A NEW WORLD OF ECONOMICS * ECONOMICS FOR THE NEW WORLD

BY: NATHAN LEWIS
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 Twitter economics and policy channel@NLeconandpolicy

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The Decline of the Spanish Empire

September 18, 2018

This is another section from my upcoming book, The Magic Formula.

 

 

The Spanish Empire

When the eighteen-year-old Isabella of Castile married the seventeen-year-old Ferdinand of Aragon in 1469, they were so poor that they had to borrow to meet the expenses of their wedding ceremony. The ceremony was modest; both the bride and groom, centerpieces in the factional politics of the time, traveled to Valladolid in secret, and met for the first time four days before their wedding. But things were already looking up for the pair. When she was younger, Isabella was sometimes in need even of food and clothing.

The wedding effectively united Spain into a single entity, making it a major presence in European affairs. Spain thrived under Ferdinand and Isabella’s leadership. Longstanding civil wars ceased; serfdom was abolished; bandits were eradicated; roads were improved; the judicial system was reformed, along with tax administration and many other government institutions. The year 1492 was a double landmark, as Spain’s overseas empire began is amazing expansion, and also, the Muslims were driven from Spain for the first time since 711. Soon after, Spain invaded and expanded its realm in Muslim North Africa. Tax revenue of less than 900,000 reals in 1474 rose to over 26,000,000 reals in 1504, without the imposition of any new taxes. The gains came from economic expansion, and improved tax administration. Isabella died in 1504. Before his death in 1516, Ferdinand considered expanding Spain’s holdings to include all of North Africa to Egypt, and eventually, Jerusalem and the Holy Lands. But, he instead contented himself with consolidating Spain with the invasion and acquisition of Navarre, on the border with France.

More inheritances formed the empire of Charles V (1516-1556), the grandson of Ferdinand and Isabella, who ruled Spain in addition to southern Italy, the Netherlands, Austria and the Holy Roman Empire – nearly all of Europe between France and Russia. Thus, the Spanish Empire in Europe was never really a matter of expansion via the typical mode of military conquest or colonization, so much as a federalization, in the person of Charles V himself, of disparate, mostly independently-governed and autonomous existing entities. However, the later contraction of this empire, under the pressure of foreign military advance and domestic secession, was real.

Already by the mid-sixteenth century, while Spain’s overseas empire was expanding dramatically, in Spain itself and in Spain’s European holdings, a process of economic decay had begun. This strange contrast, between difficulties at home and glittering advances worldwide, appears to have been related to Spain’s liberal attitude toward the overseas empire, amounting to benign neglect arising from the sheer difficulty of effectively managing such a realm in that era. Kingdoms had been small and ruled by direct personal interaction. Charles V was an example of the old type of king that personally led his armies into battle. In one anecdote from early in his reign, Charles once asked for a pen and paper, but none could be found in the castle.

Spain’s government asked little of its overseas colonies except for a share of silver mining production, and even this imposition was thoroughly evaded. The Spanish eight-real coin, later known as the silver dollar, began to be minted in 1497. Later, the enormous flow of silver from the mines of the New World were minted into these silver dollars, which became the premier international currency of the world, a common coinage throughout the Americas and also throughout Asia, where it became the regular silver coinage of China. The Chinese yuan, Japanese yen, Korean won, Philippine peso, Hong Kong dollar, and U.S. dollar were all eventually derived from the Spanish silver dollar, along with various other dollars and pesos throughout the Americas. The value of the Spanish silver dollar was maintained essentially unchanged until it was effectively retired in the early twentieth century. Thus, with Low Taxes and Stable Money, the Spanish Empire expanded abroad, even as Spain itself was taxed and devalued into oblivion. At its peak around 1580-1600, after the union with Portugal in 1580, the overseas Empire spanned the world, including virtually all of Latin America from Mexico south including California and the Caribbean; the Philippines, the Marianas, Micronesia, Guam and Palau; and a network of trading ports along the islands and coastline of West and East Africa, southeastern Arabia, India, Malaya, Macau (China), Bali, and Japan.

From the beginning of his reign, Charles was faced with constant challenges and was forever short of funds. Wars with France in the 1520s, Ottoman Turkey in the 1530s, and revolt in Germany in the 1540s and 1550s, placed a constant strain on finances. Charles borrowed enormous sums from German and Genoese bankers, and also went from realm to realm to try to extract more taxes. At first, Italy and the Netherlands bore the brunt of this revenue-collecting, but that resource was soon exhausted. In time, Charles was refused; these countries considered themselves independently-governed states. They were willing to fight and pay for their own defense, but would not fund any foreign wars. Eventually, Charles turned primarily to Spain, and especially Castile, to raise taxes, and raise them he did.

The centerpiece of this tax system was the alcabala, a device that originated during the Muslim rule of Spain. It was a 10% tax on the transfer of all real and personal property. However, unlike a modern retail sales tax or VAT, it applied to all transactions, and could be imposed many times in the process of a product moving to market. In effect, it was a tax on the division of labor itself, and quite destructive of commerce despite its seemingly low rate. Also, it behaved as a tax on all asset transfers. Queen Isabella, in her Last Will, called for the abolition of the tax. Cardinal Jimenez pleaded with Charles V to eliminate it. But it also produced the most revenue among the many taxes of the day, and so it was kept. More taxes were added: The cruzada was once an emergency tax levied in times of war, but it became payable every three years by all inhabitants. This single tax brought in nearly as much revenue as all of Spain’s overseas empire. The terces reales was a one-third tax on all church tithes; the subsidio a tax on all clerical rents and incomes; the excusado a further tax on church tithes. Additional customs duties (both external and internal) were imposed, along with a tax on sheep and cattle. The servicio had been a temporary tax granted during emergency, but it became permanent, and a major revenue source.

The outcome of this barrage of taxes in Castile was an explosion of tax avoidance, evasion and resistance. Peasants who would sometimes murder the tax-gatherers were not afraid of less violent means of avoiding taxes. These taxes did not produce much revenue. By the end of the Charles’ reign, and after the imposition of many new taxes, the region of Aragon was paying less in revenue than it did at the beginning. Many of these taxes were administered by tax farmers — then, as ever, vicious, corrupt, and hated everywhere.

The countryside of Spain was depopulated as farmers fled the taxman, or were driven into destitution as their animals and goods were confiscated. One avenue of escape was the New World: with every shipment of silver and trade goods that came to Spain from overseas, thousands of emigrants left on the outbound ships for lands free of the hated taxes. Spain thus exported its best talent, the most ambitious, energetic and adventurous of its people. Another escape was the civil service: government employees were tax-free. Their headcount swelled to enormous numbers. “There are a thousand employees,” wrote one, “where forty could suffice if they were kept at work.” A third was the nobility: the nobility were free of many taxes. A fourth alternative was to join the gypsies, living in the underground economy, and possibly from outright crime. Prince Philip told his father in 1545: “the common people, who have to pay these servicios, are reduced to such utter misery that many of them walk naked.”

Merchants and manufacturers closed their businesses, and purchased entry into the ranks of the hidalgos, a lower class of the tax-exempt nobility. Their assets were converted into government debt. This also gave them access to the court. Now, instead of being a productive taxpayer, they could engage in directing some of the flow of taxes paid by others out of the government and towards their own pockets. Within the court, a continuous battle waged for the patronage and favors of the king, and with it all manner of monetary rewards. The more intensely the taxes fell upon the lower classes, the more intensely the nobles and wealthy sought ways to avoid being taxed. Attempts were made to introduce tax systems that fell upon all classes proportionally, but the terror of being subject to taxes was so great that these were all refused. After all these efforts, Charles gained about a 50% increase in nominal annual tax revenue over the 37 years of his reign; but, along with the inflow of silver from the New World, agricultural prices also increased by 100% during that time. By 1543, 65% of tax revenue was used to pay interest on the debt. An attempt was made to pay down some of the debt, but the bondholders complained that there was no other investment that would turn a profit.

During this time, the overseas empire was experiencing incredible success. The empires of the Aztecs and Incas fell with astonishing rapidity in the 1520s and 1530s. In the following decades, the Spanish adventurers consolidated their rule throughout the Americas, subduing and often enslaving millions of natives. In 1522, Ferdinand Magellan’s fleet accomplished a circumnavigation of the world. In following decades, Spanish and Portuguese traders traveled throughout Asia, transporting silver and luxury goods between Europe and India, Siam, the “spice islands” of the Moluccas, China, the Philippines and Japan. In the 1570s, they established a trading route across the Pacific between China and Spain’s colonies in Mexico and South America. Spanish galleons carried silver from mines in Bolivia and Mexico to China, and carried all manner of silks, porcelain, spices and other manufactured goods back to Europe. Before long, Chinese manufacturers were making goods according to European specifications, including clothing in the latest continental fashions. The Spanish government attempted to charge tariffs on this trade, but they were almost universally evaded.

Charles’ son Philip II became king in 1556, and had the unfortunate duty of defaulting on the enormous debts his father had amassed. He defaulted in 1557, 1560, 1575 and 1596.

In 1566, a revolt broke out in the Netherlands, then under Spanish rule. Twenty thousand troops were sent under the command of the Duke of Alba to suppress the revolt. The Netherlands had been somewhat autonomous from Spain, and taxes were based on long-standing Dutch norms. To pay for the expense of the troops, Alba imposed a variety of new taxes including the hated alcabala in the Netherlands. Whatever their previous grievances (mostly centered on the Protestantism sweeping Europe at the time), the Dutch now had a new reason to fight. The revolt turned into a disastrous civil war that lasted eighty years, with catastrophic consequences for Spanish finances. The independent Dutch Republic was established in 1581, although battles with Spain continued until 1648. The Netherlands had always been a center for trade, but independence freed the Netherlands from Spanish taxation and created a new competitor for Spain’s overseas trade empire. Many of the new Dutch traders were simply the merchants of Spain with a new flag. As the Spanish coinage was later debased, during the seventeenth century, the Netherlands maintained a scrupulous policy of monetary stability. The Netherlands became the wealthiest nation of the seventeenth century, and the finance capital of Europe, before it too succumbed to overtaxation in the eighteenth century and was eclipsed by Britain.

Philip II’s empire was harried by both the Dutch and the English, who interfered with shipping especially along the North Atlantic coast. In 1588, Philip decided that he would invade England, and sent off an Armada of 130 ships to accomplish that goal. The Armada was defeated, mostly by terrible weather rather than the overmatched British navy. But, Britain showed that it would fight with all of its resources; and certainly one reason for this was that they would rather be ruled by Elizabeth I than fall under the oppression that Philip II imposed upon his own people. The costs of the Armada and Philip’s other imperial ambitions were enormous, and funded by more debt and more taxes. The milliones and sisas piled heavy new excise taxes upon the existing tax structure.

Philip III became king in 1598, at the age of twenty. At the beginning of his reign, popular discussion erupted around solutions to Spain’s difficulties. Many of the proposals were absurd and fantastical, but the main current of thought comes down to us even today, four hundred years later: government expenditure should be slashed; the tax system should be overhauled; immigrants should be encouraged to repopulate Castile; fields should be irrigated, rivers made navigable, agriculture and industry should be protected and fostered. But the kind of person who might undertake such a task was exactly opposite to the kind of person that thrived and flourished in the environment of the previous seventy years. Instead, the young king fell under the influence of a smooth-talking and corrupt nobleman, the Duke of Lerma. Lerma soon replaced all the top posts in the government with his friends and relations. He undertook no reforms; instead, his main goal was to use his position to enrich himself. He was relatively poor when he first gained the king’s favor, but soon, in the midst of a barren and troubled land, he was fabulously wealthy. He filled many lower positions with men much like himself. Of his two favorites, one was eventually arrested for embezzlement, and the other was eventually executed.

Lerma’s self-enrichment did nothing for Spain’s financial problems, so beginning in 1599 he authorized the issuance of a coinage of pure copper, with a face value equivalent to the existing silver coins. In 1603, the coins were returned to the mint to be stamped at double their face value. More copper coins were issued in 1617. A new element of monetary debauchery was added to Spain’s many domestic difficulties. (The Spanish silver dollar, by then used externally throughout the Americas and Asia, remained unchanged.) Another debt repudiation took place in 1607.

Lerma managed to get commitments for more taxes from Catalonia and Valencia, but so much was required in the form of bribes and rewards to nobles and officials that little net revenue was produced. Court life became decadent. The king amused himself with festivals and entertainments, while foreign diplomats were left waiting. Aristocrats, many of them also financially hard-pressed, left the direct management of their estates in the country and moved to the Court, to seek favors and rewards of the king. The struggle for position in the Court required ostentatious display, and if their expenses soared, this was offset by the rewards they obtained. To sustain the support of the nobles, the king would grant mercedes, or rewards for service, and these grants became a continuous stream of patronage further bleeding the state’s finances. As farmers fled the countryside, manufacturing abandoned, the merchant classes crushed, and a flood of emigrants sought their fortune overseas, the population of Madrid grew from 4,000 in 1530 to 37,000 in 1594, and as high as 100,000 in the 1630s. From the servants of the aristocrats, through the lower levels of government bureaucracy, to the highest levels of the Court, careers were built on influence, favor and recommendation. One observer said there were thirty parasites for every one that did a day’s work.

Philip IV became king in 1621 – not quite age sixteen — and also brought with him a key minister, the Count-Duke of Olivares. If Lerma had been predictably corrupt, Olivares was surprisingly virtuous. Ambitious, capable, dynamic, known for hard work and lack of sleep, by all indications devoted to public service, he intended to enact all the reforms that had been discussed over the past twenty years and return Spain to imperial greatness. In 1623, a reform plan aimed to reduce municipal officers by two-thirds; impose sumptuary laws; prohibit foreign manufactures; and close brothels. Internal resistance was strong, however, and little was accomplished. Instead, spending increased on the military, while new wars erupted with the Netherlands. In 1623, Olivares attempted to abolish an unpopular tax on articles of consumption, which hit the poor the hardest, but the plan was rejected in the face of revenue needs. Instead, the tax was doubled.
Another debt default occurred in 1627. An ambitious plan to eliminate the autonomous, federal structure of the empire and organize an empire-wide army was formed: “one king, one law, one coinage.” But the plan was rejected throughout the empire, for the simple reason that nobody wanted to be subject to Castilian law – that is, the tax law, and requirements of military service – or the debased and unreliable Castilian coinage. Still more taxes were imposed in Castile, along with – among the tax-exempt nobility — outright confiscations of wealth exchanged for unwanted government bonds. Interest payments on government bonds were halved, and payments to foreigners ceased entirely. Twenty million ducats’ worth of copper coins were issued in 1621 and 1626, swamping Spain in junk coinage. Inflation erupted, and price controls were imposed. After the price controls failed, the coins’ face value was halved in 1628, causing a dramatic deflation that bankrupted many.

Olivares rushed from one trouble spot to another, dealing with the never-ending series of crises with exemplary energy, dedication and commitment. Mostly, this meant military action, which cost money, which meant more taxes, which produced new crises. In an effort to fund the military, new taxes were imposed in the Basques. The Basques had no hope of resisting, but they resisted anyway, and had to be bullied into compliance with military force. An attempt to impose excise taxes on food in Sicily and Naples set off revolts, which required the intervention of the Spanish fleet to subdue. Olivares had made many attempts to extract more taxes and military assistance from Catalonia, but these had been rejected. In 1639, France invaded Catalonia, and the Catalans’ response was decidedly tepid. The military contribution which Madrid demanded of the Catalans, for defense of their own land, was met with increased hatred of Madrid. Many Catalan soldiers deserted. In 1640, Olivares demanded one of the most odious forms of taxation – the billeting of foreign troops, in support of the conflict with France. In response, Catalonia erupted into a ten-year civil war. In January 1641, the leader of the revolution formally declared the allegiance of Catalonia to the King of France. Soon, the Spanish military was fighting a combined army of Catalans and French just outside of Barcelona.

Portugal had become part of the Spanish empire in 1580, when the Portuguese king died without an heir. Philip II of Spain claimed the throne in the vacuum. In 1634, Olivares installed a new governor of Portugal, which had been largely autonomous before. The governor was assigned to impose new taxes in Portugal and remit them to Madrid. A five percent alcabala was imposed in Portugal, contrary to a prior charter between Portugal and Spain. In 1640 a revolution erupted in Portugal, in which the governor was exiled, the tax administrator was hanged, and Portugal declared itself independent of Spain. With this, Olivares and the Spanish monarchy were broken and defeated. After 1640, much of Spain’s remaining European holdings – in Italy, Flanders, and on the eastern border of France – were lost, while even in Spain, Aragon, Valencia and Andalusia threatened to follow Portugal into independence. Another issuance of copper coins in 1641 led to inflation; an anti-inflationary reform in 1642 again caused deflationary havoc. Olivares was ousted in 1643, and died in 1645 – apparently broke, having spent much of his own wealth in service to the state. No other minister of comparable energy existed to take his place, and the government drifted. More defaults followed in 1647 and 1653; more junk coinage was issued. In 1654, it was said that: “On may days the household of the King and Queen lack everything, including bread.” Military defeats in 1663 and 1665 added to the disintegration of the European empire.

France’s envoy to Spain, the Marquis de Villars, said in 1668: “It would be difficult to describe to its full extent the disorder in the government of Spain.” The government was largely run by a council of twenty-four “without spirit or experience,” exemplified by the Duke of Medina de las Torres, who had “spent all his life in Madrid in total idleness, almost exclusively shared between eating and sleeping.” A coup in Madrid in 1669 nearly succeeded. Sicily revolted in 1674; the same year, France took Burgundy. Much of Spain’s overseas empire fell into the hands of the Dutch.

Spain’s Habsburg monarchy hobbled along for a while longer. This was actually a prosperous time for Spain’s foreign provinces in Italy and the Americas, and also some aristocrats in Spain, who found that Madrid had become so feeble that they were effectively free of any obligations. The value of the copper coinage declined until, in another attempt at reform, it was raised again in 1680, causing destruction both ways. In the cities, barter accompanied riots. The remnants of industry were destroyed; that year, the royal family could not raise the funds for its annual trip to Aranjuez. In 1701, when the Habsburg family failed to produce a successor, control of Spain passed to the Bourbon family of France. The sixteen-year-old Duke of Anjou, born at Versailles and renamed Philip V, did not speak Spanish. Neither did any of the advisors he brought with him, who completely remade the Spanish government in the French model.