'76 Blog

September 29. 2009 17:56

Trevor Simmons writes...
( trevor.m.simmons@gmail.com)

Dr. Watson,  I agree with the premise of your article, but several statements seem oversimplified to the point of being misleading.  First, you suggest that Britain's "limited government" and "low taxation" provide the keys to the relative advantage Britain held over France in the 1700s.  It is true that Britain possessed many *elements* of what we now call "free trade" and "capitalism"; merchants and goldsmiths, cosmopolitan connections, and extensive international trade predisposed to London to economic growth well before the eighteenth century.  But "free trade" as such did not exist for most of the 1700s; in principle it traces its origins to 1776, in practice to the 1840s.



The lion's share of British trade during the period under review operated according to the principles of mercantilism.  Historians now understand that, even in the eighteenth century, manufacturing and industry generated less wealth than previously thought.  The spurt in the 1740s was marginal; the growth of the 1780s was confined largely to cotton goods; not until the 1820s did the full weight of new industry impose itself on the economy as a whole.  The result was that, in the manufacturing sector, even in profitable branches like the cotton trade, the risks associated with new manufacturing techniques more often than not inspired a high degree of caution with respect to free trade.  Instead, the British government directly participated in trade through a powerful collection of chartered companies, including the famous East India Company, which presided over Britain's windfall profits in the cotton industry by selling cheap manufactured textiles to India.



Moreover, Britain's international trade during the eighteenth century operated under the conditions of the preferential tariff system established by the Navigation Acts, which dated from 1651 and remained in effect until 1849.  The original purpose of the Navigation Acts sought to make British trade more competitive against Dutch and French merchants.  Thereafter, until the 1820s, the continuation of the Navigation Acts depended on the dominance of agriculture in the British domestic economy, and thus, in turn, upon the dominance of the landed aristocracy in British politics (which, as you know, began to change in 1832).  



We may thus locate the beginnings of British laissez-faire capitalism in the period from 1840 to 1860, when a spate of legislation installed a free trade system, when Richard Cobden and his free trade followers had reached their height of influence, and when British trade - not incidentally - had reached its most competitive with respect to the rest of the world.



It is very much at the heart of this matter that the great proponents of laissez-faire capitalism - chiefly Smith, Ricardo, and Hume - only emerged in the middle of the eighteenth century, and only then in opposition to the established practice of mercantilist trade.  Smith's 1776 publication of "Wealth of Nations" does indeed mark the first comprehensive exposition of the theory of capitalism; but his influence was retrospective, and his later fame shows just how revolutionary was his departure from the mercantilist ideas that was then commonplace.



The question is now upon us: what explains Britain's dramatic advantage over France?  An enormous body of research suggests that the British lead came primarily in the area of finance and commercial services - not in industry or manufacturing.  One estimate puts Britain's lead in developing modern financial institutions a century ahead of France.  The form taken by the public debt and its management were far more advanced in Britain than in France.  During the Napoleonic Wars, Britain was able to borrow extensively and efficiently because investors had confidence that their money would be returned, whereas France was forced to rely heavily on taxation because creditors were unimpressed by the government's record in honoring its obligations.



The roots of this decisive British lead traced not to "free trade" strictly construed, but rather to the financial revolution of the 1690s, centered on the foundation of the Bank of England in 1694 and the creation of the national debt thereafter.  These innovations provided the British government with a banker and they made credit available to English enterprise to a degree wholly lacking in France.  The revolution in finance and banking was also linked to wider developments in the financial sector in the 1690s, including recoinage, the establishment of a gold standard, the development of specialized merchant banks in the City, and the growth of markets and institutions for mortgages, bills of exchange, insurance, and stocks.  These developments boosted shipping, expanded overseas trade, and generated vast sums of invisible earnings; they all added to an already vigorous British economy that was centered in London.  



There was also a strategic element to these innovations: lack of credit had placed Britain at a disadvantage in her struggle with the Dutch, which made improved credit a vital part of British defense strategy.  As one historian points out, "no fundamental revolution was possible before 1688 because James II's pro-French and pro-Catholic policies frightened the predominantly Protestant bankers and investors whose support it required."  The Revolution of 1688 removed this obstacle and transformed the nature of the monarchy, and thus launched a century and a half of financial and economic evolution that would result in the system of free trade finally established in the 1840s.



In short, the foundation of the Bank of England, far more than low taxes or "free trade", provided the key innovation that gave England its dramatic economic lead over France in the eighteenth century.



It is important to note at this point that I am not making a policy prescription for the present; I am not suggesting that our leaders should expand the central bank or extend credit yet further.  The situation in the 1690s - and indeed throughout the whole of the eighteenth century - differed markedly from what we face today.  Credit and debt greatly assisted British success in the eighteenth and nineteenth centuries; credit and debt, without proper limits, also created the crisis we presently face.  Let this be a lesson that the events of the past seldom provide any easy answers for the present.  History does not repeat; it echoes.



Finally, as a minor aside, I find it curious that you included "charismatic leadership" as a factor that creates "hunger, suffering, and tyranny."  Certainly there have been many leaders who have masked their weaknesses with stirring rhetoric and with noble (yet unattainable) ambitions.  Perhaps Obama is among them, and perhaps his policies provide the reason for your statement.  But one can hardly forget the opposite impact that "charismatic leadership" had when Winston Churchill stirred the hearts of Englishmen, or when Ronald Reagan convinced Americans, en masse, to support his firm stand against the "evil empire."

John Andrews