I recently spent a good amount of time learning about the history of finance, how it functioned in some of the largest empires mankind has ever seen, and, most importantly, how those empires compare to America.
Funnily enough, it was as I was driving back from visiting Rob that I came across a very interesting parallel. I was listening to Mike Duncan’s Revolutions podcast season 5 on Simon Bolivar and the liberation of South America. In the podcast, he mentioned how often the Spanish Empire, during the early modern era(1500-1800), was fiscally insolvent. Then Holy Roman Emperor, Charles the V, ran a deficit of about a million ducats per year on top of a 36 million dollar deficit he had already spent. As a result, his successor, Philip II, defaulted on Spain’s debts in 1557, 1560, 1575 and 1596(that doesn’t even mention the 6 more times they had to default in the early 17th century). Despite all of the conquest overseas, the Spanish did not seem to behave in a fiscally responsible manner at all. Despite how much gold and silver they discovered.
Ryan Miller in his Spain’s Lesson in Hubris, how similar some of the assumptions Spanish rule made that ultimately led to their decline. As Ryan states in his article title, most of what caused the fall was hubris applied to their fiscal policy. Spain made the mistake of thinking that its economy could be propped up by their gold and silver discoveries alone. As a result, they stopped producing goods, stopped innovating, and pretty much just became lazy. Once that happened, the Spanish were weak, vulnerable, and ultimately fell to Napoleon. All of this was due to a misplaced faith in precious metals.
Initially, Spain knew that it needed to go conquer the New World in South America in order to access the riches there. When they got there, it turned out to be filled with so much wealth. As is the case with so many countries, Spain assumed this would be enough forever and always. Oh, how wrong that ended up becoming. In his article, Ryan Miller writes:
The Spanish management of the Americas and its riches in the century after discovery started them on their journey to financial ruin and relative insignificance. Retrospect makes one wonder, “whether the Discovery of Peru has been more beneficial, or more mischievous to Europe,” just as an anonymous seventeenth-century writer did. Looking back, it seems the Spanish should have followed Daedalus’ advice toward his son, Icarus: ‘do not fly too high.’ Instead, the Spanish imperial desires increased exponentially, believing the American riches would never end, and doomed their failure from the very beginning. Whereas Icarus’ wax wings melted when he rose too high, so too did the Spanish’s wings of gold and silver melt away when the material could not fulfill their ambition—inflation robbing its value and debt stealing it from the peninsula. The Spanish fatally held absolute confidence in the American colonies as a source of endless wealth and power and acted accordingly, causing their economy and prominence to come crashing down because of it.
The “ancient” power of gold and riches was too strong for the Spanish to resist diving into a full-blown empire a world away. The excitement of the early–sixteenth-century “treasure ships” traveling back to the continent full of gold and silver set the table for the disappointment of the later sixteenth- and seventeenth-century economic declines that would symbolize the decline of the Spanish empire.
Martin Gonzalez de Cellorigo, the arbitrista (a contemporary social commentator), explained in 1600 that “the effect of an apparently endless flow of American silver into Seville had been to create a false sense of wealth as consisting of gold and silver, whereas true wealth lay in productive investment,” which Spain was not doing. Instead, the Habsburg kings continued their endless wars in the belief that they had ample amounts of wealth to uphold them. As debts piled up from this borrowing, the Spanish became inventive with loan types that pushed Spain into bankruptcy.
Is America at the risk of doing the same with its housing prices? Is the increase in the asset prices actual, real value or are we at risk of inflating the prices so much that they ultimately crash. Just as Spain did with its precious metals, are we assuming that asset prices are going to keep going up when they actually don’t have real value behind them? All of the money we have printed in the past couple of years alone makes me wonder if that is more of a possibility than anyone would like to admit.
What do you all think? Can you think of any other civilizations that made the same mistake?
Here’s an awesome series on financial history that I reference often when thinking about the rise and fall of civilizations.