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

In general, mercantilism is the belief in the idea that a nation's wealth can be increased by the control of trade: expanding exports and limiting imports. In the context of the European colonization of North America, mercantilism refers to the idea that colonies existed for the benefit of the Mother Country. In other words, the British saw the American colonists as tenants who 'paid rent' by providing materials for Britain to use.

According to the beliefs at the time, the wealth of the world was fixed. To increase a country's wealth, leaders 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, under the theory of mercantilism, 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. 

However, mercantilism was not the only idea of how nations built wealth at the time of the American colonies' search for independence, and most acutely as they sought solid and equitable economic foundations for the new American state.

Adam Smith and The Wealth of Nations

The idea of a fixed amount of wealth existing in the world was the target of Scottish philosopher Adam Smith (1723–1790), in his 1776 treatise, The Wealth of Nations. Smith argued that the wealth of a nation is not determined by how much money it holds, and he argued that the use of tariffs to halt international trade resulted in less—not more—wealth. Instead, if governments allowed individuals to act in their own "self interest," producing and purchasing goods as they wished, the resulting open markets and competition 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 roles of government were 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 and the Founding Fathers

Smith's work had a profound effect on the American founding fathers and the nascent nation's economic system. Instead of founding America on the idea of mercantilism and creating a culture of high tariffs to protect local interests, many key leaders including James Madison (1751–1836) and Alexander Hamilton (1755–1804) 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. These included 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. 

Sources and Further Reading