the import of cloth, thereby conferring more special privileges on the domestic cloth trade and increasing the financial ties of the Crown to the cloth merchants. And finally, in 1564, in Queen Elizabeth's reign, the Merchant Adventurers were reconstituted under tighter and more oligarchic control.

In the late sixteenth century, however, the mighty Merchant Adventurers began to decline. The English war with Spain and the Spanish Netherlands lost the Adventurers the city of Antwerp, and at the turn of the seventeenth century, they were formally expelled from Germany. The English monopoly of woollen exports to the Netherlands and the German coast was finally abolished after the revolution of 1688.

It is instructive to note what happened to printed calico in England as compared to the supression of the industry in France. The powerful woollen industry managed to get the importation of calicoes banned from England in 1700, a decade or so after France, but in this case domestic manufacture was still permitted. As a result, domestic manufactures of calico spurted ahead, and when the woollen interests managed to get a prohibition of calico consumption act passed in 1720 (The Calico Act), the domestic calico industry was already powerful and could continue to export its wares. In the meanwhile, calico smuggling continued, as did domestic use – all stimulated by the fact that prohibition was not enforced nearly as strictly in England as in France. Then, in 1735, the English cotton industry won an exemption for the domestic printing and use of ‘fustians’, a mixed cotton and linen cloth, which were the most popular form of calico in England in any case. As a result, the domestic cotton textile industry was able to grow and flourish in England throughout the eighteenth century.

Prominent in English mercantilism was the pervasive creation by the Crown of grants of monopoly privilege: exclusive power to produce and sell in domestic and in foreign trade. The creation of monopolies reached its climax in the reign of Queen Elizabeth (1558–1603), in the latter half of the sixteenth century. In the words of historian, Professor S.T. Bindoff: ’... the restrictive principle had, like some giant squid, fastened its embracing tentacles round many branches of domestic trade and manufacture’, and ‘in the last decade of Elizabeth's reign scarcely an article in common use – coal, soap, starch, iron, leather, books, wine, fruit – was unaffected by patents of monopoly’.6
In sparkling prose, Bindoff writes how lobbyists, using the lure of monetary gain, obtained royal courtiers to sponsor their petitions for grants of monopoly: ‘their sponsorship was usually a mere episode in the great game of place-and-fortune-hunting which swayed and swirled incessantly around the steps of the throne’. Once granted their privileges, the monopolists got themselves armed by the state with powers of search-and-seizure to root out all instances of now illegal competition. As Bindoff writes:

The ‘saltpetre men of the gunpowder contract dug in every man's house’ for the nitrate-laden soil which was their raw material. The minions of the playing-card monopoly invaded shops in search of cards lacking its seal and browbeat their owners, under threat of summons to a distant court, into compounding for their offences. The search-warrant was, indeed, indispensable to the monopolist if he were to eliminate competition and leave himself free to fix the price of his wares.7

The result of this expulsion of competition, as we might expect, was the lowering of quality and the raising of price, sometimes by as much as 400 per cent.

England was pre-eminently the home of foreign trade companies receiving grants of monopoly for trade with portions of the globe. The granddaddy of the English foreign trade companies was the Muscovy Company, chartered in 1553, and granted a monopoly of all English trade with Russia and Asia through the White Sea port of Archangel. In the late 1570s and early 1580s, Queen Elizabeth granted trading privileges to a spate of new monopoly companies including the Barbary, Eastland, and Levant Companies. A small group of politically powerful men, centred originally in the Muscovy Company, was at the core of every one of these monopoly companies. The Muscovy Company, for a while, held a monopoly on all exploration and trade with North America. Further, when in the 1580s the Muscovy Company's trade with Russia was severely injured by the Cossacks’ disruption of the Volga trade route from Asia, Muscovy Company leaders formed both the Turkey Company and the Venice Company in 1581 for trading with India. The two companies merged in 1592 into the Levant Company, which enjoyed a monopoly grant trade with India through the Levant and Persia.

Running like a powerful thread through all these interlocking monopoly companies was the person and the family of Sir Thomas Smith (1558–1625). Smith's grandfather, Andrew Judd, was a principal founder of the Muscovy Company. His father, Sir Thomas Smith, Sr (1514–77), attorney, had been an architect of the Tudor system of royal absolutism, high taxation, and economic restriction. By the 1590s, the junior Smith was the governor – the head – of literally every single monopoly company concerned with foreign trade and colonization. These included the Muscovy Company, which held the monopoly charter for the colonization of Virginia. But the climax of Smith's career came when, to all his other posts, was added governor of the mighty East India Company, chartered in 1600 with a monopoly of all trading to the East Indies.

Austrian Perspective on the History of Economic Thought (2 volume set)

Sunday, April 21, 2013

Mercantilism and Colbertism in France

In France, which was to become in the seventeenth century the home par excellence of the despotic nation-state, the promising cloth trade and other commerce and industry in Lyons and the Languedoc region in the south were crippled by the devastating religious wars in the last four decades of the sixteenth century. In addition to the devastation and the killing and emigration of skilled Huguenot craftsmen to England, high taxes to finance the war served to cripple French economic growth. Then, the politique party, riding to power on the promise of ending religious strife, ushered in the unchecked reign of royal absolutism.

Crippling regulation of French industry had begun in the late fifteenth century, when the king issued scores of guild charters, conferring the power to control and to set standards of quality in the different occupations upon urban guilds and their officials. The Crown conferred cartellizing privileges on the guilds while levying taxes upon them in exchange. A major reason why Lyons had flourished during the sixteenth century was that it was granted a special exemption from guild rule and guild restrictions.
By the end of the sixteenth century and the religious wars, the old regulations were still in place, ready to be enforced. The new absolute monarchy was ready to enforce them and carry them further. Thus, in 1581, King Henry III ordered all the artisans of France to join and group themselves into guilds, whose orders were to be enforced. All except Parisian and Lyonnaise craftsmen were forced to confine their activity to their current towns; in that way, mobility in French industry was brought to an end. In 1597, Henry IV re-enacted and strengthened these laws, and proceeded to enforce them thoroughly.

The result of this network of restriction was the total crippling of economic and industrial growth in France. The typical ploy of preserving ‘standards of quality’ meant that competition was hobbled, production and imports limited, and prices kept high. It meant, in short, that consumers were not allowed the option of paying less money for lower-quality products. State-privileged monopolies grew as well, with similar effects; and upon the guilds and the monopolies the state levied increasing and stifling taxes. Growing inspection fees for quality also exacted a great burden on the French economy. Furthermore, luxury production was particularly subsidized, and the profits of expanding industries diverted to subsidize the weak. Capital accumulation was thereby slowed and the growth of promising and strong industries crippled. The subsidizing and privileging of luxury industries meant a shift of resources away from cost-cutting innovations in new mass-production industries, and towards such areas of high-cost craftsmanship as glass and tapestries.

The increasingly powerful French monarchy and aristocracy were large consumers of luxury goods and were therefore particularly interested in fostering them and maintaining their quality. Price was no great object since the monarchy and nobility lived off compulsory levies in any case. Thus, in May 1665, the king established monopoly privileges for a group of French lace manufacturers, using the transparently canting argument that this was done to prevent ‘the export of money and to give employment to the people’. Actually, the point was to prohibit anyone other than the privileged licensees from making lace, in return for hefty fees paid to the Crown. Domestic cartels are worthless if the consumer is allowed to buy cheaper substitutes from abroad, and so protective tariffs were levied on imported lace. But apparently smuggling abounded, and so in 1667, the government made enforcement easier by prohibiting all foreign lace whatsoever. In addition, to prevent unlicensed competition, it was necessary for the French Crown to prohibit any lace work at home, and to force all lace work to occur at fixed, visible points of manufacture. Thus, as the finance and commerce minister and general economic czar Jean-Baptiste Colbert wrote to a government lace supervisor: T beg you to note with care that no girl must be allowed to work at the home of her parents and that you must oblige them all to go to the house of the manufactures...’

Perhaps the most important of the numerous mercantile restrictions on the French economy imposed in the seventeenth century was the enforcing of ‘quality’ standards on production and trade. This tended to mean a freezing of the French economy at the level of the early or mid-seventeenth century. That coerced freeze effectively hobbled or even prevented the innovation – new products, new technologies, new methods of handling production and exchange – so necessary to economic and industrial development. One example was the loom, invented in the early seventeenth century, at first used principally for the production of the luxury item, silk stockings. When looms began to be applied to relatively mass-consumption woollen and linen goods, the hand-knitters balked at the efficient competition, and persuaded Colbert, in 1680, to outlaw the use of the loom on any article except silk. Fortunately, in the case of the loom, the excluded woollen and linen manufacturers were politically powerful enough to get the prohibition repealed four years later, and to get themselves included in the protectionist/cartellist system of advantage.

All these tendencies of French mercantilism reached a climax in the era of Jean-Baptiste Colbert (1619–83), so much so that he gave the name Colbertisme to the most hypertrophied embodiment of mercantilism. The son of a merchant born at Reims, Colbert early in life joined the French central bureaucracy. By 1651, he had become a leading bureaucrat in the service of the Crown, and from 1661 to his death 22 year later, Colbert was the virtual economic czar – absorbing such offices as superintendent of finance, of commerce, and secretary of state – under the great Sun King, that epitome of absolutist despotism, Louis XIV.

Colbert engaged in a virtual orgy of grants of monopoly, subsidies of luxury, and cartellizing privilege, and built up a mighty system of central bureaucracy, of officials known as intendants, to enforce the network of controls and regulations. He also created a formidable system of inspections, marks and measurements to be able to identify all those straying from the detailed list of state regulations. The intendants employed a network of spies and informers to ferret out all violations of the cartel restrictions and regulations. In the classic mode of spies everywhere, they also spied on each other, including the intendants themselves. Penalties for violations ranged from confiscation and destruction of the ‘inferior’ production, to heavy fines, public mockery, and deprivation of one's licence to stay in business. As the major historian of mercantilism summed up French enforcement: ‘No measure of control was considered too severe where it served to secure the greatest possible respect for the regulations.’3
Two of the most extreme examples of the suppression of innovation in France occurred shortly after the death of Colbert during the lengthy reign of Louis XIV. Button-making in France had been controlled by various guilds, depending on the material used, the most important part belonging to the cord- and button-makers’ guild, who made cord buttons by hand. By the 1690s, tailors and dealers launched the innovation of weaving buttons from the material used in the garment. The outrage of the inefficient hand-button-makers brought the state leaping to their defence. In the late 1690s, fines were imposed on the production, sale, and even the wearing of the new buttons, and the fines were continually increased. The local guild wardens even obtained the right to search people's houses and to arrest anyone in the street who wore the evil and illegal buttons. In a few years, however, the state and the hand-button-makers had to give up the fight, since everyone in France was using the new buttons.

More important in stunting France's industrial growth was the disastrous prohibition of the popular new cloth, printed calicoes. Cotton textiles were not yet of supreme importance in this era, but cottons were to be the spark of the Industrial Revolution in eighteenth century England. France's strictly enforced policy made sure that cottons would not be flourishing there.

The new cloth, printed calicoes, began to be imported from India in the 1660s, and became highly popular, useful for an inexpensive mass market, as well as for high fashion. As a result, calico printing was launched in France. By the 1680s, the indignant woollen, cloth, silk and linen industries all complained to the state of ‘unfair competition’ by the highly popular upstart. The printed colours were readily outcompeting the older cloths. And so the French state responded in 1686 by total prohibition of printed calicoes: their import or their domestic production. In 1700, the French government went all the way: an absolute ban on every aspect of calicoes including their use in consumption. Government spies had a hysterical field day: ‘peering into coaches and private houses and reporting that the governess of the Marquis de Cormoy had been seen at her window clothed in calico of a white background with big red flowers, almost new, or that the wife of a lemonade-seller had been seen in her shop in a casquin of calico’.4 Literally thousands of Frenchmen died in the calico struggles, either being executed for wearing calicoes or in armed raids against calico-users.

Calicoes were so popular, however, especially among French ladies, that the fight was eventually lost, even though the prohibition stayed on the books until the late eighteenth century. The smuggling of calicoes simply could not be stopped. But it was of course easier to enforce the prohibition against domestic calico manufacture than against the entire French consuming population, and so the result of the near-century of prohibition was to put a total stop to any domestic calico-printing industry in France. The calico entrepreneurs and skilled craftsmen, many of them Huguenots oppressed by the French state, emigrated to Holland and England, strengthening the calico industry in those countries.
Furthermore, pervasive maximum wage controls discouraged workers from moving or, in particular, entering industry, and tended to keep workers on the farm. Apprenticeship requirements of three or four years greatly restricted labour mobility and prevented entrance into crafts. Each master was limited to one or two apprentices, thereby preventing the growth of any single firm.

Before Colbert, most French revenue came from taxation, but grants of monopoly proliferated so much during the Colbert regime to try to pay for swelling expenditures, that monopoly grant revenue came to more than one-half of all state income.

Most onerous and strictly enforced was the government's salt monopoly. Salt producers were required to sell all salt produced to certain royal storehouses at fixed prices. The consumers were then forced to purchase salt and, to expand state income and deprive smugglers of revenue, to purchase a fixed amount at four times the free market price and divide it among the inhabitants.

Despite the enormous increase in monopoly grant revenue, taxes rose greatly in France as well. The land tax, or taille réelle, was the single largest source of revenue for the state, and in the early part of his regime, Colbert tried to expand the burden of the taille still further. But the taille was hampered by a network of exemptions, especially including all the nobility. Colbert tried his best to spy on the exempt, to ferret out ‘false’ nobles, and to stop the network of bribes of the tax-collectors. An attempt to lower the taille slightly and greatly to increase the aides – indirect internal taxes at wholesale and retail, particularly on beverages – came a cropper on the bribery and corruption of the tax farmers. And then there was the gabelle (tax on salt), revenue from which rose tenfold in real terms between the early sixteenth and mid-seventeenth centuries. During the Colbert era, gabelle revenues rose not so much from an increase in tax rates as from the tightening of enforcement of the existing steep taxes.

The land and consumption taxes fell heavily upon the poor and upon the middle class, gravely crippling saving and investment, especially, as we have seen, in the mass-production industries. The parlous state of the French economy may be seen by the fact that, in 1640, just as King Charles I of England was facing a successful revolution largely brought about by his imposition of high taxes, the French Crown was collecting three to four times as much taxes per capita as did King Charles.

As a result of all these factors, even though the population of France was six times that of England during the sixteenth century, and its early industrial development had seemed promising, French absolutism and strictly enforced mercantilism managed to put that country out of the running as a leading nation in industrial or economic growth.

Austrian Perspective on the History of Economic Thought (2 volume set)