A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein

Luck, too, is required: had João II accepted his proposal, then Columbus would have staged his expedition from the Portuguese Azores, which he knew well, and he probably would have foundered and perished in the unfavorable winds at that latitude. As fortune would have it, all four of his journeys were mounted from the more southerly Spanish Canaries, freshened with easterly trade winds blowing straight toward the Caribbean.

So single-mindedly did Columbus pursue the westerly route that he failed to take along on his journeys the specialists instinctively sought by later, and far more competent, conquistadors: Arabic translators to tell him that the primitive Carib “Indians” he encountered and brought back with him to Spain were certainly not residents of India; jewelers to ascertain that the massive quantity of yellow metal weighing down his holds was iron pyrite, fool’s gold; or apothecaries like Tomé Pires to warn him that the “cinnamon” and “pepper” he presented to Ferdinand and Isabella on his return were, respectively, a nondescript bark and chilies of a sort never before seen in the Old World.

So thinly stretched were the Portuguese that on their largest merchantmen, often only a few European officers and soldiers commanded crews consisting of hundreds of Asians or African slaves.

Vasco da Gama’s voyage of 1497-1499 was simply the most remarkable maritime accomplishment of its time, a round trip across 28,000 miles of open ocean to attain its goal—India. Columbus, in spite of his blandishments, had done no such thing.

Unlike Columbus, da Gama gathered painstaking nautical intelligence before weighing anchor. He identified Calicut on India’s southwestern Malabar Coast as the richest entrepôt on the subcontinent—almost precisely where the southwest monsoon deposited his ships after they departed the coast of East Africa. Da Gama accomplished his staggering nautical feat with the aid of two innovations.

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.

Da Gama’s small fleet had been out of sight of land an astounding ninety-five days; by contrast, Columbus’s transit during his first voyage from the Canaries to the Bahamas took thirty-six. So great was da Gama’s navigational skill that his measured latitudes were never off by more than two degrees. Columbus, by contrast, was notorious for his navigational inaccuracy, placing, for example, Cuba at forty-two degrees north latitude —that is, even with Boston.

The Portuguese sought not a trading empire, but rather a protection racket that coerced local merchants into selling spices and other goods at below market rates and excluded others, particularly Muslims, from honest commerce. The dividing line between protection and piracy is a fine one indeed, and the Portuguese crossed it routinely.

Venice’s spice trade did plummet, by perhaps as much as three-fourths, in the decades following 1498. The falloff was not, however, the result of a Portuguese blockade. Rather, large amounts of spices were now flowing around the Cape to Lisbon, then onward to Antwerp, the main Habsburg trading hub in an increasingly prosperous northern Europe.

Perhaps even more detrimental to the Venetian spice trade than competition from the Cape route was the deterioration in relations between Venice and the ever-expanding Ottomans.

The royal family and its favored merchants and captains earned fabulous wealth from the spice trade, but the nation itself was bankrupted by the staggering military expenses of a global empire. Portugal became known as the “Indies of the Genoese,” chronically in debt and beholden to Italian merchants and German banks run by the Fugger family, the kingdom’s major creditors.

Ultimately, events in northern Europe sealed the fate of the Portuguese spice empire. The early seventeenth century would see a struggle for wealth and power among three nations—Portugal, Spain, and the Netherlands—whose newly acquired mastery of the earth’s wind systems allowed them to compete both commercially and militarily over a planet completely encircled by trade routes.

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.

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).

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.

Mariners had for centuries harnessed the Indian Ocean monsoons, but away from Asia these seasonal phenomena play only bit roles, overshadowed by two main wind systems, both of which blow constantly through out the year. The first system, taken advantage of by Columbus, and even more spectacularly by Magellan, blows from east to west in the tropical latitudes (or, more accurately, from the northeast above the equator, and from the southeast below it). The second system blows in the opposite direction—from west to east—in the temperate latitudes, most strongly between forty and fifty degrees latitude in both the northern and southern hemispheres (roughly even with Venice and the southern tip of New Zealand, respectively).

By the time of Columbus’s transatlantic voyages, cane had just been transplanted to the Spanish Canaries, from where his expeditions were staged. It quickly spread throughout the tropics of the New World and touched off an explosion of cane production that powered much of the world economy for the next three centuries. The “sugar belt” of the New World, which spread from northern Brazil to Surinam and up the Caribbean chain all the way to Cuba, attracted large numbers of European settlers lured by the relatively short transatlantic passage, the lack of organized native opposition, and agricultural profits unimaginable in their homelands.

Between the sixteenth and nineteenth centuries, the piece of eight, particularly the trusted Mexican coin, was the de facto world currency. Whether in the hands of the mighty trading companies or a lowly local merchant, Spanish dollars paid for nutmeg in the Bandas, calicoes in Gujarat, silk in Manila and Mexico, coffee in Yemen, and cinnamon in Sri Lanka.

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

The majestic, liberal, and free-trading British Empire was more than two centuries in the future; Tudor England was a nation of bankrupt monarchs, crown monopolies distributed to court favorites, and royal letters of marque granting freebooters a piece of the action.

Through Silva and his charts, Drake appropriated for England the most closely kept naval and trade secret of the era: celestial navigation in the strange skies “below the line” in the southern hemisphere.

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.

Dikes and windmills were expensive, and local church and municipal councils raised the required funds in the form of loans. This turned Holland into a nation of capitalists; merchants, aristocrats, and even rich peasants tended to invest their spare guilders in the bonds used to finance the reclamation projects.

Fractional shares not only made it easier for merchants to bear prudent risks, but also allowed investors to increase their margin of safety by blunting the damage done by the loss of an individual ship or an unsuccessful commercial outcome. This in turn increased the willingness of investors to provide capital, which further lowered interest rates. 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.”18 Essentially, such markets assigned prices to given amounts of commodities at some point in the future—say for a thousand pounds of herring one year hence. These financial instruments could then be bought and sold just like the actual item. The Dutch did not invent this concept—it was well known in both southern Europe and the Muslim world—but they refined and institutionalized it to a degree never before seen.

All other things being equal, a Dutch company could borrow at a 4 percent interest rate two and a half times more money than an English company could at a 10 percent rate.

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.

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.

The lure of Western culture and technological knowledge, or “Dutch learning,” would help open Japan long before the appearance of Perry’s black ships in 1854.

When this attempt failed, Coen forced the Chinese to knuckle under by sinking eighty junks along the south China coast. Their foreign trade at a standstill, the Chinese granted the VOC a permanent trading post on Taiwan—Fort Zeelandia—whose warehouses soon bulged with spices, silks, porcelain, and drugs.35

This grisly recruitment effort was run by a specialized corps, composed mostly of women, the zielverkoopers (literally, “soul sellers”). Their marks were the young foreign men, mainly from Germany, who swarmed into Dutch cities seeking their fortune. In return for a cut of their signing advance and future pay from the Company, the women advertised room, board, and the sort of entertainments usually sought by unattached young men, during the weeks and months until they sailed for Asia.

Over half of the million or so men who embarked from Holland’s wharves for the East never returned.

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.

The decisions of merchants and politicians in London, as well as the shifting tastes of Western consumers, would soon end the Dutch golden age. Ironically, Willem Ill’s capture of the English crown set in train events that cleared the way for England to replace Holland as the world’s economic and military superpower. The era of spices was coming to an end, and Britons, frozen out of the East Indies, turned their attention north to India and China, and west to the Caribbean and Africa, where they would prosper from the commodities of the future: cotton, tea, sugar, opium, and slaves.

In May 1773, Parliament, at the request of the EIC, passed the Tea Act. It imposed no new taxes, but rather allowed the Company, for the first time, to import tea directly from Asia into America. The act cut the price of tea in half and was therefore a boon to colonial consumers.2 The middlemen cut out by the act, local smugglers and tea merchants, were not as happy with the new legislation. When news of its passage arrived in Boston in September 1773, these two groups took action against the “unfair foreign competition” from the EIC.

After 1700, the pattern changed completely. New commodities—coffee, sugar, tea, and cotton—which were previously little known in the West and whose production could be easily transplanted across continents, came to dominate global commerce.

No one could hope to maintain a monopoly in items that were so easily grown and produced, and the nation most proficient at the new high-volume commerce, England, slowly realized that peaceful free trade served its interests best.

but Pope Clement VIII spared Europe the caffeine controversy when, around 1600, he sampled a cup and blessed coffee as a Christian beverage.

In order to accomplish this, he willingly dealt away the ancient divine right of kings and elevated Parliament to governmental supremacy. In exchange, Parliament gave William a robust tax base of excise levies (especially on luxury commodities such as coffee) to pay for his war against France.

This grand bargain—the Revolutionary Settlement of 1689—had far-reaching effects. First, the transfer of power from an absolute monarch to a representative legislative body invigorated the rule of law, the essential soil in which nations thrive economically.18 Second, the establishment of a crown excise tax made it easier for the government to pay off debts, thus making it a better credit risk and dramatically lowering interest rates. As a bonus, lenders perceived that a dominant legislature made up of wealthy bondholders and businessmen was less likely to default on its loans. Between 1690 and 1727, prime interest rates in England plummeted from over 10 percent to 4 percent.19 Third, after the events of 1688-1689, the Dutch financiers deduced that the commercial wind had shifted and decamped en masse for London.

Thus, before the invention of practical spinning machines in the eighteenth century, almost all of the West’s cotton cloth came from thread spun in India.

The histories of tea and sugar are also intertwined and their consumptions rose nearly in tandem. The sugar planters encouraged the consumption of tea, realizing that it was in their interest, and the EIC did the same for sugar, in which it otherwise had little direct trade.

Barbadian planters directed their factories toward rum production and kept the island the richest place in the Caribbean well into the eighteenth century, even as its sugar output fell well behind that of Jamaica, Saint-Domingue (modern Haiti), and the Leewards.69

Barbados’s heyday was relatively short-lived. After 1680, falling sugar prices, English tariffs, and depleted soil and forests ruined its plantations, and many planters fled to greener pastures in the New World.

Yet another group went to an even larger and more promising venue: what is now South Carolina, where they re-created the plantation society they had left behind on the island. This Barbadian heritage manifested itself in the most slave-intensive society on the North American continent, and in a political style that centuries later yielded Fort Sumter and Strom Thurmond.

The Portuguese, English, and Dutch operating “beyond the line” in the New World were to become three of the largest consumers of slave labor in the history of mankind. This was an unplanned and unforeseen fallout of the logistics of the plantation economy. Growing cane requires vast amounts of manpower, which the European homelands could not supply.

The first workers in the cane fields of the English Caribbean were white freemen, but by the late seventeenth century almost one-third of the field hands were prisoners.74 It was not unheard of for youths to be kidnapped (or “barbadosed,” a term analogous to the more modern “shanghaied”) off the streets of Bristol or Liverpool to work in the cane fields. Even when available, English laborers were often surly and uncooperative; in the best of circumstances they remained on the plantation for only a few years before their indenture, their contracts, their prison terms, their patience, or their lives expired. A more permanent solution was needed.

Africans had for millennia been accomplished farmers; not only were they skilled with plow and hoe, but they were also, unlike the English, well used to the heat and resistant to the great killers of the sugar islands—yellow fever and malaria. Best of all, they were cheap in comparison with free English labor, in terms of both initial price and upkeep. After 1660, plantation crews consisting of scores, and then hundreds, of Africans became the norm.

Before the RAC faded into obscurity in the seventeenth century, it had shipped 75,000 slaves across the Atlantic. Of this number, about one in six did not survive the journey. (The death rate was almost certainly higher among the white crew members, who were not only more susceptible to tropical disease than the slaves but also less expensive to replace).

Millions more would follow. Even in the absence of religious and cultural strictures against slavery, it is difficult and expensive to hunt, capture, and transport human beings; the majority of black slaves initially fell into the hands of opposing tribal armies, not slave traders. The Europeans’ susceptibility to infectious diseases dictated a minimal white presence on the African slave coasts, limited to visiting crews and a few permanent agents, whose primary expertise lay in plying local rulers with gifts and bribes of all descriptions. Since the local inhabitants of the slaving ports would not countenance such inhuman treatment of their ethnic brethren, the captives themselves had usually passed through several hands before reaching the coast in order to ensure that they were of different tribal origin from their final African jailers. Until well into the nineteenth century, the Portuguese, English, Dutch, and French remained largely unaware of just how their human cargoes had been acquired, and often of their precise geographic origin. Even had they wanted to capture the slaves themselves, Europeans could not have survived long enough to do so. The RAC’s records show that 60 percent of its personnel in Africa died in the first year and 80 percent by the seventh year, and that only one in ten was discharged alive from company service.

Just how did Europeans pay for their slaves? Largely in cloth.