The fall of the Spanish empire

Source: http://www.americaneconomicalert.org/view_art.asp?Prod_ID=1086

It may be hard for most people to imagine, but Spain was the first global Superpower.  It gained this status as the defender of Europe against Muslim armies and by leading the West’s exploration of America.  In 1492, the same year that Spanish-financed Christopher Columbus discovered the New World, the last Muslim stronghold of Granada was ceded to Ferdinand and Isabella to complete the Catholic Reconquest of the Iberian peninsula.  With Spain as its political base, and gold and silver flowing in from its American colonies, the Hapsburg dynasty became the dominant power in Europe.  It controlled rich parts of Italy through Naples and Milan, and Central Europe from the Netherlands through the Holy Roman Empire to Austria.  In the 16th century it added the far distant Philippine islands to its empire.  The Hapsburgs held off the Ottoman Turks, whose resurgent wave of Islamic conquest in the 16th century swept across the Balkans and nearly captured Vienna.
The Hapsburgs went into decline in the 17th century, and while any such momentous event has many causes, for our purposes the focus will be on the economic collapse of Spain, which not only sapped the empire of strength but served to build up the power of its rivals.
The demands of empire required a strong and growing economy, but Spain did not keep up with the economic expansion that was taking place in other parts of Europe. Madrid’s financial base fell out from under its empire. Spain could continue to consume in the short term because of the flow of precious metals from American mines, but it could not produce the goods it needed at home, which in the long-run proved fatal to its standing as a Great Power and as an advanced society.
Spanish imports were double exports and the precious metals became scarce within weeks of the arrival of the American treasure fleets as the money flowed to Spain’s many creditors. What industry there was, along with banking and shipping, was in the hands of foreign owners. As a modern historian, Jaime Vicens Vives, has concluded, “This was one of the fundamental causes of the Spanish economy’s profound decline in the seventeenth century, maritime trade had fallen into the hands of foreigners.” This, plus the “opening of the internal market to foreign goods,” produced a “fatal result.” Spain’s exports were at the same time under heavy pressure by competitors in third country markets. A nation that cannot control its domestic market will seldom be able to sustain itself in foreign markets, which are inherently less accessible and more unstable.
Yet, Spanish leaders were deluded by a sense of false prosperity. This is testified by the statement of a prominent official, Alfonso Nunez de Castro in 1675: “Let London manufacture those fine fabrics of hers to her heart’s content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens…so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.” A few years later, the Madrid government was bankrupt. The Spanish nobleman had foolishly elevated consumption, a use for wealth, above production, the creation of wealth.
Historians have traced the flow of Spanish gold and silver across the markets of Europe. Those who “served” Spain by establishing industries to manufacture goods for the Spanish market gained the money. Spain’s rivals, France, Holland (which started a successful revolt in 1568) and England, prospered by their trade surpluses, and reinvested the money to expand their own capabilities. Another modern expert on Hapsburg history, Henry Kamen, has cited contemporary sources who referred to 17th century Spain as “the Indies for the foreigner.” The military empire of the Hapsburgs became the economic colony of other powers, or, to use a current phrase, Spain was the “engine of growth” for the rest of the continent.
Where there were jobs and prosperity, there was also rapid population growth, and rising tax revenue. Rival powers were able to field and finance military forces that could defeat the once superior Spanish forces both on land and at sea. The irony of this is that Spain was ruled by a warrior aristocracy tempered by centuries of constant warfare against Islamic hordes and Christian heretics. These nobles looked down on merchants and manufacturers and disparaged their mundane professions only to find that without a strong domestic business class they could not afford the fleets and armies that guarded the empire they had built.

Louis McFadden and Conspiracy Theories

Louis T. McFadden (1876-1936) was a Representative from Pennsylvania. He made a scathing speech before Congress in 1934 accusing the Federal Reserve of being corrupt and of causing the Great Depression.

He survived a first assassination attempt (two revolver shots missed him), then he became violently ill after eating some food at a political banquet in Washington, DC. A physician friend quickly procured a stomach pump and saved his life. Shortly after this he took a trip to New York City where after another banquet he suffered a "dose of intestional flu" and died. The cause of death as listed on the death certificate however was "heart failure".

While I am on the topic, Charles Lindbergh, Sr. (1859-1924) was a Representative from Minnesota who was opposed to the Federal Reserve Act. His son was the famous aviator (and alleged Nazi sympathizer) and his infant grandson, also named Charles Lindbergh was kidnapped and murdered in 1932. Coincidence? Of course. But there is a conspiracy theory that the man executed for the Lindbergh kidnapping was actually innocent. One theory is that the aviator accidently killed his own son and covered it up with the kidnapping claim (a la Jon Benet Ramsey, whose father was a pilot).

While I am talking about conspiracy theories, John F. Kennedy signed an executive order (#11110) limiting the power of the Federal Reserve only a few months before his assassination.

Now you know the rest of the story.

The Patroonship of Rensselaerswyck

This is a fascinating story of a feudal estate in New York that was established while it was under Dutch control and lasted until the 1840s.

http://en.wikipedia.org/wiki/Manor_of_Rensselaerswyck

"Kiliaen van Rensselaer, a pearl and diamond merchant of Amsterdam, was one of the original directors of the West India Company^[7] and one of the first to take advantage of the new settlement charter. On January 13, 1629, van Rensselaer sent notification to the Directors of the Company that he, in conjunction with fellow Company members Samuel Godyn and Samuel Blommaert, sent Gillis Houset and Jacob Jansz Cuyper to determine satisfactory locations for settlement."

The default of 1575

From: http://www.bloomberg.com/news/2011-07-31/default-more-than-400-years-ago-leaves-scars-christophe-chamley.html

The House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.
Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.
Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.
Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism -- the ire of the elders.

Confluence of Interests

But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.
Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.
Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now -- perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.
Why did the Cortes and the king play this game?

Stop the Spending

The cities wanted to stop Philip’s spending. They knew that bonds not explicitly backed by dedicated taxes would be very tough to sell, that a default would make it even harder for Philip to borrow without their help, and that his lack of direct taxing authority would force his hand in a standoff. But after the payments stopped on the short-term debt, things careened in an unexpected direction, much as they did after Lehman Brothers Holdings Inc. failed in September 2008. Many bankers who had lent to the king were, themselves, leveraged. The payment halt froze the funds deposited by local merchants to the bankers.
At that time of costly communications, periodic commercial fairs were essential events for the economic activity throughout Europe. Credit was rolled over from fair to fair by bankers, and lending agreements were renegotiated. With the Spanish commercial credit market frozen, the fairs couldn’t be held. Indeed, the main fair that was held twice a year at Medina del Campo was canceled. In sort, the default caused a banking collapse, which led to a severe recession.

Caving on Taxes

After two years, in November 1577, the cities caved, agreeing to a very large tax increase. The king resumed debt payments to the bankers. As the king explained in the settlement agreement, called Medio General, the bankers were joined in their demands “by the petition of the delegates of the cities with particular urgency about the same business.” In other words, the cities were begging the king to restore the business of trade. The fairs at Medina del Campo resumed late in the next year, but they had lost their preeminence forever.
What’s the message for the House Republicans today? First, don’t overestimate your power. Second, history stays with us. Spain’s default is 424 years old, but its story is still being told and may, to this day, be affecting that nation’s perceived creditworthiness and cost of capital.

The South Sea Bubble

The year 1720 was really the first "modern" economic collapse, featuring both the collapsing Mississippi Bubble in France and the South Sea Bubble in England. These bubbles involved the national debt, financing speculative growth, derivatives, and hyperinflation. John Law was ahead of his time with his economic theories. And financial regulation was the result. There was a proposal in Parliament that bankers should be tied up in sacks filled with snakes and dumped into the murky Thames River.

See also: HOW THE FRENCH INVENTED SUBPRIME IN 1719.

John Law and the Mississippi Bubble

A cute cartoon about the first bubble caused by issuing paper money.