Friday, 20 April 2012

Classical mercantilism a consequence of gold standard

Mercantilism makes sense when countries are on a gold standard. The main economic job of a government was to ensure a sufficient money supply to meet the demand for it. If they didn't then rates would rise and that would crimp economic growth. But to do this requires additional gold. If your country isn't one of those that discovered vast gold underground then you need to buy that gold in from overseas. But international trade was then usually executed in gold. Clearly buying gold with gold can't make sense to anyone other than arbitrageurs, so next best is domestically produced goods, services, commodities.