State formation

Jørgen Møller - State Formation, Regime Change, and Economic Development (Routledge, 2017)

Representative institutions redux

In recent decades, the ‘Why Europe?’ question has attracted overwhelming interest in the social sciences. From having been a dusty, forgotten issue, primarily studied by historical sociologists, it is now a part of mainstream political science and economics. For example, over the last decade, the leading journal in political science, American Political Science Review, has published a series of articles that, often with the help of sophisticated statistical methods, address different aspects of the question (e.g., Acemoglu and Robinson 2006; Stasavage 2010; 2014; Hariri 2012; Woodberry 2012; Blaydes and Chaney 2013; Kokkonen and Sundell 2014). Similarly, the question has received attention from economists, an issue to which we return in Chapter 13.

It is thus hardly an exaggeration to say that much of contemporary social science – as in the late nineteenth and early twentieth centuries – revolves around the causes of the emergence of modernity in the West and the implications of this for the rest of the world. This new interest in old questions primarily seems to have been prompted by the following insight: only a historical perspective can enable us to understand the contemporary variation in economic prosperity and levels of democracy, particularly outside of Europe and the European settler colonies (e.g., Acemoglu et al. 2001; 2002a; Acemoglu et al. 2008; Hariri 2012). The more specific claim is that a series of medieval political institutions contributed to putting a leash on European monarchs and limiting their arbitrary exercise of power. These institutions were subsequently transplanted to some of the European colonies, where they facilitated economic growth as well as democratization.

What kinds of institutions have been attributed these tantalizing effects? As we shall see in Chapter 13, which addresses economic and political development outside of Europe, the answer to this question is not always clear. But it should be obvious that the representative institutions of the Middle Ages – Estates or parliaments and diets – form part of the core. Here, we can repeat Ertman’s (1997, 19) observation from Chapter 2 that these institutions alone were able to limit the monarchy’s exercise of power in a systematic manner.

The following pages are premised on this point. The purpose is to address a new body of literature on the origins and character of representative institutions. I have already reviewed Ertman’s (ultimately, Otto Hintze’s) account of why medieval representative institutions were stronger in some areas than others, and why they therefore had a varying impact on state formation and regime change. However, new research has been burgeoning in recent years. Most importantly, English political scientist David Stasavage has followed up on Hintze’s and Ertman’s analyses of the character and impact of the representative institutions in medieval Europe. Stasavage’s work has thus far resulted in two books (2008; 2011) and four scientific articles (2007; 2010; 2014; 2016). This chapter discusses this work and sets the stage for the next chapters, which use this medieval legacy to explain contemporary variations in economic and political development.

Surveying representative institutions

To explain a phenomenon, one first has to capture it. With this in mind, Stasavage compiles a dataset tallying representative institutions in twenty-four European states in the five centuries between 1250 and 1800 – the period to which Myers (1975) refers as the Age of the Polity of Estates. Instead of distinguishing between the number of chambers and whether or not the representatives were representing estate groups or localities, as Hintze and Ertman do, Stasavage (2010) maps the following:

(1) Does a representative assembly exist?
(2) Does the representative assembly have a veto on taxes?
(3) Does the representative assembly audit government spending?

The first condition is fulfilled if a collective assembly is found on the national level, convenes with some regularity, and at a minimum is consulted by the monarch. We find assemblies of this kind throughout Western (or Latin) Christendom in the Middle Ages. They emerge at different points in time: relatively early in Western Europe and relatively late in Scandinavia and East-Central Europe (Poland and Hungary). The only states in Stasavage’s dataset that do not live up to the first condition at any time in the period 1250–1800 are the duchies of Milan and Tuscany and, hardly surprisingly, Russia, which is the only state outside of Western Christendom that is tallied.

The second condition is more demanding as it requires that the assemblies have a veto on taxation. This was the core prerogative of most representative bodies, and this condition is fulfilled in the vast majority of the twenty-four states. In fact, among the states with representative institutions, Denmark and Naples are the only ones without. 1 The third condition is met if the representative institutions had a direct right to audit the monarch’s expenditure and possibly even decide over public spending. There are very few cases in which we find this prerogative (eight of Stasavage’s twenty-four states). In addition to city-states such as Siena and Florence, England after the Glorious Revolution in 1688 is an instance. Finally, Stasavage codes how frequently the representative institutions convene, ‘annually’ being the highest value and ‘never’ the lowest. 2

Geographic barriers for representation

What explains the variation captured in Table 10.1? And what explains why the frequency of assemblies was so different across this universe: from the city-states, where the assemblies met many times annually, via the almost annual meetings in states such as Württemberg, Austria, and England, to the extremely rare gatherings in states such as Denmark and France?

Stasavage’s attempt to answer this question begins with an apparent paradox. As we know from previous chapters, it is widely assumed that representative institutions made it easier to impose and collect taxes for the purpose of financing warfare, and they have also been seen as easing public borrowing and promoting economic growth. If only some of these postulates are correct, then why did the representative institutions not win out throughout Europe? And why were many states so slow to introduce them? These are the questions raised by Stasavage (2010) in the article ‘When Distance Mattered’.

The title hints at his answer. Boiled down to a single sentence, there were significant geographical barriers to representation. A myriad of researchers have linked democracy with the size of the political unit. This point is best illustrated by the direct democracies of antiquity, which required that all (male) citizens were able to participate in the popular assembly. But scholars have also been pointed out that many island states have been able to maintain democracy in the period following World War II, an observation that has been linked to their limited size, which has made it easier to create a sense of political community (Dahl and Tufte 1974).

The representative institutions of the Middle Ages were not particularly democratic (see Møller and Skaaning 2013, Chapter 4). However, Stasavage argues, this does not alter the fact that geographical barriers had at least as much significance for how they worked. In Europe of the High Middle Ages, traveling great distances was associated with exorbitant costs – measured in time as well as money. The network of Roman roads had fallen into disrepair in the Early Middle Ages. In fact, it was mostly the memory of them that remained by the year 1200, at which time the representative institutions were emerging. Some improvements were made around this time, but it was only really after 1800 that large-scale advances of European infrastructure began to occur. In other words, transport was extremely cumbersome throughout the period Stasavage analyses. 3

Stasavage argues that this affected the impact of representative institutions on public borrowing. Here, he invokes economic theories about corporate finance. One of the key insights of these theories is that a common condition for being able to raise new funds for investments is that the borrower accepts external control or at least monitoring. However, such control can be so costly that potential investors pull back for this reason alone (2010, 625–626). Stasavage draws an analogical inference about the medieval representative institutions, the point being that the cities’ representatives would only go along with raising funds for the monarch if they were allowed to monitor how he spent them, but that such ex-post control could easily become too costly if geographical barriers prevented the representatives from meeting with some regularity. 4

Stasavage accordingly reasons that a state’s geographical size will have an impact on (i) the existence of representative institutions, (ii) how frequently they were called, and (iii) whether or not they had the right to oversee public spending. Conversely, he does not expect to find a relationship between geographical size and a veto on taxation, as this does not require a high meeting frequency. Stasavage applies these expectations in a series of statistical analyses in which he supplements the information from the dataset above with a number of control factors, including indicators measuring the presence of external threats and the size of the population, respectively. The intuition behind the first control variable is that the threat of war can trigger the summoning of representative institutions – and for that matter bring about an expansion of the prerogatives of these assemblies. The reasoning behind the second control variable is that the per capita expenses related to warfare will be greater in areas where the population is smaller. Finally, Stasavage controls for urbanization by rerunning his analysis without the city-states that are included in the dataset – on the basis of the potential objection that the representative institutions in these states were peculiar.

Stasavage measures geographic barriers in several different ways, including the average distance any representative would have to travel – ‘as the crow flies’ – in order to participate in an assembly. More specifically, he tests his expectations in two different ways. The first analysis operates on the ‘national’ level – that is, across the national units described in Table 10.1 above. As a next step, Stasavage shifts the level of analysis to the regional level by repeating his analysis on the French regions that had separate representative institutions. That is, Stasavage investigates whether there were also geographical barriers to representation within France.

What do the analyses show? Stasavage finds that geographical size has a very consistent, statistically significant, and substantial effect: first, in terms of whether or not a representative assembly existed; second, whether it exercised oversight over public spending; and third and finally, on how frequently it met. For example, the assembles in the quartile of the smallest states in the dataset met on average more than once every second year, while the assemblies of the corresponding quartile of the largest states met less than once every third year. Conversely, as expected, there is no correlation between geographical barriers and whether or not the representatives have a veto on taxation (2010, 636–637).

Stasavage uses this baseline to predict how often the French regional Estates were convened. The model provides a reasonably good prediction of the meeting frequency in eleven of the thirteen regions. The two exceptions are Normandy and Brittany, where the regional Estates convened surprisingly often considering the large size of these units. Finally, Stasavage repeats his national analysis but substitutes the French regions for France. The results are again robust, which is reassuring in as much as it is rather artificial to work with ‘national’ units in the medieval world. France is thus not the only country with regional Estates. The same applies to the Holy Roman Empire, which had a single representative assembly (the Imperial Diet – Reichstag), but where Stasavage has instead coded the assemblies in the individual states (Landtage).

A final objection is that, over time, the political institutions might have an impact on how large a given state is (or, rather, becomes). If a certain kind of representative institution made it easier to borrow or charge money for warfare, this should make it possible to swallow up neighbouring states that did not have the same advantage – as money is the fuel of warfare. Conversely, one might imagine that authorities that are not accountable to a representative assembly would be able to engage in ambitious foreign policy more easily, which might provide opportunities to increase the size of the state in question. In both cases, this would undermine Stasavage’s test of the relationship between geographical barriers and the characteristics of the political institutions. However, Stasavage also takes this into account in his test and dismisses this objection.

Representative institutions and public borrowing

 

Dutch investors

Jan Luiten van Zanden - The Long Road to the Industrial Revolution. The European economy in a global perspective, 1000-1800 (Brill, 2009) 223

The reasons for this gap were obvious to Dutch investors: they distrusted monarchs whose actions were not bound by representative institutions. The Leiden millionaire Pieter de la Court van der Voort, for example, recommended buying English stock, as it was guaranteed by Parliament. He was, however, extremely suspicious of the other monarchies. High interest rates would only fool the ignorant, he claimed, but served as a warning for those in the know, as they were only offered by swindlers. One should be especially careful with those who invoked the bible to prove their reliability, or when dealing with monarchs: ‘Those who trust the signed promises of sovereigns find themselves easily betrayed’, De la Court told his wife and heirs (Prak, 1985, p. 137).

Two Spains

Regina Grafe - Distant Tyranny. Markets, Power, and Backwardness in Spain, 1650-1800 (Princeton University Press, 2012), 215-218

Two Spains

By the eighteenth century at the latest, it was increasingly clear that the divergence in regional fortunes was not entirely aleatory. Instead, a trend that had been observed by some since the early seventeenth century had become unmistakable. The center of gravity of the Spanish economy was moving from the Castilian heartland to the coasts. Demographic trends illustrate this. Chapter 7 showed that urbanization remained stagnant. However, this is somewhat misleading. It is not that there was no urban growth across Spain, rather population growth and decline canceled each other out. Cadiz, for example, passed from 40,000 to 70,000 and Barcelona grew significantly over the course of the eighteenth century. Increasing urbanization in the coastal provinces was accompanied by de-urbanization in the interior, with the exception of the growing capital Madrid. As a result, the overall share of population in towns hardly changed at all. A look at the population distribution between the coast, interior, and Madrid between 1700 and 1900 in figure 8.1 illustrates the point.

Rafael Dobado has argued that population density in the late eighteenth century was highly correlated with regional levels of economic well-being in Spain in the later nineteenth century, for which more reliable estimates are available. 3 Population density is therefore one of the better indicators for economic growth in an era in which population statistics are a lot more reliable than estimates of income. In 1787 about 160 people lived in every square kilometer in Spain’s coastal regions, but only about 75 in the interior. 4 The difference is strikingly large and as figure 8.1 suggests, it only increased over time. The shift from the interior to the coastal regions and to Madrid was still modest in the eighteenth century, but it accelerated in the nineteenth and continued in the twentieth.

In fact, the trend had begun much earlier. In the late sixteenth century the central Castilian regions, that is, Castille-Leon and Castille-La Mancha, accounted for 46 percent of the population of the Spanish territories, while Catalonia and Valencia accounted for about 10 percent. By the mid nineteenth century they were home to 27 and 19 percent of the total population, respectively. 5 The question thus remains why within a general pattern of slow market integration some regions patently fared worse than others. In other words, what explains the center-periphery divide in Spain, the economic, political, social, and cultural cleavage that has been the central feature of Spanish history and historiography?

Much of the Spanish historiography of the early modern period has developed around the notion of the “Two Spains.” In economic history this has been most elegantly elaborated by Ringrose, who has argued in Madrid and the Spanish Economy that the rise of the bureaucratic capital of the Crown’s making stifled growth elsewhere in central Spain. 6 The consequence was the emergence of two fundamentally different Spains. One Spain comprised Madrid and the Castilian interior, the historic territories of Leon, Old and New Castile, and Estremadura on the Portuguese borders. The other covered much of the coastal regions, in particular the northern Cantabrian coast, including the Basque Provinces and Navarra, the Mediterranean coast with the former reign of Aragon, Murcia, and Andalusia. Essentially the divide was between the “center” and the “periphery.”

Ringrose had not invented the idea of Two Spains. It became popular in the second half of the nineteenth century among Spanish commentators from Ramiro de Maeztu y Whitney (1875–1936) to Marcelino Menéndez Pelayo (1856–1912). 7 Since the twentieth century, it has generally been used to describe the conflict between liberal and reactionary forces that opened up after 1808 and persisted throughout the Civil War and dictatorship of the twentieth century. Ringrose simply traced the idea back to what he saw as its regional origins. In this, he was in good company. José Ortega y Gasset, Spain’s most influential writer of the early twentieth century, argued in Invertebrate Spain (1922) that it would be

an insult to historical intelligence to assume that when a superior national unit had been formed out of smaller nuclei, the latter cease to exist as actively differentiated elements. This erroneous idea would, for example, lead to the idea that when Castile reduces to a national Spanish unit Aragon, Catalonia and the Basque Country, these lose their character as distinct peoples [pueblos] and become part of the whole. 8

Not so, Ortega y Gasset exclaimed. While the unification might contain their centrifugal tendencies, it would not break the force of their independence. If the central organ disappeared, the nation would revert to its constituent parts. Disintegration in Spain was thus the corollary of the decadence at the center, in Castile. According to Ringrose, Ortega y Gasset, and many others the decline had started as early as the 1580s and had never ceased. 9 Here were the supposed origins of a division between a conservative, inward-looking interior Spain and an outward-looking, culturally, socially, and economically more advanced coastal Spain.

This narrative mirrors national historiographies in many places. The notion of commercially minded, more tolerant port towns and backward hinterlands has been part of histories written from Hamburg to Boston and from Canton/Guangzhou to Buenos Aires. It appeals as much to cultural historians as to hard-nosed economists, who have argued that Europe’s growth in the early modern period was largely “Atlantic,” though the latter have a hard time accounting for the poor economic performance of thoroughly Atlantic Spain. 10

From this point of departure, it was a relatively short step from the Spanish declension narratives of the sixteenth to early eighteenth centuries to the chronologically second half of the Two Spains story, that is, the role of the coastal areas in eventually pulling a recalcitrant hinterland into the modern age. In Spain, Europe, and the “Spanish Miracle,” 1700–1900, Ringrose took his interpretation into the early nineteenth century and argued that the outward orientation of the coastal regions—exemplified by the early (by Spanish standards) industrialization in Catalonia, the Basque Country, and parts of Andalusia—eventually led Spain out of backwardness. 11 By seeking integration with regions outside the Peninsula, they overcame the nefarious influence of a centralist bureaucracy that, in the later eighteenth century, contributed only slowly to this drive by opening up the Americas trades, for example. Again Ringrose was building on a long tradition of late nineteenth and early twentieth-century writers. The young, still liberal Maeztu warned against separatism of the coastal regions. Having spent part of his youth in Havana and returning to Spain just before the U.S. occupation of Cuba, he had witnessed the dismemberment of Spain firsthand. However, he also called for “another” (more modern) Spain that could only be created under the direction of the open- and industriously minded Basques and Catalans. 12

Notas

3 Dobado González, “Legado peculiar,” 101.

4 Ibid., 108–9.

5 Pérez Moreda, “El Legado demográfico,” 131.

6 “In the case of Madrid and Castile, market oriented commerce developed but only as a consequence of continuous political intervention in the economy.” Ringrose, Madrid, 2. For a similar argument, cf. Madrazo, Comunicaciones, 60–61, and Herr, Rural Change.

7 Juliá, Historias de las dos Españas; Alvarez Junco, Mater Dolorosa, 383ff.

8 Ortega y Gasset, España invertebrada, 32–33.

9 There is an endless, self-referential literature on Spanish decline. See, e.g., Elliott, “Decline of Spain,” and Kamen, “The Decline of Spain.” It is interesting to note that in the 1920s the possible loss of Catalonia or the Basque Country simply looked like a logical continuation of the loss first of the European, then of most of the American territories, and finally of Cuba, Puerto Rico, and the Philippines. For Ortega y Gasset evidently the latter had been just as much part of what he considered Spain as Catalonia; they were all part of the same entity rather than colonies of the Peninsula or even Castile.

10 Acemoglu, Johnson, and Robinson, “Rise of Europe.” Spain’s poor economic record is— once more—explained away by its supposed institutional exceptionalism.

11 Ringrose, Spanish Miracle.

12 Maeztu, Hacia otra España. See the very interesting discussion of the origins of the concept of the nation in Balfour and Quiroga, España reinventada, chapters 1–3.

Bibliografía

Balfour, Sebastian, and Alejandro Quiroga. España reinventada: Nación e identidad desde la transición. Trans. Ana Escartin. Barcelona: Ediciones Peninsula, 2007.

Dobado González, Rafael. “Un legado peculiar: La geografía.” In El legado económico del antiguo régimen en España, ed. Enrique Llopis, 97–119. Barcelona: Crítica, 2004.

Ringrose, David R. Spain, Europe, and the “Spanish Miracle,” 1700–1900. New York: Cambridge University Press, 1996.

Ramsey rule

Ramsey Taxation 

Ramsey Taxation is an attempt to minimize the distortative effects of taxes. 

Introduction

As demonstrated in the prior readings, the imposition of taxes by the government can lead to a decrease in overall welfare. As shown in the section on excess burden, $1 of taxation may cost society more than $1 due to the changes in behavior resulting from the possible reduction in price received by the supplier, and the possible increase in price received by the buyer. As shown in Figure 1, when a tax is imposed on a good, the consumer will most likely pay a higher price for that item and the seller will most likely receive a lower price. The incidence, or the individual/entity paying the tax, ultimately depends on the elasticity of supply and the elasticity of demand—that is, the responsiveness of supply and demand to changes in prices. Additionally, the size of the dead weight loss to society also depends on the elasticity of supply and demand.

Figure 1: Supply and Demand Responses to the Imposition of a Tax

The Ramsey Rule 

F.P. Ramsey used this model as a starting point for considering what sort of taxes might have the least distortionary, welfare-reducing effect on society. For simplicity’s sake, Ramsey assumed a case of perfectly elastic supply, where a supplier will provide an infinite amount at a given price. In this model, as seen below, the more inelastic the demand, the less the dead weight loss. Thus, when demand is less responsive to changes in prices, then the imposition of a tax results in a smaller dead weight loss. According to this argument, politicians will generate a smaller cost to society if they tax necessities such as milk, which people will continue to buy in the face of an increase in prices. A simplified version of the Ramsey rule is the “inverse-elasticity rule.” This rules states that tax rates on goods should be inversely related to their elasticity of demand. 

Figure 2: Elasticity of Demand and the Size of the Dead-Weight Loss

Argument against the use of the Ramsey Rule for Taxation 

The major criticism of the Ramsey rule is based on the observation that the demand for necessities is more inelastic than the demand for luxuries. As a result, a tax system that strictly follows the Ramsey rule might be somewhat regressive in nature, because necessity goods are likely to represent a higher percentage of household income for poorer households. Many have also criticized the rule because the application of this rule will likely result in important administrative and compliance costs. 

https://resources.saylor.org/wwwresources/archived/site/wp-content/uploads/2011/05/ECON305-2.2.4-RamseyHandout.pdf

Silver & Dutch disease

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.

[...]

EPILOGUE: Financial Folly and Spain’s Black Legend

[...]

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.

Notas

25 See, for example, Sachs and Warner 1995; Auty 2001.

26 For another examination of the institutionally detrimental effects of resource windfalls, see Tornell and Lane (1999).
27 See also Lovett 1980, 1982.

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