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Growth and Decline of the Economies
of Europe and the US
Published by Bhaskar Sarkar, at Smashwords
Cover art: Sarita Sharma
Discover other titles by Bhaskar Sarkar at Smashwords.com Author Profile:
/>Copyright Author Bhaskar Sarkar 2012
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Dedication
This book is dedicated to students and teachers of economics in the developed world.
May God give them the wisdom to find an alternative to neo-liberal capitalism and save
the world
Contents
Prologue
Chapter 1: Economy and Wealth of Nations
Chapter 2: Economic Growth and Decline of Europe
Chapter 3: Economic Growth and Decline of United States
Chapter 4: Impoverishing Nations
Chapter 5: Impoverishing the People
Chapter 6: Bonanza for the Rich
Chapter 7: Causes for the Decline
Chapter 8: Strategy for the Future
Epilogue
Bibliography
About The Author
Prologue

“ You don’t need an economist or the Federal Reserve to tell the American people that
the economy is in trouble because they have been experiencing it for years now We
have to stop giving tax breaks to companies that are shipping jobs overseas and invest
those tax breaks in companies that are investing in the US,”- Barack Obama, American
Democrat President in waiting at a debate at University of Texas, Austin on Thursday 21
February 2008.
About four years have passed since Barack Obama became the President of United
States. But the world economic situation is still grim. The decline in the economies of the
United States and much of Europe is not a figment of the imagination of the Author.
Government debts are soaring. GDP growth is stagnating. Unemployment is stubbornly
refusing to comedown. Poverty and inequality levels are rising. Goldman Sachs is now
predicting that the largest developing economies namely Brazil, Russia, India and China
also known as the BRIC will overtake G7, the seven largest economies of the developed
world, in size of their economy. (Briefings; Time Magazine April 4, 2011). Fareed
Zakaria, the well known author, TV anchor and correspondent has written the book, “The
Post-American World”.
On September 15, 2008, ahead of the collapse of the over 150 year old investment bank,
Lehman Brothers, Alan Greenspan, the head of the Federal Reserve admitted that the US
economy was facing its worst crisis in a century. A 2008 report by the Federal Reserve
showed that household net wealth in the United States fell for the first time in five years
in the fourth quarter of 2007, dropping $532.9 billion or 3.6 percent,. The collapse of real
estate prices accounted for a third of the decline, while the decline in value of financial
assets like stocks, bonds and mutual fund investments accounted for nearly half. By
October 2008, with the stock market loosing 20% in one week, with stock prices
hovering at about half their 2007 peaks, after 23 banks and some Fortune 500 companies
having gone bankrupt, everyone was ready to admit that there was a crisis in the US
economy. Today, in the second half of 2011, the economic situation in the United States
and Western Europe is as grim if not grimmer.
But it was not always so. The 1950s and 1960s was characterized by great economic
prosperity in the United States. Economic growth was high and inflation was contained.

Distribution of wealth was reasonably fair and the rich poor divide was not as much as it
is today. There was a substantial and prosperous middle class. Then 1973 and the years
that followed brought in a variety of fiscal problems. The US dollar weakened and the US
had to leave the “Gold Standard”. There was an oil crisis in 1973 and energy crisis in
1979. There was increased accumulation of capital in the US. Unemployment began to
rise. Inflation or stagflation was increasing. A number of theories concerning new
economic systems began to develop. There was extensive debate between those who
advocated “social democracy and central planning” and those recommending “liberating
corporate and business power and re-establishing market freedoms”. By 1980, the pro
corporate group had emerged the winner. The global economic system that they created
would become known as “neo-liberalism”.
The other day I was listening to a program on CNN on the US Economy. The anchor was
very clear that when US government and politicians discussed the US economy, they
tended to approach the problem from statistical approach rather than a peoples approach.
Thus measures which benefit the super rich and the American companies or which
projected a rosier statistical picture, rather than those which benefited the American
people are usually given more weight age. No one seems to be clear as to why the
economies are not reviving. The debate in the Congress is limited to reducing deficit and
perpetuating the “Bush Tax Cuts” and increasing stimulus to create employment and
increase tax on the rich. The debate in the academic world does not seem to cover any
new ideas. Every one seems to recommend more of neo-liberal capitalism and
globalization with minor differences.
This book seeks to examine some historical facts regarding the rise of the economic
power of Western Europe and the United States and the causes of the decline of the
economic power. It is also an appeal to the professional economists and academicians to
halt the march of neo-liberal capitalism and globalization unleashed by President Ronald
Regan in 1981 and followed by all his successors to date with disastrous results for the
US and the developed world. These economic doctrines, which impoverish the majority
of the people of the developed world while benefiting the American companies and the
super rich, are economic policies which will finally end peace and prosperity in the US,

Britain, Europe, and this world. The fact that the British Economy is at a 60 year low is
no coincidence. British Prime Minister Mrs. Margaret Thatcher, a contemporary and
confidante of Ronald Regan, introduced the same economic liberalization in UK at about
the same time.
The book is also an appeal to the professional economists and academicians to re-
examine the forgotten economic theory of “Mercantilism” and see if it can revive the
fortunes of the United States and the developed world. It is also an appeal to the
economists of the developed world to find an alternative to neo-liberal capitalism and
globalization which are impoverishing the governments and ordinary people of the
developed world.
The Author
Back to Contents
Chapter 1: Economy and Wealth of Nations
“I would like to read what John McCain has to say about honor. Both my husband and I
have been laid off and we cannot afford to buy his book to find out” - Zulia Zulich,
Rancho Cucamonga, California, US, In Box, Time Magazine, September 29, 2008
Before we discuss the rise and fall of the economies of the developed world and how the
economies can be revived, it may be appropriate to spend a few minutes to define the
meaning of the economy of a nation and its wealth. Is the economy of a nation a set of
impersonal statistics like GDP, GDP growth, per capita GDP, consumer confidence or
Dow Jones index? Or does the economy and wealth of a nation mean the ability of the
government to spend money to wage war and to provide aid to other countries or protect
greedy investors and bailout the private sector banks and financial institutions which are
on the verge of collapse? Or does it mean the prosperity of the limited companies and
business houses of the nation, their assets and profitability or the wealth and prosperity of
the super rich or the upper class of the world that are getting wealthier by the minute? Or
does it mean the wealth, well being and prosperity of majority of the people of the
nation?
If the economies of nations mean the ability of the national governments of the developed
nations to spend, the economies are perhaps fine. Governments can borrow or print as

much money as they want. The developed countries have been doing just that since 2000
and funding wars in Iraq and Afghanistan and providing assistance to favored countries
like Israel, Pakistan, Ethiopia, and Georgia to name a few and running up huge trade and
budget deficits. These Governments can also spend trillions of dollars of taxpayer’s
money to bail out banks and investment banks which are going bust because of their
greedy and unsound credit and investment policies which the governments failed to
regulate. If the economy means the prosperity of nations multinational companies and the
super rich, then they are doing better. They have been able to stash over a trillion dollar
of profit offshore at tax havens to avoid paying their legitimate share of taxes. There is no
doubt that a few Wall Street icons, over 100 year old Fortune 500 companies, may have
collapsed. But that has happened before in 1979, 1982/83, 1988, 2000/03 and 2008. The
super rich are doing fine. The world had 1210 billionaires in 2011, an increase of about
200 over 2010. Of the 1210, 713 were from United States and Europe and 330 is Asia.
But if by the economy of nations we mean the economic condition of majority of the
people, it is bad and getting worse by the day every year since 2000. Unemployment is
increasing and is at unprecedented levels in Western Europe. Poverty is increasing.
Savings of many thrifty and prudent citizens have disappeared with the collapsing
financial giants. Most sixty plus citizens of the developed world are resigned to defer
retirement as much of their retirement plans have gone sour and are resigned to a life of
penury after retirement.
Economy
An economy is defined as the total of all human activity including producing,
exchanging, distributing, and consuming goods and services inside an economic system.
The economy of a country consists of all economic activity in its economic system. An
economy may also be described as a social network where goods and services are
provided or exchanged according to demand and supply between participants by barter or
on payment with currency accepted within the network. A given economy is the end
result of a process that involves its technological developments, history, social
organizations as well as its geography, endowment of natural resources and ecology.
An economic system is composed of people and institutions. It is governed by rules, and

relationships between the people and the institutions. Laws regarding sale, lease or
mortgaging property are example of rules. The organizations like central governments,
state governments, central banks, banks, stock exchanges, courts, corporations etc are
examples of institutions. Relationships include the relations between the employee and
employer, banks and their creditors and debtors, corporations and governments and the
vender and the consumer etc.
The people of the country may be divided into classes. Adam Smith divided the
population into owners of resources (labour, land and capital) and labour. Another way of
dividing the population could be by income. Thus we have the rich, the middle class and
the poor. One percent of the worlds wealthiest have 40 percent of the world’s wealth.
Another way of dividing the population is to classify them as the privileged and under
privileged. The wealthy are naturally privileged. The privileged also include politicians,
senior officers of public and private institutions and well educated professionals. The
poor are naturally under privileged. The under privileged also include ethnic and
religious minorities, immigrants, refugees etc.
Institutions can be public or private. Public institutions are created by governments to
provide essential services, maintain law and order and to protect the country from
external threat. Public institutions like hospitals or schools are set up and run with public
money or taxes paid by the taxpayers. They may charge fees for services provided and
partly or fully fund their activities. Private institutions like manufacturing units, banks,
hospitals, and hotels on the other hand are set up by owners of resources. Their primary
focus is to generate more and more profit and wealth for the owners and share holders.
Wealth of Nations
What constitutes wealth of nations? Unfortunately, there is no universally accepted
definition of wealth of nations. To a lay man, individual wealth consists of money (cash),
valuable possessions like gold, gems and jewelry, land and buildings, and stocks, shares,
bonds, debt and other modern investments. In case of nations, wealth is more difficult to
define. Some may include the wealth of its people, its institutions, foreign exchange
reserves etc. Some may like to add its natural and manpower resources. Some may
restrict it to the wealth of its central government. The wealth of nations or individuals is

constantly changing. However, it is interesting to note the various nuances of wealth.
Cash or Legal Tender
The first and foremost part of the wealth of a nation is its cash. All countries have printed
or issued a certain amount of currency and coins. Most of it is held within the country but
some of it may be held outside the country as foreign exchange reserves. The total money
in any economy is held at different places.
Cash is that amount of currency that is physically available with individuals and
institutions and not deposited in any bank. In developing countries like India where parts
of rural population do not have access to banks, cash constitutes a larger percentage of
the total currency in the economy. Cash is used for day to day expenditure. Cash is also
used for smuggling, trading in narcotics, bribing, funding political parties etc. Cash is
also used in transactions to avoid paying VAT and other taxes.
Money is also held with central banks of countries. Money is held with banks in the form
of savings or demand (current) deposits. This money can be withdrawn from the bank at
short notice. Money is also held as Term Deposits or fixed deposits where the money is
locked in for a specified period.
Money is essential for survival. It enables us to buy goods and services that we need or
that we want. When we have more money than what we need and want, we have an
investable surplus. Thus capital is formed. This capital can remain deposited in banks or
be used for producing goods and services or for speculation. When it is used for
producing goods and services, we generate employment and profits. When capital is used
gainfully for speculation, it does not generate employment but more capital. When there
is more capital than what can be invested in goods and services we have a serious
problem. When we have too much money chasing too few goods and services, we have
inflation. When we have too much money chasing too few speculative or investment
opportunities in stocks, shares, debt, property, commodities etc, we have bubbles. When
these bubbles burst, there is a financial meltdown.
A dollar currency note or coin remains a dollar over the years. But its purchasing power
is always changing. Most of the time, the purchasing power of money within a country
keeps reducing due to rise in prices of goods and services or inflation. To compensate for

the rise in the cost of goods and services, incomes have to be increased.
When money is used for purchasing goods and services from outside the country, an
exchange rate comes into play to convert the currencies of the importer and exporter
countries. The purchasing power of a currency may increase in a foreign country if the
currency of the foreign country is devalued. The converse is also true. Exchange rate of
currencies is one of the reasons for the so called wealth of developed nations. One US
dollar is equal to about 55 Indian Rupee or 6.39 Chinese Yuan. The exchange rates are
constantly changing. There is no mathematical logic behind these figures. The exchange
rate is supposed to be determined by demand and supply. However, in many countries
like India and China, the exchange rate is totally or partially fixed by the government to
suit its trading requirements. To illustrate the point let us compare the GDP of United
States and China. The GDP of the United States in 2010 was about 14.6 trillion dollars
US. The GDP of China in 2010 was 5.87 trillion dollar US. Thus if China changed its
conversion rate from 6.39 Yuan per dollar to 2 Yuan per dollar, it would immediately
become the largest economy in the world.
Gold, Precious Metals and Stones
The second part of the wealth of a nation is gold and precious stones and precious metals.
Their value tends to constantly rise over the years. In 1971 the price of one oz of gold
was US $40. In September 2011 it rose to over US $ 1900, an over 47 times increase in
40 years. The prices of gems and other precious metals have also been increasing though
the increase is not uniform or comparable with gold.
Land and Property
The third part of wealth comprises of land and property. Price of land has been increasing
all over the world. There may be short term fall in prices of land after financial
meltdowns but the prices rebound within 10-15 years. In rare cases, specific portions of
land may see a reduction in value due to ecological degradation or political unrest.
However, the cost of the building itself usually reduces due to aging or due to damage in
natural disasters.
Stocks, shares and other financial instruments
The fourth part of wealth is stocks, shares and other financial instrument. Their value is

always fluctuating and unreal. They have a face value, a book value and a market value.
It is this so called market value that is used to calculate the value of ones holding of
stocks, shares and other financial instrument at any given time. The market value changes
by the minute. When the markets crashed in 2008, the total value of the stocks reportedly
fell by about 35 trillion US dollars. Stocks, bonds and other financial investment
instruments can become junk or valueless if the company or bank collapses or is declared
bankrupt. It will thus be seen that wealth represented by stocks, shares and other financial
instruments are unreal. The “market capitalization” figure or the value of all stock of
companies listed in a stock exchange is a meaningless figure. The sum can never be
realized because stocks and shares are converted to real money only when they are sold
and any large sale reduces the price.
Other Resources
Some like to include natural resources like deposits of coal, crude oil, natural gas, metals,
precious metal and gems, hydro-electric power generation potential etc into the wealth of
nations. Some would want to include manpower resources or technological excellence in
wealth of nations. Some may want to include tourist earning potential into wealth of
nations. But the value of these resources is difficult to quantify and best ignored while
assessing the wealth of a nation.
Holders of the Wealth of Nations
Wealth of nations are held by four entities, the Central Government, Governments of its
states/counties/provinces, its institutions, and its people.
Central Governments
The wealth of Central Governments consist of money collected as taxes, its reserves of
domestic money and precious metal held with its central bank, money given as loan to
foreign governments, money invested in bonds of foreign countries and foreign
exchange reserves. The financial state of the central governments of developed countries
is poor. Their government debts are huge and range from about 70 to 200 percent of
GDP.
Governments of States /Counties/Province
The wealth of Governments of States/Counties/Province consist of lands and property in

its possession, money collected in taxes and money received as grant from the central
government and deposited in banks or state treasuries. Finances of most of these
governments are usually in dire state.
Institutions
The wealth of the institutions consists of the cash, properties and investments. The first
two are real. The value of investments, as we have seen, keeps changing with time.
People
The people of a nation also hold a part of its wealth. The people may be further divided
into the privileged class, the middle class and the poor and under privileged. In most
countries the wealth of the top one percent of the population is equal to the wealth of the
bottom 40 to 60 percent of the population. This inequality in the distribution of wealth is
not destabilizing as long as the poor and under privileged have enough money to meet
their basic needs of food, shelter and education that enable them to live in their traditional
life styles.
Measuring Economy
How do we measure the size of an economy? Do we measure it by its GDP, by the level
of Public Debt, by the exchange rate of its currency, the current account deficit, the trade
deficit, stock market performance, industrial output, agricultural output, the number of
billionaires they have, the real income of the people, the unemployment levels, the
poverty levels or levels of economic disparity. The assessment will naturally depend on
the yardstick used. The most common method used is to measure the countries GDP in
US dollars (PPP). The figures are calculated annually by World Bank and a few other
organizations. The measurement by GDP has serious shortcoming which we will discuss
in Chapter 4.
Measuring Wealth of Nations
Measuring the wealth of nations is equally problematic. Most countries do not declare the
total currency that is in circulation in the economy. The gold and foreign currency
reserves of countries may be in public domain but there is no way of knowing the
quantity and value of gold, silver, gems and jewelry held by the people of a nation.
Comparing wealth of nations involves use of currency conversion rates which are often

manipulated to suit the requirements of the governments, World Bank or IMF.
Conclusion
It is the author’s opinion that much of the economic crisis that seems to engulf the United
States and Europe is because we are so much taken in by economic theories and so busy
manipulating economic policies and activities to suit different interest groups that we
seem to forget the basics. Some thoughts which the learned readers may like to ponder on
are:
Real wealth consists of money (currency and coins), land, gold, silver, gems etc. Like
matter, real wealth cannot be destroyed. It only moves from one individual, institution or
country to another. Unreal wealth in the form of shares, bonds, derivatives and other
financial instruments, on the other hand, can loose its value overnight during stock
market crashes and financial meltdowns.
Demand at any given time is finite. If one American consumes one kg of meat a day, the
total monthly requirement for a population of 300 million will not exceed 9 billion kg. If
more is available in the market, some of it will remain unsold. The same is true for all
goods and services.
When there is more capital in an economy than what can be used to purchase or invest in
goods and services we have a serious problem. When we have too much money chasing
too few goods and services, we have inflation. When we have too much money chasing
too few speculative or investment opportunities in stocks, shares, debt, property etc, we
have bubbles. When these bubbles burst, there is a financial meltdown. Excessive
liquidity or money supply is a greater threat to the stability and wellbeing of mankind
than nuclear weapons, pandemics and terrorism because it puts necessities of life,
particularly food and housing beyond the reach of the poor and the underprivileged.
These people constitute 60 to 80 percent of the population of countries. This is bound to
lead to social unrest in the long run.
The value of wealth of nations, institutions and individuals are constantly changing. If
you do not know how to hold on to real wealth, it will move to some other country,
institution or individual.
Back to Contents

Chapter 2: Economic Growth and Decline of Europe
It is generally accepted that at the beginning of the 18
th
Century, the level of prosperity in
the nations of Asia and Europe was more or less the same. But by 1950, the situation had
completely changed. Per capita income of the people of Western Europe was 20 to 30
times that of countries of Asia and Africa. It is thus natural for intellectuals, economists
and even the people of the developed world to claim that these countries became wealthy
due to their superior innovativeness and economic policies which enabled them make
more effective use of resources namely land, labour and capital and pull economically
ahead of the rest of the world. However, as we shall see in this chapter, this claim is
largely unsubstantiated.
Economic History of Europe
The decline of feudalism in Europe leading up to the French Revolution had a profound
effect on the European economy. Isolated feudal estates were replaced by centralized
nations as the focus of power. Technological changes in shipping and the growth of urban
centers led to a rapid increase in international trade. Growth of specialized education in
Europe in the 12
th
Century gave rise to economic theories and brought in concepts of
national economies and state intervention into trade and economic policies. The new
economic policies had a profound effect on the prosperity and economic power of
Europe.
The Elizabethan System
England was the first European nation to begin a large scale and integrated approach to
trade. This was during the reign of Queen Elizabeth I (1558–1603). The concept of
national balance of trade first appeared in an article, “Discourse of the Common Wealth
of this Realm of England,” in 1549. The article stated that "We must always take heed
that we buy no more from strangers (other countries) than we sell them, for so should we
impoverish ourselves and enrich them.” New markets had to be developed to sell more.

The economic theory also required cheaper imports. This prompted the court of Queen
Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish
stranglehold on trade with North, Central and South America. Queen Elizabeth enacted
the Trade and Navigation Acts in Parliament and ordered the British navy to protect and
promote of English shipping.
Mercantilism
The economic theory of “Mercantilism” was further refining of the Elizabethan System.
Mercantilism arose in France in the early 16th century, soon after the monarchy had
become the dominant force in French politics. The French government became deeply
involved in the economy in order to increase exports. Protectionist policies were enacted
that limited imports and favored exports. Industries were organized into guilds and
monopolies, and production was regulated by the state through a series of over a
thousand directives outlining how different products should be produced. In 1539, France
banned the import of woolen goods from Spain. A number of restrictions were imposed
on the export of bullion. To improve industry, foreign artisans and craftsmen were
brought in. French government also took steps to decrease internal barriers to trade,
reducing internal tariffs and building an extensive network of roads and canals. These
policies were quite successful. France's industrial output and economy grew considerably
during this period and France became the dominant European military power. France
never developed a strong navy and never became a major trading power. Britain and the
Netherlands remained supreme in the trading field.
In England, Mercantilism reached its peak during the Long Parliament Government
(1640–1660). Mercantilist policies were also embraced throughout much of the Tudor
and Stuart reigns. In Britain, government control over the domestic economy was far less
extensive than on the Continent. Government controlled monopolies were common.
British mercantilism was mainly restricted to efforts to control trade. A wide array of
regulations was put in place to encourage exports and discourage imports. Tariffs were
placed on imports and bounties given for exports. The export of some raw materials was
banned completely. The Navigation Acts expelled foreign merchants from England's
domestic trade. The nation aggressively sought colonies and once under British control,

regulations were imposed that allowed the colony to only produce raw materials required
by Britain and to trade only with Britain. This led to friction with the colonies in North
America and was one of the major causes of the American Revolution. The Mercantilist
policies turned Britain into the world's dominant trader, and an international superpower.
The other nations of Europe also embraced Mercantilism to varying degrees. The
Netherlands, which had become the financial center of Europe by being its most efficient
trader, had little interest in seeing trade restricted and adopted few Mercantilist policies.
Mercantilism became prominent in Central Europe and Scandinavia after the Thirty
Years War (1618–1648). Prussia under Frederick the Great was perhaps the most rigidly
controlled economy in Europe. During the economic collapse of the seventeenth century
Spain did not have a coherent economic policy.
Mercantilism also fueled the establishment of European colonies around the world. Each
European nation attempted to seize colonies that would be sources of raw materials and
exclusive markets. This expansion was often conducted under the aegis of companies like
the British and Dutch East India Companies or the Hudson Bay Company with
government guaranteed monopolies in a certain part of the world. Though Mercantilism
has been criticized by economists like Adam Smith and economic liberalization is made
out to be economic concept of our time, the countries of the world continue to fight each
other for access to raw materials and exclusive markets. Mercantilism is now practiced by
large developing countries like China, India, Brazil etc who are strong enough to resist
the pressure of the developed countries to “Globalize” the economy by removing trade
and investment barriers and reducing import duties.
Growth of Economic Institutions
Economic institutions like banks, limited companies and stock exchanges first made their
appearance in Europe. Evolution of banks was perhaps the most important development
in the growth of financial institutions. Before banks appeared on the scene, credit
requirements of businesses, individuals and even the kings were met by money lenders
who charged steep interest for the money lent. However, there was the problem of safe
keeping of surplus cash. In England such funds were kept with reputed goldsmiths who
even paid interest on the money given to them for safekeeping. Banks evolved to meet

these two requirements. The bank held cash for customers, lent money and discounted
bills of exchange. They paid interest on the cash deposited; collected interest on funds
lent and charged a fee for discounting bills of exchange. The first bank to be established
in Europe was an Italian bank at Venice in the 12
th
Century. The Amsterdam Bank in
Holland was established in 1609 and it had benefited Dutch commerce tremendously by
enabling companies and individuals to raise money when required. In 1694, while
England was at war with France, the English Government became desperately short of
money. The Stuarts had defaulted on their loans so often that the Treasury found it
difficult to raise money. In desperation, King William and his ministers allowed a group
of wealthy people to form a public bank. In return the bank agreed to give the Treasury a
loan of 1,200,000 pounds. The Bank of England was thus founded by an act of the
Parliament in 1694. Along with the banks came currency notes. Initially, bank notes were
hand written with a face value of at least 20 pounds. Notes of 1 and 2 pounds were
introduced in 1797. Banks contributed immensely to the growth of European commerce
and prosperity by providing large funds for commercial ventures which individual money
lenders might have found difficult.
The second most important development was the evolution of joint stock companies.
Proprietary and partnership business had always been there. A joint stock company is a
company or business organization involving two or more individuals that own a part
(share) of the capital or investment (stock). Certificates of ownership called "shares" are
issued by the company in return for financial contribution. The shareholders are free to
transfer their ownership interest in the company at any time by selling their shareholding
to others. In modern company law, the company possesses a legal personality separate
from shareholders. The shareholders are only liable for the company's debts to the value
of the money they invested in the company. Today joint stock companies are commonly
known as corporations or limited companies. The earliest joint stock company was
reportedly formed at Toulouse, France in 1250. The Swedish company Stora is reported
to have undertaken a stock transfer in 1288. The British East India Company, one of the

most famous joint stock companies, was granted an English Royal Charter by Queen
Elizabeth I on December 31, 1600. Soon afterwards, the Dutch East India Company
issued shares in 1602. The evolution of the joint stock company was the major driving
force for overseas trading and expeditions to Asia, Africa and the Americas. The risk in
such ventures was colossal. But it was shared by the shareholders and limited to their
investment. So there was no risk of going bankrupt. The amounts that could be raised
were also much more than what could be raised by individuals or small groups. The joint-
stock company thus became a more viable financial structure than previous guilds or state
regulated companies. Joint stock companies were also the driving force behind the
industrial revolution. Money could be raised easily for commercializing new inventions
and innovation by setting up factories or developing sources for raw materials like mines
and plantations.
The third most important financial institution to evolve was the Stock Markets where the
shares could be bought and sold. The London Stock Exchange was established in 1802.
Soon stock exchanges were established in all the European capitals. Fortunes could now
be made or lost by speculating on the value of shares.
Industrial Revolution
The Industrial Revolution was a period in the 17
th
and 18
th
Century when major changes
took place in agriculture, manufacturing, and transportation systems. It started in Britain
and spread to Europe. It brought great socio-economic changes throughout Europe and
North America and eventually the world. The manual labour based economies of the
Great Britain, Europe and the United States began to be replaced by one dominated by
industrial mass production with machinery. The first mechanically operated cotton
spinning mill started working in Britain in 1743. Concrete was developed in 1756 using
lime mortar. The textile industry was mechanized in 1769. The steam engine was
invented in 1775. Development of new techniques of making iron and steel using coal

instead of charcoal took place with the setting up of a blast furnace in 1709. Forges for
making sections came up in1785. The first iron bridge was built in 1778. Mechanical
mining using the steam engine commenced in 1770. Industrial revolution brought great
economic benefits to Europe and America.
The development of financial institutions of the kind prevalent in Europe and later in the
United States was not seen in the feudal or tribal nations of Asia, Africa and the
Americas. Neither was there any industrial revolution outside Europe and the United
states till the 20
th
Century. These countries fell behind the Europeans in economic and
consequently military power. They were thus first exploited by the early European
multinational companies and subsequently colonized between 1750 and 1950.
Early Multinational Corporations
Multinational companies are companies which operate outside their country of founding.
Such companies started to appear in Europe at the start of the 7
th
Century.
British East India Company
The British East India Company was the oldest multinational company formed in Europe
and the world. It was formed on 31 December 1601 as a joint stock company for pursuing
trade with East Indies, a term used at the time to indicate South East Asia of today. The
company traded mainly in cotton, silk, indigo dye, natural potassium nitrate, tea and
opium. The high profits reported by the Company from its Indian operations prompted
King James I of Britain to send a diplomatic mission to the court of Mughal Emperor,
Jahangir in 1612. A commercial treaty was signed and the Company was granted
exclusive rights to reside and build factories in many parts of India. In 1711, the
Company established a trading post in Guangzhou (earlier known as Canton), China, to
trade tea for silver. The Company came to rule large areas of India from the Battle of
Plassey in 1757 till the Sepoy Mutiny of 1857 when the British Crown assumed direct
administration of India under the Government of India Act of 1858. During this period it

exercised military power and assumed administrative functions in addition to its
commercial pursuits. It effectively functioned as a mega corporation.
British East India Company displayed many characteristics of modern day multinationals
namely ruthless exploitation of the resources available particularly native farmers and
plantation workers, influence peddling at home and in the country of operation and high
profits at all cost. The Company developed a strong lobby in the English parliament. It
lent a sum of £3,200,000 to the British treasury, in return for monopoly trading rights. By
1720, 15% of all British imports were from India. Almost all of it passed through the
Company. Britain surged ahead of its European rivals in manufacturing and trade.
Demand for raw materials and profits from India were boosted by the need to sustain the
troops and the economy during Britain’s wars with its European neighbors. As a result,
Britain experienced higher standards of living. Its overseas trade increased. The
Company became the single largest player in the British global market. However, by the
middle of the 19
th
Century, the Company was in financial trouble due to increasing
expenditure on military campaigns and administration. By the middle of the 19th century,
the Company's rule extended across most of India, Burma, Malaya, Singapore, and Hong
Kong and a fifth of the world's population was under its trading influence. The Indian
Sepoy Mutiny of 1957-58 changed all that. The Company was nationalized and all its
Indian possessions were taken over by the British Crown under the Government of India
Act of 1958. Till its nationalization, the Company held a privileged position in relation to
the British Government similar to what most multinational companies do today. As a
result, it was frequently granted special rights and privileges, including trade monopolies
and tax exemptions. These caused resentment among its competitors, who saw unfair
advantage in the Company's position. Despite this resentment, the Company remained a
powerful force for over 250 years. The Company was finally dissolved in 1874.
Dutch East India Company
Next came the Dutch East India Company. It was a chartered company established in
1602. It was the second oldest multinational company in the world. The government of

Netherlands granted it a 21 year monopoly to carry out colonial activities in Asia. It was
granted quasi-governmental powers, including the authority to maintain armies, build
forts, wage wars, imprison and execute convicts, negotiate treaties, coin money, and
establish colonies. The Company eclipsed all its rivals in the Asian trade. Between 1602
and 1796 the Company sent almost a million Europeans to work in the Asian trade on
4,785 ships, and netted for their efforts more than 2.5 million tons of Asian goods. By
contrast, the rest of Europe combined sent only 882,412 people from 1500 to 1795, and
the fleet of the British East India Company, the Company’s nearest competitor, was a
distant second to its total traffic with 2,690 ships and a mere one fifth the tonnage of
goods carried by the Company. In 1640, the Company established itself in Sri Lanka, and
broke the Portuguese monopoly of the cinnamon trade. In 1658, the Company’s forces
captured Colombo the capital. By 1659, the Portuguese were expelled from Sri Lanka
and the Company secured the monopoly over cinnamon trade. The Company went on to
conquer the entire Malabar Coast of India up to Goa. In 1652, Dutch established an
outpost at the Cape of Good Hope (the southwestern tip of Africa, currently in South
Africa) to re-supply its ships on their journey to East Asia. This post later became a full
fledged colony called the Cape Colony, when more Dutch and other Europeans started to
settle there. The Dutch East India Company established trading posts were also
established in Iran, India, Malaysia, Thailand and China. By 1669, the Company was the
richest private company the world had ever seen, with over 150 merchant ships, 40
warships, 50,000 employees, a private army of 10,000 soldiers, and a dividend payment
of 40% on the original investment.
A major problem in the European trade with Asia at the time was that the Europeans
could offer few goods that Asian consumers wanted. European traders therefore had to
pay for spices with gold and silver, and this was in short supply in Europe. The Dutch
and English had to obtain gold and silver by creating a trade surplus with other European
countries. To overcome this problem the Company started an intra-Asiatic trade system,
whose profits could be used to finance the spice trade with Europe. The Company traded
throughout Asia. Silver and copper from Japan were used to trade with India and China
for silk, cotton, porcelain, and textiles. These products were either traded within Asia for

the coveted spices or brought back to Europe. The Company established a trading post on
an artificial island off the coast of Nagasaki. For more than two hundred years, it was the
only place where Europeans were permitted to trade with Japan.
Around 1670, the Third Anglo-Dutch War interrupted the Companies trade with Europe.
In 1741, the Dutch were defeated by the Indian ruler of Travancore. Around the turn of
the 18th Century, demand for Asian commodities increased in Europe. There was also an
abundant supply of capital at low interest rates. This enabled the Company to easily
finance its expansion in the new areas of commerce. Between the 1680s and 1720s, the
Company approximately doubled in size. The tonnage of the returning ships rose by 125
percent in this period. However, the Company's revenues from the sale of goods landed
in Europe rose by only 78 percent. For various reasons the era of expansion turned out to
be less profitable with annual return on investment coming down to 3.5 percent while the
average annual profit remained around 2 million guilders.
From 1730 to 1780, the fortunes of the Company continued to decline. Local rulers
gradually squeezed the Company out of Iran, Surat, the Malabar Coast, and Bengal in
India. The Fourth Anglo-Dutch War (1780-1784) finished the Company. British attacks
in Europe and Asia reduced the Companies fleet by half. The British captured valuable
cargo at sea and devastated its remaining power in Asia. The direct losses of the
Company were calculated to be 43 million guilders. After the Fourth Anglo-Dutch War,
the Company became a financial wreck. Its possessions in present day Indonesia and the
debt were taken over by the Dutch Government and named the Dutch Republic of
Batavia also called the Dutch East Indies. After independence it became the Republic of
Indonesia. The Company was nationalized on 1 March 1796 by the Dutch Government.
Most of the former possessions of the Company were subsequently occupied by Great
Britain during the Napoleonic Wars. Some of these were restored to the Dutch
Government by the Anglo- Dutch Treaty of 1814.
Other Early Multinationals
The success of the British and Dutch East India Companies prompted other European
powers to set up their own multinational companies to obtain a share of the Asian trade.
The French East India Company was established in 1664. It was granted a 50-year

monopoly on trade in the Indian and Pacific Oceans, a region stretching from the Cape of
Good Hope to the Straits of Magellan. The French monarch also granted the Company a
concession in perpetuity for the island of Madagascar, as well as any other territories it
could conquer. The Company failed to found a successful colony on Madagascar, but was
able to establish ports on the nearby islands of Bourbon (today’s Reunion Island) and Ile-
de-France (today's Mauritius). By 1719, it had established itself in Chandanagore and
Pondicherry in India. In the same year the Company was merged with other French
trading companies. The reorganized corporation resumed its operating independence in
1723. The Company was not able to maintain itself financially, and it was abolished in
1769. The company was reconstituted in 1785. In 1790, its monopoly was withdrawn.
Not accustomed to competition, the Company fell into steady decline and was finally
liquidated in 1794.
The Danish East India Company was founded in 1616. It was focused on trade with India
and had its base near Nagapattinam in Tamil Nadu, India. During its heyday, the Danish
East India Company imported more tea into Europe than the British East India Company
and smuggled 90 percent of it into Britain, and sold the tea at a huge profit. However, the
company could not operate profitably for long and was dissolved in 1729. Its possessions
in India became Danish Crown colonies. Denmark finally sold its settlements in India and
the Danish Gold Coast to the British in 1850.
The Swedish East India Company was founded in 1731 for the purpose of conducting
trade with the Far East. It grew to become the largest trading company in Sweden during
the 18th century. However its European influence was marginal. It folded up in 1813.
The early European multinationals, like the multinationals of today, played an important
role in enriching their countries of origin. They also established trading and military
bases all over Asia, Africa and enabled Europe to colonize the world.
Europe Colonizes the World (1750 – 1950)
European colonies were the product of the European Age of Exploration starting in the
15th century. The initial motivation behind spreading out to the unknown parts of the
world was trade. The growth of the Ottoman Empire and the fall of Constantinople to it
in 1453, cut off over land trading routes with Asia. Europeans were thus forced to try to

discover new sea trading routes. The early multinational companies of Britain,
Netherlands, France, etc first set up trading posts along the coast lines and islands of
Africa, Asia and Americas. They then built forts and armies, acquired territories and
finally became the rulers. Only China, Mongolia and Japan escaped being colonized,
possibly because their sea distance from Europe made it difficult and uneconomical to
colonize them.
Portugal led the way in exploring along the coast of Africa in search for a maritime route
to India. They established the first direct European diplomatic contacts with Indian states
in 1511, China in 1513 and Japan in 1542. They were followed by Spain near the close of
the 15th century. France, England and the Netherlands followed the Portuguese and
Spanish trade routes into the Atlantic, Indian and the Pacific Oceans, reaching Australia
in 1606 and New Zealand in 1642.
The Portuguese Colonial Empire was the first global empire in history. It also lasted the
longest from 1415 capture of Ceuta, a tiny city state on the African coast opposite
Gibraltar, to handing over of Macau, another city state to China in 1999. Portugal began
the “Age of Exploration” by exploring the Atlantic coast of Africa, establishing trading
posts for gold and slaves during the 15th century. In 1498, a Portuguese expedition
commanded by Vasco da Gama reached India by circumnavigating Africa, and initiated
Portuguese trade and colonization in the East. The Portuguese empire consisted of a vast
number of small and large colonies that are now part of 49 different sovereign countries.
The most important of them were Brazil, Portuguese West Africa (Angola), Accra
(Ghana), Portuguese Gold Cost, Portuguese Guinea- Bissau, Portuguese Madagascar, part
of Morocco, Portuguese East Africa (Mozambique), Zanzibar (Oman), Aden, Bahrain,
Sri Lanka and Goa. Some of these were lost to other European powers, particularly Great
Britain.
Spain took control of a large part of North America including Mexico, Florida in the
United States, all of Central America and a great part of South America including
Argentina, Peru, Colombia, Venezuela, the Caribbean islands including Cuba, and the
Philippines. Britain colonized the whole of Australia and New Zealand, most of India,
Malaysia, Burma (Myanmar), Ceylon (Sri Lanka), and large parts of Africa including

Egypt, Kenya, Uganda, Rhodesia (Zimbabwe), South Africa, Namibia, Nigeria, Jamaica
and Trinidad and Tobago in the Caribbean Islands and Canada. France held parts of
Canada and India (nearly all of which was lost to Britain in 1763), Indochina (Vietnam,
Laos and Cambodia), large parts of Africa including Sudan, Rwanda, Ivory Coast,
Algeria, Tripolitania (Libya), Louisiana Tract in North America (later sold to the United
States) and Lebanon. The Netherlands established a large number of trading posts in Sri
Lanka, India, New York in North America but lost all of them to Britain in the 4
th
Anglo
Dutch War. It however held on to Batavia (Indonesia) till the end of World War II.
Germany colonized Tanganyika (Tanzania), Rwanda (up to 1917), German South West
Africa (Namibia) in Africa. Belgium colonized Congo. Italy colonized Somalia, Eritrea
and part of Somalia. Russia acquired Siberia, Central Asia and Alaska (which it later sold
to the United States).
This colonization helped the economy of the European countries owning them. Trade
flourished because of the ability of the colonizers to access local produce like cotton, silk,
spices, indigo, coffee, coco, sugar, jute, timber, ivory and handicrafts which were in great
demand in the affluent societies of Europe. The colonies also provided captive markets
for manufactured goods and weapons. By the late 16
th
Century, silver obtained from
South, Central America and Mexico accounted for one fifth of the Spain's total budget.
The European countries fought wars amongst themselves that were largely paid for by the
money coming in from the colonies. Nevertheless, the slave trade, sugar cane and banana
plantations of the West Indies (Caribbean Islands), rubber plantations of Malaya, and
coffee and coco plantations in Africa and South America produced huge profits for the
European countries.
European powers exploited the resources and people of their colonies to the hilt. In India,
the British forced the farmers of Bengal and Bihar to cultivate Indigo instead of rice. It
did not matter that many starved and there was a famine in 1942. What mattered was that

the British companies made handsome profits. It is also said that the British cut off the
thumbs of the Muslin weavers of Bengal because the cloth manufactured in Britain could
not match the local fabric “Muslin” which they produced. It did not matter that the
weavers starved. What mattered was that British cloth produced in Manchester could be
sold and British companies made good profit.
Slave Trade
The primary objective of European colonists was to exploit New World’s land and
resources for profits. Native peoples were at first utilized as slave labor by the European
colonists. Large numbers of them died from overwork and diseases. A vast amount of
labor was needed to create and sustain plantations that required intensive labor to grow,
harvest, and process prized tropical crops. When a sufficient unpaid or under paid
workforce could not be locally collected, importing slaves seemed to be the logical
solution. Western and Central Africa and India became the source for enslaved people to
meet the demand for labour.
A number of African kings and merchants took part in the trading of enslaved people
from 1440 to about 1833. They sold their prisoners of war to European or Arab buyers.
Selling captives or prisoners was common practice amongst Africans and Arabs during
that era. With the rise in demand due to European needs, enslaving ones enemy became
less a consequence of war, and more and more a reason to go to war. The European
traders exported goods from Europe to African Kingdoms. For each slave, the African
rulers would receive weapons, ammunition and manufactured goods from Europe.
European traders under their countries naval protection then transported enslaved
Africans across the Atlantic Ocean in their own specially designed ships to the Americas
and the Caribbean Islands. The plantation economies of the New World were built on
slave labor. Seventy percent of the enslaved people brought to the new world were used
to produce sugar, the most labor-intensive crop. The rest were employed for harvesting
coffee, cotton and tobacco, and in some cases in mining. The produce of slave labour
operated plantations in the colonies including cotton, sugar, tobacco, molasses and rum
were then shipped back for sale in Europe at huge profits. In the European colonies, the
slaves' children were legally enslaved at birth.

The enslavement of Africans and shipping them to South American colonies of the
Portuguese and Spanish empires started in 1502. The Portuguese bought slaves from
African rulers and merchants. They also carried out expeditions to capture and enslave
Africans. They then either sold them to other European colonizers to make money or
used the slaves for running plantations in their own colonies. The Spanish empire took
money and awarded license to merchants to trade in slaves in their colonies. After 1580,
the British, French and Dutch traders joined the lucrative trade. The main destinations of
the slaves were the Caribbean colonies, Brazil, and North America. These European
countries built colonies in the New World whose economies were dependent on slave
labour. Britain also shipped slaves and “bonded labour” (poor people who had borrowed
money at high interest rates and were forced to work for generations without
remunerations) from India to its colonies particularly Fiji, East and Southern Africa and
the Caribbean Islands. Descendants of these Indian are found in very large numbers in
these countries.
Most historians now agree that at least 12 million slaves left the African continent
between the 15th and 19th century. 10 to 20 per cent died on board ships. Thus a figure of
11 million enslaved people transported to the Americas. The slave population multiplied
with time. The West Indian colonies of the European powers were some of their most
lucrative possessions.
Denmark, which had been active in the slave trade, was the first country to ban the trade
through legislation in 1792. The ban took effect in 1803. Britain banned the slave trade in
1807, imposing stiff fines for any slave found aboard a British ship. The Royal Navy,
which then controlled the world's seas, moved to stop other nations from continuing the
slave trade. Between 1807 and 1860, the West Africa Squadron of the British Navy
seized approximately 1,600 ships involved in the slave trade and took custody of 150,000
Africans who were aboard these vessels. However, several hundred slaves a year were
transported by the British navy to the British colony of Sierra Leone, where they were
made to serve as 'apprentices' in the colonial economy until the Slavery Abolition Act of
1833 was passed in Britain. The British planters were compensated with twenty million
pound sterling, and slaves were required to remain as slaves on the plantations for a

further six years.
Trans-Atlantic Slave Trade lasted for over three and a half centuries from 1502 to 1859.
Can any American or European economist calculate the wealth generated by slave trade
and the productivity of over 12 million African and Indian slaves who worked on the
plantations, mines, roads, railways and homes without any remunerations in the colonies
for a period of over 350 years? Trading in slaves and their exploitation is the foundation
on which much of the prosperity of Europe was built.
Opium Wars with China
The Chinese Emperor prohibited the sale and smoking of opium in 1729. The East India
Company established an elaborate scheme to defeat the ban. Opium produced in India
was taken to the Chinese coast hidden aboard British ships and then smuggled into China
by native merchants to pay for tea imports. British exports of opium to China grew from
an estimated 15 tons in 1730 to 75 tons in 1773. For the fifty years from 1773 to 1823,
opium trade with China became they main money spinner for the East India Company.
In 1756, the Qing Dynasty ruling China passed a decree which restricted foreign trade to
one port, Canton, and stopped foreigners from entering China. As a result, the British
East India Company faced a trade imbalance in favor of China. To overcome the
problem, the company invested heavily in opium production and sale to Chinese
smugglers. British and United States’ (then a British Colony) merchants brought opium
from the British East India Company's factories in the Indian state of Bengal, and shipped
it to the coast of China, where they sold it to Chinese smugglers for silver. The Company
had its monopoly on opium trade recognized by the British government, which itself
wanted the silver. By the 1820s China was importing 900 tons of Indian opium annually.
By 1938, the figure reached 1400 tons. The Chinese tried to stop the smuggling. Some
native drug traffickers were put to death. They forced the British merchants to surrender
their opium to be destroyed. When the British learned of what was taking place in
Canton, they sent a large contingent of the British Indian army, which arrived at Canton
in June 1840. British warships wreaked havoc on coastal towns. After the British
captured Canton, they sailed up the Yangtze River and captured the tax barges of the
Chinese Emperor. It was a devastating blow to the Chinese Empire. In 1842, the Qing

authorities sued for peace, which concluded with the Treaty of Nanking ending the First
Opium War. The treaty was ratified in 1843. In the treaty, China was forced to pay an
indemnity to Britain, open four ports to Britain for trade, and cede Hong Kong to Queen
Victoria. In the supplementary Treaty of the Bogue, the Qing Empire also recognized
Britain as an equal sovereign power and gave British subjects extra-territorial privileges
in ports covered in the treaty.
The Chinese authorities were reluctant to adhere to the terms of the 1842 Treaty of
Nanking. They tried to keep out as many foreign merchants as possible and victimized
Chinese merchants who traded with the British at the ports opened under the Treaty. To
protect those Chinese merchants who were friendly to them at Hong Kong, the British
granted their ships British registration in the belief that the Chinese authorities would not
interfere with vessels which carried the British flag. In October 1856 the Chinese
authorities in Canton seized a vessel called the "Arrow" which had been engaged in
piracy. The "Arrow" had formerly been registered as a British ship and was still flying
the British flag when it was seized. The British consul in Canton demanded the
immediate release of the crew and an apology for the insult to the British flag. The crew
was released, but no apology was given. In reprisal, the British governor of Hong Kong
ordered his warships to bombard Canton. The incident set the stage for the Second
Opium War.
A strong Anglo-French force was dispatched to teach the Chinese a lesson. The force
occupied Canton in December 1857, and then cruised north to briefly capture the Taku
Forts near Tientsin in May 1858. The invasion led the Chinese to accept the Tientsin
Treaties of June, 1858. Under the treaty, China agreed to open more ports for foreign
trade, to legalize opium imports, to establish a maritime customs service with foreign
inspectors, to allow foreign diplomats at Peking and to allow Christian missionaries into
interior China. China soon abrogated the Anglo-French treaties and refused to allow
foreign diplomats into Peking. In 1859, a British naval force was repulsed with losses.
Undeterred by the setback, another Anglo-French force of 11000 British and 7000 French
forces attacked China in 1860. The force reached the walls of Peking (Beijing) on
September 26. The Old Summer Palace at Peking was occupied, looted and burned on

October 24. China capitulated. Ten new ports including Tientsin were opened to trade
with the western powers, foreign diplomats were to be allowed at Peking and the opium
trade was deregulated. Kowloon, on the mainland opposite Hong Kong Island, was
surrendered to the British. An indemnity of three million ounces of silver was paid to
Great Britain and two million to France. These treaties were soon followed by similar
arrangements with the United States. The Treaties later came to be known as the
“Unequal Treaties”. The Opium Wars was the start of China's “Century of Humiliation”.
Post War Europe
The World War II completely devastated Europe. Much of its cities and industries were
completely destroyed by bombing. The governments were impoverished by the war
expenses. Governments required American finances to rebuild their countries and
economies. The British pound lost its premium status to the dollars. The colonies started
independence movements. The European countries found it impossible to finance the
colonial wars of independence. One by one, the colonies became independent. The
European countries lost their cheap sources of raw material and captive markets. Local
industrial production ate into their exports. Trade balances reversed as European imports
exceeded their exports. As neo-liberal capitalism caught on, European companies except
Germans shifted their mining and manufacturing to the developing world in search of
higher profits. The European investors made more money. But unemployment and
poverty of the ordinary people kept increasing. Government debts are rising to dangerous
levels and sovereign defaults seem round the corner. The European Union and its central
bank have spent billions of dollars to bail out Greece and banks in Spain. Governments
have initiated austerity measures such us increasing retiring age and reducing salaries and
pensions and axing public sector jobs. The austerity measures are deeply unpopular and
labour unrests and protests break out from time to time. Many of the European countries
like Britain, Italy and Greece are in recessions. Many banks in Europe are in danger of
collapsing and require billions of dollars in bailouts. The chances of Greece leaving the
European Union are real. Spain and Italy are likely to require bailouts.
In 2011, two hundred fifty five years after 1756 when the seeds of the Opium wars were
sown, Britain again has a trade deficit with China. Today it has no colonies to exploit or

opium to sell at gunpoint. It has no slaves to produce cheap goods and services. Britain
and most of Europe can only borrow money to balance their budgets and seek foreign
investment to create jobs. They can only borrow or print money to import food, fuel,
household goods, clothes and shoes from the developing world. Britain is
decommissioning warships. China and India are adding new ones.
Conclusion
A study of economic history of Europe clearly proves that the wealth of the nations of
Western Europe is not solely or even primarily due to innovation and enterprise. Europe
colonized most of the world from the 17
th
to the 20
th
Century. Spain plundered all the Inca
and Maya gold and silver and ruled much of Mexico, Central and Latin America. Britain,
France, Germany, Holland, Italy and Portugal colonized most of Asia and Africa and
took complete control of trade and commerce in these countries. They took billions of
dollars worth of gold and jewelry as war compensation and taxes from the defeated
countries. Many of the British crown jewels had adorned crowns of Indian and other
kings. Europeans took over and exploited the natural resources of the colonized countries
like minerals, spices, tea, coffee, rubber, ivory and silks with minimum possible
compensation and slave labour. It brought them great riches and left the colonies in abject
poverty and a state of underdevelopment.
Is it also not true that most of the economy of European nations were developed with the
help of slaves from Africa at almost no cost at all? Slaves from Africa and bonded labor
from India were extensively used in cotton, tobacco, sugar, banana, coffee, tea and rubber
plantation in the Caribbean Islands, South America, Africa and Asia and South Pacific
Islands.
England, France and United States fought and won wars with China for the right to sell
opium. These countries not only made great wealth from this narcotic trade but also
obtained the territory of Hong Kong and about 10 millions oz of silver as compensation

for the war.
It should be quite obvious that the wealth of the Western European Economies is not
purely a result of innovation and enterprise. Much of it is due to barbaric acts and
practices which would not be acceptable in today’s world. History cannot be reversed.
Open minded economists must clearly understand that Europe has developed at the cost
of their colonies. They plundered the riches of the kings and people of the countries they
colonized. They exploited the mineral resources of the colonies without any
compensation or royalties. They enslaved millions of people. They have a head start. But
things are changing. The developed economies, without colonies and slaves to support
their economies, are no longer competitive and are on the decline. The leading
developing countries like Brazil, Russia, India, China and South Africa and the Asian
Tiger Economies are catching up.
Back to Contents
Chapter 3: Economic Growth and Decline of United States
Origin of United States
The territory known as United States of America today was the home to a number of
native Indian Nations. The area was colonized by Europe. Britain established colonies on
the eastern regions of United States. France colonized the Mississippi River valley and
called it the Louisiana Tract. Spain colonized the shores of the Gulf of Mexico in Mexico
and Florida.
The British established 13 colonies along the east coast of North America from New
Found land to Florida. The first colony to survive was James Town settlement of Virginia
which was founded in 1607. The early colonies consisted of English farmers whose
primary cash crop was tobacco. All the colonies were independent farming economies.
The colonies were established under a system of Proprietary Governors (representatives
of the charter companies who established the colonies) who were appointed under
mercantile charters to English joint stock companies to found and run settlements.
England also took over the Dutch colony of New Netherlands (including the New
Amsterdam settlement) which was renamed New York in 1664. With New Netherlands,
the English came to control the former New Sweden which the Dutch had conquered

earlier. This became part of Pennsylvania. The 13 British colonies joined together to form
the United States of America in 1776, fought a war of independence against Britain and
were granted independence in 1883. In about 270 years the United States grew to become
the largest, integrated, industrialized economy in the world.
The colonies were established by driving away the native Indian population. Initially
there was very little resistance. Land was plentiful and the Indians just moved westwards.
But the Indians resisted when the settlers moved west from the Appalachian Mountains.
Frontier warfare during the American War of Independence between the Native Indians
and the settlers was particularly brutal. Numerous atrocities were committed on both
sides. Noncombatants of both races suffered greatly during the war, and villages and food
supplies were frequently destroyed during military expeditions. The largest of these
expeditions was the Sullivan Expedition of 1779, which destroyed more than 40 Iroquois
villages in order to neutralize Iroquois raids on New York. The expedition failed to have
the desired effect. Indian resistance became even more determined. In this connection,
the orders of George Washington to General John Sullivan, at Head-Quarters May 31,
1779 make interesting reading:
“The Expedition you are appointed to command is to be directed against the hostile
tribes of the Six Nations of Indians, with their associates and adherents. The immediate
objects are the total destruction and devastation of their settlements, and the capture of
as many prisoners of every age and sex as possible. It will be essential to ruin their crops
now in the ground and prevent their planting more
I would recommend, that some posts in the center of the Indian Country, should be
occupied with all expedition, with a sufficient quantity of provisions whence parties
should be detached to lay waste all the settlements around, with instructions to do it in
the most effectual manner, that the country may not be merely overrun, but destroyed.
But you will not by any means listen to any overture of peace before the total ruinment of
their settlements is effected. Our future security will be in their inability to injure us and
in the terror with which the severity of the chastisement they receive will inspire them.”
The genocide and ethnic cleansing of the native Indians continued till after the battle of
Little Big Horn in 1876 which was the last major Indian victory in battle. The native

Indians were bundled into 310 Indian Reservations spread over a number of states in an
area totaling 2.3 percent of the total land mass of the United States which was once their
home.
A defeated Napoleon sold the Louisiana tract to the United States in 1803 rather than
have it fall into British hands. The region consists of 12 states in the north-central and
north-eastern United States, namely Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.
Florida was annexed in 1815. Victory in the Mexican Wars (1820-30) enabled the United
States acquired the northern half of Mexico. This area later became the states of
California, Nevada, Arizona, New Mexico and Utah. Oregon was ceded by the British to
the United States in 1846. Alaska was purchased from Russia in1867 and became the
49th US State.
Colonial Economy Before 1783
England's colonizing what would become the United States was mainly an economic
venture. Charter joint stock companies, formed by groups of stockholders (usually
merchants and wealthy landowners) ventured across the Atlantic in search of profit.
While the private sector financed the companies, the King of England provided each
project with a charter or grant conferring economic rights as well as political and judicial
authority. The colonies generally did not show quick profits. The English investors often
sold their colonial charters to the settlers. The colonists were left to build their own lives,
their own communities, and their own economy.
Throughout the colonies, people lived primarily on farms and were self-sufficient. They
grew tobacco, and sold timber and tar, both categories of naval supplies needed by
England. Settlements spread, and trade in deerskin, lumber, and beef thrived. Rice
cultivation was developed on a large scale with the help of slaves imported from rice-
growing regions of Africa. Indigo, a dye, and a lucrative cash crop was grown with the
help of African slaves. Slave labor was integral to making the cultivation of rice, tobacco
and indigo profitable as cash crops. South Carolina had the largest number of slaves in
the colonies. A few cities developed. Small local industries such as sawmills, and
gristmills emerged as the colonies grew. Entrepreneurs established shipyards to build

fishing fleets and, in time, trading vessels. Iron forges were developed. By the 18th
century, regional patterns of development had become clear. The New England colonies
relied on shipbuilding and sailing to generate wealth. Plantations using slave labor was
the main economic activity in Maryland, Virginia, and the Carolinas grew tobacco, rice,
and indigo. The middle colonies of New York, Pennsylvania, New Jersey, and Delaware
exported general crops and furs. Except for slaves, standard of living was generally
higher than in England itself.
War of Independence (1775 to 1787)
This was the period of the War of Independence. The Congress and the American states
had great difficulty in financing the war. In 1775 there was at most 12 million dollars in
gold in the colonies, not nearly enough to cover immediate expenses of the government,
let alone on a major war. The British made the situation much worse by imposing a tight
blockade on every American port, which cut off almost all imports and exports. One
partial solution was to rely on volunteer support from militiamen, and donations from
patriotic citizens. Another was to delay actual payments, pay soldiers and suppliers in
depreciated currency, and promise it would be made good after the war. Indeed, in 1783
the soldiers and officers were given land grants to cover the wages they had earned but
had not been paid during the war. A French loan was used in 1782 to set up the private
Bank of North America to finance the war.
Early Years (1787 to 1817)
The United States’ Constitution was adopted in 1787. It established that the entire nation
was a single unified market, with no internal tariffs or taxes on interstate commerce.
Alexander Hamilton was the first secretary of the treasury during the administration of
George Washington. He succeeded in building a strong national finance based on taking
over the state debts, bundling them with the old national debt and creating new securities
which were sold to the wealthy. The wealthy, holding government securities now had an
interest in keeping the new government solvent. Hamilton funded the repayment of debt
with tariffs on imported goods and a highly unpopular tax on whiskey. Hamilton believed
that the United States should pursue economic growth through diversified activities like
shipping, manufacturing, and banking in addition to agriculture. He sought and got the

Congressional authority to create the First Bank of the United States in 1791.
In 1801, Thomas Jefferson became president and turned to promoting a more
decentralized, agrarian democracy called “Jeffersonian democracy”. It was based his
philosophy of protecting the common man from political and economic tyranny. He
particularly praised small farmers as "the most valuable citizens." However, Jefferson did
not change Hamilton's basic policies. The charter of the First Bank of United States was
allowed to expire in 1811. However, the War of 1812 with the British established the
need for a national bank and President Madison reversed Jefferson’s decision. The
Second Bank of United States was established in 1816, with a 20 year charter.