The Future of Britain

HISTORY
The Spanish
Empire and New
World Silver:
The Downfall of
the Empire?
Sam Norman
1604. The Spanish Empire
was the richest in Europe
in the late sixteenth and
early seventeenth centuries,
due to the massive influx
of gold and, particularly,
silver from the Americas.
Which Spain had colonised, more so
than any other European power. Potosi,
a Peruvian city, for example, became
famous due to its massive output of silver,
being called a land of ‘extraordinary
riches’ by Miguel de Cervantes in Don
Quixote. Things were thus looking very
positive for the future of the empire,
holding the equivalent of 1.5 trillion
dollars in gold and silver by 1600.
Despite this great wealth, economic
mismanagement led the empire into a
spiral of decline from which it could not
recover.
The influx of silver and gold into Spain
led to multiple problems. Perhaps the
biggest problem was that of inflation;
levels of which, in Spain, amounted to
1-1.5% per year, a figure that seems
low by modern standards but which
was actually rather devastating as the
currency was based on a silver metallic
standard; and thus inflation would only
be caused by debasement of the coinage
(replacing the silver or gold within it
with a cheaper metal) or by an increase
in the number of coins made due to an
increase in the amount of silver or gold.
The latter was the reason behind the
Spanish inflation, which led to prices
being almost 500% higher by 1650. This
price increase had not been seen before
in Europe and it did not just affect
Spain- England saw similar inflation as
did much of Europe. This led to higher
food prices and, more importantly,
higher arms prices, which was especially
devastating for the Spanish who were
fighting multiple wars in Europe
almost constantly through the sixteenth
century, usually against the French.
Even when not directly involved, Philip
II Hapsburg, king of Spain and the rest of
the Hapsburg lands, which encompassed
Austria, the Netherlands and the Holy
Roman Empire, would siphon off money
from Spain to fund wars in other parts
of his kingdom.To make the situation
worse, this inflation made ships far more
expensive for Spain. Since so much silver
and gold had to be exported to Europe
from America by the Spanish fleet, a
strong navy was incredibly important.
But the fleet was incredibly expensive
for the Spanish and thus they were open
to raids, both by privateers and other
countries. Sir Francis Drake alone stole
fifteen tons of silver in 1571- 1573 and
numerous Spanish coins, worth over
twenty-five million dollars. This piracy
significantly damaged Spain, who
needed the constant supply of Silver for
their coinage.
The influx of precious metals proved a
disaster for Spain. The Spanish Empire
went bankrupt several times in the
sixteenth century: 1557, 1560, 1576 and
1596 all saw Spain declare bankruptcy.
By 1600, Spain had amassed a debt of
over 85 million ducats, whereas their
annual income was only just under ten
million. Spain was in economic turmoil,
with the American bullion being used
as loans to Genoese merchants, who soon
had great control over the economy of
Spain.
The Empire could still maintain itself if
the only economic issue were inflation.
However, other problems furthered
the poor economic situation. Much of
Spain’s manufacturing was done by
the artisan classes of the Jews and the
Moriscos. However, both these classes
were expelled from Spain, the Jews
in 1492 and the Moriscos in 1609,
and as such, Spain became incredibly
dependent on foreign manufactured
goods, which, due to their high inflation
rates, became very expensive for them.
The Spanish Empire did survive all this,
however. Despite the pirate raids and
the foreign wars, the huge inflation and
the lack of manufacturing, the Spanish
Empire saw a recovery in the eighteenth
century, gaining lands in India and
stabilising their economy
The empire really started to face
difficulties in the early nineteenth
century, when the colonies in the New
World began seeking independence. But
despite this resurgence, the problems
caused by the silver and gold were still
deep wounds for the Spanish Empire.
The debt and expensive military
upkeep led the Empire to defeat in wars,
reducing their European territories,
losing valuable areas such as Naples
and the Netherlands. By no means were
these wounds caused by the silver and
gold fatal, but they were still a disaster,
the beginning of a spiral from which
Spain could not escape. ƒ
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A TURN FOR THE WORST - WHY
SPAIN SHOULD GO BACK TO GOLD
The impression given in this article is
that inflation and deflation under a
gold standard are driven by the supply
of gold or silver.
The housing boom experienced by the
Spanish from 2002 onwards was driven
partly by high demand driven by the
fundamentals. However, the ECB’s low
rate policy drove speculative booms in
housing. The results can now be seen.
Spain should learn from Austrian
School theorists like Ludwig von
Mises and Friedrick Hayek that a fiat
currency can lead to serious problems
when the central bank feels like going
on a printing spree.
FINANCE & MARKETS
Perpetually changing and subsequently altering our daily lives in one way or another, the financial sphere
holds a prodigious influence over society and societal practices.
Yet, many don’t take notice of this factor of preeminent importance due to its seeming lack of relevance to daily life.
My personal interest in the topic lies within this general consensus of disinterest, as I have become intrigued in its
news and relevancy over the past few years. Looking at specific markets such as commodities, manufacturing and
pharmaceuticals as well as the future outlook for our natural resources, I hope you’ll find our writers have portrayed
a brief introduction to the world of business as well as the future of Britain, encouraging you to further explore this
area of the world economy.
Lewis Bizaoui, Section Editor
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