Mauricio Drelichman & Hans-Joachim Voth - Lending to the Borrower from Hell. Debt, Taxes, and Default in the Age of Philip II (Princeton University Press, 2014), 263-269
Silver
The second key explanation for declining state capacity in Spain emphasizes the incentives to push through reform against potential opposition. Spain’s treasury, in contrast to Britain’s, had access to significant mineral wealth. The silver mines of Potosí, once they could be successfully exploited, created a torrent of silver; a substantial share of it found its way into the coffers of the Castilian Crown.
We are not the first to argue that silver was bad for Spain. Contemporaries already saw American silver as a poisoned chalice. Writing in 1600, Martín González de Cellorigo (1600) observed that
Our Spain has set her eyes so strongly on the business of the Indies, from where she obtains gold and silver, that she has forsaken the care of her own kingdoms; and if she could indeed command all the gold and silver that her nationals keep discovering in the New World, this would not render her as rich and powerful as she would have otherwise been.
There can be no question that in general, many countries around the globe and throughout history suffered from a “resource curse.” Figure 35 illustrates the basic pattern in a cross-section of countries today: growth is systematically lower the higher the share of primary exports in GDP. The resource curse theory’s origins can be traced back to the 1950s’ dependency theory of H. W. Singer (1949) and Raúl Prebisch (1950). The fact that resource abundance and poor economic performance go hand in hand is well documented in the empirical literature. 25 The resource curse literature first underscored the deterioration in the terms of trade—a phenomenon labeled “Dutch disease” after the 1970s’ natural gas boom in the Netherlands (Corden and Neary 1982). Yet this rise in the terms of trade is an optimal response: a country that becomes richer will increase its consumption; in the face of a relatively inelastic supply of domestic factors of production, this can only be accomplished through increased imports of traded goods and a corresponding deterioration in the terms of trade. This situation is reversed if the resource abundance disappears; Dutch disease on its own cannot account for longterm economic decline.
Instead, the literature offers three alternative explanations. One strand argues that resource-abundant countries invest less abroad and lose out as a result. A second approach emphasizes learning by doing in the traded goods sector (van Wijnbergen 1984; Krugman 1987). Efficiency losses here are a result of agents optimizing their utility and ending up in an equilibrium that is socially suboptimal. Similarly, Patrick Asea and Amartya Lahiri (1999) emphasize the detrimental effects of resource booms on human capital accumulation decisions. A third strand in the literature considers negative political economy externalities, such as greater incentives for rent seeking (Baland and Francois 2000; Torvik 2002). Halvor Mehlum, Karl Moene, and Ragnar Torvik (2006) generalized this approach, introducing institutional quality as a determinant of rent seeking. James Robinson, Ragnar Torvik, and Thierry Verdier (2006) explicitly model the incentives of politicians, as shaped by institutions, as a conduit for the resource curse. 26
Spain experienced a resource boom that was large even by modern standards. Silver revenues became significant in the 1540s, and then reached values of 4 million ducats or more in every quinquennium from the 1560s onward. Eventually, imports were so large that the Crown’s share reached more than 2 million ducats per year at its peak, or more than 10 million every five years (figure 36). For comparison, Henry VIII’s sales of confiscated church lands produced revenues of only 375,000 pounds over six years—or no more than 4 million ducats (Hoyle 1995).
How does this resource boom compare with modern-day examples? In table 29, we compare the share of revenue from silver in Castile at the peak (1587–89) with contemporary oil exporters and mineral producers. Castile was never as dependent on silver as Saudi Arabia and Nigeria in 2000–2003 were on oil, but it still generated a higher proportion of revenue from resources than Norway. Compared to the mineral-rich countries, Castile scores near the top; only diamond-exporting Botswana has a higher share of government revenue derived from a mineral resource.
Silver had an enormous impact on the economy of Castile, Europe, and indeed the whole world. The silver price differentials between Europe and the Far East stimulated long-distance trade. Some scholars see this period as the “birth of globalization” (Flynn and Giráldez 2004). The bullion that was retained in Europe roughly doubled the monetary stock in the course of a century; the ensuing “price revolution,” a sustained increase in the price level of virtually all European economies, had large effects on fiscal systems, trading arrangements, and monetary institutions (Hamilton 1934; Flynn 1978; Fisher 1989).
The strongest effects of the resource windfall were felt in Castile. The large increase in the supply of silver coupled with the new sources of demand from the Far East prompted factors of production to be diverted from export industries, such as fine wool and manufactures, and into the extraction and service industries associated with the silver trade. This classic case of Dutch disease afflicted Castile for much of the second half of the sixteenth century (Forsyth and Nicholas 1983; Drelichman 2005), but the resource boom had costs in terms of economic as well as political development that went far beyond factor allocation and balance of payments effects.
Silver’s greatest downside was that it weakened the bargaining position of the Cortes vis-à-vis the Crown. Because of silver revenues, Castile’s rulers could spend freely using borrowed funds and effectively present the Cortes with the bill. Throughout the sixteenth century, the Crown resorted twice to the same “hardball” bargaining. It borrowed short term through asientos against silver and other extraordinary revenues, without the Cortes’ consent. As a debt crisis loomed and short-term loans became hard to roll over, it requested increases in ordinary taxation to be able to issue more long-dated juros. Long delays or outright refusals to approve these tax increases would have resulted in a rapid deterioration of the military situation—a political cost that the Cortes was seldom prepared to bear. Also, debt holders in the cities— many of them of elevated social status—were affected by the default and probably saw a tax rise as a much smaller evil than a continued moratorium.
The first such episode was triggered by the suspension of payments of 1575. As we discussed in chapter 4, the proximate cause of rapid borrowing was the flare up of the Dutch Revolt. 27 Philip convened the Cortes and requested a threefold increase in the value of the alcabalas sales tax. During the payment suspension, the military situation in the Netherlands deteriorated. The Cortes eventually granted a doubling of the alcabalas with an additional extraordinary levy in the first two years. Despite hard bargaining, the Cortes received no additional control over the Crown’s expenditures.
One might ask whether silver was instrumental in this outcome. Ultimately, the Cortes was forced to grant a tax increase. Couldn’t Philip II have borrowed against these future tax revenues, used the proceeds to lead Castile into the same expensive campaigns, and requested money from the Cortes later? We argue that the nature of the early modern sovereign debt markets ruled out such a scenario. Sixteenth-century monarchs who wanted to venture into the international credit markets had two options. The first one was to hand over control of the revenue sources that guaranteed repayment. This usually happened in the framework of a multiyear arrangement and secured the lowest interest rates. Castilian juros were usually issued under such arrangements.
The second route was uncollateralized, short-term borrowing with high interest. Bankers typically imposed tight credit limits; neither Henry VIII nor Charles V borrowed more than twice their annual revenues. American bullion taxes were paid to the Crown, leading to massive increases in its ability to borrow short term. Genoese bankers would not have lent to Philip II on the chance that the Cortes might later pay; they took a calculated gamble in lending to him because the steady silver flows meant that the Crown would be liquid enough to repay a good part of the loans. Silver allowed borrowing to take place, war to be declared, and Philip to lead Castile into military adventures that left the Cortes with little choice but to grant additional taxes in case events took a turn for the worse—as they often did. Without silver, Spain’s military adventures under Philip II would almost certainly have been fewer and cheaper.
The second example is similar. After the Armada’s defeat in 1588, Philip again convened the Cortes and requested emergency taxation to protect Castile. The millones, as the new excises were called, departed from earlier practice. The Cortes succeeded in attaching strings to the millones’ renewal (Jago 1981). The scheme consisted of multiyear agreements negotiated between the Crown and Cortes. The new taxes were collected at the local level and, in theory, transferred to the Crown provided that the conditions in the previous agreement had been met. An independent commission staffed by city representatives was to monitor compliance.
The revival of parliamentary authority took place mainly on paper and did not make itself felt in the Crown’s coffers. Although the millones commission repeatedly sought instruments to control the use of the funds, it never gained the ability to restrain the Crown from diverting them to its preferred uses. Starting in the 1620s, the king gradually packed the commission with his own representatives. As the Crown declared its sixth bankruptcy in 1647, the Council of Finance absorbed the commission (Jago 1981). The following year the Peace of Westphalia would mark the end of Castile’s imperial adventures, and usher in a period of internal strife and disintegration of state institutions. The Cortes never recovered the influence it lost; after 1663, it was only convened on ceremonial occasions.
Silver made it harder to strike the mutually advantageous deal that emerged in other countries—a bargain that saw the representative assembly agreeing to greater centralization and higher taxes in exchange for effective oversight as well as control. City-states first overcame the collective bargaining problem and created “consensually strong” executives; the Dutch Republic and England eventually followed suit. Such a bargain could not be struck in Spain, despite false starts. Ultimately, because of silver revenues, the Crown’s hand was just too strong to compromise. A better tax system, funding a more effective executive, would have also been a more equitable system—one that distributed burdens more equally between Castile and the other territories ruled by Philip II, leading to less distortionary taxation within Castile.
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EPILOGUE: Financial Folly and Spain’s Black Legend
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If neither imperial overstretch (Kennedy 1987) nor the willful breaking of contracts was to blame for Spain’s eventual loss of momentum, then what was responsible? Modern-day economic theory argues that institutions conducive to growth should deliver a strong state with a constrained executive (Acemoglu 2005). We argue that imperial Spain’s difficulties do not reflect the evils of an unconstrained executive and were more about the failure to build a consensually strong state—one where those paying taxes gained some degree of control over expenditure in exchange for massively higher contributions. Taxation, while high in Castile, was often low in Aragon, Navarre, Portugal, and the Crown’s other territories—and the resulting inefficiencies did much to misallocate resources. Recent research has pointed out just how economically damaging Spain’s internal fragmentation was. A more successful state could have implemented a tax regime that followed Ramsey’s rule, lowered taxes on Castile, raised them in other territories on the Iberian Peninsula, and abolished internal customs barriers. In our view, the inability to raise state capacity must ultimately be traced back to a resource windfall— silver. It kept the Crown fiscally sound without the need to strike a bargain that would have helped to build a stronger, more capable state in the long run.
25 See, for example, Sachs and Warner 1995; Auty 2001.
27 See also Lovett 1980, 1982.
Bibliograflia
Lovett, A. W. 1980. “The Castilian Bankruptcy of 1575.” Historical Journal 23:899–911.
Lovett, A. W. 1982. “The General Settlement of 1577: An Aspect of Spanish Finance in the Early Modern Period.” Historical Journal 25 (1): 1–22.
Sachs, Jeffrey, and Andrew M. Warner. 1995. “Natural Resource Abundance and Economic Growth.” NBER Working Paper 5398.
Tornell, Aaron, and Philip R. Lane. 1999. “The Voracity Effect.” American Economic Review 89 (1): 22–46.
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