Drelichman voth lending to the borrower from hell; debt, taxes, and default in the age of philip II (2014)

Lending to the Borrower from Hell The Princeton Economic History of the Western World Joel Mokyr, Series Editor A list of titles in this series appears at the end of the book Lending to the Borrower from Hell Debt, Taxes, and Default in the Age of Philip II Mauricio Drelichman and Hans-­Joachim Voth Princeton University Press Princeton and Oxford Copyright © 2014 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket photograph: Signature of Philip II, reading “Yo, el Rey.” Courtesy of the General Archive of Simancas, Ministry of Culture, Spain, PTR, LEG 24, 22 Jacket art: Titian (Tiziano Vecellio) (c.1488–1576), detail of King Philip II (1527–98), oil on canvas, 193 x 111 cms 1550 Prado Museum, Madrid, Spain Courtesy of Bridgeman Art Library, NY All Rights Reserved Drelichman, Mauricio Lending to the borrower from hell : debt, taxes, and default in the age of Philip II / Mauricio Drelichman and Hans-Joachim Voth pages cm — (The Princeton economic history of the western world) Summary: “Why lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights Lending to the Borrower from Hell looks at one famous case—the debts and defaults of Philip II of Spain Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times Yet he never lost access to capital markets and could borrow again within a year or two of each default Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders They provide powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times.A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults”—Provided by publisher Includes bibliographical references and index ISBN 978-0-691-15149-6 (hardback) 1. Finance, Public—Spain—History—16th century. 2. Debts, Public—Spain—History—16th century. 3. Taxation—Spain—History—16th century. 4. Philip II, King of Spain, 1527– 1598. I. Voth, Hans-Joachim. II. Title HJ1242.D74 2014 336.4609'031—dc23 2013027790 British Library Cataloging-­in-­Publication Data is available This book has been composed in Verdigris MVB Pro Text and Gentium Plus Printed on acid-­free paper ∞ Printed in the United States of America 1 3 5 7 9 10 8 6 4 2 To Paula To Bea Contents Acknowledgments Prologue Chapter ix Lending to the Sound of Cannon Philip’s Empire 45 Taxes, Debts, and Institutions 74 The Sustainable Debts of Philip II 105 Lending to the Borrower from Hell 132 Serial Defaults, Serial Profits 173 Risk Sharing with the Monarch 211 Tax, Empire, and the Logic of Spanish Decline 243 Financial Folly and Spain’s Black Legend 271 Chapter Chapter Chapter Chapter Chapter Chapter Chapter Epilogue References Index 281 297 Acknowledgments Blame the Midwest Tender academic minds often need peace and quiet to get down to business We first met in the delightful town of La Crosse, Wisconsin (also known as “Mud City, USA”), where distractions were few and far between This is the place that the organizers of the annual Cliometrics conference had chosen as a venue in 2003 The authors got talking and quickly agreed that they should look into a joint project on the early history of sovereign borrowing Philip II’s defaults are justly famous, but had not been given their due from an economic perspective, or so we felt Explaining why everyone before us had been wrong also seemed the best way to use two characteristic virtues of our respective nationalities—modesty, for the Argentine, and subtlety, for the German Money may be the sinews of power, but it is also the lifeblood of scholarship—and especially so if the project involves extensive data collection in the archives, plus the coding of hundreds of contracts written by hand in sixteenth-­century script This book would not exist without the financial support of several institutions We have been fortunate in receiving funding by the Spanish Ministry of Science and Innovation (MICINN) Sadly, the annual treasure convoys from Madrid, laden with ducats earmarked for research and sailing, did not always arrive in full strength Our applications almost floundered when we failed to specify whether the project required use of the Spanish research station in Antarctica, or if we would need an oceanographic research ship The importance of linguistic accuracy was brought home to us when we discovered, minutes before submitting the research budget, that we were about to request cases of red wine (cajas de tinto) instead of ink-­jet cartridges (cartuchos de tinta) Despite correcting this potentially embarrassing line item, our funding requests were often cut by 60 to 80 percent without explanation, even during Spain’s boom years, while receiv- .. .Lending to the Borrower from Hell The Princeton Economic History of the Western World Joel Mokyr, Series Editor A list of titles in this series appears at the end of the book Lending to the Borrower. .. Borrower from Hell Debt, Taxes, and Default in the Age of Philip II Mauricio Drelichman and Hans-­Joachim Voth Princeton University Press Princeton and Oxford Copyright © 2014 by Princeton University... Lending to the borrower from hell : debt, taxes, and default in the age of Philip II / Mauricio Drelichman and Hans-Joachim Voth pages cm — (The Princeton economic history of the western world) Summary: