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[Excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]

The “Bullionist” Attack on Foreign Exchange and on the East India Trade

Having survived the assaults of ignorant moralists before the Reformation, the foreign-exchange market was subjected, during the far more secular age of the late 16th century onward, to the assaults of regulators on behalf of the nation-state. Writers who have been misnamed “bullionists” adopted the ignorant view that an outflow of gold or silver bullion abroad was iniquitous, and that this calamity was brought about by the machinations of evil foreign exchange dealers, who deliberately sought gain by depreciating he value of the nation’s currency.

Nowhere was there any insight that the outflow of bullion might have been performing an economic function, or was the result of underlying supply-and-demand forces. Despite their insights into Gresham’s law and debasement, Thomas Smith and Thomas Gresham would have to be placed in the “bullionist” category. The policy conclusion of the bullionists was all too simple — the state should outlaw the export of bullion and should severely regulate or even nationalize the foreign exchange market.

The exchange dealers battled back, with sensible and powerful arguments. Thus in 1576 they argued, in a “Protest against the State Control of Exchange Business,” that state intervention would cause a drying up of commerce. On the low value of the English pound, they replied, “we can say nothing but that our exchanges are made with a mutual consent between merchant and merchant, and that abundance of the deliveries or of the takers make the exchange rise and fall.”

One prominent bullionist of the early 17th century was Thomas Milles (ca. 1550 — ca. 1627). In a series of tracts from 1601 to 1611, Milles advances the old bullionist position. Foreign exchange transactions, Milles opined, were evil; they were institutions with which private merchants and bankers, “covetous persons (whose end is private gain),” rule in the place of kings. Something new, however, had been added. For the powerful East India Company had been chartered in 1600, to monopolize all trade with the Far East and the Indies.

The East India trade was unique in that Europeans purchased a great deal of valuable muslins and spices, but the Indies in turn bought very little from Europe except gold and silver. European nations, therefore, had an “unfavorable balance of trade” with the Far East, and the India trade therefore quickly became a favorite target for mercantilist writers. Not only were goods being imported from the East as against few exports, but specie, bullion, seemed to flow eternally eastward. Milles therefore took up the bullionist cudgels by calling for restriction or prohibition of the Indies trade, and attacking the activities of the East India Company.

Milles was also eager to intensify regulations against the Merchant Adventurers, the governmentally privileged monopoly for the export of woolen cloth to the Netherlands. Instead, he craved a return to the old, privileged raw-wool export monopoly of the Merchant Staplers. In fact, Milles went so far as to call the old regulated Stapler trade the “first step towards heaven.”

It is certainly likely that Milles’s eagerness to regulate and prohibit foreign trade and bullion flows was connected with his own occupation as a customs official. The more regulation, the more work and power for Thomas Milles.

Stung to the quick, the secretary of the Merchant Adventurers, John Wheeler (ca. 1553–1611) replied to Milles’s charges in his Treatise of Commerce, in 1601. Wheeler upheld the “orderly competition” of the 3,500 merchant members joined together in the privileged monopoly, as against the unorganized, dispersed, “straggling and promiscuous trade” of free competition. He also engaged in semantic trickery by asserting that monopoly by definition means only “single seller”; hundreds of merchants linked together into a privileged export company were able, after all, to act virtually as one privileged firm. In Wheeler’s own words, these merchants were “united and held together by their good government and by their politic and merchantilike orders” — backed up, we must not forget, by the armed might of the state.

Sneering at the idea of free competition, Wheeler smugly opined that any merchant who loses a little liberty will be better off “being restrained … in that estate, than if he were left to his own greedy appetite.” When John Kayll, over a decade later in The Trades Increase (1615), protested that the monopoly of the Merchant Adventurers would “unjustly keep others out forever,” his pamphlet was suppressed by the archbishop of Canterbury and he earned a stint in jail for his pains.[1]

Later, in the 1650s, Thomas Violet had a Milles-type motive for special pleading in his call for prohibition of the export of bullion. Violet had been a professional “searcher” and government informer seeking out violations of the law prohibiting the export of bullion. Now, in A True discoverie to the commons of England (1651), he sought to reinstate that good old law, and he accompanied his call for reinstatement of bullion prohibition with a request that he himself be employed once again to seek out violators. To the embarrassing fact that he, Violet, had himself been convicted and punished for violating these very provisions, he countered with a ready quip — “an old deer-stealer is the best keeper of a park.”

The most distinguished bullionist of the early 17th century was Gerard de Malynes (d.1641). Malynes was a Fleming born in Antwerp to the prominent van Mechelen family, probably changing his name to Malynes when he emigrated to London in the 1580s (perhaps in response to the Spanish persecution of Protestants in the Netherlands in that era). Malynes was listed as an alien in the records of that period, and as a member of the “Dutch” Protestant Church. He is also depicted in the records as a “merchant stranger,” that is, as a merchant from abroad.

Malynes turned out to be a speculator and an unscrupulous, even crooked, businessman, embezzling money from his Dutch business associates. He was often on the verge of bankruptcy, and his partner and father-in-law, the Antwerp-born Willem Vermuyden, died in debtors’ prison. Malynes, nonetheless, was a linguist and highly educated scholar, deeply interested in literature, the Latin language, mathematics, and classical Greek philosophy. He was also well-versed in Scholastic doctrine.

A member of a royal commission of 1600 to study economic problems, Malynes began his bullionist writings in 1601, in particular A Treatise on the Canker of England’s Commonwealth, and published many tracts into the 1620s. Like Gresham and the 16th-century bullionists, Malynes fulminated against the foreign-exchange dealers, asserting superficially and incorrectly that exchange rates were set by willful conspiracies of exchange dealers. Malynes was more rigorous than previous bullionists; instead of institutions to control exchange dealings, he advocated a government “bank” which would enjoy a monopoly on all foreign exchange transactions.

“Even if a cheaper pound will bring in less foreign-exchange revenue, one wonders where the English would continue to find either foreign currency or specie to pay for the higher-priced foreign products. Surely the specie would eventually run out.”

Intertwined with his star-crossed business career was Malynes’s service in government, becoming at various times a top bureaucrat at the Royal Mint and a financial adviser to the crown. Malynes also had a personal stake in the revival of rigorous exchange control, for he himself eagerly anticipated filling the resurrected post of royal exchanger. To Malynes, there was a “just” exchange rate at the legal par, and the government’s task was to enforce it.

In an earlier tract in 1601, Saint George for England Allegorically Described, Malynes, harking back to an old theme, denounced foreign exchange dealings as “usury,” and expressed the hope that by tight control this usury could die a gradual death.

To advocate rigorous exchange control, Malynes of course had to deny that the foreign exchange market could in any way equilibrate or regulate itself, or that exchange rates were set by supply-and-demand forces. To Malynes goes the dubious credit for the emergence of the spurious and pernicious “terms-of-trade” fallacy. This doctrine argues that a balance of trade deficit and export of bullion will not regulate itself. For higher foreign exchange rates and cheaper domestic currency will not, as one might believe, spur exports and retard imports. Instead, the “unfavorable” terms of trade of, say, the pound in terms of foreign currency will lead to even more imports and fewer exports, thus driving more bullion out of the country.

Even if a cheaper pound will bring in less foreign-exchange revenue (a highly unlikely event seen more often in armchair speculation than in practice), one wonders where the English would continue to find either foreign currency or specie to pay for the higher-priced foreign products. Surely the specie would eventually run out, and for that reason alone some market mechanism would have to come into play to restrict foreign imports or the export of specie.

Thus Malynes managed to take the absurd position that, whatever happens in the foreign exchange market, specie will keep flowing out of England: flowing out if the pound should be expensive, since this will restrict exports and encourage imports (a correct insight), but also flowing out if the reverse happens, because of the “terms-of-trade” argument. The specie outflow was therefore blamed on the metaphysical malevolence of the exchange dealers, and it could only be cured by severe government control, including prohibition of the export of bullion.

Malynes also advocated control of the exchange rate at the legal mint par, which would mean in the context of the time a substantial appreciation, or higher value, of the pound sterling. Yet, continuing in the faulty terms-of-trade mode, Malynes saw no problem of specie outflow from such a marked appreciation of the currency. In fact, he hailed the higher domestic prices that would supposedly draw more specie into the country.

In a similar bizarre twist, Malynes, correctly noting that the inflationary influx of specie from the New World had hit the other countries of western Europe before coming into England, concluded that this was a terrible event for England. For instead of realizing that lower prices made English goods more competitive abroad, Malynes concluded that these “unfavorable terms of trade” put England into a poor competitive position and led to a permanent outflow of specie.

In view of his record in propounding tissues of egregious fallacies, it is curious that Malynes has had a good press among historians of economic thought, even among those who disagree with his basic outlook. They seem to laud him for recognizing that prices vary directly with the quantity of money, so that a country losing gold will find its prices falling, whereas a country accumulating gold will see its prices rise. But Malynes, eager to indict the workings of international prices and exchanges rather than explain how they work, was scarcely willing to develop the full implication of his occasional insights. Furthermore, considering that this “quantity theory” had long been known, and developed and integrated for centuries, by the Spanish Scholastics, Bodin, and others, Malynes’s achievements seem dubious at best.

The East India Apologists Strike Back

England suffered a severe recession in the early 1620s, and Gerard Malynes returned to the attack, publishing a series of tracts repeating his well-known views, and calling for stringent measures to curb the Merchant Adventurers and especially the East India Company, as well as any other traders who dared to export bullion from the kingdom. His influence was bolstered by having been a member of the royal commission on the exchanges in 1621.

Taking up the torch in defense of the Merchant Adventurers was one of its members, Edward Misselden (d. 1654). In a tract entitled Free Trade or the Means to Make Trade Flourish (1622), following service on a Privy Council committee of inquiry on the depression of trade, Misselden advanced somewhat beyond Malynes’s analysis. He acknowledged that bullion was exported from England, not due to the machinations of wicked exchange dealers, but from imports exceeding exports, from what would later be called an “unfavorable balance of trade.”

Misselden, then, was not concerned with regulating the exchanges. But he did want the state to force a favorable balance into being by subsidizing exports, restricting or prohibiting imports, and cracking down on the export of bullion. In short, he called for the usual set of mercantilist measures. Misselden was largely concerned to defend his Merchant Adventurers.

Like Wheeler a generation earlier, he maintained that his company was not at all a monopolist, but simply the organization of orderly and structured competition. Besides, wrote Misselden, his Merchant Adventurers exported cloth to Europe and therefore fitted in with the interests of England. The truly evil firm was the privileged East India Company, which had a decidedly unfavorable balance of trade of its own with the Indies, and which continually exported bullion abroad.

Misselden now entered into a series of angry pamphlet debates with Malynes, who replied in the same year with The Maintenance of Free Trade. (Neither party, of course, had the slightest interest in what would now be called “free trade.”) In 1623, Misselden accepted a post as deputy governor of the Merchant Adventurers in Holland, perhaps as a reward for his stirring defense of the company in the public prints. But, in addition, the East India Company, seeing in Misselden an effective champion and a troublesome foe, made him a member and one of their commissioners in Holland during the same year.

As a result, when his second pamphlet, The Circle of Commerce, was published in 1623, Misselden displayed a miraculous change of heart. For the East India Company had been suddenly transformed from villain to hero. Misselden, quite sensibly, now pointed out that while the East India Company did export specie in exchange for products from the Indies, it can and does re-export these goods in exchange for specie.

The outstanding defender of the East India Company in the early 17th century was one of its prominent directors, Sir Thomas Mun (1571–1641). Mun was early engaged as a merchant in the Mediterranean trade, especially with Italy and the Middle East. In 1615, Mun was elected a director of the East India Company, and after that he “spent his life in actively promoting its interests.” He entered the lists on behalf of the company in 1621, with his tract, A Discourse of Trade from England unto the East-Indies.

The following year he and Misselden were both members of the Privy Council committee of inquiry. Mun’s second and major work, England’s Treasure by Forraign Trade, or the Balance of Forraign Trade is the Rule of our Treasure, taking a broader view of the economy, was written around 1630 and published posthumously by Mun’s son John in 1664. When published, it carried the stamp of approval of Henry Bennett, secretary of state in the Restoration government, and also an architect of England’s mercantilist policy against the Dutch. The pamphlet was highly influential and was reprinted in several editions, the last being published in 1986.

Thomas Mun set forth what would become the standard mercantilist line. He pointed out that there was nothing particularly evil about the East India Company trade. The company imports valuable drugs, spices, dyes, and cloth from the Indies, and it re-exports most of these products to other countries. Overall, in fact, the company has actually imported more specie than it has exported. In any case, the focus of English policy should not be on the specific trade of one company or with one country, but on the overall or general balance of trade. There it must make sure that the country exports more than it purchases from abroad, thereby also increasing the wealth of the nation. As Mun succinctly put it at the beginning of England’s Treasure, “The ordinary means to increase our wealth and treasure is by foreign trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value.”

To that end, Mun advocated sumptuary laws banning consumption of imported goods, protective tariffs, and subsidies and directives to consume domestic manufactures. Mun, on the other hand, opposed any direct restrictions on the export of bullion, such as conducted by the East India Company.

Mun was wise enough in combating the fallacies of Malynes and Misselden. Against Malynes, he pointed out that the movements of the exchange rate reflect, not the manipulations of bankers and dealers, but the supply and demand of currencies: “That which causes an under or overvaluing of monies by exchange is the plenty or scarcity thereof.”

“An expansion of foreign trade per se seems to be Thomas Mun’s main objective. And this overriding goal is not very puzzling from a leader of the great East India Company.”

Misselden had advocated debasement of the currency as a means of increasing the price level. Such increase, Misselden had argued in pre-Keynesian fashion, “will be abundantly recompensed unto all in the plenty of money, and quickening of trade, in every man’s hand.” As a leader of the Merchant Adventurers, Misselden was undoubtedly highly interested in the spur that debasement would give to exports. But Mun denounced debasement, first as bringing confusion by changing the measure of value, and second by increasing prices all around: “If the common measure be changed, our lands, leases, wares both foreign and domestic, must alter in proportion.”

Neither did Mun bend his energies towards an export surplus because he was enamored of the idea of accumulating specie in England. Adhering to the quantity theory of money, Mun realized that such accumulation would simply drive prices up, which would not only be to no avail but would discourage exports. Mun wanted to accumulate specie not for its own sake, nor to drive up prices at home, but to “drive trade,” to increase foreign trade still further. An expansion of foreign trade per se seems to be Thomas Mun’s main objective. And this overriding goal is not very puzzling from a leader of the great East India Company.

Furthermore, foreign trade, as fully for Thomas Mun as for Montaigne, increased the national power — as well as the power of English traders — at the expense of other nations. England and her inhabitants only wax great at the expense of foreigners. As Mun put it succinctly, in trade “one man’s necessity becomes another man’s opportunity,” and “one man’s loss is another man’s gain.” In an odd prefigurement of the Keynesian view that national debt held at home is immaterial because “we only owe it to ourselves,” Mun and his fellow mercantilists considered internal trade unimportant because there we only transfer wealth among ourselves. The export balance in foreign trade then becomes of crucial importance, so that the export merchant becomes by far the most productive occupation in the economy.

That Mun was far from being a primitive inflationist is seen by the scorn he properly and contemptuously heaped upon the common plea — and favorite mercantilist complaint — that business and the economy were suffering from a “scarcity of money.” (The conclusion invariably drawn from such analysis is that the government was duty-bound to do something quickly to augment the money stock.) Mun wittily riposted in his Discourse of Trade,

concerning the evil or want of silver, I think it hath been, and is a general disease of all nations, and so will continue until the end of the world; for poor and rich complain they never have enough; but it seems that the malady is grown mortal here with us, and therefore it cries out for remedy. Well, I hope it is but imagination maketh us sick, when all our parts be sound and strong.

Thomas Mun may have been the most prominent and sophisticated of the early 17th-century mercantilists in England. Yet, as Schumpeter points out, these were all pamphleteers not particularly interested in analysis of the economy, special pleaders rather than aspiring scientists.[2]

Perhaps the best economic analyst of all in this period was Rice Vaughn, whose A Discourse of Coin and Coinage, though published in 1675, was written in the mid-1620s. Vaughn held, in the first place, that the disappearance of silver during this period was the effect of what we now call “Gresham’s law” — the bimetallic undervaluation by the English government of silver as against gold. Since silver, rather than gold, was the money for most transactions, this undervaluation had a certain deflationary effect.

In the course of his tract, Vaughn pointed out that an export surplus will not have the desired effect of bringing precious metals into the kingdom if the value of the gold or silver pound in England is low in terms of purchasing power; for then goods will be imported instead of the monetary metals, and the export surplus will disappear.[3]

(2-volume set)

Vaughn was also astute enough to recognize that prices do not all move together when the value of money changes; for example, that domestic prices usually lag behind the debasement or devaluation of money standards.

Most importantly, Rice Vaughn, remarkably, harked back to the Scholastic, continental subjective-utility and scarcity tradition in the determination of the values and prices of goods. Vaughn concisely pointed out that the value of a good is dependent on its subjective utility and hence demand by consumers (“Use and delight, or the opinion of them, are the true causes why all things have a Value and Price set upon them”), while the actual price is determined by the interaction of this subjective utility with the relative scarcity of the good (“the proportion of that value and price is wholly governed by rarity and abundance”).[4]

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher. See Murray N. Rothbard’s article archives.

This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.

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[1] See Joyce Oldham Appleby, Economic Thought and Ideology in Seventeenth-Century England (Princeton, N.J.: Princeton University Press, 1978), p. 106.

[2] As Schumpeter puts it, these men were “special pleaders for or against some individual interest, such as the Company of Merchant Adventurers or the East India Company; advocates or foes of a particular measure or policy…. All of them flourished … owing to the rapid increase of the opportunities for printing and publishing. Newspapers also, rare ventures in the sixteenth century, became plentiful in the seventeenth.” J.A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), pp. 160–61.

[3] Barry E. Supple, Commercial Crisis and Change in England, 1600–1642 (Cambridge: Cambridge University Press, 1964), pp. 219–20.

[4] Appleby, op. cit., note 6, pp. 49, 179; also see Terence W. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662–1776 (Oxford: Basil Blackwell, 1988), p. 386.