THE MYSTERY OF THE DARK MARKET: Keywords: Mercantilism, smuggling and bribery, customs corruption, patriot smugglers, John Hancock, free market, tariffs and customs duties, black market.

Colonial riot against customs, contemporary illustration

 “Mystery creates wonder and wonder

is the basis of man’s desire to understand.”

 Neil Armstrong

 

IX

THE MYSTERIES OF THE MARKET

A meditation about forgotten lessons of American Exceptionalism

By Xuan Quen Santos

THE NINTH MYSTERY

THE DARK MARKET

                If people are free to pursue their happiness, wealth will follow. If they are not free, they will try anyway.

                MERCANTILISM AND THE BORDERS

                Mercantilism was criticized by the French Physiocrats and by the Scottish School scholars, pointedly by Adam Smith. But their arguments and ideas were not strong enough to force changes to the status quo of the late XVIII century. The monarchies had become more powerwul and many of the chartered companies had become quasi-governments in the colonies, with their own armies and police.  Mercantilism had militarized the limits and borders between jurisdictions. Armies and navies grew in number and lethality. Fortified ports of entry and hardened borders were expanded with custom houses, tax collectors, and border police. Chartered monopolies of trade suffocated the local initiatives. Prohibitions and persecutions of colonial enterprises were the rule. Cities naturally divided by a river, suddenly became enemies. What they could trade before with a handshake across the border became illegal. Opportunities that made all the economic logic were lost to satisfy the “managed trade” done from the mother countries.

Lord North, Prime Minister of King George III
the power behind the throne and the custom houses

                The ideas and evidence provided by the early economists that favored free trade gave factual support -the evidence that science demands- to stimulate some political leaders to question the system under new light. The currents opened by “natural rights”, “equality under the law”, and “limited power of governments”, suddenly received new attention. For centuries, that type of discussion happened within the spheres of ethics and political systems, far away from involving the common person. Suddenly, economic ideas made those topics relevant to all people in their pockets. These ideas are expressed clearly in the Declaration of Independence of the United States. But the courage found by the Fathers of the Country was not just supported by those ideas. Many were smugglers and all of them were benefitting from an extensive “dark market”.

                SMUGGLING PREVAILS

                What is smuggling? Trading across jurisdictions in violation of legal restrictions.  In the more advanced countries, smuggling is associated today with illicit drugs and human trafficking.  It does not have to be that serious. Just outside some county lines, in the next county but just some feet away from the border that separates them, many gas stations and bars make their business by selling cheaper gasoline, cheaper cigarettes, or hard liquor. Some may even offer you gambling with “gaming” machines or sell lottery tickets.

Smugglers unloading in the stealth of night

                These simple acts of everyday commerce mean that the laws, ordinances, rules, restrictions, or whatever arbitrary disposition of the sheriff in the first county have made illegal or more expensive for their residents an innocuous activity. Gasoline and cigarrette taxes are higher in the first county that is also “dry”, where hard liquor and maybe even lottery ticket sales are prohibited. People from the first county buy them across the line, save some money and take home what they wanted. The border is open to come and go, thus it is not illegal to buy.

                Several things are clear in this example. The neighboring jurisdictions have different laws and different taxes; that difference has created an opportunity to save money or make some. If you think big, you may buy more beer or cigarettes than what you would personally consume and even buy extra lottery tickets to take home to sell and make more money. If you do that, you will not only be smuggling but also trafficking in illegal goods. What is also evident is that you were denied your freedom of choice and your costs have increased by having to go across the county line. Your freedom to trade in your county has also been denied and criminalized.

                A common phrase used to describe illegal commercial activities is “the black market”. From the example you may agree that describing it as black seems  too exagerated. Even “dark” may not apply to many such activities which often happened in the dark of night. Another term used is “contraband”. There seems to be a difference between re-selling beer, liquor, and cigarettes, and re-selling illicit drugs and smuggling illegal aliens across the international border. In the former cases, the line and the laws are used to interfere in the operation of the economic system. In the latter, the line and the laws are used for reasons of public safety and national security. The instrument is the same, but the purpose is different.

Privilege creates economic opportunity for gain

                   TAX FREE AND LEGAL INDIAN CASINOS

                Think of the proliferation of “Indian Casinos”. The Indian reservations are allowed to make some of their own laws. In states where gambling has been declared illegal and there happens to be a Federally Recognized Indian Tribe, the tribe can now promote and offer gambling within the reservation lands. It is also very common to find that my example of the gas station at the border applies also to the reservations. They profit from the higher costs that exist on the other side of the line. Their customers go for the entertainment that is forbidden at home and buy cheaper gas and cigarettes. Indian Casinos lure visitors with the promise of fun and lower prices that somehow are higher and forbidden on the other side of the line. Different rules lowered the prices on one side and created an opportunity for the customers and the casinos to benefit. It is not contraband because it is legal. In this case, the line and the laws have created an economic advantage for the casino that is denied to people on the other side of the line. This is clearly a “privilege”, which means “a private law”.

A monopoly created by a privilege

                During the XVIII century, by their own accounts, many Indian traders, mainly women of the Iroquois and Mohawk tribes that inhabited the territories of what are the borderlands between today’s Canada (New France) and the United States (New England), chose to trade furs originating on the French side with buyers at the trading posts of the English side. The riverine highway from the Richeliu River to Lake Champlain, to Lake George and to the Hudson River was an active contraband corridor. The Indians preferred the prices and quality of English woolens and other manufactures. Before Europeans began to draw lines and impose their laws, free trade existed on this riverine highway among the tribes.

                This territory was where most of the action of the “French and Indian War” (Seven Years' War, 1754-1763) took place. It involved several Indian tribes in conflicts against each other that would not have happened had there not been conflicts between the European empires. Policing to prevent the trade that had existed among the tribes was one local issue of the war. The trading posts were supplied by the chartered companies. Contraband does not exist until a powerful entity draws a line on a map and enforces a prohibition to trade. For the Indians, those lines did not exist. Commerce along the rivers transmit news and knowledge, creates peaceful  relationships, even family ties and tribal alliances. Managed trade harms or destroys all those common benefits, in addition to adding unnecessary costs.

                MERCANTILISM FOSTERED SMUGGLING

                In order to control the “balance of trade” in favor of the mother country, prohibitions were imposed on what the colonies could manufacture forcing them to import. They were restricted as to whose ships they could use, and also with whom they could trade. British colonies could only buy from British producers and use British ships. All the empires did the same to protect their interests. At times, it was possible for the colonies to import from other authorized sources but they were discouraged by having to pay high duties (import taxes).

                In the case of the British colonies in North America, several circumstances worked to their advantage. They were more distant and less profitable for the king’s treasury than the Caribbean colonies. Historians estimate that it cost the crown four times more for the royal navy to police the Atlantic and the ports of New England than they could collect in duties and tariffs. The English Navigation Acts had existed long before 1765, but had not been effectively enforced. During the previous hundred years, England had undergone major changes in its governance. It went through the English Civil War, the dictatorship of Cromwell, the restoration of the Stuarts, the transfer of the monarchy to a Dutch king, and eventually imposing the German dinasty of the Hanoverians. Parliament and factional politics had become the power of the state. During this time, that historians call of “benign neglect”, the colonies were mostly on their own.

                Much has been written about how this period allowed (better described as “forced”) the colonists to experiment with different schemes of self-governance and military defense. They became free to pursue their happiness, even if it was illegal, and wealth followed. After 1765, the British monarchy began to assert its dominion, but by then, the economy of the colonists had become much less dependent on the “managed trade” imposed by the mother country.

Unloading contraband away from customs control

                The New England colonies that were not suitable for large scale farming, gradually converted to small industry and commerce, with many towns and ports. The North Atlantic fisheries led to ship building. Ships became merchant ships and intercolonial commerce began to compete with the British interests. Colonists ignored the Navigation Acts and their ships transported illegal goods from the French, Dutch and Spanish West Indies. Like the Hudson River, the Mississippi was also a riverine highway for smuggling. All of it was illegal trade under the mercantilist English laws.

                It was inevitable that the other face of smuggling appeared.

                SMUGGLING AND BRIBERY

                Contraband and public corruption go hand in hand. The first one is commerce arbitrarily categorized as illegal. The second one is the result of the economic opportunities that the arbitrary law created.

                All the mercantilist legislation falls under what one of the champions of free trade categorized as “not respectable”. By definition, arbitrary legislation is not respectable. The French economist and politician Frederic Bastiat (1801-1850) was elected to the Constitutional Assembly and later to the Legislative Assembly in the aftermath of the third French revolt of 1848. He had championed the principles of free trade as a journalist and published a summary of his public debates in “The Law”. It is amazing to read it now as it seems that we are debating again what was left behind many generations ago. These are his words about respectable laws: “No society can exist if there is no respect for its laws. But, it must be the case that for the laws to be respected they must be respectable. When the laws and moral principles are in contradiction the citizen is caught in the cruel alternative of choosing between what is right or following the law”. Mercantilist legislation is the concession of arbitrary privileges for the benefit of a few at the expense of the welfare and rights of the many.

Frederic Bastiat - Defender of free trade

                Smuggling or contraband of what normally would have been plain acts of commerce were declared illegal for the benefit of the kings’ business partners, and the manufacturers and merchants of the mother country. When the colonists realized what the scheme was, and found alternatives that could benefit them, they took them. Smuggling, or buying contraband merchandise would increase their wellbeing, cover the costs of avoiding the high duties or tariffs, or the costs of avoiding prosecution. The difference between the arbitrary prices set by the monopolies and the market prices available in the open market allowed for a profit and for PAYING BRIBES.

                If people are free to pursue their happiness, wealth will follow. If they are not free, they will try anyway.

                Mercantilism came with bureaucracy and abuse. British customs officials, like all customs officials of the other colonial empires, earned a modest salary from the Crown. Before the XIX century, it was common for the high and mid-level officials to have bought their post by paying a bribe to some higher up in the mother country. They soon found that they could earn a bonus by looking the other way as the “dark” shipments came in, by counting less number of items for their ledgers, by changing the description of the imported goods, by lowering the “ad valorem” estimate of value… When smugglers were caught, they were often released by sympathetic colonial judges. Smuggling became commonplace.

Replica of a smuggler's ketch, smaller but faster

                The history of colonial America, the whole continent, cannot be fully understood ignoring the roles that smuggling and customs corruption played. The big difference between Hispanic America and the United States is that after independence from the colonial empires, the United States opted for a transition to free trade backed by free enterprise and a government of limited powers to interfere with commerce. The Hispanic American countries kept their colonial “managed trade” with high tariffs and duties, promoting national monopolies, and keeping the corrupt structures of government intact, ready to line the pockets of the new bosses. The privileges of the king were just passed on to the new “status quo of power”, the bureaucratic state.

                SMUGGLING PATRIOTS

                John Hancock, the guy with the large signature in the Declaration of Independence, was also one of the wealthiest men in America. Part of his income was derived from smuggling. On May 10, 1768, the Liberty, a ship owned by him was inspected because the customs officials suspected Hancock of smuggling. The reason was that the ship only had 25 barrels of Madeira wine listed as cargo, but it had the capacity for much more. They alleged that Hancock must have unloaded the rest of the cargo during the night. Two customs guards had been stationed on the ship during the night and they said nothing was unloaded… at first. On June 10, 1768, his ship was finally taken over by the royal navy after the guards told the truth. A riot broke out in Boston and the homes of several customs officials were destroyed, causing them to flee. Hancock’s ships had a history of encounters with customs officials, and his goods were highly appreciated by the public.

A promoter of revolts against customs abuses,
smuggler and patriot

                Hancock was not alone. Other signers of the declaration suffered worse losses once the war begun. George Clymer from Pennsylvania lost more that one hundred of his merchant ships, either destroyed or taken over by the Royal Navy. Carter Braxton from Virginia saw all his merchant ships sunk or captured by the Royal Navy.

                In general, the many ports and harbors of New England, as well as the former pirate havens of the southern states’ coasts had an active “dark commerce” and their shipping entrepreneurs supplied the many non-British imported goods that were cheaper or unavailable from British suppliers. The colonial shipyards managed to create a fleet of merchant ships equivalent to half of the tonnage of the British merchant fleet of the times.

                Once the War for Independence began, it was the supplies and funds provided by smugglers sent by the Spanish Governor of Louisiana, Don Bernardo de Galvez, that allowed the ragtag militia led by George Washington to survive the first period of hostilities. The Spanish had closed the Mississippi River to the British Navy and sent the smugglers up the river into the Ohio. These routes had been well known to the Indian traders. New Orleans had been a center of smuggling entrepreneurs since it was established. Louis Antoine Juchereau de St. Denis founded the trading post on the Red River to smuggle French goods into New Spain, and Spanish cattle into Louisiana destined to New Orleans. It is interesting to note that his partner in the illegal operation was the Spanish Governor of the Texas territory. Later, the Lafitte brothers became the heroes of the War of 1812, and were pardoned for their well known acts of piracy and smuggling. They are the real founders of the Port of Galveston where they would dump their contraband into the Spanish territory of Texas when it was just a sandy island.

St. Denis, French explorer, trader and smuggler on the Red River in Louisiana

                Within the framework of the non-respectable mercantilist laws that ruled the colonies, the line that separates the criminal from the patriot, or the smuggler from the merchant is hardly noticeable.

Jean Lafitte raiding a merchant ship in the Gulf of America