INT 200: Global Capitalism and its Discontents

Mercantilism and theHistory of Money

Mercantilism• Economic nationalism for the purpose of building a wealthy

and powerful state– bullionism, a doctrine stressing the importance of accumulating

precious metals– a state should export more goods than it imported so that foreigners

would have to pay the difference in precious metals• only raw materials that could not be extracted at home should be imported• Subsidies, monopolies, tariffs

vs– agrarian capitalism of the physiocrats: the wealth of nations was

derived solely from the value of "land agriculture“• the production of goods and services as consumption of the agricultural surplus,

since the main source of power was from human or animal muscle and all energy was derived from the surplus from agricultural production

Mercantilism• The consolidation of the regional power centers of the feudal

era by large, competitive nation-states; but also– establishment of colonies outside Europe– growth of European commerce and industry relative to agriculture– increase in the volume and breadth of trade– the increase in the use of metallic monetary systems, particularly gold

and silver• military conflict between nation-states

– full-time professional forces– sufficient quantity of hard currency to support a military that would

deter attacks by other countries

Mercantilism• Governments and Mercantile Classes

– In exchange for paying levies and taxes to support the armies of the nation-states, the mercantile classes induced governments to enact policies that would protect their business interests against foreign competition

– capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pensions to successful producers, etc.

– tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers

– prohibited the export of tools and capital equipment – Shipping vital to national power: strong merchant marines, port duties

on foreign vessels, restrictions on foreign vessels• Zero Sum Game• Protectionism:

– quotas, subsidies, tariffs, cabotage laws, devaluation

Money

• three main functions:– a medium of exchange, easily traded for

goods & services. – a store of value, so that it can be saved and

used for consumption in the future– a unit of account, a useful measuring-stick

• Before money– Barter: a system of exchange by which goods or services

are directly exchanged for other goods or services– Gift exchange/gift economy: goods and services given

without an explicit agreement that the gift will be reciprocated

Money

• history– Obsidian (12,000), copper and silver (3,000), cattle, grain, etc.– Commodity money: value comes from the commodity of which it is

made– Electrum, an alloy of gold and silver, was used to make coins in Lydia in

around 650BCE• A coin: stamped money have a mark of some authority, a symbol, picture or words• Pre-weighted and pre-alloyed• Still a commodity money• Clipping and devaluing

– coin as a unit of weight vs. a unit of value• Seigniorage: the difference between the value of the money and the cost to

manufacture it

Money

• history– Bills of Exchange:

• the buyer’s promise to make a payment at some specified future date

– Promissory notes• circulate as a safe and convenient form of

money backed by the goldsmith's promise to pay

– Representative Money: A claim on a commodity, a "commodity-backed money

– Banknote

Money

• history– Gold Standard

• a currency is defined in terms of a specified amount of gold and for which the currency could be exchanged

• The Bretton Woods System– $35 / ounce– D. August 15, 1971

• Advantages: Long-term price stability, fixed international exchange rates

• Disadvantages: Gold unequally distributed,limits growth

• d. 1976

Money

• history– Fiat Money

• intrinsically useless; is used only as a medium of exchange• derives its value from the government which declares it to

be legal tender– Inflation, reputation of the government, devaluation

– Monetization• Money evolves to reduce barter; as a private-sector attempt

to minimize the costs of tradingvs.A Government operation

• fiscal wing of government has a huge incentive to move its economy away from barter

– Taxes, seigniorage