“A country will lose its gold unless the Prince introduces tariffs and quotas to cut down on imports of goods; and unless he gives subsidies to encourage exports; and unless he forbids skilled workmen to take their knowledge abroad and makes sure that all shipping takes place in our own boats, however dear they may be...
... Of course losing gold is a terrible thing. Everyone knows it to be one of the worst tragedies that can happen to a nation.”
Such are the principles of mercantilism, an instinctive economic philosophy, which was prevalent when the Athenians created the Delian League after the Battle of Salamis to have the financial resources to prevent further Persian attacks and was practised in the Italian city states of the Renaissance; was the centrepiece of Colbert’s management of the French economy under Louis XIV; was the casus belli of the Anglo-Dutch wars of the 17th century. It reached its apotheosis in Britain’s management of its colonies in the 18th century.
The Scottish philosophers David Hume and Adam Smith, offered a refutation to mercantilism, arguing that the loss of gold would lead to an adjustment in prices which would enhance competitiveness and restore equilibrium to the balance of payments.
Laissez-faire economics and its first cousin, free trade, won the intellectual argument in Britain with such landmarks as the Repeal of the Corn Laws in 1846.
The only problem is that mercantilism in different guises is alive and well and some of the practitioners of mercantilism are doing very well from it. China, which has had a current account surplus of $282bn over the past 12 months, has specifically sought to have a hyper-competitive renminbi.
It is now using its accumulated wealth to recolonise much of Africa and acquire strategic sources of minerals, such as the rare earths which are vital to modern electronics.
Germany (current account surplus of $18bn) is another latter day mercantilist, where a pact between the employers and the unions has made Germany the most competitive member of the eurozone, and where Government policies to promote a balanced budget have the effect of limiting domestic demand and suppressing imports.
Protectionism is never far below the surface. It was President Hoover’s instinctive response to the great depression when he signed into law the Smoot-Hawley Act, which produced a worldwide rush of reciprocal tariff barriers.
Even today we see shades of protectionism with the reluctance of the Defence Department in America to buy the Airbus A330 flight refuelling aircraft rather than the inferior Boeing 767.
The present financial crisis had its origins in ever cheaper credit, which led to over indebtedness and a bubble, most notably in real estate, which burst.
The solution has been to try to reflate the bubble, a policy reaffirmed by Mr Bernanke at the central bankers’ gathering at Jackson Hole as America faces the threat of a double-dip recession.
It is hard to see how the crisis can be resolved without pain, either in the form of slower growth and a decline in living standards or through the eventual erosion of debt through inflation. At such a time the siren calls of mercantilism and protectionism may seem very persuasive.
Roderick Collins is partner at Hasley Investment Managment
