History - The economics of fur trade

Basic economics of the fur trade

The development of the North American fur trade can be attributed to three interrelated economic factors: 1) a bountiful supply of furs; 2) an indigenous and highly motivated fur gathering system that only the Native population could provide through their interest for European goods; 3) a continuing external demand for the products of the fur trade, which a fashion- minded Europe furnished through its growing consumption and export trade. The basic economic relationship involved in the fur trade were between the imperial power in London and its North American colonies. As a result, in a similar way to all other enterprises in British North America, the NWC relied heavily on support from larger authorities based in Great Britain.

Until the late 1700s, the basic structure of the trade had remained unchanged as francophone and anglophone merchants worked together. These small merchants were gradually eliminated in the late 1760s. As distances between the supply of furs and Montreal grew, the increased capital and credit required were available only to the richest anglophone merchants. In fact, the labour of indigenous trappers and French-Canadian voyageurs enabled a minority of Montrealers like Simon McTavish, William McGillivray and Joseph Frobisher to make fortunes.

But the very magnitude of the NWC transportation and trade system foreshadowed its doom. As the fur trade extended to the Athabaska region and beyond the Rockies to the Pacific coast, the burden of maintaining it steadily mounted. Over the years, the cost of transporting goods from Montreal to the trading areas rose to double their original value. While the HBC could deliver goods to the heart of the continent and ship pelts to the mother-country at half the cost to the Canadians, the Nor'westers had to transport their packs 4 times as many miles as the English before reaching Lake Winnipeg. Further, the Canadians lost 2 entire years in shipping their goods west, having to store them in Montreal for the winter because of the river freeze-up. This delay meant a distinct disadvantage in marketing and financing.

As result, the returns on the capital of the company were consistently affected by changes in its internal organization and external competition. Economic historian Harold Innis indicates that despite a slight rise of profits in the late 1790s, the overall returns of the NWC were on the decline from 1804 to 1821. Although some years were not as good as others, the tendency toward decline is persistent. As such, it is safe to say that there was nothing phenomenal in the gains made by the ordinary partner and clerk engaged in the trade, though the situation was different depending on the individual.

The fur trade and credit

The organization of the NWC trade necessitated Agents in Montreal who purchased trade goods from English firms and local manufacturers in exchange for the pelts. Because 2 or 3 years would pass before the furs reached the European markets, the firms in London offered credit to the Montreal merchants, who in turn, offered credit to the Indians. The credit supplied in goods was to be reimbursed in fur. Thus as during the French Regime, only important Montreal merchants who had enough capital to maintain large stocks of trade goods and extend credit could survive. Because the entire business was based on credit, delays in transportation were the most dreaded of all the uncertainties. A mild winter, Indians not returning furs, wars, death by drowning and competition also had major impacts on profits.

The extension of credit to Indians was also an essential feature of the fur trade. An Indian was given an advance in goods which was equivalent to the amount of furs he had to supply in next month or trading season. Provisions were thus made to enable Indians to obtain the items they wanted even if their returns were insufficient in the short-term. Credit trade would also be used to generate and reinforce the loyalty of Indians to the company. Traders hoped Native people would feel obligated to return and clear their debts despite the presence of other traders who might offer more attractive terms. However, in most cases, Indians treated credit as a present. Therefore, until the merchants could guarantee the transformation of gifts into loans as well as the collection of debts, they could not turn the system into a straightforward market exchange. In fact, outside from counting further credits, company control over Indians was very limited.

The failure of the conventional "supply and demand" law

The Indians' demands for NWC trade goods was relatively inelastic. The average Native person living in the sub-arctic and the Plains required only 70 Made Beavers value of goods a year to satisfy his basic needs, and another 30 Made Beavers value in alcohol and tobacco. In most cases, this small demand was due to nomadic lifestyles and limited transport capabilities.

In those days of emerging capitalism, the English believed that a rise in the price of product stimulated an increase in supply. According to this theory, if the prices of furs rose, Indians would bring more furs to trade, and should keep doing so until the increased supply caused a decline in price. However, Natives did not react this way: once fixed levels of individual needs were satisfied, the Indians ceased exchanging. While favorable terms and lavish gifts would bring Indians to trade, it did not induce them to bring more furs on a per-capita basis. In fact, the reverse was the case. With demand levels relatively fixed, a drop in the effective price for goods meant that the Indians could bring fewer furs to obtain what they wanted. Thus Indians not only kept with their interests, but their economic practices were reinforced and widely used in commerce with Europeans.

When it became clear that the law of supply and demand did not function in the Northwest and that Indians were driven by their own needs, traders sought ways to increase Indian returns with means such as intimidation, wife-capture, threats, beatings, putting a thumb on the scale when giving powder or tabacco, diluting rum, and offering second-hand goods. The traders found participating in pre-trade ceremonies and offering gifts to be also quite successful. For their part, the Indians did not simply fall in line with the traders' demands. They drove a hard bargain for their furs and refused to trade for inferior goods. During the periods of intense competition, they simply reduced their fur output because fewer furs bought them the goods they required. They also showed no hesitation in trading where they received the best treatment or a better deal. In fact, while monopoly gave advantages to the companies, competition gave it to the Indians. And so, it can be stated that despite the rise of powerful companies, the "fur trade" remained in reality a precarious amalgam of exchanges that ranged from gift to credit transactions, to direct commodity exchanges, to extortion and to theft.