Wanting to build royal authority in France, the Bourbon king, Henry IV (1589 - 1610), sought means to increase the wealth of the royal government. Wealth meant power, and a strong, stable monarchy was only possible if royal revenues could be increased. The problem for Henry was that he did not have a strong tax base upon which to build his power. The system of royal tax collection was corrupt and inefficient. Based on tax farming, royal taxes yielded to the Crown only a small portion of the revenues collected. The wealthiest elements of French society, the nobility and Catholic clergy, were exempt from taxation. To tax them would undermine royal power because their price for paying taxes would be an increased role in government. Thus, only the small middle class, which was largely Huguenot, and the great mass of peasants, the poorest element of the population, paid taxes.
Henry's dilemma was how to increase revenues without raising taxes or changing the existing tax system. On the advice of his chief financial advisor, the Duke of Sully, Henry implemented a program of economic regulation intended to increase the wealth of the whole kingdom. Greater national wealth would mean greater revenues. Greater revenues would mean greater royal power.
The methods employed by Henry included founding new industries, building roads, bridges, and canals to stimulate internal economic growth, encouraging the export of French products, attempting to achieve a favorable balance of trade, and founding overseas colonies. These methods were based on economic theory and practice known as mercantilism. The theory and practice of mercantilism are explained below.
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In the 16th, 17th, and 18th centuries mercantilism was the dominant theory upon which a government made economic policy. Very simply, the real wealth of a nation was thought to be the supply of money and precious metals (gold and silver) held by its government and people. The nation with the greatest amount of real wealth was the wealthiest and, therefore, most powerful. Governments sought to regulate and control their economies to this end – increasing the real wealth of the nation.
There were several mercantilist policies that governments might use to increase the nation's real wealth. These included measures intended to stimulate economic development and growth, establish a favorable balance of trade, and utilize colonies to full economic advantage.
In order to stimulate economic development and growth, a government might provide subsidies (grants of money) for industrial growth. Such grants would be made for the start of new businesses and industries that would have immediate value in the overall economic life of the nation. Shipbuilding, for example, was a costly business yet important for the expansion of a nation's trade. A government grant of money to a group of investors wanting to start a shipyard would provide the needed capital to get the business started. Likewise, an industry such as shipbuilding would stimulate related support activities -lumbering, carpentry, iron-casting, rope-making, etc.
Governments could stimulate economic growth by creating conditions that would make commerce easier, cheaper, and safer within the country. Important to business, commerce, and industry was the movement of goods and resources. Internal trade could not expand if roads were poor, bridges non-existent, and merchants had to pay restrictive tolls and tariffs as goods were moved from one region to another. Thus, mercantilist policies included such measures as government sponsorship of construction of roads, bridges, and canals. Where possible, governments acted to reduce or eliminate internal tolls and tariffs.
Keeping the country at peace also encouraged the expansion of commerce and wealth. A nation ravaged by civil war or internal unrest could not experience commercial growth. As religion was one of the most divisive forces (Catholic vs. Protestant) threatening the peace of a nation, governments sought to end conflict by guaranteeing religious minorities tolerance. In France a Catholic king, Henry IV, valuing the economic potential of the Huguenot middle class, issued the Edict of Nantes, granting French Calvinists their freedom of worship. This policy was unpopular with the majority of French Catholics, but it did help assure peace and enabled continued economic growth. Earlier, in England, Queen Elizabeth saved her country from religious civil war by founding the Anglican Church, a national church that drew from both Catholicism and Calvinism in a new spiritual "middle way." Elizabethan England saw a great increase of commerce.
Raising taxes was not a mercantilist measure. The goal of mercantilist policy was to increase overall real wealth, in other words, make the country richer. As these policies succeeded and people acquired greater wealth, the existing tax rates would yield greater revenues. Why not raise taxes? A French peasant earning 100 sous a year and being taxed at 10% would pay 10 sous in royal taxes. He’d have 90 sous for spending. If the government raised taxes by 50 % that peasant would then pay 15 sous. However, he would now have only 85 sous for spending, less than the 90 he had before. Less spending means less consumption of goods and services. This will not increase the real wealth of the country. Instead, mercantilist policy would seek to raise overall earnings so that, say, after five years the same peasant was earning 200 sous. The original 10% tax rate would now yield 20 sous in revenues. The government would then be getting twice as much revenue at the same tax rates and the peasant would have 180 sous for spending.
The regulation of a nation's foreign trade to its own economic advantage, was a major emphasis of mercantilist policy. All governments wanted to achieve a favorable balance of trade. The balance of trade is the monetary relationship of a nation's imports to exports. A favorable balance of trade is achieved when the value of a nation's exports (sales abroad) is more than the value of its imports (purchases from abroad). In this situation more wealth is coming into the country than is going out of it. For mercantilists the challenge was how to increase exports and reduce imports.
A favorable balance of trade might be achieved through several means. The use of tariffs to reduce the amount of imports was a commonly used method. Tariffs are taxes on imported goods. By imposing a tariff, a government would raise the price of the imported good. The higher price would discourage the purchase of that good and cause the importation of that good to decline. With tariffs discouraging imports, less money would be leaving the country. Tariffs, therefore, work to protect a nation's domestic industries and commerce from foreign competition. With less foreign competition, consumers would buy more goods produced by the domestic economy.
A favorable balance of trade might be achieved by increasing the quality of goods to be sold in other countries. In other words, by increasing the value of exports. As manufactured goods commanded higher prices than raw materials, governments encouraged the growth of manufacturing. This could be done through governmental policies intended to stimulate economic growth, for example, subsidies to new industries as discussed above.
By increasing their nations' real wealth, governments using mercantilist policies sought to achieve economic self-sufficiency and still produce materials for export. The nation that could produce all that was necessary for its own economic well being and not have to depend on materials from other countries was in a most enviable position. The problem, of course, was that as economic, social, and political needs became more complex, it was increasingly difficult for any one nation to become self-sufficient. Mercantilists saw a solution to this problem - the founding of overseas colonies.
The major maritime nations of early modern Europe (Spain, Portugal, England, France, and the Netherlands) all sought to expand their wealth by establishing colonies. The economic value of colonies was obvious. Colonies were both sources of needed raw materials and markets in which the goods of the mother country might be sold. Thus, in theory, as sources of raw materials and as markets, colonies could make a nation self-sufficient.
Colonies that produced great amounts of gold and silver were the most highly sought after as Europeans undertook the long, dangerous voyages across the Atlantic. The Spanish colonies in Mexico and Peru proved to be the only sources of gold and silver. For the later colonial ventures, the English, French, and Dutch had to make do with the settlement of new lands in the Caribbean and North America.
To encourage economic development in their colonies, governments provided subsidies to colonial settlers for the production of essential raw materials. Not all colonies were immediately profitable. As the Swedes found with their short-lived settlement in America, colonies could be expensive to maintain and difficult to administer. In order to serve their economic purpose and benefit the mother country, colonies came under strict mercantilist regulation.
Mercantilist economic controls were nowhere better illustrated than with a series of laws passed by England in the 17th and 18th centuries known as the Navigation Acts. Put very simply, these laws prevented England's colonies from developing manufacturing industries that might be competition for industry in the mother country. Additional laws prohibited direct colonial trade with other countries. Raw materials produced in the colonies had to be sent to England. (England then sold them at great profit to other countries.) All commerce between England and her colonies had to be conducted in ships built, owned, and manned in England or the colonies. In short, regulation such as the Navigation Acts was intended to give the mother country a comprehensive monopoly over the economic life of the colonies. The English Navigation Acts were not unique. All colonial powers employed similar methods to regulate their overseas territories.
In conclusion, mercantilism was both an economic theory and program of economic regulation intended to increase the real wealth of the nation. The nation with the greatest real wealth was the nation with the greatest power. Mercantilist policies intended to stimulate economic development, establish a favorable balance of trade, and regulate colonial development all worked to strengthen a nation's real wealth and power.
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Epilogue
How did Henry do? Henry's monarchy, with its emphasis on religious peace (his personal conversion to Catholicism and the Edict of Nantes), provided the much-needed stability that enabled economic recovery from some thirty years of religious strife. With Sully's solid advice, Henry granted subsidies to new ceramics and glassware industries and encouraged the development of a French silk textile industry. Roads, bridges, and canals were repaired or constructed. He declared all navigable rivers to be open waterways under royal domain and forbade any interference with river traffic. France undertook its first overseas colonial venture by founding in 1608 a small settlement in North America called Quebec.
When Henry became king in 1589 the total revenue through royal taxes was 7 million livres, and the Crown was 300 million livres in debt. At the time of Henry's assassination in 1610, Crown income was 23 million livres, the debt had been paid, and the royal treasury had a surplus of some 13 million livres. Henry's mercantilist policies worked. The Crown was secure and financially strong and France was well on the way to becoming the major power in Europe.
Sources for Mercantilism - See listing for section 4.5.