Two Excellent Excerpts About Mercantilism by Murray Rothbard

Two Excellent Excerpts About Mercantilism by Murray Rothbard
February 9, 2014

Some people are surprised that I like Murray Rothbard. Rothbard was an avid gold standard advocate, but his understanding of many of the technical issues involved was pretty weak. Nevertheless, Rothbard was so widely read and followed in the 1970s and 1980s that many of these frankly dopey ideas became dogma among those of the Austrian camp who tend to apply a religionist framework to their views. It was a dark time for these things; I couldn’t name any one prominent writer who was better than Rothbard (those that did have a better understanding, like Arthur Laffer, tended not to write about it much). I spend a lot of time basically clearing away this sort of garbage.

However, Rothbard is a great source for a historical perspective. I’ve always appreciated his wonderful An Austrian Perspective on the History of Economic Thought, especially volume 1, Economic Thought Before Adam Smith. It is one of the few books one can read that you can enjoy as it is. Most books on economics are what I call a “source of raw material.” They are so full of error and fallacy, and the prevailing Keynesian dogma in academia, that they are basically unusable in their present state. When I was writing Gold: the Once and Future Money, I found this rare item in a university library. Today, it is available in digital form for free from

Read An Austrian Perspective on the History of Economic Thought

One idea that I think is quite important is the notion that today’s economic conventional wisdom is basically Mercantilism, and is reflected — rather exactly — in the writings of the British Mercantilists from about 1600 and culminating with James Denham Steuart in the 1760s. I spend considerable time on this idea in both Gold: the Once and Future Money, and Gold: the Monetary Polaris. Of course,  these ideas have a history far predating English Mercantilism. They didn’t invent it. But, that is where we will pick up the story for now.

Here are two excerpts from An Austrian Perspective on the History of Economic Thought, which are available at here:


The postmedieval 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 elite.

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 newfound 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 17th and 18th 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 17th 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 it 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 safekeeping 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 willful 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 6 years of interest had been paid out of the 12 years’ debt. Furthermore, the interest was paid at the arbitrary rate of 6 percent, even though the king had originally contracted to pay interest at rates ranging from 8 to 10 percent.

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 percent. Even that low rate was later cut to 2.5 percent.

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?[1]

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.

“Whenever the central bank inflated itself into financial trouble, the government stood ready to allow it to suspend specie payments.”
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 18th and early 19th century, the bank was allowed to suspend payments for two decades.

The same year, 1696, the Bank of England had another scare: the specter 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 17th century, the states of western Europe, particularly England and France, had discovered a grand new route toward 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 percent of its budget via public debt.


From the early decades of the 17th century, English mercantilists were bitter at the superior prosperity and economic growth enjoyed by the Dutch. Observing that the rate of interest was lower in Holland than in England, they chose to leap to the causal analysis that the cause of the superior Dutch prosperity was Holland’s low rate of interest, and that therefore it was the task of the English government to force the maximum rate of interest down until the interest rate was lower than in Holland.

The first prominent mercantilist tract calling for lowering the interest rate was that of the country gentleman Sir Thomas Culpeper, in his brief Tract Against the High Rate of Usury (1621). Culpeper declared that Dutch prosperity was caused by their low rate of interest, that the high English interest rate crippled trade, and therefore that the government should force maximum interest rates down to outcompete the Dutch. Culpeper’s pamphlet played a role in Parliament’s lowering the maximum usury rate from 10 to 8 percent. Culpeper’s tract was reprinted several times, and Parliament duly pushed the maximum rate in later years down to 8 and then 6 percent.

Each time, however, resistance increased, especially as government intervention forced down the maximum rate repeatedly. Finally, in 1668, the mercantilists tried for their most important conquest: a lowering of the maximum interest rate from 6 to 4 percent, which would presumably result in rates below the Dutch. As a propaganda accompaniment to this bill, Culpeper’s son, Sir Thomas Culpeper, in 1668 reprinted his father’s tract, along with one of his own, whose title says it all: A Discourse showing the many Advantages which will accrue to this Kingdom by the Abatement of Usury together with the Absolute Necessity of Reducing Interest of Money to the lowest Rate it bears in other Countreys.

Culpeper Senior’s pamphlet was published along with the influential contribution by the already eminent merchant and man of affairs, Josiah Child, in his first pamphlet, Brief Observations concerning trade, and interest of money. Child was a prominent member of the king’s council of trade, established in 1668 to advise him on economic matters. Child treated lowering the maximum rate of interest to 4 percent as virtually a panacea for all economic ills. A lower rate of interest would vivify trade and raise the price of land; it would even cure drunkenness.

When the House of Lords’ committee held hearings on the interest-lowering bill during 1668–69, it decided to hold testimony from members of the king’s council of trade, of whom Josiah Child was a central figure. But another important figure was a very different member of the council of trade, and also a member of the Lords’ committee, the great Lord Ashley, John Locke’s new and powerful patron. As a classical liberal, Ashley opposed the bill, and at his behest, Locke wrote his first work on economic matters, the influential though as-yet-unpublished manuscript, “Some of the Consequences that are like to follow upon Lessening of Interest to Four Percent” (1668). Locke made clear in this early work his profound insight and thoroughgoing commitment to a free-market economy, as well as his later structure of property-rights theory.

Locke displayed straightaway his skill at polemics; the essay was basically a critique of Child’s influential work. First, Locke cut through the holistic rhetoric; of course, he pointed out, the borrowing merchant will be happy to pay only 4 percent interest; but this gain to the borrower is not a gain for the national or general good, since the lender loses by the same amount. Not only would a forced lowering of interest be at best redistributive, but, Locke added, the measure would restrict the supply of savings and credit, thereby making the economy worse off. It would be better, he concluded, if the legal rate of interest were set at the “natural rate,” that is the free-market rate, “which the present scarcity [of funds] makes it naturally at.” In short, the best interest rate is the free-market, or the “natural” interest rate, set by the workings of free man under natural law, i.e., the rate determined by the supply of and demand for money loans at any given time.

Whether or not Locke or Ashley proved decisive, the House of Lords finally killed the 4 percent bill in 1669. Three years later, Ashley became chancellor of the Exchequer as Earl Shaftesbury, and the following year Locke became secretary to the council for trade and plantations, which replaced the old council of trade. At the end of 1674, however, Shaftesbury was fired, the council of trade and plantations was disbanded, and Locke followed his mentor into political opposition, revolutionary intrigues, and exile in Holland.

John Locke finally returned to London with the overthrow of the Stuarts and the Revolution of 1688, returning in triumph on the same ship as Queen Mary. Locke returned to England to find the old East India crowd up to their old tricks. England was in dire financial straits, Charles II having ruined public credit with his Stop of the Exchequer, and the East India people had once again introduced a bill in 1690 for the compulsory lowering of interest to 4 percent. At the same time, Sir Josiah Child was brought back to expand his pamphlet into a Discourse About Trade (1690), an anonymous book reprinted three years later as A New Discourse of Trade, with Child’s name blazoned on the title page. It was the New Discourse that was to make such an excessive impression on 18th-century thinkers. In addition to the renewed arguments for lower interest, the Discourse and the New Discourse added more apologetics for the East India line on trade and on monopolies.

In response, John Locke’s new political patron, now that Shaftesbury had died, Sir John Somers, MP, apparently asked Locke to expand his 1668 paper to refute Child’s and other proponents of the 4 percent bill. Locke responded the following year with his expanded book, Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money (1692) which brought Locke’s previously unpublished arguments into public debate. Locke’s work may have been influential in the 4 percent bill once again being killed in the House of Lords.

The latter part of Locke’s Considerations was devoted to the great recoinage controversy, into which England had been plunged since 1690. In that year, England’s basic money stock of silver coins had deteriorated so far, due to erosion and coin-clipping, and the contrast of these inferior “hammered” coins to the newer, uneroded and unclipped “milled” coins was so great, that Gresham’s law began to operate intensely. People either circulated the overvalued eroded coins and hoarded the better ones, or else passed the poor coins at their lower weight rather than at their face value. By 1690 the older hammered coins had lost approximately one-third of their worth compared to their face value.

It was increasingly clear that the Mint had to offer recoinage into the new superior coins. But at what rate? Mercantilists, who tended to be inflationist, clamoured for debasement, that is, recoinage at the lighter weight, devaluating silver coin and increasing the supply of money. In the meanwhile, the monetary problem was aggravated by a burst of bank credit inflation created by the new Bank of England, founded in 1694 to inflate the money supply and finance the government’s deficit. As the coinage problem came to a head in that same year, William Lowndes (1652–1724), secretary of the treasury and the government’s main monetary expert, issued a “Report on the Amendment of Silver Coin” in 1695, calling for accepting the extant debasement and for officially debasing the coinage by 25 percent, lightening the currency name by a 25 percent lower weight of silver.

In his Considerations, Locke had denounced debasement as deceitful and illusionist: what determined the real value of a coin, he declared, was the amount of silver in the coin, and not the name granted to it by the authorities. Debasement, Locke warned in his magnificently hard-money discussion, is illusory and inflationist: if coins, for example, are devalued by one-twentieth, “when men go to market to buy any other commodities with their new, but lighter money, they will find 20s of their new money will buy no more than 19 would before.” Debasement merely dilutes the real value, the purchasing power, of each currency unit.

Threatened by the Lowndes report, Locke’s patron, John Somers, who had been made Lord Keeper of the Great Seal in a new Whig ministry in 1694, asked Locke to rebut Lowndes’s position before the Privy Council. Locke published his rebuttal later in the year 1695, Further Considerations Concerning Raising the Value of Money. This publication was so well received that it went into three editions within a year. Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government’s changing the definition of a foot or a yard. Locke put it dramatically: “one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches.”

Furthermore, government, the supported guarantor of contracts, thereby leads in contract-breaking:

The reason why it should not be changed is this: because the public authority is guarantee for the performance of all legal contracts. But men are absolved from the performance of their legal contracts, if the quantity of silver under settled and legal denominations be altered … the landlord here and creditor are each defrauded of twenty percent of what they contracted for and is their due.
One of Locke’s opponents both on coinage and on interest was the prominent builder, fire-insurance magnate and land-bank projector, Nicholas Barbon (1637–98). Barbon, son of the fanatic London Anabaptist preacher and leather merchant and MP Praisegod Barbon,[1] studied medicine and became an MD in Holland, moving to London and going into business in the early 1660s. In the same year as Child’s Discourse About Trade, Barbon, who had just been elected to Parliament, published the similarly titled Discourse of Trade (1690), again timed to push for the 4 percent interest bill in Parliament. An inveterate debtor and projector, Barbon of course would have liked to push down his interest costs.

In 1696, Barbon returned to the lists in a bitter attack on Locke’s Further Considerations on the coinage. Arguing against Locke’s market commodity, or “metallist,” view of money, Barbon, urging devaluation of silver, countered with the nominalist and statist view that money is not the market commodity but whatever government says it is. Wrote Barbon: “Money is the instrument and measure of commerce and not silver. It is the instrument of commerce from the authority of that government where it is coined.”[2]

Fortunately, Locke’s view triumphed, and the recoinage was decided and carried out in 1696 on Lockean lines: the integrity of the weight of the silver denomination of currency was preserved. In the same year, Locke became the dominant commissioner of the newly constituted board of trade. Locke was appointed by his champion Sir John Somers, who had become chief minister from 1697 to 1700. When the Somers regime fell in 1700, Locke was ousted from the board of trade, to retire until his death four years later. The Lockean recoinage was assisted by Locke’s old friend, the great physicist Sir Isaac Newton (1642–1727) who, while still a professor of mathematics at Cambridge from 1669 on, also became warden of the Mint in 1696, and rose to master of the Mint three years later, continuing in that post until his death in 1727. Newton agreed with Locke’s hard-money views of recoinage.

Barbon and Locke set the trend for two contrasting strands in 18th-century monetary thought: Locke, the Protestant Scholastic, was essentially in the hard-money, metallist, anti-inflationist tradition of the Scholastics; Barbon, on the other hand, helped set the tone for the inflationist schemers and projectors of the next century.[3]