Fordney-McCumber Tariff

Fordney-McCumber Tariff

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One of the first legislative trends of the Sixty-Seventh Congress (1921-23) was the Republican leadership`s marshaling of their overwhelming majorities in both the House and Senate to return the nation’s tariff policy to protectionism. The Emergency Tariff Act of 1921 was designed to be only a temporary measure until a more comprehensive measure could be drafted.Major new tariff legislation was guided through Congress by Representative Joseph W. Fordney of Michigan and Senator Porter J. McCumber of North Dakota, and provided for the following:

  • raising tariff rates to their highest level to that time, exceeding those provided by an earlier Republican Congress in the Payne-Aldrich Tariff (1909);
  • granting to the president broad powers to raise or lower rates by as much as 50 percent on items recommended by the Tariff Commission, a review body created during the Wilson administration;
  • introducing the use of the “American selling price”* as a means to increase the protective nature of the tariff without raising rates further.

As a matter of actual practice, the Republican presidents of the 1920s predictably ignored recommendations to lower tariff rates, but regularly offered protection to American producers by raising rates when given the opportunity.The impact of the Fordney-McCumber Act was considerable. Rising tariff barriers in the U.S. made it more difficult for European nations to conduct trade and, resultantly, to pay off their war debts.Further, the protective shield against foreign competition enabled the growth of monopolies in many American industries. Predictably, other nations resented the American policy, protested without result, and eventually resorted to raising their own tariff rates against American-made goods, thus creating a significant decline in international trade.The Fordney-McCumber Tariff called for a commission to consider reductions in tariffs. Seven years later, Senator William E. Borah of Idaho pronounced the commission a failure:

To my mind the record is one which condemns the Tariff Commission if we are to regard its operations as having anything whatever to do with the question of reducing tariff rates. In that respect it has been as inflexible as one could well conceive any law to be. I take the position that not a single reduction of any moment whatever has been brought about or been recommended by the Tariff Commission; that not 1 cent of the tremendous burden laid upon the consumers of this country by reason of conditions under which the tariff was enacted has been lifted by the action of the Tariff Commission during these seven years ...

*For example, if a set amount of a foreign-produced chemical had a value in its home market of $60 and the U.S. tariff rate for that item was 50 percent, then the total price on the American market would be $90 ($60 + $30). However, that item might be in short supply in the U.S. and could command a market price of $80. Under Fordney-McCumber, the statutory 50 percent rate would be applied to the higher American selling price and result in an overall price of $120 ($80 + 40). The rate remained unchanged, but it would be harder for foreign producers to market their product in the U.S.See other aspects of Harding`s domestic policy.What is a Tariff? Also see tariff table summary.

Fordney-McCumber Tariff - History

Illustration shows a group of children labeled "Sugar Trust (eating "Dingley Baby Food"), Clothing Trust, Tobacco Trust, Steel Trust, Beef Trust, Paper Trust, [and] Coal Trust", some are playing in a rough manner with little dolls labeled "Small dealer, The Public, Independent Producer, [and] Consumer", another doll, "Cattle Raiser" has been tossed aside. In the background, on the left, a woman labeled "Dingley Tariff" is sitting in a chair with a child on her lap, and on the right is a building identified as the "Home for Infant Industries". In the left foreground, Joseph Cannon is speaking to Theodore Roosevelt, who is holding a paper labeled "Tariff Revision".

This tariff was passed in 1922. It raised duties to an average of 38 percent. It particularly provided protection to thechemical and drug industries that had developed during World War I.

Both US industry and farming had flourished during World War I. The US was supplying the Allies with both arms and food. In 1919 farm production came to $17.7 Billion. Two years later production had dropped to $10.5 Billion, creating a depression on American farms. The fear was that drop would also happen to American Industry.

Once President Harding won his election Republicans quickly passed the Emergeny Tariff of 1921. The goal was to quickly raise tariffs to replace the low tariff in place under the Underwood Simmons Tariffs that the President Wilson had promoted. The new tariffs immediately increased tariffs on a large number of items including agricultural imports like wheat. The Emergency Tariff were passed as a stop gap matter until a more comprehensive tariff system could be put in place. The emergency tariff went into effect as soon as Harding took office and could sign the tariff.

The house held hearing on the best way to implement a tariff and decided on hat they called an American Valuation method. This was a system that calculate the American value of the product as opposed to the cost in the country of origin. Then a tariff of the difference would be placed on the goods. Most Democrats opposed the bill claiming it would just increase prices to Americans. The bill passed the House 289 to 127 on July 21, 1921

The Senate then took up the bill. They voted down the American Value method and instead gave the President the ability to raise the tariff on items based on his determination of value. The discussion on the bill in the Senate went on for a long time, but finally it passed the Senate 48 to 22 on August 19, 1922. The House and Senate then resolved their differences by agreeing to create a Tariff commission that would advice the President on what to set the tariffs at. In the end under the Fordney McCumber tariff the average duty on all imports was 14% as opposed to 9% under Underwood Simmons, and on duitable items it was 38.5% as opposed to the the duty of 27% under Underwood -Simmons. The average duty however was slightly lower then they had been under the 1909 Payne Aldrich duty.

Patrick Buchanan: Tariffs -- The Taxes That Made America Great

As his limo carried him to work at the White House Monday, Larry Kudlow could not have been pleased with the headline in The Washington Post: "Kudlow Contradicts Trump on Tariffs."

The story began: "National Economic Council Director Lawrence Kudlow acknowledged Sunday that American consumers end up paying for the administration's tariffs on Chinese imports, contradicting President Trump's repeated inaccurate claim that the Chinese foot the bill."

A free trade evangelical, Kudlow had conceded on Fox News that consumers pay the tariffs on products made abroad that they purchase here in the U.S. Yet that is by no means the whole story.

A tariff may be described as a sales or consumption tax the consumer pays, but tariffs are also a discretionary and an optional tax.

If you choose not to purchase Chinese goods and instead buy comparable goods made in other nations or the USA, then you do not pay the tariff.

China loses the sale. This is why Beijing, which runs $350 billion to $400 billion in annual trade surpluses at our expense is howling loudest. Should Donald Trump impose that 25% tariff on all $500 billion in Chinese exports to the USA, it would cripple China's economy. Factories seeking assured access to the U.S. market would flee in panic from the Middle Kingdom.

Tariffs were the taxes that made America great. They were the taxes relied upon by the first and greatest of our early statesmen, before the coming of the globalists Woodrow Wilson and FDR.

Tariffs, to protect manufacturers and jobs, were the Republican Party's path to power and prosperity in the 19th and 20th centuries, before the rise of the Rockefeller Eastern liberal establishment and its embrace of the British-bred heresy of unfettered free trade.

The Tariff Act of 1789 was enacted with the declared purpose, "the encouragement and protection of manufactures." It was the second act passed by the first Congress led by Speaker James Madison. It was crafted by Alexander Hamilton and signed by President Washington.

After the War of 1812, President Madison, backed by Henry Clay and John Calhoun and ex-Presidents Jefferson and Adams, enacted the Tariff of 1816 to price British textiles out of competition, so Americans would build the new factories and capture the booming U.S. market. It worked.

Tariffs financed Mr. Lincoln's War. The Tariff of 1890 bears the name of Ohio Congressman and future President William McKinley, who said that a foreign manufacturer "has no right or claim to equality with our own. . He pays no taxes. He performs no civil duties."

That is economic patriotism, putting America and Americans first.

The Fordney-McCumber Tariff gave Presidents Warren Harding and Calvin Coolidge the revenue to offset the slashing of Wilson's income taxes, igniting that most dynamic of decades — the Roaring '20s.

That the Smoot-Hawley Tariff caused the Depression of the 1930s is a New Deal myth in which America's schoolchildren have been indoctrinated for decades.

The Depression began with the crash of the stock market in 1929, nine months before Smoot-Hawley became law. The real villain: The Federal Reserve, which failed to replenish that third of the money supply that had been wiped out by thousands of bank failures.

Milton Friedman taught us that.

A tariff is a tax, but its purpose is not just to raise revenue but to make a nation economically independent of others, and to bring its citizens to rely upon each other rather than foreign entities.

The principle involved in a tariff is the same as that used by U.S. colleges and universities that charge foreign students higher tuition than their American counterparts.

What patriot would consign the economic independence of his country to the "invisible hand" of Adam Smith in a system crafted by intellectuals whose allegiance is to an ideology, not a people?

What great nation did free traders ever build?

Free trade is the policy of fading and failing powers, past their prime. In the half-century following passage of the Corn Laws, the British showed the folly of free trade.

They began the second half of the 19th century with an economy twice that of the USA and ended it with an economy half of ours, and equaled by a Germany, which had, under Bismarck, adopted what was known as the American System.

Of the nations that have risen to economic preeminence in recent centuries — the British before 1850, the United States between 1789 and 1914, post-war Japan, China in recent decades — how many did so through free trade? None. All practiced economic nationalism.

The problem for President Trump?

Once a nation is hooked on the cheap goods that are the narcotic free trade provides, it is rarely able to break free. The loss of its economic independence is followed by the loss of its political independence, the loss of its greatness and, ultimately, the loss of its national identity.

Brexit was the strangled cry of a British people that had lost its independence and desperately wanted it back.

Patrick J. Buchanan is the author of "Nixon's White House Wars: The Battles That Made and Broke a President and Divided America Forever."

Regulatory Theory and its Application to Trade Policy

  • Author : Wendy L. Hansen
  • Publisher : Routledge
  • Release Date : 2017-10-10
  • Genre: Business & Economics
  • Pages : 138
  • ISBN 10 : 9781351580632

The purpose of this book, first published in 1990, is to explain the varying levels of protection from foreign competition across US industries by focusing on factors that affect both the supply of and demand for the regulation of trade. What circumstances lead industries to request protection, and what factors affect the government’s decision of whether or not to supply that protection? What factors best explain the actions of interest groups and the decisions of regulators? This detailed study answers these key questions and more.


The tariff was supported by the Republican party and conservatives and was generally opposed by the Democratic Party and liberal progressives. One intent of the tariff was to help those returning from World War I have greater job opportunities. Trading partners complained immediately. European nations affected by World War I sought access for their exports to the American market to make payments to the U.S. for war loans. Democratic Representative Cordell Hull said, "Our foreign markets depend both on the efficiency of our production and the tariffs of countries in which we would sell. Our own [high] tariffs are an important factor in each. They injure the former and invite the latter."

Five years after the passage of the tariff, American trading partners had raised their own tariffs by a significant degree. France raised its tariffs on automobiles from 45% to 100%, Spain raised tariffs on American goods by 40%, and Germany and Italy raised tariffs on wheat. [ 6 ]

In 1928, Henry Ford attacked the Fordney–McCumber Tariff, arguing that the American automobile industry did not need protection since it dominated the domestic market, and their interest is in expending foreign sales. [ 7 ]

Some farmers opposed the Fordney- McCumber Tariff, blaming it for the agricultural depression. The American Farm Bureau Federation claimed that because of the tariff, the raised price of raw wool cost to farmers $27 million. Democratic Senator David Walsh challenged the tariff by arguing that the farmer is the net exporter and does not need protection because they depend on foreigner markets to sell their surplus. The Senator pointed out that during the first year of the tariff the cost of living climbed higher than any other year except during the war, presenting a survey of the Department of Labor, in which all of 32 cities assessed had seen an increase in the cost of living. For example, the food costs increased 16.5% in Chicago and 9.4% in New York. Clothing prices raised by 5.5% in Buffalo, New York, and 10.2% in Chicago. Republican Frank W. Murphy, head of the Minnesota Farm Bureau, also claimed that the problem was not in the world price of farm products, but in the things farmers had to buy. Republican Congressman W. R. Green, chairman of the House Ways and Means Committee, acknowledged that the statistics of the Bureau of Research of the American Farm Bureau that showed farmers had lost more than $300 million annually as a result of the tariff. [ 8 ]

Fordney-McCumber Tariff

Fordney-McCumber Tariff in the United States Introduction to Fordney-McCumber Tariff, 1922 In the context of the legal history: Pushed by Congress in 1922, it raised tariff rates to protect and promote big business. Resources In the context of the legal history: See Also International […]

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What was the impact of 1920s tariffs on world trade?

The Act and tariffs imposed by America's trading partners in retaliation were major factors of the reduction of American exports and imports by 67% during the Depression. Economists and economic historians have a consensus view that the passage of the Smoot&ndashHawley Tariff exacerbated the Great Depression.

Beside above, what was the impact of the Fordney McCumber tariff of 1922? The Fordney&ndashMcCumber Tariff of 1922 was a law that raised American tariffs on many imported goods to protect factories and farms. The US Congress displayed a pro-business attitude in passing the tariff and in promoting foreign trade by providing huge loans to Europe. That, in turn, bought more US goods.

Also to know is, why were tariffs passed in the 1920s?

These were enacted, in part, to appease domestic constituencies, but ultimately they served to hinder international economic cooperation and trade in the late 1920s and early 1930s. High tariffs were a means not only of protecting infant industries, but of generating revenue for the federal government.

Smoot-Hawley Tariff Act

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Smoot-Hawley Tariff Act, formally United States Tariff Act of 1930, also called Hawley-Smoot Tariff Act, U.S. legislation (June 17, 1930) that raised import duties to protect American businesses and farmers, adding considerable strain to the international economic climate of the Great Depression. The act takes its name from its chief sponsors, Senator Reed Smoot of Utah, chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, chairman of the House Ways and Means Committee. It was the last legislation under which the U.S. Congress set actual tariff rates.

What was the Smoot-Hawley Tariff Act?

Formally called the United States Tariff Act of 1930, this legislation, originally intended to help American farmers, raised already high import duties on a range of agricultural and industrial goods by some 20 percent. It was sponsored by Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon and was signed into law on June 17, 1930, by Pres. Herbert Hoover.

How did the Smoot-Hawley Tariff Act impact the American economy?

Economists warned against the act, and the stock market reacted negatively to its passage, which more or less coincided with the start of the Great Depression. It raised the price of imports to the point that they became unaffordable for all but the wealthy, and it dramatically decreased the amount of exported goods, thus contributing to bank failures, particularly in agricultural regions.

Why did the Smoot-Hawley Tariff Act have such a dramatic effect on trade?

The punitive tariffs raised duties to the point that countries could not sell goods in the United States. This prompted retaliatory tariffs, making imports costly for everyone and leading to bank failures in those countries that enacted such tariffs. Some two dozen countries enacted high tariffs within two years of the passage of the Smoot-Hawley Tariff Act, which led to a 65 percent decrease in international trade between 1929 and 1934.

The Smoot-Hawley Tariff Act raised the United States’s already high tariff rates. In 1922 Congress had enacted the Fordney-McCumber Act, which was among the most punitive protectionist tariffs passed in the country’s history, raising the average import tax to some 40 percent. The Fordney-McCumber tariff prompted retaliation from European governments but did little to dampen U.S. prosperity. Throughout the 1920s, however, as European farmers recovered from World War I and their American counterparts faced intense competition and declining prices because of overproduction, U.S. agricultural interests lobbied the federal government for protection against agricultural imports. In his 1928 campaign for the presidency, Republican candidate Herbert Hoover promised to increase tariffs on agricultural goods, but after he took office lobbyists from other economic sectors encouraged him to support a broader increase. Although an increase in tariffs was supported by most Republicans, an effort to raise import duties failed in 1929, largely because of opposition from centrist Republicans in the U.S. Senate. In response to the stock market crash of 1929, however, protectionism gained strength, and, though the tariff legislation subsequently passed only by a narrow margin (44–42) in the Senate, it passed easily in the House of Representatives. Despite a petition from more than 1,000 economists urging him to veto the legislation, Hoover signed the bill into law on June 17, 1930.

Smoot-Hawley contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail. (Because the legislation set both specific and ad valorem tariff rates [i.e., rates based on the value of the product], determining the precise percentage increase in tariff levels is difficult and a subject of debate among economists.) Within two years some two dozen countries adopted similar “beggar-thy-neighbour” duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

In 1934 President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, reducing tariff levels and promoting trade liberalization and cooperation with foreign governments. Some observers have argued that the tariff, by deepening the Great Depression, may have contributed to the rise of political extremism, enabling leaders such as Adolf Hitler to increase their political strength and gain power.

How did high tariffs affect the economy? They hurt the economy by limiting American producers’ ability to sell goods overseas. … The economy in early 1929 appeared strong and prosperous, but by 1932, many people and businesses were suffering directly from the bad economy.

The Smoot-Hawley Tariff Act raised the United States’s already high tariff rates. In 1922 Congress had enacted the Fordney-McCumber Act, which was among the most punitive protectionist tariffs passed in the country’s history, raising the average import tax to some 40 percent.

End the Tariff Taboo

Rennae LaPan attaches a steel and aluminum door at GM’s Chevrolet Silverado and GMC Sierra pickup truck plant in Fort Wayne, Ind., July 25, 2018. (John Gress/Reuters)

T o the American policy elite, there are few heresies greater than tariffs. In the world of think-tank white papers and academic panel discussions, tariffs keep Marxism company in the ashbin of history, supposedly discredited by the mathematical models of orthodox economists and disdained by every presidential administration since Herbert Hoover.

Entrenched skepticism was no match for the Trump administration, which shattered decades of consensus by increasing average tariffs on Chinese goods from 3 percent to almost 20 percent. This new trade war has been condemned by virtually every quarter of mainstream policy opinion, yet rather than restore the pre-Trump status quo, the new Biden administration appears ready to continue the supposedly backwards policy. Biden — a career free-trader who supported NAFTA and China’s ascension to the World Trade Organization — has no plans to rescind Trump’s China tariffs.

The most polarizing president in modern memory has apparently forged a new consensus in support of one of the most disfavored tools in economics. Tariffs have unexpectedly crawled out of the ashbin of history, and post-Trump Republicans will have to decide if they’ll try to push them back in. But that requires a fair understanding of what tariffs can and can’t do — and few policy tools are more misunderstood than tariffs.

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Navarro’s Faith-Based Case for Tariffs

Republicans and neoliberal Democrats have long told a story about America’s use of tariffs that goes like this: During the laissez-faire heyday of the 19th century, America enjoyed unprecedented growth and industrialization. But as the 20th century crept on, domestic industries began insisting on protection from foreign competition and successfully lobbied for tariffs, culminating in the disastrous Smoot-Hawley Tariff of 1930, which helped turn the stock-market crash into the Great Depression. Tariffs became increasingly obsolete in the post-war world after economists proved that they lead to deadweight loss and retaliation and are useful only for dying industries that can’t handle competition, and for corrupt governments that use them to pick winners and losers.

Virtually every part of this story is wrong. The United States spent much of the 19th century as the most protected economy in the developed world, becoming a manufacturing juggernaut despite average tariff rates hovering between 20 percent and 50 percent (today’s average is 2 percent). The supposedly catastrophic Smoot-Hawley tariff wasn’t even the decade’s largest hike on a percentage basis. That would be the now-forgotten Fordney-McCumber tariff of 1922, which was followed not by depression but by the Roaring Twenties. Smoot-Hawley itself did not cause the Great Depression, the Fed did. Barry Eichengreen has even argued that Smoot-Hawley’s effect on the United States was likely expansionary, with prices declining less sharply in the U.S. relative to its foreign competitors.

Tariffs can have this effect in part because of optimal tariff theory, a concept developed by Nicholas Kaldor in 1940. This theory states that for a large economy with substantial buying power in the world market, taxing imports can increase national wealth by lowering demand (and therefore prices) for imported goods and increasing demand for domestic goods exported to the world. That depends, however, on trading partners’ not retaliating.

Unfortunately, for much of recent history, we have been the trading partner that doesn’t retaliate. Ideological commitment to free trade turned the U.S. into the “mark” in international trade negotiations, allowing our partners to gain entry to our market without granting equal access to American exports in return. Tariffs aren’t principally about protection they’re about leverage. Absent the threat of tariffs, competitors feel free to break rules and create asymmetric advantages.

For instance, under Obama, inbound tariffs for Chinese exports carried an average tariff of 3 percent while Chinese duties on our exports averaged 8 percent, to say nothing of non-tariff trade barriers. Such unequal arrangements contributed to America’s record-high trade deficits, with consumption outstripping production by around 2 to 4 percent of GDP for most of the past 20 years, for a combined goods-and-services deficit of $605 billion through November 2020.

Conservatives have long insisted that trade deficits don’t matter. Armchair policy wonks are fond of pointing out that you run a trade deficit with Shake Shack, yet both are better off from this exchange. But as U.S. Trade Representative Robert Lighthizer points out, if you run a trade deficit with everyone, with no net-positive income stream from selling goods or services of your own, you’re just in debt, and your consumption of Shackburgers depends on your credit-card company’s patience.

Some believe that creditor patience is virtually limitless for the United States, because the dollar’s reserve-currency status means that our trading partners will always accept dollar-denominated IOUs in the form of U.S. Treasuries to fund our consumption. But trade deficits necessarily get plugged by sales of assets as well as by debt — meaning we are auctioning off our future productive capacity to consume more in the present.

Nor is debt without drawbacks: When exporters such as China and Germany recycle their profits into Treasuries, it lowers interest rates and stimulates borrowing — and financial bubbles — at the same time their production glut deepens American deindustrialization. As Warren Buffett said, “our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have been both selling pieces of the farm and increasing the mortgage on what we still own.” If this can’t go on forever, eventually it will stop.

Persistent trade deficits also carry distributional consequences. Every American worker is both a consumer and a producer. When we import more than we export, domestic producers face more competition without a commensurate increase in demand for their labor. This hurts American producers to help (for now) American consumers — an arrangement that most Americans don’t regard that as an equal trade-off. The outcomes of this choice are visible in the research of David Autor, David Dorn, and Gordon Hanson, who find that exposure to Chinese import pressure predicted male wage declines, which in turn predicted increased mortality and out-of-wedlock births. The economic models said that these workers would move into more-efficient sectors, but that didn’t happen. If we want to minimize these harms we should seek balanced trade, so that, as Oren Cass points out, “workers not only face greater competition but also enjoy greater opportunity.”

Tariffs are often not the best way to balance trade. Picking which goods to tax invites rent-seeking and lobbying, and the policy can have unintended effects due to the complexity of supply chains with inputs that jump from country to country before final assembly. Aiming for balanced trade merely means considering the contexts in which tariffs can be part of the solution alongside other approaches. For too long, an ideological attachment to free trade has foreclosed inquiry.

National Security
The requirements of national security have trumped free trade since the publication of Wealth of Nations, when Adam Smith noted that “if any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply.” The Trump administration invoked that logic when it used Section 232 to place a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, claiming that national security required the U.S. to safeguard its domestic capacity to produce defense inputs. The context for the tariffs was a longstanding policy by Chinese manufacturers to overproduce these metals, depressing world prices and giving China a majority share of world production.

The tariffs immediately attracted critics. Most of our imported steel and aluminum comes from allies like Canada and the European Union, not adversaries such as Russia and China, supposedly ensuring that our supply of needed goods would remain secure in a crisis. And the economic models said that even if prices spiked owing to shortage, the price signal would pull new producers into the market and quickly boost supply.

The COVID-19 pandemic put those theories to the test, and the results were bleak. Having offshored its capacity to produce personal protective equipment (PPE), medical devices, and pharmaceuticals, the U.S. found itself dependent on global supply chains that were falling apart. Adversaries and allies alike restricted the export of needed goods to ensure that their home markets were adequately supplied, and the process to bring new production online took a while as the body count climbed.

The lesson of the crisis is that productive capacity is not liquid, growing or shrinking to instantly match demand. It exists within a fragile ecosystem — the “industrial commons” — made up of human know-how within many interconnected, geographically rooted supply chains. When a supply chain gets offshored and the know-how migrates elsewhere, it has cascading effects, and can’t be recreated just because there’s an emergency. Harvard Business School professors Gary Pisano and Willy Shih explain this cascade:

Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products.

If the manufacturing gets offshored, the engineering, research, and design will follow, because these activities reap efficiency gains by locating close to the assembly line. Then you lose the future. This dynamic is well underway in the U.S., where R&D that American firms used to conduct in America is increasingly moving to East Asia. Tariffs alone are unlikely to reverse this trend, but in conjunction with industrial policy to support firms in bearing reshoring costs, it can work. For example, Taiwan has successfully reshored over $33 billion of investment from China through a “non-red supply chain” policy of tax credits, subsidies, and other state support to reshoring firms. It wouldn’t have succeeded without U.S. tariffs on China changing the cost structure of exporting from China.

This means tariffs that disincentivize the offshoring of manufacturing can be part of a strategy to gain new high-value industries rather than merely protect existing ones, by helping America’s industrial commons stay healthy enough to attract innovation. Doubters need only look to the advanced technology industries that sprung out of the Asian Tiger economies behind high tariffs and export promotion. Indeed, there is evidence that lowering tariffs on intermediate inputs actually decreases firm-level innovation because firms can purchase someone else’s technology instead of developing it internally. In some sectors, that’s efficient, but in others, dependence on someone else’s technology is a grave threat.

The industrial commons supporting our defense-industry supply chains are in dire straits. A 2018 Pentagon report identified dozens of militarily significant inputs with at most two, and in some cases zero, domestic suppliers, each of which functions as a choke point for our defense capacity. These include key inputs for satellites and missiles, casting for submarines, fasteners, high-voltage cables, flares, valves, fittings for ships, circuit boards, batteries, night-vision systems, sensors, and specialty chemicals. China is the sole supplier for many of these goods. Offshoring our ability to manufacture ships, satellites, and armaments not only renders us dependent on international supply chains that might not be there in an emergency, but it also hamstrings our ability to innovate and maintain our competitive edge.

When steel tariffs were announced in March 2018, the commentariat agreed almost unanimously that higher steel prices would weaken U.S. industry, including the defense sector, by raising input costs. Yet only one year later, U.S. steel prices had dropped back down to their pre-tariff level as steelmakers added capacity, and dire predictions failed to materialize. Protests that we already made enough steel to meet defense needs missed the point: By allowing the steel industry to continue to produce its full product range and remain profitable in the face of the Chinese supply glut, the tariffs may have arrested Pisano and Shih’s know-how cascade and safeguarded long-term viability.

But steel is only one part of the puzzle, because U.S.–China trade competition is increasingly about who will own the technologies that shape the future. Tariffs should be aimed at winning what is essentially a zero-sum competition for global market share in strategic sectors such as 5G telecom, advanced semiconductors, biotechnology, new materials, and aerospace. The free market is agnostic on American leadership of defense-critical industries Americans should not be. If American capital wants to speed the rise of an adversary, at the very minimum, it should pay a tariff that internalizes the national-security costs of doing so.

Social Dumping
Economists are trained to identify solutions that improve aggregate welfare. But as the economist Dani Rodrik points out, taking $100 away from Peter and giving $200 to Paul improves aggregate welfare and yet will leave half of this two-person society fuming. If net improvements occur through redistributions that people regard as illegitimate or rigged, it’s cold comfort to insist that society as a whole is better off.

Free trade makes society richer but involves major wealth redistributions between winners and losers. The international trading system has “level playing field” rules to ensure that the redistributions are accepted as legitimate. For example, the World Trade Organization allows states to place tariffs on imports that were subsidized by their home state, or were “dumped” on a trade partner for less than the cost of production.

But subsidies and dumping aren’t the only way to break the rules and make your goods cheaper than your competitor’s. You could be willing to fill your supply chains with slave labor. You could be willing to violate even your “free” workers’ rights by banning independent labor unions. You could ignore basic health-and-safety regulations, and you could be willing to despoil the environment. You could also be willing to evade even those international trading rules that do attempt to enforce a level playing field, by hiding subsidies as low interest loans from Party-connected banks and foiling WTO dumping calculations by exporting certain goods at artificially high prices so it all averages out.

When a competitor cheapens its goods by ignoring its legal obligations and violating its citizens’ rights, it’s called social dumping, and it’s just as illegitimate to ask workers to compete with socially dumped goods as with conventionally dumped goods. The competitor’s policy choice distorts the domestic bargain that workers struck in their own country, by forcing them either to abandon that bargain — for civilized labor standards, for breathable air, for safe products — or lose their jobs. If you think it’s illegitimate to ask an American worker to compete in a market with state-subsidized goods, it makes no difference whether that subsidy comes from a government check or the government’s suppression of collective bargaining. Tariffs are justified against such goods to preserve each society’s autonomous right to its own social contract.

This exposes the mistaken view that tariffs are merely a tool for government to unfairly pick winners and losers. When the global trading system includes rule breakers, free trade with that rule breaker means letting their artificially cheap goods into your market, where they will distort prices and put your firms out of business. Some on the right believe that if our trading partners want to use their taxpayers’ money to subsidize exports, American consumers should happily accept the philanthropy: cheaper inputs and cheaper prices. But Americans will remain competitive only in those industries that its trading partners have chosen not to subsidize, so the decision to avoid tariffs results in the Chinese Communist Party picking our winners and losers for us.

The bottom line is this: Trade imbalances harm us, and they are caused by competitors breaking the rules of the international trading system to create unreciprocal advantages. These include subsidies and dumping but also currency manipulation, forced technology transfer, inadequate or selective regulatory enforcement, IP theft, and intentional supply gluts. Ending this rule-breaking would require the U.S. to either find a governance mechanism that could force China to change its domestic system — none currently exists — or take enforcement action. That’s what Lighthizer’s USTR office did when it investigated which Chinese exports benefited from rule-breaking and imposed 25 percent tariffs to offset their unfair advantage.

Some say that this tit-for-tat escalation, fueling higher costs and greater uncertainty, is the single greatest drawback of tariffs. These fears often follow a naïve pattern of observing some unfair competitive act but cautioning against a response lest it invite “retaliation” — ignoring that the fight is already upon us. Complaints that China tariffs raise prices on American consumers are really complaints about losing a foreign subsidy, paid for by frittering away America’s long-term productive capacity. And certainty that this fundamentally unfair system will continue is not the kind of certainty our trade policy should protect. We can either grit our teeth and make our competitors feel that there are consequences for breaking the rules — or we can continue to be the mark.

The Dutch Economy in the Golden Age (16th – 17th Centuries)

In just over one hundred years, the provinces of the Northern Netherlands went from relative obscurity as the poor cousins of the industrious and heavily urbanized Southern Netherlands provinces of Flanders and Brabant to the pinnacle of European commercial success. Taking advantage of a favorable agricultural base, the Dutch achieved success in the fishing industry and the Baltic and North Sea carrying trade during the fifteenth and sixteenth centuries before establishing a far-flung maritime empire in the seventeenth century.

The Economy of the Netherlands up to the Sixteenth Century

In many respects the seventeenth-century Dutch Republic inherited the economic successes of the Burgundian and Habsburg Netherlands. For centuries, Flanders and to a lesser extent Brabant had been at the forefront of the medieval European economy. An indigenous cloth industry was present throughout all areas of Europe in the early medieval period, but Flanders was the first to develop the industry with great intensity. A tradition of cloth manufacture in the Low Countries existed from antiquity when the Celts and then the Franks continued an active textile industry learned from the Romans.

As demand grew early textile production moved from its rural origins to the cities and had become, by the twelfth century, an essentially urban industry. Native wool could not keep up with demand, and the Flemings imported English wool in great quantities. The resulting high quality product was much in demand all over Europe, from Novgorod to the Mediterranean. Brabant also rose to an important position in textile industry, but only about a century after Flanders. By the thirteenth century the number of people engaged in some aspect of the textile industry in the Southern Netherlands had become more than the total engaged in all other crafts. It is possible that this emphasis on cloth manufacture was the reason that the Flemish towns ignored the emerging maritime shipping industry which was eventually dominated by others, first the German Hanseatic League, and later Holland and Zeeland.

By the end of the fifteenth century Antwerp in Brabant had become the commercial capital of the Low Countries as foreign merchants went to the city in great numbers in search of the high-value products offered at the city’s fairs. But the traditional cloths manufactured in Flanders had lost their allure for most European markets, particularly as the English began exporting high quality cloths rather than the raw materials the Flemish textile industry depended on. Many textile producers turned to the lighter weight and cheaper “new draperies.” Despite protectionist measures instituted in the mid-fifteenth century, English cloth found an outlet in Antwerp ‘s burgeoning markets. By the early years of the sixteenth century the Portuguese began using Antwerp as an outlet for their Asian pepper and spice imports, and the Germans continued to bring their metal products (copper and silver) there. For almost a hundred years Antwerp remained the commercial capital of northern Europe, until the religious and political events of the 1560s and 1570s intervened and the Dutch Revolt against Spanish rule toppled the commercial dominance of Antwerp and the southern provinces. Within just a few years of the Fall of Antwerp (1585), scores of merchants and mostly Calvinist craftsmen fled the south for the relative security of the Northern Netherlands.

The exodus from the south certainly added to the already growing population of the north. However, much like Flanders and Brabant, the northern provinces of Holland and Zeeland were already populous and heavily urbanized. The population of these maritime provinces had been steadily growing throughout the sixteenth century, perhaps tripling between the first years of the sixteenth century to about 1650. The inland provinces grew much more slowly during the same period. Not until the eighteenth century, when the Netherlands as a whole faced declining fortunes would the inland provinces begin to match the growth of the coastal core of the country.

Dutch Agriculture

During the fifteenth century, and most of the sixteenth century, the Northern Netherlands provinces were predominantly rural compared to the urbanized southern provinces. Agriculture and fishing formed the basis for the Dutch economy in the fifteenth and sixteenth centuries. One of the characteristics of Dutch agriculture during this period was its emphasis on intensive animal husbandry. Dutch cattle were exceptionally well cared for and dairy produce formed a significant segment of the agricultural sector. During the seventeenth century, as the Dutch urban population saw dramatic growth many farmers also turned to market gardening to supply the cities with vegetables.

Some of the impetus for animal production came from the trade in slaughter cattle from Denmark and Northern Germany. Holland was an ideal area for cattle feeding and fattening before eventual slaughter and export to the cities of the Southern provinces. The trade in slaughter cattle expanded from about 1500 to 1660, but protectionist measures on the part of Dutch authorities who wanted to encourage the fattening of home-bred cattle ensured a contraction of the international cattle trade between 1660 and 1750.

Although agriculture made up the largest segment of the Dutch economy, cereal production in the Netherlands could not keep up with demand particularly by the seventeenth century as migration from the southern provinces contributed to population increases. The provinces of the Low Countries traditionally had depended on imported grain from the south (France and the Walloon provinces) and when crop failures interrupted the flow of grain from the south, the Dutch began to import grain from the Baltic. Baltic grain imports experienced sustained growth from about the middle of the sixteenth century to roughly 1650 when depression and stagnation characterized the grain trade into the eighteenth century.

Indeed, the Baltic grain trade (see below), a major source of employment for the Dutch, not only in maritime transport but in handling and storage as well, was characterized as the “mother trade.” In her recent book on the Baltic grain trade, Mijla van Tielhof defined “mother trade” as the oldest and most substantial trade with respect to ships, sailors and commodities for the Northern provinces. Over the long term, the Baltic grain trade gave rise to shipping and trade on other routes as well as to manufacturing industries.

Dutch Fishing

Along with agriculture, the Dutch fishing industry formed part of the economic base of the northern Netherlands. Like the Baltic grain trade, it also contributed to the rise of Dutch the shipping industry.

The backbone of the fishing industry was the North Sea herring fishery, which was quite advanced and included a form of “factory” ship called the herring bus. The herring bus was developed in the fifteenth century in order to allow the herring catch to be processed with salt at sea. This permitted the herring ship to remain at sea longer and increased the range of the herring fishery. Herring was an important export product for the Netherlands particularly to inland areas, but also to the Baltic offsetting Baltic grain imports.

The herring fishery reached its zenith in the first half of the seventeenth century. Estimates put the size of the herring fleet at roughly 500 busses and the catch at about 20,000 to 25,000 lasts (roughly 33,000 metric tons) on average each year in the first decades of the seventeenth century. The herring catch as well as the number of busses began to decline in the second half of the seventeenth century, collapsing by about the mid-eighteenth century when the catch amounted to only about 6000 lasts. This decline was likely due to competition resulting from a reinvigoration of the Baltic fishing industry that succeeded in driving prices down, as well as competition within the North Sea by the Scottish fishing industry.

The Dutch Textile Industry

The heartland for textile manufacturing had been Flanders and Brabant until the onset of the Dutch Revolt around 1568. Years of warfare continued to devastate the already beaten down Flemish cloth industry. Even the cloth producing towns of the Northern Netherlands that had been focusing on producing the “new draperies” saw their output decline as a result of wartime interruptions. But textiles remained the most important industry for the Dutch Economy.

Despite the blow it suffered during the Dutch revolt, Leiden’s textile industry, for instance, rebounded in the early seventeenth century – thanks to the influx of textile workers from the Southern Netherlands who emigrated there in the face of religious persecution. But by the 1630s Leiden had abandoned the heavy traditional wool cloths in favor of a lighter traditional woolen (laken) as well as a variety of other textiles such as says, fustians, and camlets. Total textile production increased from 50,000 or 60,000 pieces per year in the first few years of the seventeenth century to as much as 130,000 pieces per year during the 1660s. Leiden’s wool cloth industry probably reached peak production by 1670. The city’s textile industry was successful because it found export markets for its inexpensive cloths in the Mediterranean, much to the detriment of Italian cloth producers.

Next to Lyons, Leiden may have been Europe’s largest industrial city at end of seventeenth century. Production was carried out through the “putting out” system, whereby weavers with their own looms and often with other dependent weavers working for them, obtained imported raw materials from merchants who paid the weavers by the piece for their work (the merchant retained ownership of the raw materials throughout the process). By the end of the seventeenth century foreign competition threatened the Dutch textile industry. Production in many of the new draperies (says, for example) decreased considerably throughout the eighteenth century profits suffered as prices declined in all but the most expensive textiles. This left the production of traditional woolens to drive what was left of Leiden’s textile industry in the eighteenth century.

Although Leiden certainly led the Netherlands in the production of wool cloth, it was not the only textile producing city in the United Provinces. Amsterdam, Utrecht, Delft and Haarlem, among others, had vibrant textile industries. Haarlem, for example, was home to an important linen industry during the first half of the seventeenth century. Like Leiden’s cloth industry, Haarlem’s linen industry benefited from experienced linen weavers who migrated from the Southern Netherlands during the Dutch Revolt. Haarlem’s hold on linen production, however, was due more to its success in linen bleaching and finishing. Not only was locally produced linen finished in Haarlem, but linen merchants from other areas of Europe sent their products to Haarlem for bleaching and finishing. As linen production moved to more rural areas as producers sought to decrease costs in the second half of the seventeenth century, Haarlem’s industry went into decline.

Other Dutch Industries

Industries also developed as a result of overseas colonial trade, in particular Amsterdam’s sugar refining industry. During the sixteenth century, Antwerp had been Europe’s most important sugar refining city, a title it inherited from Venice once the Atlantic sugar islands began to surpass Mediterranean sugar production. Once Antwerp fell to Spanish troops during the Revolt, however, Amsterdam replaced it as Europe’s dominant sugar refiner. The number of sugar refineries in Amsterdam increased from about 3 around 1605 to about 50 by 1662, thanks in no small part to Portuguese investment. Dutch merchants purchased huge amounts of sugar from both the French and the English islands in the West Indies, along with a great deal of tobacco. Tobacco processing became an important Amsterdam industry in the seventeenth century employing large numbers of workers and leading to attempts to develop domestic tobacco cultivation.

With the exception of some of the “colonial” industries (sugar, for instance), Dutch industry experienced a period of stagnation after the 1660s and eventual decline beginning around the turn of the eighteenth century. It would seem that as far as industrial production is concerned, the Dutch Golden Age lasted from the 1580s until about 1670. This period was followed by roughly one hundred years of declining industrial production. De Vries and van der Woude concluded that Dutch industry experienced explosive growth after 1580s because of the migration of skilled labor and merchant capital from the southern Netherlands at roughly the time Antwerp fell to the Spanish and because of the relative advantage continued warfare in the south gave to the Northern Provinces. After the 1660s most Dutch industries experienced either steady or steep decline as many Dutch industries moved from the cities into the countryside, while some (particularly the colonial industries) remained successful well into the eighteenth century.

Dutch Shipping and Overseas Commerce

Dutch shipping began to emerge as a significant sector during the fifteenth century. Probably stemming from the inaction on the part of merchants from the Southern Netherlands to participate in seaborne transport, the towns of Zeeland and Holland began to serve the shipping needs of the commercial towns of Flanders and Brabant (particularly Antwerp ). The Dutch, who were already active in the North Sea as a result of the herring fishery, began to compete with the German Hanseatic League for Baltic markets by exporting their herring catches, salt, wine, and cloth in exchange for Baltic grain.

The Grain Trade

Baltic grain played an essential role for the rapidly expanding markets in western and southern Europe. By the beginning of the sixteenth century the urban populations had increased in the Low Countries fueling the market for imported grain. Grain and other Baltic products such as tar, hemp, flax, and wood were not only destined for the Low Countries, but also England and for Spain and Portugal via Amsterdam, the port that had succeeded in surpassing Lübeck and other Hanseatic towns as the primary transshipment point for Baltic goods. The grain trade sparked the development of a variety of industries. In addition to the shipbuilding industry, which was an obvious outgrowth of overseas trade relationships, the Dutch manufactured floor tiles, roof tiles, and bricks for export to the Baltic the grain ships carried them as ballast on return voyages to the Baltic.

The importance of the Baltic markets to Amsterdam, and to Dutch commerce in general can be illustrated by recalling that when the Danish closed the Sound to Dutch ships in 1542, the Dutch faced financial ruin. But by the mid-sixteenth century, the Dutch had developed such a strong presence in the Baltic that they were able to exact transit rights from Denmark (Peace of Speyer, 1544) allowing them freer access to the Baltic via Danish waters. Despite the upheaval caused by the Dutch and the commercial crisis that hit Antwerp in the last quarter of the sixteenth century, the Baltic grain trade remained robust until the last years of the seventeenth century. That the Dutch referred to the Baltic trade as their “mother trade” is not surprising given the importance Baltic markets continued to hold for Dutch commerce throughout the Golden Age. Unfortunately for Dutch commerce, Europe ‘s population began to decline somewhat at the close of the seventeenth century and remained depressed for several decades. Increased grain production in Western Europe and the availability of non-Baltic substitutes (American and Italian rice, for example) further decreased demand for Baltic grain resulting in a downturn in Amsterdam ‘s grain market.

Expansion into African, American and Asian Markets – “World Primacy”

Building on the early successes of their Baltic trade, Dutch shippers expanded their sphere of influence east into Russia and south into the Mediterranean and the Levantine markets. By the turn of the seventeenth century, Dutch merchants had their eyes on the American and Asian markets that were dominated by Iberian merchants. The ability of Dutch shippers to effectively compete with entrenched merchants, like the Hanseatic League in the Baltic, or the Portuguese in Asia stemmed from their cost cutting strategies (what de Vries and van der Woude call “cost advantages and institutional efficiencies,” p. 374). Not encumbered by the costs and protective restrictions of most merchant groups of the sixteenth century, the Dutch trimmed their costs enough to undercut the competition, and eventually establish what Jonathan Israel has called “world primacy.”

Before Dutch shippers could even attempt to break in to the Asian markets they needed to first expand their presence in the Atlantic. This was left mostly to the émigré merchants from Antwerp, who had relocated to Zeeland following the Revolt. These merchants set up the so-called Guinea trade with West Africa, and initiated Dutch involvement in the Western Hemisphere. Dutch merchants involved in the Guinea trade ignored the slave trade that was firmly in the hands of the Portuguese in favor of the rich trade in gold, ivory, and sugar from São Tomé. Trade with West Africa grew slowly, but competition was stiff. By 1599, the various Guinea companies had agreed to the formation of a cartel to regulate trade. Continued competition from a slew of new companies, however, insured that the cartel would be only partially effective until the organization of the Dutch West India Company in 1621 that also held monopoly rights in the West Africa trade.

The Dutch at first focused their trade with the Americas on the Caribbean. By the mid-1590s only a few Dutch ships each year were making the voyage across the Atlantic. When the Spanish instituted an embargo against the Dutch in 1598, shortages in products traditionally obtained in Iberia (like salt) became common. Dutch shippers seized the chance to find new sources for products that had been supplied by the Spanish and soon fleets of Dutch ships sailed to the Americas. The Spanish and Portuguese had a much larger presence in the Americas than the Dutch could mount, despite the large number vessels they sent to the area. Dutch strategy was to avoid Iberian strongholds while penetrating markets where the products they desired could be found. For the most part, this strategy meant focusing on Venezuela, Guyana, and Brazil. Indeed, by the turn of the seventeenth century, the Dutch had established forts on the coasts of Guyana and Brazil.

While competition between rival companies from the towns of Zeeland marked Dutch trade with the Americas in the first years of the seventeenth century, by the time the West India Company finally received its charter in 1621 troubles with Spain once again threatened to disrupt trade. Funding for the new joint-stock company came slowly, and oddly enough came mostly from inland towns like Leiden rather than coastal towns. The West India Company was hit with setbacks in the Americas from the very start. The Portuguese began to drive the Dutch out of Brazil in 1624 and by 1625 the Dutch were loosing their position in the Caribbean as well. Dutch shippers in the Americas soon found raiding (directed at the Spanish and Portuguese) to be their most profitable activity until the Company was able to establish forts in Brazil again in the 1630s and begin sugar cultivation. Sugar remained the most lucrative activity for the Dutch in Brazil, and once the revolt of Portuguese Catholic planters against the Dutch plantation owners broke out the late 1640s, the fortunes of the Dutch declined steadily.

The Dutch faced the prospect of stiff Portuguese competition in Asia as well. But, breaking into the lucrative Asian markets was not just a simple matter of undercutting less efficient Portuguese shippers. The Portuguese closely guarded the route around Africa. Not until roughly one hundred years after the first Portuguese voyage to Asia were the Dutch in a position to mount their own expedition. Thanks to the travelogue of Jan Huyghen van Linschoten, which was published in 1596, the Dutch gained the information they needed to make the voyage. Linschoten had been in the service of the Bishop of Goa, and kept excellent records of the voyage and his observations in Asia.

The United East India Company (VOC)

The first few Dutch voyages to Asia were not particularly successful. These early enterprises managed to make only enough to cover the costs of the voyage, but by 1600 dozens of Dutch merchant ships made the trip. This intense competition among various Dutch merchants had a destabilizing effect on prices driving the government to insist on consolidation in order to avoid commercial ruin. The United East India Company (usually referred to by its Dutch initials, VOC) received a charter from the States General in 1602 conferring upon it monopoly trading rights in Asia. This joint stock company attracted roughly 6.5 million florins in initial capitalization from over 1,800 investors, most of whom were merchants. Management of the company was vested in 17 directors (Heren XVII) chosen from among the largest shareholders.

In practice, the VOC became virtually a “country” unto itself outside of Europe, particularly after about 1620 when the company’s governor-general in Asia, Jan Pieterszoon Coen, founded Batavia (the company factory) on Java. While Coen and later governors-general set about expanding the territorial and political reach of the VOC in Asia, the Heren XVII were most concerned about profits, which they repeatedly reinvested in the company much to the chagrin of investors. In Asia, the strategy of the VOC was to insert itself into the intra-Asian trade (much like the Portuguese had done in the sixteenth century) in order to amass enough capital to pay for the spices shipped back to the Netherlands. This often meant displacing the Portuguese by waging war in Asia, while trying to maintain peaceful relations within Europe.

Over the long term, the VOC was very profitable during the seventeenth century despite the company’s reluctance to pay cash dividends in first few decades (the company paid dividends in kind until about 1644). As the English and French began to institute mercantilist strategies (for instance, the Navigation Acts of 1551 and 1660 in England, and import restrictions and high tariffs in the case of France ) Dutch dominance in foreign trade came under attack. Rather than experience a decline like domestic industry did at the end of the seventeenth century, the Dutch Asia trade continued to ship goods at steady volumes well into the eighteenth century. Dutch dominance, however, was met with stiff competition by rival India companies as the Asia trade grew. As the eighteenth century wore on, the VOC’s share of the Asia trade declined significantly compared to its rivals, the most important of which was the English East India Company.

Dutch Finance

The last sector that we need to highlight is finance, perhaps the most important sector for the development of the early modern Dutch economy. The most visible manifestation of Dutch capitalism was the exchange bank founded in Amsterdam in 1609 only two years after the city council approved the construction of a bourse (additional exchange banks were founded in other Dutch commercial cities). The activities of the bank were limited to exchange and deposit banking. A lending bank, founded in Amsterdam in 1614, rounded out the financial services in the commercial capital of the Netherlands.

The ability to manage the wealth generated by trade and industry (accumulated capital) in new ways was one of the hallmarks of the economy during the Golden Age. As early as the fourteenth century, Italian merchants had been experimenting with ways to decrease the use of cash in long-distance trade. The resulting instrument was the bill of exchange developed as a way to for a seller to extend credit to a buyer. The bill of exchange required the debtor to pay the debt at a specified place and time. But the creditor rarely held on to the bill of exchange until maturity preferring to sell it or otherwise use it to pay off debts. These bills of exchange were not routinely used in commerce in the Low Countries until the sixteenth century when Antwerp was still the dominant commercial city in the region. In Antwerp the bill of exchange could be assigned to another, and eventually became a negotiable instrument with the practice of discounting the bill.

The idea of the flexibility of bills of exchange moved to the Northern Netherlands with the large numbers of Antwerp merchants who brought with them their commercial practices. In an effort to standardize the practices surrounding bills of exchange, the Amsterdam government restricted payment of bills of exchange to the new exchange bank. The bank was wildly popular with merchants deposits increasing from just less than one million guilders in 1611 to over sixteen million by 1700. Amsterdam ‘s exchange bank flourished because of its ability to handle deposits and transfers, and to settle international debts.

By the second half of the seventeenth century many wealthy merchant families had turned away from foreign trade and began engaging in speculative activities on a much larger scale. They traded in commodity values (futures), shares in joint-stock companies, and dabbled in insurance and currency exchanges to name only a few of the most important ventures.


Building on its fifteenth- and sixteenth-century successes in agricultural productivity, and in North Sea and Baltic shipping, the Northern Netherlands inherited the economic legacy of the southern provinces as the Revolt tore the Low Countries apart. The Dutch Golden Age lasted from roughly 1580, when the Dutch proved themselves successful in their fight with the Spanish, to about 1670, when the Republic’s economy experienced a down-turn. Economic growth was very fast during until about 1620 when it slowed, but continued to grow steadily until the end of the Golden Age. The last decades of the seventeenth century were marked by declining production and loss of market dominance overseas.


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