A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein

Another Dutch financial innovation that served to decrease risk (at least when used properly) was the futures market—the “buying of herrings before they be catched.”

Shippers could also acquire maritime insurance as

hedge against loss of their cargoes at sea,

The ability of the Dutch to borrow, combined with the turbulence of English politics, gave Holland a head start that England would not overcome until its financial and political institutions were reformed generations later.

Less a trading company than a guild, the English company allowed each of its members to trade on his own account, owning only the ships in common with other members. Since both the voyages and the merchants were separately financed, there was almost no cooperation where it mattered: at the EIC’s trading posts. When disputes broke out among English traders in Asia, they had to be sorted out in London, half a world and a two-year round-trip away. At Bantam in Java, near modern-day Jakarta, there were three different English trading offices. Not only did the merchants of EIC trade their own goods; they were free to compete directly with their

own company.23 The VOC, by contrast, sent to Indonesia a strong governor-general with full authority over all of the company’s officers.

The decentralization of the EIC also made it more susceptible to corruption than the VOC. Although the behavior of Dutch traders and sailors was hardly upstanding in this regard, the employees of the EIC treated its ships as their own, transporting large amounts of trade goods for their accounts to and from Asia.

Another great advantage that the Dutch had over England, and over its other European rivals, was in maritime technology. The decrease in piracy in northern European waters after 1595 allowed the development of a round, slow, but highly efficient vessel known as the fluitschip, or “flute ship,” which required less than half the crew of other vessels of similar tonnage. Initially, the craft was victimized by its own success; its efficiency threw so many sailors out of work that many turned back to piracy.

In his report, Coen, a true spiritual ancestor of the modern bean-counting MBA, wielded the cutting-edge management tools of the seventeenth

century, and observed that the company was turning very little profit on its complex operations. He recommended two courses of action: first, that a monopoly be obtained on the three precious “fine spices”—nutmeg, cloves, and mace—and second, that this be done at any cost, including the ruthless exploitation of local workers and the importation of Dutch colonists and slave labor.

Your Honors should know by experience that trade in Asia must be driven and maintained under the protection and favor of Your Honors’ own weapons, and that the weapons must be paid for by the profits from the trade, so that we cannot carry on trade without war, nor war without trade.

Later that year, the VOC, without English support, committed one of the bloodiest outrages of the colonial era when they assaulted the main island of Lonthor and slaughtered most of its approximately thirteen thousand inhabitants. The few survivors were sent off to forced labor in Java or enslaved to work the clove trees that had once been theirs. In the decades that followed, those who had been packed off to Java were sent back home when the Dutch found themselves in need of native expertise to salvage their mismanaged nutmeg groves.

Meanwhile, the English were left in nominal control of Run and a tiny neighboring island. Although the Dutch did not physically eject the British from Run, for fear of violating the 1619 treaty, they destroyed the island’s nutmeg trees.

In two decades, the Dutch had accomplished what the Portuguese had not been able to do in the preceding century—acquire a nearly complete monopoly on cloves, nutmeg, and mace. But like the Portuguese, they could not control the pepper trade, which was spread too diffusely between India and Indonesia.

Paradoxically, the real beneficiary of the Anglo-Persian seizure of Hormuz was the VOC.31 The nominal victors at Hormuz, the Persians and the English, derived little benefit from their newly won command of the Gulf, the former because they had no merchant fleet, and the latter because they no longer had Moluccan spices to ship to the caravans at Persian Gulf ports. The Dutch had almost totally frozen the English out of the spice trade, and not until the end of the seventeenth century would the EIC be able to exploit other commodities and once again challenge the VOC.

In the end, Tomé Pires, the Portuguese apothecary, adventurer, and author we met in Chapter 4, had not quite gotten it right when he famously said, “Whoever is lord of Malacca has his hand on the throat of Venice.” In order to strangle it, one needed to be lord not only of Malacca, but also of Sunda, the Cape of Good Hope, and the Spice Islands. The Portuguese had not quite been up to it, but by the mid-seventeenth century, the Dutch had finally cornered the spice market and throttled Venice.

(Charles X of Sweden, in reply to a diplomat from Holland who lectured him about freedom of religion, famously pulled a Dutch coin from his pocket with a sly, “Voilà votre religion.”33)

Over half of the million or so men who embarked from Holland’s wharves for the East never returned. In the words of the economic historian Jan de Vries, “It is hardly an exaggeration to say that the Company swept the city streets of beggars and the unemployed.”38 The low quality of these recruits would eventually be the Achilles’ heel of the VOC. By contrast, the EIC realized that it needed men who could sail, handle cargo, and fight to serve on its relatively small and undermanned Indiamen. The English Company selected only the most qualified applicants and granted them exemption from the Royal Navy’s press gangs.

Now came the hard part: distributing the vast amount of goods without depressing prices. The VOC used many different arrangements, but the most common involved selling the entire stock of a given commodity at a fixed price, with the promise that the Company would refrain from releasing any future stocks for a predetermined period—in Dutch, the stilstand—so as to protect the buyer.

The signing of the Treaty of Münster in 1648, which ended the Eighty Years’ War between the Dutch and the Spanish and granted the Netherlands its independence, unleashed the full potential of Dutch trading capacity, which before then had been restrained by the threat of Spanish seizure and blockade. Holland’s new commercial power came as a rude shock to England. With the Spanish threat gone, the English were even less of a match for Holland’s merchants. Suddenly, the Dutch were everywhere in the Baltic, in Spain, and on the Mediterranean, loading onto their flute ships timber, salt, wines, and olive oil that had previously sailed under the flag of Britain.

Navigation Act in 1651. This legislation prohibited third-party trade into England—that is, although it was perfectly legal for a foreign ship to land its own nation’s goods on the wharves of London, landing the goods of another nation was outlawed. Since this law applied to most cargo on Dutch vessels, the act amounted to a declaration of war against Holland.

Three hundred years ago, as England debated the India trade, few detected the flaws in mercantilism.42 One observer, Roger Coke, noted that Holland, the world’s wealthiest nation on a per capita basis, “imported everything,” whereas impoverished Ireland exported far more than it imported.43 Another, Charles Davenant, cogently explained that the benefits of keeping a nation “more Cheaply supply’d” with foreign imports far outweighed the damage done to domestic employment. He perceptively argued that trade was not in fact a zero-sum game, “For all Trades have a Mutual Dependance upon one another, and one begets another, and the loss of one frequently loses half the rest.” In his view, protectionist measures were “needless, unnatural, and can have no Effect conducive to the Publick Good”; further, they encouraged inefficient domestic industries with artificially high prices and threw good money after bad.

The 1701 Act (named for the year it actually became effective) backfired, for three reasons. First, calicoes became forbidden fruit, and thus even more desirable. Second, smuggling, the inevitable accompaniment of prohibition, flared up in the years following the act’s passage. In the words of one pamphleteer, “England being an Island, there are a thousand places for putting goods on shore.”51 Though most of the smuggled calicoes were brought in by French and Dutch merchants, no small amount entered England in the private baggage of the EIC’s employees. Third, and worst of all for the weavers, the act aided domestic cotton manufacturers by providing them with large amounts of plain Indian cloth to feed their advanced printing machinery.

The picture their data draw is stunning.81 Between 1519 and the end of the slave trade in the late 1860s, 9.5 million African slaves arrived in the New World; Figure 10-2 plots the annual transatlantic traffic. Since the best estimates of mortality on the middle passage are around 15 percent, this means that eleven million captives began the journey in Africa.

The majority of the 9.5 million who survived the middle passage cut, crushed, and boiled cane.82 Fully 80 percent of slaves came to Brazil and the Caribbean, while most of the rest went to Spanish North America and South America. So massive was this involuntary migration that as early as 1580, slaves constituted well over half of voyagers to the New World; by 1700, three-quarters; and by 1820, 90 percent. Truly, the settlement of the Americas would not have been possible without black slaves, who constituted fully 77 percent of those who crossed the Atlantic before 1820.83 Only after the mid-nineteenth century, when the institution was finally outlawed, did the majority of immigrants have white skin.

After 1800, the relatively high fertility and low death rates among slaves in the United States meant that southern plantation owners simply did not need to import more Africans. The American prohibition of the slave trade in 1808 easily passed through the southern-dominated Congress for just this reason: the Americans’ abolition of the slave trade crippled their Caribbean and Brazilian competitors. By 1808, almost all North American slaves were native-born, and by the Civil War, relatively little cultural memory of Africa remained.87 The Caribbean islands and Brazil, on the other hand, required a constant flow of Africans; well into the twentieth century, the Yoruba language flourished in Cuba, the last bastion of the New World plantation society, and African influences still pervade Caribbean culture.

This set off the War of 1812, which disrupted the flow of American cotton to England. Now suddenly dependent on higher-priced cotton from the EIC’s Indian monopoly, the Lancashire mill owners were infuriated. Parliament repealed the orders in June 1812, too late to stop the war with the Americans, and in July 1813 voted to end the EIC’s monopoly in India.

The high interest rates were a two-edged sword. On the one hand, they afforded the Company, and subsequent private English traders, enormous profits through borrowing at low rates in England and lending at astronomical rates in China. But it did the EIC no good to have chronically insolvent trading partners who were in constant need of rescue. Even today, international commerce is a highly uncertain enterprise, and merchants frequently have to bear losses. Adequate credit is to trade what altitude is to aircraft; without it, the odds of coming to grief over perilous commercial terrain are great. All merchant enterprises sooner or later lose cargoes or encounter soft markets. Without ample capital reserves and the ability to borrow at low rates of interest, bankruptcy is inevitable. Stretching the analogy a bit, if the hong system was an aircraft unable to attain a safe altitude, it also operated on only one engine. The Chinese had no functioning insurance markets; when fire swept Canton in 1822, most of the local traders were wiped out.

Academic research on opium consumption in China bears out Maugham’s observation: it was largely a social drug that harmed only a tiny percentage of users. One modern scholar estimates that although as many as half of men and one-fourth of women were occasional users, in 1879 only about one Chinese person in a hundred inhaled enough opium to even be at risk of addiction.26 The emperor and the mandarins did express some moral outrage over the debilitation caused by opium, but they were far more concerned about the drug’s damage to their balance of trade. China subscribed to European-style mercantilism as faithfully as any seventeenth-century Western monarchy. Before 1800, the tea trade was, at least in the terms of the mercantilist ideology of the day, grossly favorable to the Chinese. The EIC’s records pinpoint 1806 as the year when the silver flow reversed. After that date, the value of opium imports exceeded that of tea exports, and Chinese silver began flowing out of the Celestial Kingdom for the first time. After 1818, silver constituted fully one-fifth of the value of Chinese export goods. In the 1820s, a powerful group of mandarins began to support legalizing opium as a way to reduce its price and staunch the outflow of silver. One of them, Hsü Nai-chi, wrote a memo to the emperor noting that some users were indeed enfeebled, but the

fiscal damage to the nation was far worse. He recommended legalization, with the stipulation that opium should be purchased only by barter (presumably for tea), not with silver. The wide circulation of this memo among Canton’s foreign traders gave them hope that legalization was imminent. Hsü’s proposal was defeated, however, in a bitter battle at the imperial court.

During the War of 1812, the Americans came up with a revolutionary vessel whose speed enabled their privateers

to ravage English shipping and outrun blockades—the Baltimore clipper. The most famous, the Prince de Neufchatel, seized numerous British merchantmen before being cornered by three Royal Navy frigates just prior to the war’s end. The British towed the clipper to drydock and plumbed the secrets of its speed: a clean, narrow hull that kept the ship upright sailing into the strongest winds; and massive, tightly hung sails, characteristics easily visible in racing yachts even today. The fatal mistake of the Prince de Neufchatel’s captain, in fact, had been to overload the boat with too much weight in canvas sail, which had to be hauled down during the blustery conditions that prevailed during its final engagement.

The first Opium War had started. It would not end until 1842 and the infamous Treaty of Nanking, which awarded Britain monetary recompense, eliminated the hong monopoly, set Chinese export and import tariffs at a low rate, and opened Canton and four other treaty ports (Shanghai, Amoy, Foochow, and the island of Ningbo). In these ports, Britons had the privilege of extraterritoriality (immunity from Chinese law) and were governed by British consuls. No mention was made of opium, whose continued importation was tacitly understood by both sides. To this day, the humiliation of the Treaty of Nanking burns in China’s national consciousness. That not one American in a hundred has heard of it does not augur well for Sino-American relations in the

twenty-first century.

Then, just as quickly as the surplus had appeared, it vanished. Four events consumed the bounty. First, a series of massive conflicts gripped Europe and crippled the regional grain trade. Between the Seven Years’ War in 1756 and the end of the French-Napoleonic wars in 1815, England was either engaged in global conflict or preparing strenuously for it. Second, during the eighteenth century, England’s population nearly doubled, to nine million. Third, rapid industrialization after 1760 shifted workers and

financial capital from farms to factories. Finally, a series of crop failures began in 1756 and continued, on and off, for nearly two decades. In most years after 1780, Britain was a net importer of grain, mostly from Denmark, Poland, and coastal Germany. The year 1808 was the last time that England sent abroad more grain than it purchased.

Alas, Principles, and Ricardo himself, arrived too late to save England from the draconian Corn Law of 1815. In response to a pro-Corn Law tract by Thomas Malthus, Ricardo wrote an anti-Corn Law pamphlet, “An Essay on the Influence of a low Price of Corn on the Profits of Stock.” In it, he pointed out that the major advantage of the

“real” England (as opposed to the hypothetical England of Principles) lay in its factory machinery. The corn laws, he wrote, impeded the purchase of foreign grain and forced England to waste its precious labor in less productive farmwork. This benefited no one except the landowning aristocracy. Ricardo’s pamphlet convinced few. His more influential Principles did not appear in print until 1817, and he himself did not enter Parliament until 1819. The thought of German, Polish, and Danish warehouses bulging with cheap grain incited England’s working poor. In the end the mob proved more influential than the forces of rational discourse, but not in the direction intended. In March 1815, anti-Corn Law rioters raged through London’s streets and broke into the houses of the bill’s supporters, including those of Lord Castlereagh, the notoriously repressive foreign minister, and Frederick Robinson, who had introduced the bill. In the aftermath of the French wars, starving workers rioted for free trade, just as today more comfortable workers riot against it. Their lawlessness proved similarly counterproductive, forcing pro-repeal politicians and newspapers to disown their raucous allies. In 1815 the landed interests ruled the day. That

year’s infamous legislation, whose passage required not only majority votes in both houses but also fixed bayonets outside them, absolutely forbade grain imports when wheat fell below eighty shillings per quarter.66 Not long after, grain prices briefly fell well below eighty shillings, and Ricardo participated in a successful rearguard action through further pamphleteering and speeches in the Commons against the demands of land...

Military intervention consumed taxes, which drove up the price of England’s exports, and spending too much for expensive protected domestic grain to feed English workers did the same. Both damaged the nation.73 From this reasoning naturally flowed his belief in pacifism, international cooperation, and, most importantly, free trade.

The combination of generous funding and cheap postage enabled the League to blanket England’s pitifully small number of voters—just 7 percent of adult males after the Reform Act of 1832.78

Allowing in cheap foreign corn helped the workingman in two ways: first, it provided him with easy bread; and second, this bread would be

paid for by English manufactures, whose production gave the laborer work. In short, trade inward of necessity produced trade outward.

Protectionists predicted a catastrophe for farmers because of cheap grain imported from abroad. At first, this did not happen, as Europe’s increasing population ensured high food prices. But a generation after repeal, an avalanche of inexpensive grain from the Americas, Australia, New Zealand, and Russia buried English and continental farmers. By 1913, England imported 80 percent of its wheat from abroad, but as the twentieth century dawned, no sane Englishman would have traded his nation’s industrial present for its agricultural past.

The invasion of New World grain played out differently on the Continent, where the 1880s saw

the beginnings of a devastating backlash against free trade that would last until the middle of the twentieth century. This nineteenth-century reaction against the new global economy speaks forcefully to the twenty-first: although free trade benefits mankind in the aggregate, it als...

Figure 12-3 illustrates the operation of a simple, early mechanical refrigeration device. The compressor sucks ammonia

from the system on the left of the diagram, producing low pressure there, and compresses it into the right half. As the ammonia boils off on the low-pressure side, it cools a jacket of brine (which has a low freezing temperature) that is circulated out to the task at hand—ice-making machinery in the case of an ice plant, or the refrigerated compartment of a ship. On the high-pressure side, the ammonia condenses, producing “waste” heat that is vented off.

One of the most notorious pieces of legislation ever passed by Congress, it is also one of the most poorly understood. Smoot-Hawley

Hawley did dramatically raise U.S. tariffs, but they were already quite high. More important, and contrary to popular perception, it did not cause, or even greatly deepen, the Great Depression, nor was it a significant departure from previous American trade policy. Rather, Smoot-Hawley represented the high tide of worldwide protectionism that flowed on the new global agricultural trade.