Most of this paper was written during a leave for the spring semester of 1964 and I wish to thank Vanderbilt University for this opportunity. I have greatly benefited from suggestions and criticisms of an earlier draft by A. E. Fareed, David Felix, M. M. Knight, Karl de Schweinitz, Warren C. Scoville, Overton Taylor, Charles H. Wilson, and James S. Worley.

¹ Schumpeter, for example, was sympathetic toward Mercantilist policies on both counts. See his History of Economic Analysis (New York: Oxford University Press, 1955), pp. 335 ff. He aptly categorized Mercantilist propositions and policies under three headings: Export Monopoly, Exchange Control, and Balance of Trade. The employment effect of a favorable balance of trade via interest rates has been explored most fully by John Maynard Keynes in The General Theory of Employment, Interest and Money in Chapter 23, “Notes on Mercantilism …” For a critical evaluation seeGoogle ScholarBlitz, R. C. and Long, M. F. “The Economics of Usury Regulation,” Journal of Political Economy, LXXIII (12. 1964), pp. 608–619Google Scholar.

² Hume, David, The Philosophical Works of David Hume; Vol. Ill: Essays Moral, Political and Literary (Edinburgh: Adam Black & Tait, 1826), p. 352Google Scholar.

³ That bullion constituted a commodity in which Spain, in particular, had a comparative advantage of production was by no means alien to Mercantilist thought, as is. illustrated by the following passage: “Now the earth in it selfe may be said, to produce two severall sorts of naturall commodities, thence drawne from the very intrailes thereof, such as is gold, silver, copper, lead, and the like. The second are wares growing on the face thereof, such as are fruits, trees, graine, etc. … those things whose plenty (otherwise without Traffike, and transport to other Countries, where such is wanting) would prove altogether fruitlesse, unnecessary, and per adventure prejudiciall unto the owners and possessors, and this hath been manifested in some parts …” From Lewis Roberts, “The Treasure of Traffike or a Discourse on Forraigne Trade,” first published in 1641, reprinted in J. R. McCulloch, ed., Early English Tracts on Commerce (Cambridge, [Eng.]: The University Press, 1954), pp. 60–61.

The same author continues: “First it must be considered and granted, that silver and gold is not growing in every region, and therefore, as things in themselves, scarce, and by all Princes sought after, may be accounted on foreign commodity … ” (ibid., p. 67). Also see “An Essay Upon Money and Coins,” first published in 1757 (author anonymous), reprinted in J. R. McCulloch, ed., Old and Scarce Tracts on Money (London: P. S. King & Son, 1933), p. 403. McCulloch attributes this essay to Joseph Harris, Assay-master of the Mint.

⁴ The distinguishing feature of accommodating payments is “… that they have taken place only because the other items in the balance of payments are such as to leave a gap of this size to be filled.” See Meade, J. E., The Balance of Payments (London: Oxford University Press, 1952), p. 11Google Scholar. These payments are made in order to avoid “… exchange variation, import restriction, or other alternative methods of closing the gap.” Meade continues: “On the other hand, the distinguishing feature of autonomous payments is that they take place regardless of the size of the other items in the balance of payments.” (ibid.).

⁵ Ibid., p. 19.

⁶ , Roberts, “Treasure of Traffike.”Google Scholar

⁷ Heckscher, Eli F., Mercantilism (2d. rev. ed.; New York: Macmillan, 1955), II, 180, quoting the sixteenth-century Venetian VendraminoGoogle Scholar.

⁸ In passing, it should be mentioned that in the case of countries which are presently both heavy gold producers and exporters, no distinction was made until recently in their trade statistics between autonomous and accommodating movements. See Balance of Payments of the United States, 1949–1951 (Washington, D.C.: U.S. Department of Commerce, Office of Business Economics, 1952), p. 113Google Scholar.

⁹ For example, see Mun, Thomas, England's Treasure by Forraign Trade, first published in 1664; reprinted in McCulloch, ed., Early English Tracts on Commerce, pp. 115–210Google Scholar; Hamilton, Earl, “American Treasure and the Rise of Capitalism,” Economica, XXVII (11. 1929), pp. 338–57; andCrossRefGoogle ScholarWilson, Charles H., “Treasure and Trade Balance: The Mercantilist Problem,” Economic History Review, 2d. ser., Vol. II (1949), pp. 152–61.CrossRefGoogle Scholar While Mun explored some peculiarities of England's trade with the Orient, his focus was very much different from my paper. He directed attention to England's general balance, rather than to the particular balance with the Orient and suggested that in this specific historical situation, England had nothing to worry about, largely because of the large volume of re-exports. The concern of this paper is not how well or how poorly one or the other country did in international trade, but rather with certain impediments to automatic adjustments.

¹⁰ It would require a much larger specie export and price fall for the deficit country without price increase in die surplus country than would be necessary if prices were falling in the deficit country and rising at the same time in the surplus country.

Comparisons with fair precision of the degree of price flexibility between different periods or countries and, secondly, how much price flexibility is compatible with the many long-term contractual payment obligations that prevail under any capitalistic system are perennial issues among economists. We may eschew these difficult problems here. It may be pointed out, however, that during the Mercantilist period in most Western European countries probably the largest portion of the labor force was working on the land under some form of long-term contractual agreement and yet an equilibrium adjustment in the foreign exchange market would have required, as I argued above, a much wider price fluctuation than would be necessary in modern times in a similar situation.

¹¹ Keynes, John Maynard, Indian Currency and Finance (London: Macmillan, 1913), pp. 99–101Google Scholar.

¹² For example, see Dales, J. H., “The Discoveries and Mercantilism: An Essay in History and Theory,” The Canadian Journal of Economics and Political Science, XXI (02. 1955), p. 144, alsoGoogle ScholarLipson, citing E., The Economic History of England, 1947, II, 286–88Google Scholar.

¹³ Marshall made the argument that the demand for the luxuries of the rich, which do not absorb much of their income, tends to be inelastic. Marshall, Alfred, Principles of Economics (8th ed.; London: Macmillan, 1936), p. 106Google Scholar.

¹⁴ As it is the current vogue to explain too many of the world's problems in terms of demand inelasticities of which many are established only most tenuously, I do not wish to put too much weight here on the inelasticity argument. It is presented n i a speculative vein.

¹⁵ See Masselman, George, The Cradle of Colonialism (New Haven: Yale University Press, 1963), pp. 75, 456–57;Google ScholarFurnivall, J. S., Netherlands India (Cambridge, [Eng.]: The University Press, 1944), pp. 33, 39–40Google Scholar; and Hall, D. G. E., A History of South-East Asia (London: Macmillan, 1964), p. 316Google Scholar.

¹⁶ , Furnivall, Netherlands India, p. 37Google Scholar.

¹⁷ , Masselman, Cradle of Colonialism, p. 173Google Scholar.

¹⁸ In the extreme case of an absolutely inelastic deman d the deficit in terms of foreign currency will remain unchanged.

¹⁹ The usual formulation of this problem is in terms of both demand elasticities of exports and imports when trade initially is i n balance. It has been shown that the sum of these demand elasticities needs to be greater than unity for devaluation to be effective. The devaluatio n may also be effective when the sum of the demand elasticities is less than unity, if the initial position is a trade deficit. See Joan Robinson, “The Foreign Exchanges,” from Essays in the Theory of Employment (1947) reprinted in Howard S. Ellis and Lloyd A. Metzler, eds., Readings in the Theory of International Trade (Homewood, 111.: Richard D. Irwin, 1950); also see Appendix D, “The Marshall-Lerner Condition” by Egon Sohmen, pp. 610–12 in Kindleberger, Charles P., International Economics (Homewood, 111.: Richard D. Irwin, 1958)Google Scholar.

²⁰ On the other hand some of the spices could apparently be harvested wild in some places.

²¹ A dual economy per se would not upset the specie flow mechanism as long as there is no significant change in the relative size of the monetary sector, on the one hand, and the barter and subsistence sector, on the other.

²² The very extensive literature on the breakdown of the manor, the growth of the towns, and gradual changes from payments in kind to a system of wages deals with these aspects of economic development in a different context. It may be recalled that the peak of the so-called Second Enclosure Movement in England did not come until late in the eighteenth and early nineteenth centuries. In as backward a country as Prussia the liberal agricultural reforms hardly had a serious start before 1807 and continued well into the second half of the nineteenth century.

²³ Consider, for example, the hypothetical case of Countries A and B, both of which produce one-half of their respective total output in a monetized market sector and the other half in a subsistence sector. Over a given period of time, these proportions change to 60 and 40 per cent in both countries. However, in Country A this is accomplished by a group of the subsistence farmers being transformed completely into producers for the market, whereas in Country B, the same total change is brought about by all of the subsistence farmers now sending a small part of then-total output to the market where they barter it for a few necessities. Surely, because of the different paths of transformation from a subsistence to a market economy, the monetary requirements of Countries A and B would be very different during the process of transformation. We may next contemplate a somewhat different case: Country A is intensely monetized and has an unfavorable balance with Country B which initially is only slightly monetized but is undergoing a process of rapid monetization. Let us further assume that the imputed gross national product of Country B is several times as large as that of Country A. Under these assumptions Country A could become denuded of specie before prices would move up in Country B.

²⁴ Some large foreign transfers of specie did take place to finance armies fighting abroad, but since these outlays are neither in response to investment criteria nor are they generators of any delayed return flows they have always had an unsettling effect on the international payment mechanism.

²⁵ See Tawney's, R. H. lengthy introduction to Thomas Wilson's A Discourse Upon Usury (1572) (London: S. Bell and Sons, 1925), n.b. pp. 60–86, 134–54Google Scholar.

²⁶ Ibid., p. 78.

²⁷ Heckscher, Mercantilism, Vol. I, ch. vii, “Foreign Trade and Business Organization,” pp. 326–455.

²⁸ Even during the late nineteenth century, bonds made up a much greater proportion of total foreign investment than is the case today.

²⁹ Riemersma, Jelle C., “Monetary Confusion as a Factor in the Expansion of Europe (1550–1650),” Explorations in Entrepreneurial History, Vol. V, No. 1, 10. 1962, p. 61.Google ScholarAlso, Supple, Barry E., “Currency and Commerce in the Early Seventeenth Century,” The Economic History Review, 2d. ser., Vol. X (12. 1957), pp. 241, 252–55Google Scholar.

³⁰ , Riemersma, “Monetary Confusion,” p. 62Google Scholar.

³¹ See Kent, Raymond P., Money and Banking (4th ed.; New York: Holt, Rinehart' and Winston, 1961), p. 65Google Scholar.

³² That “States … rob one another of their money, ” and also difficulties about international monetary treaties were recognized. See Rice Vaughan “A Discourse of Coin and Coinage,” first publishe d 1675 in McCulloch, , ed., Old and Scarce Tracts on Money, pp. 24, 88Google Scholar.

³³ At the middle of the thirteenth century the ratio was 9 to 1 in Western Europe; by 1600 it had deteriorated to 11 to 1; and in the next fifty years the ratio moved to 15 to 1. The secular depreciation of silver then came to a halt and for approximately the next one hundred years there took place a slight reversal of the trend and the ratio of silver vis-à-vis gold held steady. This temporary stabilization was largely due to the great outflow of silver to the Orient. But thereafter the depreciation of silver resumed once more and by the early twentieth century the ratio had dropped to 80 to 1. Feavearyear, Albert, The Found Sterling (2d. ed.; Oxford: The Clarendon Press, 1963), pp. 150–52Google Scholar.

³⁴ Ibid., p. 151.

³⁵ Chaudhuri, K. N., “The East India Company and the Export of Treasure in the Early Seventeenth Century,” Economic History Review, 2d. ser., Vol. XVI, (08. 1963), pp. 23–38.CrossRefGoogle ScholarAlso , Feavearyear, The Pound Sterling, p. 139Google Scholar.

³⁶ Feavearyear, p. 23.

³⁷ The problem was well recognized by Shakespeare who in The Merchant of Venice described “gaudy gold, hard food for Midas'” as the symbol of wealth but silver as “pale and common drudge “tween man and man” as quoted by Feavearyear, p. 24. For an excellent discussion of this problem see Spengler, Joseph J., “Coin Shortage: Modem and Premodern,” The National Banking Review, III (12. 1965), pp. 201–16. The chronic shortage of silver coins, which lasted well into the eighteenth century, and its international causes are discussed inGoogle ScholarAshton's, T. S.An Economic History of England: The 18th Century (London: Methuen & Co., 1955), pp. 167–77Google Scholar.

³⁸ See , Supple, “Currency and Commerce,” p. 244Google Scholar; also his Commercial Crisis and Change in England 1600–1642 (Cambridge, [Eng.]: The University Press, 1959), pp. 172–73Google Scholar.

³⁹ Ibid., p. 173.

⁴⁰ , Feavearyear, The Pound Sterling, p. 21Google Scholar.

⁴¹ Heaton, Herbert, “Heckscher on Mercantilism,” Journal of Political Economy, XLV (06 1937), p. 378Google Scholar.

⁴² Moreover, in the case of some countries whose coins were, for one reason or another, much in vogue abroad, this constituted an export industry of no small importance. In England mint charges were stopped in 1666 (, Feavearyear, The Pound Sterling, p. 96). The explicit purpose of this measure was to increase the amount of money in circulation, and apparently by then the feelings on this matter were strong enough so that an increase in the tariff could be substituted for the mint charges. The complex repercussions on the bimetallic system of medieval and Mercantilist seigniorage charges may be illustrated by the following example: In 1346 the English mint ratio was 12:4. However, the seigniorage charge came to 4.17 per cent for gold and, as one may expect, it was higher for silver,, namely, 5.18 per cent. Because of this relative difference in seigniorage charges, one pound of unminted gold would, after its transformation into coin, actually command a ratio of only 11:9 for silver coins. Again, n i similar fashion, precoined silver bullion would command after its transformation into coin a ratio of only 13:1Google Scholar(Fearvearyear, The Pound Sterling, pp. 21–22)Google Scholar.