Throughout the 16th century, the expansion trade across the oceans created commercial opportunities that involved both high risk and high potential profit. Government advancement of trade was considered crucial to ensure the survival of the nation, and this economic worldview (known as "Mercantilism") dominated the financial world of the 16th and 17th centuries. Mercantilism spurred on exploration, conquest, the building of colonies, and also many European wars as governments fought to monopolize trade.
The balance of trade (also known as net exports) is the difference between exports and imports, measured in monetary terms. Maintaining a trade surplus (exporting more goods than are imported) was considered crucial. Trade had already begun to be accounted for more scrupulously during the Renaissance, and the first large-scale balance of trade calculations were completed in 1615 in Elizabethan England. Sir Thomas Smith wrote that "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them," and mercantilist views were later put forward in even greater detail by Thomas Mun, in a work titled "England's treasure by forraign trade, or, The balance of our forraign trade is the rule of our treasure."
Both governments and merchants had a strong interest in encouraging the growth of commerce via high-risk overseas voyages, and this led to the emergence of both the chartered company and the joint-stock company. Charter companies were created when the Crown granted charters to specific merchants, granting a monopoly in a given region for a specified period of time. The Crown also provided legal support to enforce the monopoly.
Overseas trading voyages were very capital-intensive and very risky, subject to the threat of storms, mutinous crews, piracy, and other hazards. Large sums of money needed to be invested to buy cargo and ships, and to pay for crews. Furthermore, voyages would last many months, or even years, before profit could be realized. All these factors created a need for a new form of commercial organization to spread the risk and assist in raising capital.
The result was the joint-stock company, in which multiple investors contributed various sums and became stock holders, each with a right to a share of the company's profits in proportion to the size of their investment. Shareholders were also usually allowed to sell their shares to other interested parties, making it much easier to find interested investors and raise capital. The joint-stock company was a major landmark in the development of capitalism. Limiting each stockholder's liability to the value of their shares made this form of business entity very successful, and laid the foundation for the modern corporation. The buying and selling of company stock also led to the emergence of brokers, who received a commission fee for connecting buyers and sellers, and arranging deals.
Perhaps the most famous of the joint-stock companies was the British East India Company, founded in 1600. The spice trade was extremely lucrative and led to intense competition between European nations. Spices such as pepper sometimes became even more valuable commodities than gold, depending on supply and demand. Since the Dutch had enjoyed a near monopoly on pepper and tried to corner the market in 1599, this prompted the founding of the British East India company, which was given a Royal charter granting a fifteen year monopoly on British trade in the East Indies. During the course of its existence, the company became so powerful in India that it acquired governmental and military powers as well as dominating trade, and its activities played a crucial role in the history of the British Empire.
The Dutch, who were also in intense competition with the Spanish, followed suit and formed the Dutch East India Company several years later. The Dutch East India Company was very financially successful, in large part due to the extremely brutal and unscrupulous tactics it used in its monopoly building activities. By the latter half 17th century the Dutch East India company had become the richest corporation in the world, paying shareholders an annual dividend of 40% and maintaining extensive fleets and company agents.
One of the most legendary figures from the era of Mercantilism and overseas voyages was the English privateer Sir Francis Drake. Drake's continuous raids and plundering of gold from the Spanish is estimated to have yielded anywhere between 300,000 and 1,500,000 pounds worth of treasure. Whatever the exact amount, the share of money taken by the Crown in 1580 enabled Queen Elizabeth to pay off England's foreign debts and balance the budget while still leaving 40,000 pounds at her disposal. Elizabeth invested the money in the Levant Company, and the profits it yielded were used in forming the East India Company in 1600.
The predictable result of Drake's exploits was that he became a hero to the English and a hated pirate to the Spaniards. At one point King Philip II reportedly offered a reward of 20,000 ducats for Drake's death, a sum equivalent to about $6,500,000 in modern terms. Spain also demanded that Drake be turned over as a pirate, but Queen Elizabeth refused and had Drake knighted instead.
Conflict between the English and Spanish over New World gold and trade routes eventually led to the declaration of war. The wealthy and powerful Spanish began to build an Armada to attack England, but the victory would go to the English instead. Elizabeth I's famous spymaster Francis Walsingham was believed to have instructed his agents to corner bills of exchange drawn on Genoan banks, restricting the resources available for the build-up of the Spanish Armada and slowing their progress for several years. This application of economic warfare is believed to have contributed to Spain's defeat, concluding with Drake's legendary military victory over the Spanish Armada in 1588.
John Maynard Keynes later wrote that the modern age opened with the accumulation of capital from the huge quantities of gold and silver brought back to Europe in the 16th century, and that the treasure obtained by Drake's piracy, in particular, was "the fountain and origin of British Foreign Investment."
A History of Money will continue in Part XI, examining the rise of large state-financed banks, and the role played by the English goldsmith bankers in laying the foundations for modern banking...