My ultimate interest is to offer a critical analysis of how colonial Spanish strategy, governance, and reaction kicked off the ultimate decline of the peninsular economy. Looking more closely at that map, I saw the legend indicate this color represented the Spanish Empire.
Even as a child, I was astounded by how much land it covered, and naturally I thought that it must have been powerful too. Tracing the boundaries of the territory with my hand, I imagined how mighty and prosperous Spain must have been to accumulate such a vast amount of territory.
I knew nothing of atrocity, bureaucracy, or colony, but the size of their empire stuck out to me. Rushing to the end of the atlas, the rapid disappearance of that Spanish Empire confused me.
What could cause an empire like that simply to disappear? Numerous historians have offered their own answers to this debacle over the years. While those dug Spain deeper, they are consequences more than causes. The real cause came from the very beginning, when Spain first integrated the American colonies into its economy.
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. 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 style of and motivations for Spanish colonization are essential to understanding how the American colonies began the ultimate decline.
His initial letter to the king and queen of Spain also provides a window into what Columbus saw as Spanish motivations. While fame and faith were certainly important, the finances played a massive role in motivating that Spanish expansion. The immediate price inflation caused by the shipments of gold and silver set in motion the avalanche that would take with it the Spanish economy. The first Spanish conquistadores were thrilled to see all the gold and silver worn by the Aztec and Incan royalty and strove themselves to find the mines that offered such valuable substance.
The American bullion put major pressure on the Spanish economy, and this pressure was only increased with the new costs that came with the empire. The costs of the vast and distant American colonies put significant pressure on the peninsular economy contributing to the ultimate financial struggles underlying the Spanish decline. Both money and good people were needed by these budding Spanish societies in America, and the absence of these two things from Spain negatively impacted the peninsula.
The vastness and distance of the Americas complicated defending the new borders around and trade between. Trade and communication between Madrid and the New World was difficult in optimal conditions, so the threat of foreign powers intervening made it all the more difficult.
The Crown experimented with various measures attempting to counterbalance this precarious issue, but the attempts never quite appeased the situation as these defensive costs were coupled with constant ambitious military campaigns.
The Spanish Habsburg kings could not help but fall into the trap of using their newly acquired and greatly desired bullion to finance extremely costly military ventures that stretched the Spanish economy even more thinly.
The newfound gold and silver funded the aggressive tactics of the monarchs both directly through payments and indirectly through paying back loans taken to pay for the armies.
Mauricio Drelichman summed it well:. The debt continually grew as conflicts all over Europe were incited and continued by armies paid by the Spanish American silver. The costs of the conflicts coupled with the costs of repaying the debts accumulated for these conflicts neutralized any benefit the gold and silver may have created, and they added to the initial economic woes of price inflation and the American imperial toll.
The constant acquisition of loans by the Habsburg monarchs and the required subsequent repayments further dug the Spanish economy into an inescapable hole that would suffocate the country on the eve of modernity.
The borrowing itself was not the issue; rather, it was the places where it was funneled. Recklessly misused, it merely hastened the inevitable crash. As debts piled up from this borrowing, the Spanish became inventive with loan types that pushed Spain into bankruptcy.
The Spanish concocted new strategies with the inland loaners to continue to borrow as much as anyone was willing to loan and to drive the debt to all new heights. These loans reached such a deficit that Philip II restructured them for juros , a very similar style of loan, in , when bankruptcy was declared that year. Or, if you are already a subscriber Sign in.
Other options. Close drawer menu Financial Times International Edition. Search the FT Search. World Show more World.
US Show more US. Companies Show more Companies. Markets Show more Markets. Opinion Show more Opinion. A rumour - denied by the Spanish finance ministry - circulated on Thursday that nervous depositors had withdrawn a billion euros of cash from their accounts at Bankia, a bank that was created out of the merger-cum-rescue of seven small regional savings banks in Fears are rife of a vicious circle.
If more cash leaves the Spanish banking system, the banks may not have the money needed to keep lending to the government. Spaniards might be all the more minded to transfer their money to the safety of a German bank account if they witness a traumatic exit of Greece from the eurozone - something likely to involve the freezing and forced conversion of ordinary Greeks' savings into severely devalued drachmas.
On the other hand, if the Spanish banks get into trouble then the government in Madrid may not have enough money to bail them all out. But the problems faced by Spain's government and its banks are just symptoms. The real issue is the mess that is Spain's economy. Believe it or not, before Spain's government was one of the least spendthrift in the eurozone - unlike Greece.
Or Germany. What's more, Madrid was in the process of paying its debts off - it earned more in tax revenues than its total spending. Evidently, this crisis has nothing to do with the recklessness of Spain's government. Instead, it was other people in Spain who behaved recklessly.
Interest rates fell to historic lows when the euro was launched in So Spain's banks, property developers and ordinary home-buyers collectively borrowed and fuelled an enormous property bubble.
Between and , Spanish property prices tripled - comparable to the price rises seen in the UK. Now the bubble has popped. Those prices are steadily falling - and they look like they have a lot further to go. The construction industry has collapsed, leaving hundreds of thousands out of work. Overindebted home-owners face financial misery and have cut back on spending. And the banks are staring at a mounting pile of bad mortgage debts.
All of which means that now - just like the UK - Spain's government finds itself borrowing and spending like crazy to stop its economy from collapsing altogether. Unfortunately for Spain, a burst housing bubble isn't the biggest problem the country faces. That's because Spain also experienced another bubble - in its labour markets. Wages rose far too quickly during the boom years of the last decade. That loss of competitiveness has left Spain - not just the government, but the entire country - with a big overspending problem.
Unfortunately for Spain, it shares a currency with Germany. That means Spain can no longer simply devalue the peseta - something that would automatically make its workers cheaper and more competitive in the world.
There is no peseta to devalue. It means that Spain will remain stuck in an overvalued currency - while Germany will continue to enjoy an undervalued currency - for many more years, until that gap in the relative competitiveness of their workers slowly closes again.
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