Mercantilism and Its Effect on Colonial America

The site where Adam Smith wrote The Wealth of Nations
The Fife, Scotland site where Adam Smith wrote "The Wealth of Nations".

Kilnburn/Wikimedia Commons

Mercantilism is the idea that colonies existed for the benefit of the Mother Country. In other words, the American colonists could be compared to tenants who 'paid rent' by providing materials for export to Britain. According to the beliefs at the time, the wealth of the world was fixed. To increase a country's wealth, they needed to either explore and expand or conquer wealth through conquest. Colonizing America meant that Britain greatly increased its base of wealth. To keep the profits, Britain tried to keep a greater number of exports than imports. The most important thing for Britain to do was keep its money and not trade with other countries to get necessary items. The colonists' role was to provide many of these items to the British. 

Adam Smith and The Wealth of Nations

This idea of a fixed amount of wealth was the target of Adam Smith's The Wealth of Nations (1776). In fact, he argued that the wealth of a nation is actually not determined by how much money that it had. He argued against the use of tariffs to halt international trade was actually resulting in less not more wealth. Instead, if governments allowed individuals to act in their own 'self interest', producing and purchasing goods as they wished with open markets and competition this would lead to more wealth for all. As he said, 

Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Smith argued that the main role of government was to provide for common defense, punish criminal acts, protect civil rights, and provide for universal education. This along with a solid currency and free markets would mean that individuals acting in their own interest would make profits, thereby enriching the nation as a whole. 

Smith's work had a profound effect on the American founding fathers and the nation's economic system. Instead of founding America on this idea of mercantilism and creating a culture of high tariffs to protect local interests, many key leaders including James Madison and Alexander Hamilton espoused the ideas of free trade and limited government intervention. In fact, in Hamilton's Report on Manufacturers, he espoused a number of theories first stated by Smith including the importance of the need to cultivate the extensive land that is in America to create a wealth of capital through labor, distrust of inherited titles and nobility, and the need for a military to protect the land against foreign intrusions.