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There are some arguments that Spain over-exploited the precious metal deposits of the new world, leading to wide-scale inflation. This, coupled with their expulsion of Jewish money lenders, caused their economy to collapse. I am confused as to how this happened, or were the reasons that the Spanish empire collapsed unrelated to the wealth they got?

I am mainly confused as to how Spain, with access to the wealth of an entire continent, failed to simply dominate the entirety of Europe and could not even deal with the Barbary pirates raiding her shores.

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To the closer, could you explain why. Causes of Spanish collapse is a major historiographical debate afair. – Samuel Russell Jun 14 '13 at 1:26
    
Expulsion of money lenders would have opposite effect compared to gold excess. – Anixx Jun 14 '13 at 7:35
    
The Spanish Empire, Silver, & Runaway Inflation: Crash Course World History #25 - youtu.be/rjhIzemLdos – Caesar Jun 14 '13 at 8:39
    
@Caesar I've seen that video, it doesn't explain much – Evil Washing Machine Jun 14 '13 at 18:23
    
@SchwitJanwityanujit Really? Because he talks about how the silver caused inflation in Spain and how all that wealth made them go into all types of wars attempting to conquer Europe and how it lead to them going bankrupt 4 times. I don't know what more you were looking for. – Caesar Jun 14 '13 at 20:17
up vote 15 down vote accepted

Nial Ferguson in the Ascent of Money cites Spain as the canonical case of a state that just doesn't get economics.

Philip II of Spain defaulted on debt four times - in 1557, 1560, 1575 and 1596 - becoming the first nation in history to declare sovereign default due to rising military costs and the declining value of gold, as it had become increasingly dependent on the revenues flowing in from its mercantile empire in the Americas.

Let me emphasize "the declining value of gold" - gold has very little intrinsic value. When gold is used as a medium of exchange, the value is set by the market, and adding more gold will only generate inflation. Inflation encourages borrowing and discourages lending; the tension between those two hampers the ability of the economy to invest, or even to spend money wisely. (I lack the background in Spanish history to draw the relationship between the effects of inflation and the expulsion of the Jews, but it seems to me that there may be an interesting story there.) (There is also probably an interesting paper on macroeconomic errors of a mercantile economy, but I have neither the skill, nor the time, nor the space, to write that paper.)

Adding specie to an economy doesn't enable the country to spend the money wisely. To defeat the Barbary pirates, Spain would have had to construct a superior fleet. Fleet building is a long term investment - even if you can produce the ships quickly, you need to produce professional sailors, admirals and tactics, and you have to ensure that the fleet is supported by solid logistics. That kind of investment is difficult to make in times of high inflation. In an environment where the throne regularly defaults, I would suggest that it is imprudent to participate in such a long term investment.

I think it would also be interesting to examine the actual inflow of specie compared to the expected inflow of specie. I think that the Spanish Throne and the Spanish economy probably reasoned as you do that they had access to the "wealth of a continent". In truth they had a capital inflow - large, but limited. In order to make use of the wealth of the continent, they would have to borrow against future inflows, and lending to the Spanish throne was not a good idea. Furthermore I'm not sure that they accounted for the rising cost of obtaining and defending that capital inflow.

Complex question, and I'm sure that there are many book-length answers.

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Why were they forced to default when they had all that gold? This is not even counting all the produce of their colonies, like sugar, tobacco, cotton, which can all be sold for a high margin in European markets. – Evil Washing Machine Jun 14 '13 at 17:56
    
They were in debt, and they couldn't make the payments. I don't have citations, but we can infer that they borrowed against future gold inflows. Like a lottery winner who spends faster than the money comes in, eventually the debt catches up. – Mark C. Wallace Jun 14 '13 at 18:17
    
Ah ok. I've upvoted your answer, but I haven't accepted it just in case someone has a more indepth response :) – Evil Washing Machine Jun 14 '13 at 18:24

John Maynard Keynes indirectly answered this question in his 1930 essay "Economic Possibilities for our Grandchildren," http://www.econ.yale.edu/smith/econ116a/keynes1.pdf, in which he traced the development of Britain's capital account directly to the capture of Spanish Treasure by Sir Francis Drake. Essentially Queen Elizabeth I was able to pay off the (remaining) national debt and invest 40,000 pounds. Given the "typical" one-fifth royal share, the total amount was somewhere over 200,000 pounds for British investors in Drake's "venture," with even greater losses for the Spanish.

Basically, gold shipments made Spain feel wealthier than they actually were. Or put another way, they had budgeted for X, and were X-200,000 pounds poorer after Drake's depredations. Overspending (or losing) a large part of one's budget is a sure way to economic decline.

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-1 - your answer doesn't indicate what "X" was. If it was 201,000, or 200,200,000, makes a MAJOR difference – DVK Jun 19 '13 at 20:40
    
Although this surely was a big blow, I don't think this was the reason, because then Spain would have first prospered and then defaulted once, and then prospered again. They didn't. – Lennart Regebro Aug 11 '13 at 11:26
    
While it was a benefit for the British, who used their windfall wisely, the risk inherent in the treasure fleets was understood and planned for by the Spanish - that wasn't the first or last time a fortune went missing from the New World en route to the Old. – RI Swamp Yankee Mar 1 at 13:15

If the gold was the real problem of Spain the Spanish empire will no take long far from XVI. century. The real problem of were from 1780-1876.

1º When French bourbons arrived to Spain he drove the textile industry and modernized the army and navy as the same level as European country. While the mining and agriculture industry was still outdated. From 1714-1780 maintained its empire and even recovered Italy from Austrian hands and defied English power. However, it was only a shadow and in 1780 the political and economical crisis started. Nor Agriculture nor Mining was updated and the production was too small for that years and furthermore, there was the mentality of politicians to go forward to the liberal and parliamentary monarchy.

2º 1792-1814: The War against Napoleon ended with 2-4% population killed, textile factories destroyed, the navy nearly complete destroyed and the political crisis between liberals and absolutist started. 1814-1876: Civil wars and political instability provoked a great chaos and Latin-america take advantage of the empty power. That marked the lost of the most part of the American colonies. Between 1876-1929 was the rapid recovery, the 1st industrial revolution done it and the start of the Second one (battleships, machine guns, destroyers, submarines, radio, pharmaceutic, automotive, aeronautic etc...). However, the new innovations not arrives to the army until the first decade of the XX.century. Spain couldn't hold the American colonies but the African colonies just in time.

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An interesting perspective. But I think it doesn't address the years 1500-1714 when (from the asker's perspective) Spain on paper should have been strong enough with all those resources to conquer all of Europe. – T.E.D. Feb 29 at 20:39
    
The superiority of Spain in XVI. century was because of the Elite tercios and the Spanish Armada commanded by the Admiral Alvaro de Bazan, first with the father and later with the son. However, in 1580, Alvaro de Bazan died before the operation to invade England started provocking the weak of the Armada until XVIII. century, with new admirals, a century without good admirals. Like Armada first in 1643 happenned to elite tercios. Spain was in real crisis to compete with other european powers and the army exhausted. The arrive of the Bourbons and its reforms were necessary. – Basque_Spaniards Mar 1 at 10:23

No use having an advanced army if you can not keep it in time . It was also expensive, was a proffessional army, which forced to have a healthy economy. The fact of not having it brought to Spain several economic cracks at the second half of XVI. century. A proffessional army with gun artillery since XIV. century and firearm since XV. century. Those advances werent seen in other european country until XVII. century.

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