Political Institutions and the Spanish Monarchy's Finances 1521-1648

Akira Motomura, Stonehill College

Introduction

The Spanish Monarchy was Europe's most powerful and feared state after Charles of Ghent inherited Spain and other European dominions in the 1510s. For more than a century, the Monarchy fought various enemies in lengthy, expensive wars and lost much of its political and economic power. After King Charles II died without heirs in 1700, Spain could not prevent France and England from playing dominant roles in a war to determine his successor. What factors caused this precipitous decline in Spanish power?

Finances apparently affected the outcomes of Spain's wars, which were often lengthy and indecisive in the early stages. One Spanish royal councillor affirmed that "victory [in the Eighty Years War] would go to 'whoever is left with the last escudo'" (Parker 1985, 238). Spain's problems were worsened by the ability of its opponent in that longest and costliest war, the Northern Netherlands, to borrow large sums at lower interest rates.

The argument of this essay is that the Spanish Monarchy's ability to finance its wars was hurt by its political structure. Spain could not raise revenue and borrow as effectively as its main antagonist, the Dutch Republic. Spain's traditional monarchy left more power with traditional elites who had less interest in supporting wars than did commercial interests in the Dutch Republic. Also, the Spanish Monarchy was more likely to default on its obligations than was the Dutch Republic, perhaps because the state had less interest in preserving property rights on future financial claims. The argument is similar to the one that changes in British political institutions after the Glorious Revolution of 1688 were major factors in Britain's rise as a global power. It seems worth examining whether a similar story can be told of the Spanish-Dutch war which brought down a global power a century earlier.

This essay concentrates on the Spanish side of the story and makes comparisons with the Dutch situation. Many elements of this argument need further investigation or precise numbers, and the argument itself requires more refinement, but this summary provides what should be a useful outline.

General Historical Background

In the late 1510s, Charles of Ghent became Charles V (1516-56) of the Spanish Crowns of Castile and Aragon, the Low Countries, Burgundy, some Italian cities, and the Holy Roman Empire. Castile's forces later conquered New Spain (Mexico) and Peru. Charles' far-flung dominions struck fear in European rivals, but were vulnerable due to their isolation from each other. Charles often found himself at war against the Ottoman Empire, France, German Protestants, or other opponents (Lynch 1984a, 86-104; Lovett 1986, 40-60).

Charles abdicated in 1556 and divided his empire, but the wars continued. His son Philip II (1556-98) inherited Spain, the American colonies, the Italian cities and the Low Countries. He used Castile as his power base. He took the throne of Portugal in 1580, which brought an overseas empire in Asia and Brazil that carried major costs. Philip II and his successors Philip III (1598-1621) and Philip IV (1621-65) could not avoid intermittent warfare.

Spain's record in its wars was generally not very positive. The Dutch, English, and French were frequent opponents, with the Eighty Years War, which began as the Dutch Revolt, being the longest and costliest war (Parker 1985). In 1567, the Monarchy increased taxes in the Netherlands, hoping to make them self- supporting from the Crown's viewpoint. Tax collections increased several-fold through 1570-71 but also ignited the Dutch Revolt of 1568 in the Northern Netherlands (Parker 1972, 287). The rebels formed the Dutch Republic. Spain and the Netherlands began the Twelve Years Truce in 1609, during which the Dutch enjoyed practical but not formally recognized independence from Spain. The war resumed in 1621 with fighting not only in Europe but in Asia and America as well. The war lasted until the Peace of Westphalia in 1648. In that treaty, the Spanish Monarchy formally recognized the Dutch Republic, thus officially conceding the original Dutch goal of independence. Spain's wars against England and France generally ended with neutral or unfavorable results for Spain. Overall, Spanish power declined precipitously. By 1648 other major European states were not in awe of Spain, and by 1700 Spain was clearly less powerful in Europe than its main antagonists.

The question naturally arises of what factors played major roles in Spain's defeats. Lack of military skill or ability was probably not in itself decisive. Spanish forces won many battles and earned a reputation for valor in battle. Spain's major wars were not decided quickly by military imbalance. States' ability to finance prolonged warfare became important to outcomes. It seems worth examining what influenced the ability to finance war.

Some Literature on War Finance

An important literature has developed recently on the effect of political institutions on such consequences as states' capacity to finance warfare. Some of this research has focused on the 18th-century conflicts between Britain and France. John Brewer (1990) and Douglass North and Barry Weingast (1989) have argued that the changes in the structure of Britain's government after the Glorious Revolution of 1688 promoted its rise as a global power. A government that represented commercial interests was more protective of property rights. It was thus less inclined to default on debt. Also, those most able to pay, the same people of commerce, were more willing to pay taxes because they had a stake in the government, saw commercial opportunity in successful wars and could see clear limits on government power. With these effects, prospective lenders had more confidence that the British government would not default and could raise enough revenue to service debt. As a result, Britain borrowed heavily at low interest rates.

Britain outspent its major rival, France, even though contemporary French ministers were astute in their handling of state finances (White 1989; Velde and Weir 1992). France's government structure contained stronger incentives to default and less clarity in fiscal authority. The monarchy needed the cooperation of landed elites who might not feel a strong stake in wars against Britain.

Differences in Institutional Structures

The Spanish Monarchy and the Dutch Republic seem to present a 17th-century situation paralleling that of 18th-century France and England. Spain was a monarchy with major traditional elements resembling those of France. It was not an absolute monarchy during the period in question, even in its home province of Castile. The Crown had unquestioned rights to some traditional revenues, and powers to borrow and to coin. Most new revenue sources required approval by a body representing traditional elites, the Cortes. Commercial interests were not dominant politically. Property rights appear to have been based more on custom as opposed to law when compared with more modern states. Spain was also a collection of kingdoms, some of which had strong rights which limited royal powers and enabled some kingdoms to turn down a monarch's request for help.

In contrast, the Dutch Republic was more of a bourgeois- dominated commercially-oriented republic. It resembled 18th-century Britain in important respects.

It is natural to consider the thesis that the difference between Spanish and Dutch political institutions played an important role in the Republic's eventual military success in what was then acknowledged to be a battle of resources. A thesis like this one obviously cannot be tested econometrically. We must consider whether there is a strong historical case to convince us of its reasonableness. To explain Dutch success after long periods of rough stalemate, evidence must focus on differences between the two states' relative abilities to finance war, particularly differences that would turn in favor of the Dutch over time.

Historical Evidence

The Spanish Monarchy faced serious problems in raising revenues. Those difficulties worsened during the Price Revolution relative to the Dutch experience. Spain's problems were greatly connected to its structure as a monarchy with a powerful traditional elite. The Dutch Republic's institutional structure was such that those with political power were more willing and able to raise revenues. Also, the Dutch state was less inclined to default on loans, generating a more favorable credit history that differed from Spain's to a degree which increased over time.

Spending Needs

An examination of the importance of political institutions for war finance might begin with some preliminary appreciation of the magnitude of the problem facing early modern states. Total annual spending by the Spanish Monarchy increased from about one million ducats in 1534 to about 6.5 million in 1572/73 to 12.69 million in 1621 (Elliott 1963, 203; Thompson 1976, 288).

One reason for the escalation was that the cost of European warfare increased dramatically during the early modern period. The major European armies grew about ten-fold from 1530 to 1710, and costs per soldier rose, too (Bean 1973; Parker 1972, 3-24, 134; Parker 1979, 45-63, 86-103). At sea, the emergence of Atlantic powers like England and the Netherlands along with Europe's conquests and rivalries in America and Asia made ocean naval warfare both strategically and economically important after 1580. Shipbuilding was expensive and capital-intensive (Lynch 1984a, 313-50). Overall, early modern states faced the task of raising huge amounts of money by European standards.

The Monarchy was preoccupied with foreign policy concerns and decided to fight wars on the basis of religion or reputation. Any economic-based expected cost-benefit analysis was secondary if at all relevant (Elliott 1989, 114-36).

Several issues important to the ultimate result of Spain's wars were present throughout and do not necessarily provide strong answers to the question of why Spain fought well for decades against the Dutch, then lost control over time and eventually conceded a partial defeat. These include American bullion flows, Spain's multiple enemies, and the Dutch option of fighting a defensive war.

Revenues

Many Spanish Monarchy revenues were fixed traditional incomes. Prices in silver terms roughly tripled from 1521 to 1627 (Hamilton 1934, 403), with the most rapid percentage increases occurring in the first 40 years of that period. Many expenses, of course, rose with inflation or faster. In contrast, the Dutch Republic was a new state and thus not set in traditional fixed revenues. Further investigation is needed to learn whether Dutch revenues kept up with inflation more easily than Spanish ones did.

The body which represented the elite of Spain's towns, the Cortes, resisted the Crown's efforts to meet greater spending needs through taxes. The Monarchy also faced practical limits to increasing tax rates in those areas which politics allowed.

An important example of the Monarchy's limitations occurred in the mid-1570s. Tax revenues from the Netherlands dropped sharply after 1571 as resistance stiffened to the tax increases of the late 1560s. In 1574, Philip II coerced the Cortes into raising the encabezamiento, a contribution required of towns, by 206% to 3.716 million ducats (Lovett 1980). The towns were supposed to generate the revenue for the through an excise tax on staples called the alcabala. Philip's advisors believed the towns could meet their quotas by raising the alcabala rates to the legally authorized 10%. The towns did not meet their quotas and organized, threatening to withhold more revenue from the Crown. After two years, Philip II agreed to reduce the encabezamiento by 27% to 2.716 million ducats.

Unable to extract as much as he wanted from the encabezamiento, Philip tried to introduce a new tax, but failed. He proposed an excise tax on some items not covered by the alcabala. The Cortes resisted fiercely, partly because it feared giving the Crown potentially unlimited rights to another revenue source, and the proposal died (Fortea 1990).

Spanish spending on ships increased in the 1580s, helped by greater bullion imports. Spain lost about 60 % of its 100,000-ton Atlantic fleet in 1587-88, mostly in the Armada's famous failed 1588 attack on England. The Spanish Monarchy responded by building a larger and better Armada, but this too failed in an attack in 1597 (Lynch 1984a, 173-75, 346-50).

The Crown tried again to broaden its tax base and succeeded. In 1589, the Cortes granted the King the servicio de millones, a subsidy of eight million ducats to be collected over a six-year period. Rebuilding the Armada was mentioned explicitly in promoting the millones to the Cortes (Jago 1985). Each town had to contribute a quota, generally raised by taxes. The enactment of the millones required a crisis to overcome strong initial resistance.

The millones subsequently helped the Cortes increase its power at the expense of the Crown, at least according to revisionist accounts of Crown-Cortes relations (Artola 1982, 117; Jago 1981; Thompson 1982). The millones became the major source of government tax increases, but at each renewal the Cortes imposed strict conditions on how the revenues could be spent (Lovett 1977, 146-53, 206-7; Thompson 1985). The traditional town elites apparently were not enthusiastic about supporting wars in foreign lands. Also, there was no clear fiscal authority other than tradition, giving the Cortes a strong incentive to resist setting new precedents, including new revenue streams, that increased royal power.

The Cortes also used its power to prevent tax increases directed at the nobility. In 1538, it raised the servicio, a tax levied only on commoners and which required several days' work to pay, while it refused to grant the Crown its proposal to levy a sisa or foodstuffs tax that all would have paid. In 1622, King Philip IV's chief minister, the Count-Duke of Olivares, proposed a fiscal reform package that included taxes on elite income like pensions, public offices, and juros interest. The Cortes ignored the package, which was supported by one of its own committees, and voted instead to increase the millones, which affected buyers of staples (Dom'nguez Ortiz 1983, 23-27; Elliott 1986, 146-62).

The Monarchy also had great difficulty raising money from provinces other than its home base, Castile. In 1610, the Crown of Aragon's provinces, Catalonia, Aragon, and Valencia, contributed at most 600,000 ducats to Castile, representing a per capita contribution at most one-half of Castile's (Lynch 1984b, 40). When Ferdinand and Isabella united the Crowns of Castile and Aragon in the late 15th century, the union did not affect political, juridical, or monetary institutions (Elliott 1984a, 7-9). The Aragonese provinces were protected from the central Monarchy by long-standing constitutional rights called fueros which they guarded zealously. The fueros required approval by the provincial Cortes of most taxes and laws, and required the ruler to ask for funds in person. The Basque provinces enjoyed similar fueros and contributed funds that went mostly to local administration (Dom'nguez Ortiz 1983, 154). Spain's Portuguese possessions were a net drain on the Monarchy due to the costs of defending against Dutch and English attacks (Elliott 1986, 525). Its Italian territories were basically self-sustaining, but did not contribute fiscally to the rest of the Spanish Monarchy (Dom'nguez Ortiz 1983, 152-57).

Philip IV pursued both structural changes and fiscal appeals to little effect. Proposals to move toward a single fiscal regime were blocked by political opposition (Elliott 1986, 674-85). Philip visited Catalonia in 1626 to ask for additional money, but received nothing. Appeals to the other provinces were slightly more successful. The Crown received promises of about 169,000 ducats per year for 20 years from Aragon, and about 68,600 ducats along with 1500-2000 men annually for 15 years from Valencia, small help with multimillion ducat expenditures (Dom'nguez Ortiz 1983, 33). The Monarchy tried to raise about 587,000 ducats in new taxes from Portugal in the 1630s. Local protests scared Portuguese officials out of giving the political and administrative support needed to raise the money (Elliott 1986, 525).

In contrast to the Spanish Monarchy, the Dutch Republic apparently taxed itself rather heavily to support the war effort, especially after 1607. This point requires more precise support.

Borrowing and Defaults

The Spanish Monarchy defaulted on its debt service obligations more often than did the Dutch Republic. A likely cause is that a traditional monarchy had less of a vested interest in preserving property rights like future claims than did a commercially-oriented republic. Moreover, the republic's greater willingness to pay taxes gave lenders more confidence that the revenues needed to service the loans would be available. Thus, the Dutch Republic gave prospective lenders more confidence that it could and would service debt. Thus the Dutch Republic was a better credit risk than the Spanish Monarchy and enjoyed greater access to credit, as reflected in lower interest rates.

The Spanish Monarchy defaulted on its debts six times from 1557 to 1647. Each time, it stopped servicing its debts and insisted on renegotiation of the terms. The general pattern was that the original short-term debts, known as asientos, were converted into long-term bonds and consols called juros at lower interest rates. In contrast, the Dutch Republic never defaulted on its debts after 1572.

The greater creditworthiness of the Dutch Republic was manifested in greater access to credit. It paid interest rates as low as 3% while the Monarchy often could not borrow as much as it requested, even when offering as much as 10% as it did in 1621 (Dom'nguez Ortiz 1983, 8-31, 307). Dutch creditors also participated in the war effort by lowering interest rates charged to the Dutch Republic, though other Dutch lenders were willing to lend to the Spanish Monarchy (Parker 1974, 573).

Conclusions and Speculations

Substantial evidence exists to support the idea that political institutions hurt the Spanish Monarchy's ability to compete against the Dutch Republic in raising the revenue needed to fight the Eighty Years War. The Monarchy faced resistance from a traditional elite whose approval was needed to raise many new revenues. In contrast, the Dutch Republic was dominated by a commercial class that could gain from Dutch success in warfare and was apparently willing to tax itself heavily to support the war effort. That difference in practical revenue-raising ability was important both directly and in affecting the two sides' access to credit.

Clearly factors other than political structure also affected war outcomes; no monocausal explanation is likely to explain those results fully. The Dutch had the advantage of fighting for themselves rather to retain an empire. The different motives probably helped the Dutch raise revenue more easily. Spain did not achieve great success against England or France, whose government structures were also traditional. England and France had population and geographic advantages that the Dutch lacked. When considering how a small upstart's revolt could not only succeed against but also seriously weaken the world's greatest power, we should take political institutions seriously.

References available on request.