A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein

Of all the plant and animal passengers on the second expedition, none had more immediate impact than the pig. Far closer in appearance and temperament to the mean, lean, fast wild boar than to the modern farm hog and capable of transforming 20 percent of feed weight into protein (versus only 6 percent for cattle), these prolific herbivores fed voraciously on the New World’s plentiful tropical grasses, fruits, and roots.

Native American seed stock, particularly potato and corn, changed the diet of Europe. Both crops produce far more calories per acre than wheat; the potato will grow in poor soils and in a wide variety of environments, from sea level to ten thousand feet. Corn is more fastidious, requiring rich

soil and long stretches of hot weather, but it can grow in “in-between” climates too dry for rice but too wet for wheat. An impoverished swath of southern Europe stretching from Portugal to the Ukraine filled this bill precisely. By 1800 it had become one of the world’s largest corn growing regions.

In plainer English, the incentives and equal opportunity afforded by free trade simultaneously improve the overall welfare of mankind and increase socially corrosive

disparities of wealth. Even if trade slightly improves the real income of those at the bottom, they will feel the pain of economic deprivation when they fix their gaze at the growing wealth of those above them.

Simply by allowing nations to concentrate on producing those things that their geographic, climatic, and intellectual endowments best enable them to do, and to exchange those goods for what is best produced elsewhere, trade has directly propelled our global prosperity.

The harsh and lawless environment of the desert shaped both economic and religious life on the Arabian Peninsula and has to this day left its mark on the culture of the Muslim world. Survival in Arabia, with its lack of a central authority, was, and remains, utterly dependent on the good efforts of the family and the tribe.

Western notions of individual autonomy and rule of law simply do not apply in the desert. An attack on one tribesman is an attack on all, and in a landscape where a

murderer can quickly and quietly slip away, it matters little whether the accused is guilty or innocent. His entire clan is he...

In such a barren and impoverished landscape, a major source of sustenance is often theft from the tents and caravans of neighboring tribes. The signal military operation of the desert is the ghazu—a raid mounted on horses (which

are both faster and easier to control at a full gallop than the camel). The raiders swiftly and deftly execute these attacks so as to avoid causing casualties that would trigger thar.

Qussay next convinced the Quraish and the surrounding tribes that it was more profitable to trade and to protect the caravans than to raid them. Taxing traders and selling them safe conduct, it turned out, paid better than plundering a shrunken, fearful traffic.26 The Quraish continued to settle in Mecca in increasing numbers, grew wealthy, and gradually drifted away from their intensely communal, nomadic heritage. Their lives henceforth revolved around trade, not the precarious existence of oases and desert tents.

In the words of Islam’s great Western historian, Maxime Rodinson: The traditional virtues of the sons of the desert were no longer the sure road to success. Greed, and an eye to the main chance, were much more useful. The rich became proud and overbearing, glorying in their success as a personal thing—no longer a matter for the whole tribe. The ties of blood grew weaker.

In Battuta’s obsession with sharia and the Muslim world and in his lack of interest in nearly everything outside it (besides the comforts of Chinese junks) we clearly see the double-edged sword of Islam so visible in today’s world: an ecumenical but self-satisfied faith capable of uniting far-flung peoples under one system of belief and one regime of law, but also severely limited in its capacity to examine and borrow from others.

Nautical historians have in fact wondered why the Indians and Arabs stuck with the dhow so long, almost to the present day, and did not adopt the superior Chinese and European designs. The answer is at least threefold. First, the

weight of tradition among Indian shipbuilders overwhelmed the needs of sailors for secure oceangoing craft. Second, India’s west coast did not produce enough iron for construction. Third, although the sewn craft may have been less seaworthy, they were more “beachworthy”—that is, more pliable, and thus better able to survive the frequent encounters with the reefs, rocks, and shallows of the coasting trade than were the more rigid planked and ribbed Chinese and European ships.

Unluckily for Malacca, just as the Portuguese were appearing on the horizon, its leadership fell into the hands of a dissolute sultan, Mahmud Shah, from whom the Europeans plucked the city like a plump avocado. The rules of the game would soon change for the Muslims and other Asians engaged in the ancient trade of the Indian Ocean, and not for the better. In one of history’s most bizarre chains of causation, the brutal, efficient newcomers were driven by a hunger for, of all things, culinary ingredients that today lie largely unused in most Western kitchens.

The decreased tax revenues from the shrunken Chinese population contributed in no small part to the withdrawal of the Middle Kingdom’s navy from the Indian Ocean after the eunuch admiral Zheng He’s last voyage in 1433.

The nearly total destruction of Egypt’s trading and industrial structure, the disappearance of the Mongols from the world stage, and the withdrawal of China from the Indian Ocean created a vacuum that Europe—the last man standing, if just barely—filled only too happily. Yersinia pestis, which had helped smooth the way for the rise of Muslim power by attacking the Byzantine and Persian empires in the sixth and seventh centuries, greased the skids of Islamic decline in the fourteenth and fifteenth centuries.

Before the Common Era, trade was neither rapid enough nor direct enough to allow the widely separated “disease pools” of Asia, Europe, and Af...

time and distance to its probable birthplace in the Himalayan foothills, as were smallpox and measles to their origins in the Fertile Crescent. With the explosion of long-distance commerce during the Roman-Han era, and later under Islamic and Mongol influence, these diseases savaged distant, defenseless populations. Over the ensuing 1,500 years, the once-separated disease pools of the Old World collided and coalesced catastrophically, and in the end largely immunized Asians and Europeans. The first Western migrants to the New World could not even begin to comprehend the devastation they were about to visit on the native populations with thei...

infect...

The disappearance of the plague in England following the Great Fire of London in 1666 provides the essential clue. The brick houses that replaced the old wooden structures proved less hospitable to rats, and fleas found

it far harder to drop onto occupants from the new tile roofs than from the old thatched ones. As wood became scarce in western Europe and brick came into increasing use, the distance between rat and human widened, interrupting disease transmission. By the twentieth century, modern sanitary precautions and antibiotics added yet another layer of insulation that protected humankind from the large underground reservoirs of this deadly pathogen.

In 1249, events at Damietta, on the Nile delta, demonstrated the crucial importance of the spice trade in the Muslim world.

In that year, Christian forces captured the town, and so anxious were the Ayyubid Egyptians to regain this strategic trade outpost that they offered to return Jerusalem to the Christians in exchange; the offer was refused.4 When it came to the spice trade, Christian and Muslim alike usually favored Mammon over God.

In those lands with relatively low initial native economic development and population densities, and a healthy climate for Europeans—the New World, Australia, and New Zealand—the white invaders were able to survive, settle, and subdue or kill off the indigenous peoples. The conquerors then went on to produce unimaginable wealth.

Although much of the prosperity was due to trade, such as that from the sugar plantations of the Caribbean, the primary work of the settlers was mining, agriculture, and, later, manufacturing. This sequence of events was impossible in those lands with high initial native populations, high disease rates among Europeans, and relatively prosperous native trading and manufacturing economies—that is, almost all the shores touched by the Indian Ocean. In such places, white men could not hope to survive and conquer vast numbers of advanced, relatively wealthy, and highly organized natives. Here, at least at first, trade would be the order of the day for Europeans.

Put more simply, the Portuguese and Dutch sent hundreds of thousands of Europeans to the...

the seven- or eight-month journey to the populous and disease-ridden lowlands of Africa, India, Sri Lanka, Malaya, and Indonesia. For example, during the seventeenth century alone, approximately 25,000 European soldiers died within the squalid confines of the Royal Hospital at Goa from malaria, dengue, typhoid, and cholera.27 By contrast, European settlers sailed for only five or six weeks and then faced be...

In normal times, nations will expend blood and treasure over minuscule scraps of territory. These, however, were not normal

times; Portugal had just achieved a goal sought by Westerners since the death of the Prophet—access to the Indian Ocean—and the Spanish had just discovered two new continents. Such was the excitement of this era that these bitter rivals could partition the entire planet between them as easily as two schoolchildren swapping marbles at recess.

South of the equator, as southerly trade winds increasingly blew against his ships, progress became ever more difficult. Sometime during the eight-year hiatus between his return in 1489 and da Gama’s departure in 1497, a mariner unknown to history found the solution to this problem. As da Gama’s ships passed the coast of what is now Sierra Leone, they turned right, departed the coast for the open Atlantic, and headed almost due west for several hundred miles. Then, the ships gradually executed a counterclockwise semicircle thousands of miles wide, enabling them to tack across the wind blowing directly on their port sides. This slowly brought them back to the Cape. So generous was the arc that da Gama’s

fleet came within several hundred miles of Brazil. Even so, he did not swing wide enough to achieve his objective of bypassing the treacherous Cape of Good Hope to the south, instead striking Africa’s southwest coast at Saint Helena Bay.

Portugal exploited not only Asians but also its own citizens.

So miserable was the life of the common soldier that soon after arriving in India, thousands fled the ranks for monasteries. Portuguese recruits often went without shelter and during the monsoon season could be seen begging naked by the roadside.82 The tens of thousands who died of tropical diseases and malnutrition in the Royal Hospital at Goa may well have been the lucky ones.

First, within a few decades of Columbus’s second voyage in 1493, the exchange of crop species such as corn, wheat, coffee, tea, and sugar between continents had revolutionized the world’s agricultural and labor markets. The changes did not always improve the human condition. Second, by the early seventeenth century, Spanish and Dutch

mariners had decoded the last great secrets of the planetary wind machine, allowing them to cross the vast expanses of the world’s oceans with relative ease. By 1650, goods of all kinds and people of all nations ranged over most of the globe. Third, the discovery of huge silver deposits in Peru and Mexico produced a new global monetary system (along with a fearsome inflation caused by the coining of too much silver money). The most common piece of currency, the Spanish eight-real coin, was as ubiquitous as the American hundred-dollar bill and the Visa card are today. Fourth, the seventeenth century saw the rise of a completely new trading order—the publicly held joint-stock corporation. These organizations had considerable advantages over what had

preceded them: individual peddlers, their families, and royal monopolies. Large corporations soon came to dominate global commerce, a position they have not since relinquished. Finally, change always makes some people unhappy. In the new global economy of the sixteenth and seventeenth centuries, textile manufacturers, farmers, and service workers were all hurt by cheaper and better product...

By contrast, in the United States the Spanish dollar was considered legal tender until 1857.

That this huge treasure was the property of the VOC hints that by the mid-1600s, long-distance global commerce had become the domain of multinational corporate capitalism. Over the course of the seventeenth century, the Dutch company would methodically roll up the corrupt, ram shackle Portuguese trading empire, only to face a far more serious threat from another corporate challenger, the English East India Company.

In 1585, Philip’s nephew the duke of Parma (in Italy) captured Antwerp, and with a decency uncharacteristic of the times allowed the city’s Protestants to leave peaceably. Nearly simultaneously, his uncle embargoed the United Provinces and seized its vessels in Spanish and Portuguese ports. Each of these three actions was a colossal mistake. At a stroke Philip had created a network of the hardest-working, most commercially savvy traders in the world—Antwerp’s now exiled Protestants, who were now dedicated to bypassing Iberian ports.3

(in Italy) captured Antwerp, and with a decency uncharacteristic of the times allowed the city’s Protestants to leave peaceably. Nearly simultaneously, his uncle embargoed the United Provinces and seized its vessels in Spanish and Portuguese ports. Each of these three actions was a colossal mistake. At a stroke Philip had created a network of the hardest-working, most commercially savvy traders in the world—Antwerp’s now exiled Protestants, who were now dedicated to bypassing Iberian ports.

The results were mixed. The Dutch largely succeeded in India and Indonesia; by the late seventeenth century, the Portuguese were left with only tiny enclaves at Goa and Timor. The Dutch failed miserably at Manila, Macao, and, most importantly, in Africa. Unable to seize the Portuguese

bases in Angola and Mozambique, the VOC was forced to establish a new outpost at Africa’s remote southern tip, the Cape Colony, in order to protect its Indian Ocean routes. Impressive as was the war-making machinery of the VOC and WIC, their most potent weapon was Dutch finance. In 1602, investors provided the VOC with 6.5 million guilders in initial funding—about $100 million in today’s money—to hire men, purchase ships, and acquire silver and trade goods to exchange for spices. This capital was permanent, that is, if things went well, it would yield profits that would go mostly to pay for the expansion of business. Although the investors hoped for a modest annual dividend, they had no reason to expect to see their original 6.5 million guilders back anytime soon. This may not seem at all unusual to the modern investor, but at the beginning of the seventeenth century, the appearance of permanent capital in Holland demonstrated an extraordinary degree of confidence in Dutch financial institutions.

To this day, success or failure in the global marketplace depends not on size but on advanced political, legal, and

financial institutions; by 1600, the Netherlands had far and away the world’s finest, putting it in the best position to challenge the Portuguese trading empire.

Drake’s exploits, the defeat of the Armada, and the EIC’s slight head start aside, the realm of the Tudors and the Stuarts was roiled by religious strife, had only primitive and unstable financial markets, and was eventually to be plunged into a devastating civil war. France and Spain were even further behind, plagued with crown monopolies and chronic bankruptcy. By contrast, the Dutch confederation was one of the few European states free of the curse of absolute monarchy, possessed of vigorous legal and financial institutions, and relatively tolerant of the ambitious and able of all religions.

In England, reputable borrowers (that most certainly did not include the crown), paid 10 percent on their loans, versus 4 percent in Holland, with the Dutch government getting its credit at the lowest rates of all. By contrast, in England, where the crown could, and often did, repudiate its loans, lenders charged it higher rates than those for good commercial borrowers.

Dividing ownership in this way was the essence of “Dutch finance,” whose genius lay in allowing entrepreneurs and investors to spread risk.