Merchant capitalism is a term used by economic historians to refer to the earliest phase in the development of capitalism

Capitalism

Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 as an economic and social system. Early forms of merchant capitalism were developed in the medieval Islamic world

Islamic Golden Age

During the Islamic Golden Age philosophers, scientists and engineers of the Islamic world contributed enormously to technology and culture, both by preserving earlier traditions and by adding their own inventions and innovations...

 from the 9th century, and in medieval Europe

Middle Ages

The Middle Ages is a periodization of European history from the 5th century to the 15th century. The Middle Ages follows the fall of the Western Roman Empire in 476 and precedes the Early Modern Era. It is the middle period of a three-period division of Western history: Classic, Medieval and Modern...

 from the 12th century. In Europe, merchant capitalism became a significant economic force in the 16th century, depending on point of view. The mercantile era drew to a close around 1800, giving way to industrial capitalism. However, merchant capitalism remained entrenched in some parts of the West well into the 19th century, most notably the Southern United States

Southern United States

The Southern United States—commonly referred to as the American South, Dixie, or simply the South—constitutes a large distinctive area in the southeastern and south-central United States...

, where the plantation system constrained the development of industrial capitalism (limiting markets for consumer goods) whose political manifestations prevented Northern legislators from passing broad economic packages (e.g. monetary and banking reform

National Banking Act

The National Banking Acts of 1863 and 1864 were two United States federal laws that established a system of national charters for banks, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S...

, a transcontinental railroad

First Transcontinental Railroad

The First Transcontinental Railroad was a railroad line built in the United States of America between 1863 and 1869 by the Central Pacific Railroad of California and the Union Pacific Railroad that connected its statutory Eastern terminus at Council Bluffs, Iowa/Omaha, Nebraska The First...

, and incentives for settlement of the American west

Homestead Act

A homestead act is one of three United States federal laws that gave an applicant freehold title to an area called a "homestead" – typically 160 acres of undeveloped federal land west of the Mississippi River....

) to integrate the states' economies and spur the growth of industrial capitalism.

Merchant capitalism is distinguished from the mature variety by the lack of industrialization and commercial finance. Merchant houses were backed by relatively small private financiers acting as intermediaries between simple commodity producers

Simple commodity production

Simple commodity production is a term coined by Frederick Engels to describe productive activities under the conditions of what Marx had called the "simple exchange" of commodities, where independent producers trade their own products...

 and by exchanging debt with each other. Thus, merchant capitalism preceded the capitalist mode of production

Capitalist mode of production

In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...

 as a form of capital accumulation

Capital accumulation

The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...

. The transformation of merchant capitalism into industrial capitalism necessitated, according to Karl Marx

Karl Marx

Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...

, a process of primitive accumulation of capital

Primitive accumulation of capital

In Marxist economics and preceding theories, the problem of primitive accumulation of capital concerns the origin of capital, and therefore of how class distinctions between possessors and non-possessors came to be.Adam Smith's account of primitive-original accumulation depicted a peaceful...

, upon which commercial finance operations could be based and making application of mass wage labor and industrialization possible.