1. INTRODUCTION
In September 1575, Philip II stopped all due payments on his contracts with Genoese bankers, the asientos. This action triggered a financial and commercial crisis that turned out to be the most severe of his reign: for more than 2 years, it induced a near paralysis of the private credit markets in Castile and the suspension of the main commercial fairs in Medina del Campo. In this crisis, the critical element was not an action against lenders. In the historical context of the political and economic structure of Castile, Philip II used the suspension of payments as a financial weapon in his struggle against the main cities of Castile represented in the Cortes.
Why should a suspension of payments to the Genoese be caused by a conflict with the Cortes? In the political and fiscal context of Castile under Philip II, the Cortes controlled the majority of the «ordinary revenues», which provided the stable basis for the funding of the long-term domestic public debt, the juros. We showed in previous studies that each of the three suspensions of payments on asientos by Philip II (1557-1560, 1575-1577, 1596-1597) occurred when the level of ordinary revenues had become insufficient for the funding of more juros (Álvarez-Nogal and Chamley Reference Álvarez-Nogal and Chamley2013, Reference Álvarez-Nogal and Chamley2014, figure 2)Footnote 1 . Our analysis was based on macroeconomic and political arguments. In this paper, we focus on the main crisis of 1575-1577 and include new evidence at the microeconomic levelFootnote 2 , which very clearly supports our interpretation of the system of public finances of Philip II and its crises.
The Archives of Simancas, in addition to most of the documents related to the asientos, also contain papers of many individuals, savers, small investors and merchants who petitioned the Crown for help during the disturbances of the Castilian credit market after the decreto of 1575. These papers are preserved in the section Consejo y Juntas de Hacienda and do not appear to have been used by historians until now. The main bankers also petitioned the Crown for help. All these documents are essential for an understanding of the events during the financial crisis of 1575-1577 as no asiento contract was signed during the crisis. In addition to this wealth of papers, we also consulted the papers of Mateo Vázquez de Leça, one of the secretaries of Philip II, in the Archive Valencia de Juan located in Madrid. Within the limits of an article, we cannot refer to all the documents that we encountered, but one should stress their importance for an understanding of the finances of Philip II and of the financial crises.
Using all these documents, our political economy interpretation of the crisis differs from the previous studies of the financial crises of Philip II. None of them refers to the evidence that we present hereFootnote 3 . They all focus on the interactions between the Crown and the bankers and neglect two critical elements that are related. First, the cities imposed a de facto ceiling on the juros through their tax contributions and the increase of these contributions was politically costly for the Crown. Second, a large part of the asientos was financed by the Genoese bankers through financial intermediation between savers in Castile and loans to the Crown. This financial intermediation provided Philip II with leverage against the cities that opposed higher taxes to fund military ventures abroad. The suspension of payments to the bankers trickled down the pyramid of credit to their Castilian depositors. The severe impact on credit and trade eventually led the cities to capitulate. After resisting for more than 2 years, the cities accepted and voted in the Cortes a doubling of their tax contributions. Philip II immediately lifted the suspension of payments to the bankers, on terms that had been agreed 9 months before.
The crisis of 1575-1577 throws light on the political situation of Castile. As in other parts of Europe at the time (Dincecco Reference Dincecco2009; Grafe Reference Grafe2012, Ch. 1), the regime was not autocratic in fiscal affairs and, therefore, neither was it autocratic in political matters internal to CastileFootnote 4 . The central government did not have an administration to collect revenues. This task was delegated to the cities, the tax farmers and the Casa de la Contratación in Seville, which handled the revenues from the imports of precious metals.
The Cortes represented the eighteen main cities of Castile and their surrounding regions. They pledged by contracts of about 6 years a fixed contribution (encabezamiento) to the Crown. The encabezamiento was collected through sales taxes, the alcabalas that had a statutory rate of 10 per cent. The collection of the alcabalas was left to the management of the cities and the effective rate was much lower than the statutory rate. Juros were serviced by earmarked revenues, as in most countries before 1800, including England in the 18th century. The service of the juros that were written on the contribution of a particular city had a first claim on that contribution. Hence, cities kept control of the revenues for the service of their juros (which could nevertheless be traded throughout the realm) and these juros were the safest of the government bonds, with the lowest interest rate. Other juros were written on the revenues from tax farms or from the silver tax but they were not of the same quality and commanded a higher rate because these revenues were under the control of the central government and were more erratic (Ulloa Reference Ulloa1977; Álvarez-Nogal and Chamley Reference Álvarez-Nogal and Chamley2014).
For the Crown, the delegation of tax collection to the cities saved on administration costs and yielded a lower cost of the juros issued on cities. However, the fixed contribution by the cities generated a de facto ceiling on the service of these juros, and because the interest rate did not change much, on their stock. As the level of the debt rose with the economy and with government expenditures, eventually the contractual obligations of the cities had to be raised. At such times, a crisis took place.
In the early seventies, Philip II failed to increase other taxes (e.g. on flour) because of the opposition of the cities. Since an increase of the encabezamiento was long overdue, the cities would probably have accepted a moderate increase. Philip II, however, had decided on a course that would provide him with much more fiscal independence: in 1574, he declared a tripling of the encabezamiento. Cities and merchants resisted against the tax farmers who had to be sent to collect revenues that did not reach their target level. In any case, the new setting could not provide for the public debt the same credibility as an agreement in the Cortes.
When Philip II realised that this policy could not yield a permanent solution, he turned to his financial weapon and stopped the payments on asientos which led to the credit crisis. Eventually, the cities could not bear the economic cost and they demanded that the Crown come to an agreement with the bankers: they accepted a doubling of their contribution.
In the next section, we explain that although Philip II may have pretended that he did not understand much in financial affairs, he had actually become well versed in the workings of the credit market when he was the regent of Castile in charge of sending funds to his father, Charles V. He was familiar with the role of the bankers in credit markets and with the financial function of the commercial fairs at Medina del Campo. He knew how to use the credit markets as a weapon for his political goals: he had done so when he quarrelled with the Pope in 1556.
In Section 3, we analyse the relation between the activities of the Genoese bankers, the credit markets and the commercial fairs of Castile. We emphasise that Castilian residents had a large stake in the asientos through the intermediation of Genoese bankers and the chains of credit. We then show that the commercial fairs of Medina del Campo coordinated both commercial and financial trade. They acted as a contingent clock for many financial contracts (both private and public, including asientos). Letters of exchange were an essential vehicle for rolling over trade creditFootnote 5 . The commercial fairs needed the credit market and the credit market needed the commercial fairs. We provide and use a new documentation on the schedule of the fairs.
In Section 4, we analyse the policies of Philip II just before the decreto of September 1575 and the reasons for the suspension of payments.
In Section 5, we show the adverse impact of the suspension of payments of September 1575 on the Castilian credit markets, the fairs and on economic activity. The most recent worldwide financial crisis has brought considerable information on linkages in the credit markets and on the interactions between these markets and the markets for goods. A similar revelation of information has been left by the 1575-1577 crisis in the archives that provides abundant support for our political economy interpretation of the crisis. We show how the decreto initiated a process that led to the freeze of the credit market in Castile, the cancellation of the commercial fairs, and the reduction of economic activity.
The petitions to the Crown reveal that Philip II, consistent with his policy, far from punishing the bankers as the cities demanded, instead protected them from some of the consequences of the suspension of payments. In particular, as the crisis affected all credit, bankers could not collect some of their own loans from residents of Castile. We document that the Genoese bankers benefited from preferential legal treatment by the government against their own creditors and in their collection of private debts.
Section 6 is devoted to the end of the crisis.
2. THE PREVIOUS EXPERIENCE OF PHILIP II WITH FINANCIAL MARKETS
Philip II was called the «Prudent King» as he thought out issues and kept his cards close to his chest. It was an important part of his strategy not to reveal all his thinking and to pretend not to understand finance (Parker Reference Parker2010, pp. 179-180). However, before he became king he had dedicated much time to understanding the credit markets and their contribution to the finances of the Crown. He had been the regent of Spain since age 16, in 1543. One of his main tasks was the provision of funds for the wars of his father, Charles V, to whom he wrote in 1553:
the main foundation on which the war can be sustained is money and credit and without those, one cannot do anything (Carlos Morales Reference Carlos Morales2003).
The young Prince of Castile endeavoured to understand the fiscal and financial system and, during the 1550s, he kept his father informed about his activities in that task and about the problems that he encountered.
On 6 November 1551, Prince Philip reinforced previous orders of Charles V on an interest cap by the prohibition of any interest charge for the letters of exchange within CastileFootnote 6 , and by other policy measures (Aguilera-Barchet Reference Aguilera-Barchet1988)Footnote 7 . The policy aimed at a lower interest for all loans but, unsurprisingly, it had the opposite impact: the credit market contracted and interest rates, including those on the Crown’s short-term debt, rose and in some cases tripled, from 9-10 per cent to 31 per cent. On 7 October 1552, Philip explained to his father that merchant bankers in Castile had to take loans from foreign lenders with whom they had no previous association, at a higher interest, to the benefit of the foreigners (Carlos Morales Reference Carlos Morales2003, pp. 288-289)Footnote 8 .
Between 1552 and 1554, Philip II was seeking a solution to the issue. He consulted merchant bankers such as Rodrigo de Dueñas, whom he appointed as finance counsellor, and Juan Delgadillo who was an exchange agent in Burgos (Carlos Morales Reference Carlos Morales2003, pp. 291-292). Shortly before leaving for England to marry Mary Tudor, he was presented with a long study of the markets for commercial credit by Bernardino de Mendoza and Francisco de Almaguer, two main officials in the office that controlled the royal finances.
Philip II developed a network of officials (factores) with whom he had close relations, and who enabled him to bypass some bankers and get better credit terms. In 1556, he appointed Fernán López del Campo for Spain, Juan López Gallo for the Netherlands and Silvestre Cattaneo for Italy (Hernández Esteve Reference Hernández Esteve2010, pp. 32-33). López del Campo, in a report to the king, blamed the pragmatica of 1551 for the reduction in the number of traders at the fair of Medina del Campo from about 200 to 20, and in the volume of trade from 4 or 5 million ducats to half a million (Hernández Esteve Reference Hernández Esteve2010, p. 72). He recommended reestablishing the exchanges between Seville and the fairs in Castile and allowing credit between fairs, albeit with a maximum rate of 12 per cent. Following his advice, the regent of Castile (as Philip II was in Flanders at the time) promulgated another pragmatica on 5 March 1557, restoring the freedom of letters of exchange and relaxing some of the 1551 restrictions.
From his experience with the credit market, Philip II knew how to wield financial weapons to achieve his political objectives. In 1556, at the beginning of his reign when asserting his power was critical, he entered into a dispute with the Pope that turned into a test exercise for the later decreto. Philip II held Paul IV in the pincers of the military and the financial arms. The army of the Duke of Alba had come from Naples to besiege Rome. The Pope had asked, vainly, for help from Henry II, king of France. To take the city was risky when the sack of 1527 by the troops of his father had not been forgotten. Philip II forbade letters of exchange between Castile and Rome and ordered that all the citizens of Castile, many of them busy in financial affairs, should immediately leave the city (Carlos Morales Reference Carlos Morales2003)Footnote 9 . The policy disturbed the transfers of ecclesiastical revenues from Castile, an important source of revenues, and the credit market of the papal territories. The Pope, unable to sustain high military expenditure, signed a peace treaty with Philip II on 12 September 1557 (Hernández Esteve Reference Hernández Esteve2010, pp. 50-51).
3. CREDIT MARKETS AND FINANCIAL POLICY: ASIENTOS AND FAIRS
Asientos were loan contracts signed between the Crown and a banker, or a relatively small group of bankers. Under Philip II, most of the bankers came from Genoa. They were well placed at the beginning of the «Spanish Road» to the Netherlands (Parker Reference Parker1972) but they were much more than «foreign bankers»: they played the essential role as the period’s «moneyed men», that is, the group that Dickson (1967) would describe as critical for the functioning of the capital market in England, 150 years laterFootnote 10 . Genoese bankers were involved in many aspects of the credit markets in Castile. Some of them were very close to Philip II and participated in meetings of the Council of Finance (Carlos Morales Reference Carlos Morales2003, pp. 291-292). Then as now, the main task of bankers was not to supply their own funds but to connect borrowers and suppliers of funds. A central step in our argument is that the asientos were largely financed by the financial intermediation of Genoese bankers within Castile.
In a credit contract, the lender provided funds («dar a cambio») to the borrower who took the liability for future repayment («tomar a cambio»). A standard form of credit was the letter of credit that transferred money from one place to another, at a different time. The promise to deliver cash at another place could be rolled over back to the initial place. Short-term credit («traer a cambio») could be achieved by means of letters of exchange between different fairs or different places. The exchange rate differences performed like an interest that avoided usury laws. Hence, the circulation of credit that was the counterpart of trade in goods provided a natural setting for purely financial transactions.
We have examined all the asiento contracts for the years 1570-1575Footnote 11 . Since asientos had an average maturity not longer than 5 years, most of the asientos affected by the suspension of payments of 1575 were signed in these years. These contracts contain clauses that attest to three types of interactions with the credit markets.
First, all the asientos in that period include a license that authorises the banker to collect interests in the credit markets as required for the business of the asiento. The license exempts the banker and his counterparts from the laws of Castile that could constrain interest charges.
Second, many contracts mention explicitly that the funds for the loan will be raised on the credit market, with the expression «a cambio» which was used at the time. This mention is often made as an excuse for the interest charge in the contract. In 1570, 88 per cent of the volume of the asientos included such a clause «tomar a cambio». For some contracts, called factorias, funds could be raised on the credit market. For this reason, the interest rate on the asiento could not be known at the moment of signing the contract and it was left open to be determined according to the market conditions.
For example, the asiento that Lorenzo Spinola signed on 1 February 1572 for the delivery of 120,000 ducats in Madrid (towards the construction of the monastery of San Lorenzo del Escorial), stated the sources of revenues for the repayment of the principal but it did not and could not provide specific dates as they came from the fleet. The Crown provided some funds in advance and for the rest, Lorenzo Spinola «had to present his bill for the cost of borrowing in the credit market»Footnote 12 . The contract included the license for the free usage of letters of exchange at the market rate and it recognised that the interest payments on the loan would be adjusted to those of the market during the time of the loan operationsFootnote 13 .
The third type of clause is a license for the banker to «anticipate», that is, discount in the credit market, the payment orders for his reimbursement, called libranzas. For the year 1570, 48 per cent of the volume of asientos allowed the banker to sell the libranzas at a discount. By selling the libranzas early, the banker could transfer the debt and the risk of the asiento to the buyer of the discounted libranza (Ruiz Martín Reference Ruiz Martín1987, p. 292; Hernández Esteve Reference Hernández Esteve2010, p. 71).
For example, on 22 December 1574, 8 months before the decreto, Pablo de Grimaldo signed an asiento to deliver in Madrid the very large amount of 829,925 ducatsFootnote 14 in cash in three instalments (1574, 1575 and 1576)Footnote 15 . The contract granted him the fixed rate of 16 per cent as compensation for the cost of interest in the credit market. The total of these payments was capped («a buena cuenta») at 1,615,741 ducats, which corresponds to the principal and an interest rate of 16 per cent for 7 years. It is likely that neither party intended, at the time of the signing, to use the maximum maturity of 7 years of the contract. The asiento specified that the banker could cash («anticipar y pagar adelantadamente») the libranzas that he received early, by discounting them on the credit markets.
The three clauses that have been described provide ex ante evidence of the tight relations between asientos and credit markets. We will see more evidence, ex post, when creditors to the bankers complained after the suspension of payment.
3.1. Commercial Fairs as a Clock for Financial Contracts
Today, financial markets operate continuously and the overnight credit market is huge. At the time of Philip II, credit markets were decentralised and thin. The rolling over of loans through letters of credit was timed by commercial fairs that were widely spaced in time. The main fairs (ferias) of 16th-century Castile were held in Medina del Campo, at the intersection of a north-west axis and on the road between Toledo and Burgos (Ruiz Martin Reference Ruiz Martín2000, p. 278). The position was central between the main cities of the northern meseta of Castile which had benefited from wool exports and were represented in the Cortes (Valladolid, Zamora, Avila, Salamanca, Segovia). As in other countries in EuropeFootnote 16 , the fairs of Medina del Campo had been created in the 15th century. They received the continuous support of the kings and were granted the title of «General Fairs of the Realm» in 1491. Medina del Campo had become one of the most important markets of Europe. Merchants came from the main cities of Castile, from Flanders, France and Italy. The fairs were held twice a year, around May and October. They also acted as a hub for smaller nearby fairs that took place just before the main fair (Ruiz Martín Reference Ruiz Martín1987, p. 291).
The concentration of commercial transactions had its counterpart in financial transactions. Each fair had some bankers who specialised as a clearing house for letters of exchange and payment orders that connected the fairs with the main cities of Castile. As Luis Saravia de la CalleFootnote 17 wrote in 1544, «they go from fair to fair and follow the court of the king from place to place with their table, boxes and books» (Colmeiro 1988 [Reference Colmeiro1863], t. II, pp. 303-304, 501). The banker of a fair was committed by written mandate to follow the request of his contacts (Ruiz Martín Reference Ruiz Martín1970, p. 37). This function was recognised explicitly in the writing of some asientos: in October of 1573, the asiento of 400,000 ducats signed with Esteban Lomelin at the fair of Medina, which was taking place at that time, acknowledges a commission of 0.5 per cent to the banker of the fairFootnote 18 . The bankers of the fairs were also linked with several commercial banks in MadridFootnote 19 and with Genoese bankers, including many of the most important ones such as Nicolao de GrimaldoFootnote 20 .
The fairs provided focal points for payment orders: credit contracts were often contingent on a particular fair. For example, an asiento in March 1570 states that
… Joan de Curiel promises and is committed to give and pay to the person of the people whom we have sent, and in cash the afore mentioned 100,000 ducats … in the payments of the feria of May of the previous year in 1569, that is currently taking placeFootnote 21 .
In the asiento signed in 1566 by Nicolao de Grimaldo and Lorenzo Spínola for the delivery of 100,000 ducats in gold in Italy, the clock of the fairs is acknowledged by its imperfection:
and what will be paid in ferias should be calculated according to the actual date of payment, because Nicolao de Grimaldo and Lorenzo Spinola did not want to accept specified dates in the contracts as long delays could have occurred in these fairsFootnote 22 .
Table 1 presents data on all the asientos signed in the years 1570-1575. The total amounts for each year, converted in ducats and the number of asientos are listed in column 2. Column 3 reports the fraction of the amounts of disbursements to the Crown that were contingent on a fair in Castile. The next two columns present data on the distribution between the fairs of Medina del Campo and Madrid. Most of the disbursement outside of Castile took place in Flanders.
TABLE 1 PLACE OF ASIENTO DISBURSEMENTS TO THE CROWN (SEE TEXT)
Sources: Archivo General de Simancas, Contadurías Generales, 85, 86.
In addition to the business of the asientos, the fairs acted for the Crown as financial centres for other fund raisings, for some sales of the juros, and for the trade of libranzas. Hence, orderly fairs were essential for the management of the public debt and its timely payments, and, similarly, the running of the fairs depended on the timely payments of loans to the Crown.
Between 1567 and 1575, some of the biannual fairs of Medina del Campo were delayed for various reasons. During the 1560s, difficulties arose from the revolt that started in 1567 in the Netherlands which was the main destination for exports of Castilian high-quality wool (Phillips and Phillips Reference Phillips and Phillips1997). Some merchants who were connected with the American trade defaulted in Seville in 1567 and in Burgos in 1568. Both cities were also closely related through trade with Antwerp. The reduction of business forced the definitive closing of the satellite fairs of Villalon and Medina de Rioseco in 1568. In 1569, the English captured some ships belonging to important Burgos traders whose insurance had to be paid in Medina del Campo (Lapeyre Reference Lapeyre2008 [1955], p. 438). Delays continued in the 1570s: the October fairs of 1570 and 1571 were postponed to 1573.
In order to take advantage of the complementarities that are generated by market thickness, when a fair was delayed too long, it would be merged with another fairFootnote 23 . Because of the contingent credit payments, it was important that all fairs should take place eventually. The Council of Finance (Consejo de Hacienda) received requests for the regulation per decree (cédula) of the holding of the fairs. These requests emphasised that due payments could not be made, including payments to the Crown, without the fairsFootnote 24 . Hence, the king and his counsellors made efforts to minimise delays. For example in 1573, Melchor de Herrera, general treasurer of the king, convened with Hipólito Affaitadi and Jácome Bardi, two important merchant bankers of Medina del Campo, to stabilise the dates of the fairsFootnote 25 . Because of the accumulated delays in 1572-1574, the king issued a cédula in May of 1574 ordering the holding of all back fairs between 15 October and 20 November of that yearFootnote 26 , and the cash payment of all debts without refinancing. The dates of the fairs are presented in Figure 1 and in Table A1 of the Appendix. For the years before 1575, all the fairs scheduled eventually took place.
FIGURE 1 DATES OF THE FAIRS OF MEDINA DEL CAMPO Notes: Circles represent dates and numbers of fairs that were actually held (from 1 to the exceptional case of 6 when the king ordered the whole backlog to be settled in 1574). Squares represent fairs that were scheduled but did not take place around their scheduled time and were postponed to be held with a later fair. Source: See Appendix Table A1 which presents the exact dates.
The irregular inflow of silver from the Americas has been mentioned as a potential source of disturbance for the fairs (Mercado Reference Mercado1571, f. 14 v; Lapeyre Reference Lapeyre2008 [1955], p. 435). The fleet would usually arrive in August, but it could be delayed or cancelled. Figure 2 adds to Figure 1 the amount of the fleet’s precious metal. In that figure, we cannot see a relation between these arrivals and the schedule of the fairs. In the first half of the 1560s, fairs were held regularly with little silver. The most important feature of the figure is the clear break in 1575-1577 during the suspension of payments when the flows of silver were not below trend. This break will be important in our argument, as we will see later.
FIGURE 2 THE FAIRS AND THE ARRIVALS OF PRECIOUS METALS Note: The scale on the right measures the amounts of silver brought by the fleets each year. Sources: In addition to those of Figure 1, Lorenzo Sanz (Reference Lorenzo Sanz1979, pp. 283-292, 263-274).
4. THE POLICY OF PHILIP II AND THE SUSPENSION OF PAYMENTS ON ASIENTOS
The tax base for the service of the long-term debt, juros, was stationary in the early seventies (Álvarez-Nogal and Chamley Reference Álvarez-Nogal and Chamley2014). The encabezamiento had not been changed since 1562, after the resolution of the previous financial crisis, and the level of other ordinary revenues stopped growing in the early 1570s. Because of higher military activity in the Netherlands and in the Mediterranean Sea, the domestic debt was growing and its service was nearing the level of ordinary revenuesFootnote 27 . The point at which no more juros could be issued was approaching. From 1573 on Philip II made strenuous but unsuccessful efforts to increase ordinary revenuesFootnote 28 . At first, he pushed for a new flour tax with a promise to gradually redeem all the juros through a budget surplus. Such a promise could not be enforceable and the cities rejected what would have led to a significant increase of the tax baseFootnote 29 . In 1574, with no progress in the negotiations, Philip II abandoned the debt redemption plan and declared a tripling of the encabezamiento that was at first accepted by the delegates in the Cortes, but then rejected by the cities. A moderate increase would have been sufficient to avoid a short-term crisis and the tripling of the encabezamiento was much more than was required to finance new juros for a while. That tripling may have scared the cities and stiffened their will to resist but Philip II was playing hard and his authority was on the line. His actions are consistent with a long-term removal of the fiscal constraint by the Cortes Footnote 30 .
The unilateral tripling of the encabezamiento invalidated the previous system of the decentralisation of the debt service through the cities and started a showdown that would last for 3 years. Without the cities’ collaboration, and without the competent administration for tax collection, the central government had to return to the pre-1536 system of tax farming, a move that was resisted by the cities and their merchants. This outcome was not a policy goal of the royal administration either. During the 1574 negotiation with the Cortes, a letter to Philip II from his secretary confirms that an agreement of an increase of the encabezamiento to 2 million would undoubtedly be preferable to a collection of 2.5 million through tax farmingFootnote 31 .
The events of 1575 confirmed the fears of the king’s ministers. For example, in Toledo during the summer of 1575, Torregrosa, the administrator who had been sent to implement the increase of the alcabalas reported that the city’s traders were willing to do everything possible to prevent anyone from taking charge of a farmFootnote 32 and threatened to stop trading in the city and to carry their merchandises to other placesFootnote 33 . In Cadiz, the encabezamiento had been of 7500 ducats until 1574. When the king requested, by letter on 15 March 1575, a tax of 10 per cent at checkpoints until the new distribution of encabezamiento could be determined, the city answered that it could not afford it and that the tax would lead to mass emigration. Surprisingly, on the 9 June 1575, the king cancelled the previous instructionsFootnote 34 . At that time, the king might have been considering a change of course.
In any case, overall revenues fell well short of the requested amount. Before 1574, the encabezamiento had been of 1,216,362 ducats and beginning in January 1575, Philip II had requested 3,716,363 ducats. Two years later and after much effort, in the summer of 1577, the actual annual revenues of the alcabalas were only 2 million ducatsFootnote 35 .
Bankers knew that an increase of the alcabalas without the cities’ acceptance was equivalent to an extraordinary tax, and that it could not augment the tax base that funded the juros into which asientos could be converted. They nevertheless granted more than 5 million ducats in new asientos (Álvarez-Nogal and Chamley Reference Álvarez-Nogal and Chamley2014) during the first 7 months of 1575 (the highest amount for such a time frame) against the recent increase of the tax. These loans were reasonable against the recent increase of revenues and their maturity had been restricted to 1 yearFootnote 36 , but they could not satisfy Philip II. The only stable solution was an increase of the ordinary taxes that would be approved by the cities in the Cortes.
Faced with a deadlock in the negotiations with the cities, Philip II made a radical change of policy. On 1 September 1575, he ordered, through a decreto, the suspension of all payments on asientos Footnote 37 . This course of action had been strongly advised for some time by some high officials in his government. It had almost been taken in 1574, but at the last moment, Philip II had changed his mind without explanation (Carlos Morales Reference Carlos Morales2008, pp. 134-137).
The cities cheered the decreto against the asentistas. Satisfying the popular sentiment was obviously part of the strategy of Philip II. He summoned soon after the Cortes to resume the negotiations on the tax increases and he wanted to appear to be tough against the bankers who were hated by the people. One should not be surprised that the popular reaction did not anticipate the eventual cost for the Castilian economy. Think about the most recent financial crisis in the United States. At the onset of the crisis, the sentiment was to punish the bankers. Except perhaps for a few experts, people did not anticipate that eventually banks would have to be helped. In 1575, people did not have more information. They may have expected that the bankers were indeed the main target of Philip II, as, with some irony, the recent literature in economic history has argued. History has shown many times that people underestimate the impact of some financial failures on the networks of finances (e.g. the Kreditanstalt in 1931, Greece recently). It should also be pointed that at the end of 1575, no one, including Philip II himself, may have expected the crisis to turn into a war of attrition that would last so long.
The Crown stated after the decreto that it would not default on the asientos but that it would require a revision of the payments with an interest rate of 1 per cent/month on the balances due (Ruiz Martín Reference Ruiz Martín1968, p. 141). In our view, the Crown was justified in this request because of the role of the bankers as financiers of the Crown. The state of the debts with the bankers was in great confusion because the asientos could be collateralised by juros (juros de resguardo). These could be sold for cash by bankers and then replaced by other juros to be returned if the asiento was repaid in cash (Ruiz Martín Reference Ruiz Martín1968, pp. 121-125; Carlos Morales Reference Carlos Morales2013). More importantly perhaps, the bankers as «money men» were also active as financial agents of the Crown in the selling of the juros. Our preliminary research has shown that as a result of these multiple roles, the balances of the bankers with the Crown might have been very heterogeneous. Some bankers may even have been indebted to the CrownFootnote 38 . We will investigate this issue in further work. In any case, while debt contracts with bankruptcies are efficient in minimising the cost of information from the borrower to the lender according to modern economic theory (Townsend Reference Townsend1979; Gale and Hellwig Reference Gale and Hellwig1985), the information problem may have been the reverse for Philip II. The Crown was right in trying to use the suspension of payments to verify its net debt with the bankers.
5. THE SUSPENSION OF PAYMENTS AND THE CREDIT MARKETS
After the Crown froze payments to the bankers, they could not pay their creditors, who, in turn, could not pay their creditors, and so on. Given the tight interconnection between asientos and the private credit market, as described previously, the suspension of payments threw a spanner in the wheels of the credit markets and the shocks spread through the network of credit linkages.
In normal times, when credit markets function smoothly, most credit linkages remain hidden. In a crisis, these linkages emerge like rocks at low tide. The crisis that was triggered by the decreto of 1575 generated numerous cases of distress, which we have collected in the archives, affecting the fairs, the depositors, the banks and the Church.
5.1. The Impact on the Commercial Fairs
In what may be the most remarkable feature of the crisis, the freezing of the debt and its impact on trade prevented the holding of commercial fairs at Medina del Campo. As shown in Figures 1 and 2, no fair took place during the suspension of payments between September 1575 and the beginning of 1578. Contrary to what had been done before 1575, the Crown made no effort to keep a timely schedule. Such efforts would have been futile anyway. The Crown renewed its interventions only after the resolution of the crisis. On 25 April 1578, Philip II consulted with the cities on the means to resume the fairs and the payments that had been delayed since the last fair in 1575 (Colmeiro Reference Colmeiro1863 (reprint 1988), vol. II, pp. 836-838; Espejo and Paz Reference Espejo and Paz1908, pp. 269-272). Contrary to practice before 1575, no catching up took place for the fairs that had been missed during the suspension of payments.
We have emphasised the critical role of the commercial fairs as a support for financial transactions. There is no doubt that the cancellation of fairs had an amplifying effect on the credit crisis and on trade.
5.2. The Impact on Castilian Depositors
During the suspension of payments, the bankers’ creditors attempted to recover their deposits and sent numerous petitions to the Council of Finance. The following letter from merchants of Burgos is representative:
Andres de Larrea, Juan de Ybarra and Andrés de Ecija, residents of the city of Burgos, state that Nicolao de Grimaldo, prince of Salerno, Juan Fernández de Espinosa and Esteban Lomelin owe us more than 120,000 ducats cash that were signed in a contract in this fair for payment Sevilla, Burgos and in the libranzas of His Majesty following the ordinary service that we providedFootnote 39 .
The petition highlights the multiple layers of the intermediation process to finance the credit to the Crown, which in this case took the form of discounted libranzas. Since the amount of 120,000 ducats was very large, these merchants had borrowed on the credit market:
Our association, in order to discount the libranzas, had to borrow (tomar a cambio) from other people for payments in this Court, in Burgos and Sevilla and in Flanders, on our own creditFootnote 40 .
The freezing of the loans by Castilian residents to the bankers had catastrophic consequences for trade, as attested by the numerous petitions that can be found in the archives of Simancas. For example:
The suspension of payment that was ordered by your Majesty has in fact suspended all the trades and has affected all the credit market and the spirit of the trade people, not only in this place but also in othersFootnote 41 .
A group of merchants in the region of Logroño (present-day northern Spain), emphasised that the suspension of payments affected not only the bankers of the king but also the small savers who had deposits with the bankers, and their commercial activitiesFootnote 42 :
We add to this the calamity and great poverty that from us is translated to many people who have entrusted us with their savings, under the thought that their were very safe and only from this service we provided they could support their houses and families. In this way, many craftsmen, ordinary people, employees and daily workers who lived and supported themselves by the business activities that depended on credit are now homeless and vagabondsFootnote 43 .
The merchants explained that, because of the suspension, none of them could pay their creditors and go on with their business. They requested the protection of the Crown emphasising that without their contribution, the bankers could not have lent money to the king:
We have no other funds to satisfy our creditors except those that are owed to us by those who are affected by the decree. In effect, our funds were converted in the service of Your Majesty and without these funds, this financial support of Your Majesty could not have been providedFootnote 44 .
5.3. The Impact on Banks
In Segovia, one of the main cities in the northern meseta, banks and economic activity were deeply affected by the credit crisis. In October of 1575, forty men, all in important positions («todos gente principal»), were incarcerated. They had a participation in the capital of the bank of Gregorio de Haro, one of the main bankers of the city, who could not fulfil his obligations to the bank of Pedro de Angulo and Juan de Villar, who in turn, could not pay their debt of 8,000 ducats to the bank of Juan de Ibarra (Vela Santamaría Reference Vela Santamaría2014, p. 20). The large number of jailed individuals included Juan de Amarita, an agent of Simón Ruiz, the banker of Philip II, and also textile manufacturers thus threatening the entire economic activity of the city. During the crisis, donations towards the construction of the cathedral decreased markedly (García Sanz Reference García Sanz1987, p. 92).
In Seville, the only two public banksFootnote 45 that operated in that city, «Herederos de Alonso y Pedro de Espinosa»Footnote 46 and the bank of «Pedro de Morga y Matia de Fano», went bankrupt in 1576Footnote 47 . They had operated in the city since 1553 and had overcome important crises in 1557-1560 and 1567. These bank failures were a consequence of the decreto not because of direct loans to the king, but probably because of loans to individuals who had invested in loans to the king. The ties between Morga and the creditors of the Crown are illustrated by the statements of one of the debtors of the bankFootnote 48 . Andrés de Larrea, a resident of Burgos, ended up in jail when he failed to pay his debt of 16,000 ducats to the bank. In his defence, he argued that he would have liked to pay his debt, if not for his inability to recover a loan of 25,000 ducats that he had made at the last feria of Medina del Campo to Nicolao de Grimaldo and his brother. In Andrés de Lorrea’s own words, his loan to the bankers «was converted to the service of His Majesty»Footnote 49 .
The freezing of the credit markets spurred individuals, associations and institutions to develop stop-gap measures. The Consulado of Sevilla, a merchant guild which represented all the city’s merchants who were involved in trade with the colonies, extended the time for payments of the debts until the Genoese bankers were able to satisfy their debtorsFootnote 50 . Bilateral credit agreements with mortgages as collaterals, censos (Yun Casalilla Reference Yun Casalilla1987, pp. 220-223, 237; Bennassar Reference Bennassar1989, p. 87), were used by individuals and also by numerous municipalities for the purchase of bread, seeds and payments of short-term loansFootnote 51 .
The Church was not spared because of the difficulties in transferring funds to Rome. It had used the agents of Italian banks in Castile and Aragon (especially in the financial centres of Medina del Campo and Barcelona). At the end of 1577, Canobio, collector for Rome in Spain, complained to the cardinal de Como, a high official in Rome, that he could not send letters of exchange because of «ruina et poco credito dei genovesi» and suggested alternative methods of transfers (Carretero Zamora Reference Carretero Zamora2013, pp. 99-100).
5.4. The Legal Protection of the Genoese Bankers by the Crown
In face of the petitions and the complaints by residents of the realm, the Crown provided legal protection to the bankers instead. Until the settlement in the Medio General at the end of 1577, this protection against creditors prevented any ordinary court of justice from forcing them to pay their debt or seize their property. This decision extended to all types of debt since no distinction could be made for the debts related to the Crown’s credit. Furthermore, the bankers used the decreto as a quasi-official excuse to avoid any obligation in the set of complex credit linkages.
For example, four royal decrees were sent to Juan Ortega de la Torre in Burgos to protect him from any suit for any type of debt. These measures expired in October 1576, but the banker received an extensionFootnote 52 . Thanks to this royal protection, Ortega escaped credit problems and continued to operate in 1581 with branches in Madrid, Seville, Valladolid, Medina del Campo and Antwerp.
Three merchants from Burgos had discounted payment orders by the Crown (libranzas) to three well-known bankers (Nicolao de Grimaldo, Juan Fernández de Espinosa and Esteban Lomelin). After the merchants’ petition to seize the property of the bankers was rejected, they complained bitterly about the discrimination:
The delay [in payment] causes our complete ruin; the officials of Your Majesty are treating us in such a way that we cannot gain cause for our property and credit. Nicolao de Grimaldo and others are protected by Your Majesty, so that we cannot demand from law officials to seize their goods and incarcerate their persons …Footnote 53
Joan de Lago, an important merchant in Burgos, wrote in similar terms:
The payment delay leads to our complete demise. The officials of Y.M. (Your Majesty) issue orders such that we cannot prevail in our claim of payments and of credit … Nicolao de Grimaldo and our other debitors are protected by Y.M. such that we cannot request from the law that they seize their property and jail their persons, and they keep their book and papers as before (…) This causes us a considerable prejudice because they enjoy the use of the amounts they that have to payFootnote 54 .
Like Joan de Lago, Sebastian López de Orozco, an accountant, could not recover the 1,792 ducats that he had lent to Nicolao de Grimaldo a few months before the decreeFootnote 55 . This was a small amount with respect to an asiento but Grimaldo refused to return the deposit in 1575, alleging that he was unable to do so because of the decreto. Sebastián López, facing jail while the banker was unaffected, petitioned the king:
to enforce the payment and not permit the Genoese bankers to put him in jail and in a situation of great necessity, without any reason, because he did not do anything illegal. If the bankers force their debtors to pay debts, they have to do the same and to pay their debts to the people of CastileFootnote 56 .
When Sebastián López learned that Don Rodrigo de Mendoza owed Grimaldo a similar amount, he demanded that the payment of that debt be directed to him. Grimaldo instead rejected the proposal and had some of Don Rodrigo’s goods seized for non-payment! It was proof of:
the malice of the named Prince and [that] he does not pay not because he cannot but because he does not want toFootnote 57 .
The creditor Andrés de Larrea petitioned the Council of Finance (Consejo de Hacienda) and asked for help to get out of jail. He could not use local law to recover loans in order to pay his debt:
and I find myself in the impossibility not only to pay the debts that are asked from me but also to pay a bail to free myself from this terrible jail to treat my sickness. I could not find any amount of money. For this reason I have suffered much oppression and trouble in the two months of my detention. During that time my debtors have been let free and are protected while I cannot recover my claim from them. Although I have made my requests, the town’s authorities do not want to issue an order of execution against themFootnote 58 .
Because of the pyramids of credit, small investors also suffered when they had entrusted their small savings to intermediaries who had forwarded them to Genoese bankers. Doña Francisca de Salazar, the widow of Lope Rodríguez Gallo de Castro in Burgos, protested that she had lent 606 ducats to the marquis of Auñón, General Treasurer of the king, through the bank of Antonio Vázquez. To recover her ducats she had received from Auñón a payment order to be presented to Nicolao de Grimaldo. But Grimaldo refused to pay. She turned then to the marquis who likewise refused. In her appeal to the Court in Madrid and the Council of Finance to obtain the payment and seize some goods of the marquis, she stated: «We have completely lost the credit, which is the nerves, the soul and the strength of commerce»Footnote 59 .
This royal protection was not extended to other people in the realm who had to pay their own debts even if they could not recover their assets with the bankers affected by the decreto. The licenciado (holder of a degree) Mena was unable to recover his deposit of 20,000 ducats from the Genoese bankers, but his own property was seized because he could not pay a debt of 800 ducats. He avoided jail only by a fire sale of part of his properties and a loan from a friendFootnote 60 . Mena complained that the king only protected the bankers and not their Castilians creditors. These examples are but a sample of many similar documents in the archives of Simancas.
One might argue that the bankers received more protection because they were more powerful. This protection, however, was not because one of the parties was bigger and had more influence in the courts. It was a royal protection that suspended the standard judicial process. The evidence for the protection that we have uncovered here supports the idea that Philip II was aware of the practical functioning of the credit market. He used the decreto to tighten the reins on the Genoese and examine their transactions in asientos and juros (see above). However, he immediately acknowledged a debt of 15 million ducats that should be repaid and he protected them from legal proceeding. As we discuss in the next section, he obviously knew that the Genoese, like everyone in this crisis, were incurring a significant cost.
6. THE RESUMPTION OF CREDIT AFTER THE AGREEMENT WITH THE CORTES
In the 16th century, with the slow clock of the fairs and of the seasons, it took time for the cities to feel the full impact of the decreto. When the initial cheers were replaced by a flow of complaints and petitions, and despite adverse events (e.g. the sack of Antwerp by his unpaid army), Philip II stayed the course. The government of Genoa pleaded via its ambassador in Madrid and reminded Philip II of the harm that was caused on merchants and bankers in this Italian Republic which played such a crucial role for the CrownFootnote 61 . In July 1576, a special embassy impressed upon the Crown the undesirable effects of a harsh settlement upon the Republic’s internal stability (Lovett Reference Lovett1977, p. 100). The demands from the Genoese government were explicitly mentioned in the document of Medio General that resolved the crisis in 1577Footnote 62 .
The crisis spread to markets in Genoa and Rome. Several governments tried diplomacy to exert an influence on Philip II to find a solution. The king received proposals to create new financial devices to meet the state’s needs and at the same time to circumvent the Genoese intermediaries. The most important was the project of Oudegherste and Rotis in 1576 to create «Erarios» (Dubet Reference Dubet1998, pp. 205-212)Footnote 63 .
The Church intervened. The Papal Nuncio reminded the king that many non-Genoese merchants were involved with the Genoese bankers — Spanish, Milanese, Florentine, Venetian and others from every part of Italy. Should the Genoese collapse, they would take with them partners, large and small. As usual, a plea was made for the poor widows and «honest» maids who had entrusted their dowries to the asentistas and were at great risk.
Contador Salablanca, of the Council of Finance, reminded the king that if he wished to exert an effective presence outside the Spanish peninsula, the fairs had to be reinstated. Finally, even Nicolao de Grimaldo pleaded for some form of agreement, if only on an interim basis, so that he might placate his creditors (Lovett Reference Lovett1977). Institutions inside the realm (e.g. the Consulate of Burgos which represented the interests of the main businesses of the city) also insisted with the king that he should come to an agreement with the bankersFootnote 64 . But Philip II was patient. His goal was the agreement of the cities in the Cortes for a higher encabezamiento.
Negotiations were conducted in parallel with the bankers and with the cities. For the bankers, the Crown created a commission that reviewed the sales of the collateral (juros de resguardo) by the bankers, and the position of each banker with the Crown. This commission examined all the asientos that had been signed since 14 November 1560, 296 contracts with sixty-six people (Nicolao de Grimaldo 35, Lucian Centurion 34, Lorenzo Spinola 32 and so on) (Carlos Morales Reference Carlos Morales2008, p. 166). The balance of each active asiento was computed by bringing past payments to the current date with the standard monthly interest rate of 1 per cent.
In the early spring of 1577, the Crown and the bankers agreed on the amount of 15.2 million ducatsFootnote 65 . Settling with the bankers, however, was not the main issue for Philip II, and he may have waited with the bankers until March 1577 because of the deadlock in the Cortes Footnote 66 . The squeeze had to continue. During the spring and the summer of 1577, Philip II had prepared a reduction of the encabezamiento (from the tripling in 1574) if the cities would grant the servicio ordinario and the servicio extraordinario Footnote 67 . In the summer of 1577, he reiterated that the signing with bankers could not proceed as long as the cities did not agree to a tax increase. A letter written on behalf of the king by his secretary emphasises the close relation between the two issues:
Since you have sent me these reports on the matter of the Medio General and of the encabezamiento, I have examined and reflected with great care on the first and on the second. Both matters are important in the substance (…) and I hold each matter much dependent on the otherFootnote 68 .
The next month, Juan Fernández de Espinosa, General Treasurer of Castile, sent instructions from the king to Mateo Vázquez, Secretary of Philip II, that demonstrate how the two issues, the suspension of payments and the increase of the encabezamiento, were linked:
Make sure that among the negotiators they have no power, occasion, or license to err in matters that are so important and so few, namely these two matters, the signing of the Medio (agreement with the bankers) and the encabezamiento Footnote 69 .
Finally, the cities relented. On 29 October 1577, a new encabezamiento was voted in the Cortes. In previous adjustments, increases had been roughly proportional across cities. In 1577, however, the shares of some cities jumped; Seville from 10.2 to 17.5 per cent, Toledo from 5.8 to 7.6 per cent, while Granada’s share dropped from 9.2 to 5 per cent. After the agreement on the encabezamiento, the voting on the servicio extraordinario moved more quickly and a final agreement was reached on 16 November 1577 (Jago Reference Jago1985).
The terms of the agreement between the Crown and the bankers had been waiting to be signed since March 1577Footnote 70 . This was done on 5 December 1577. In the text of the Medio General, the king made it clear that in settling with the bankers, he was following the express wish of the cities:
…and adding to all this the demand that was addressed with particular insistence about the same affairs by the delegates of the realm who are gathered in the Cortes that we are holding at the present time in MadridFootnote 71 .
A decree issued 6 months after the settlement states:
Given the pressing demands on this same issue by the ambassadors that were sent to us by the republic of Genoa and by the delegates in the Cortes, we ordered to settle with these business people (hombres de negocios) the Medio General on December 5 in the past yearFootnote 72 .
On 25 April 1578, Philip II consulted with the main cities and institutions on how to resume and solve the problem of the fairs (Espejo and Paz Reference Espejo and Paz1908, pp. 269-272). The general response was that the 1575 suspension had caused enormous harm to trade (Espejo and Paz Reference Espejo and Paz1908, pp. 94, 296 y 309; Lapeyre Reference Lapeyre2008 [1955], pp. 447-448). After an interruption of 3 years, the fairs resumed on 28 October 1578, as ordered by a royal decree on 5 August 1578Footnote 73 . All the pending payments were made at that fair. However, the extended gap between 1575 and 1578 had a permanent impact and the fairs of Medina del Campo had lost their role as central financial markets of Spain. Merchants and bankers had developed letters of exchange al uso that could be paid at places other than Medina del Campo (Lapeyre Reference Lapeyre2008 [1955])Footnote 74 . During the crisis of 1575-1577, the financial activities in Medina had been gradually transferred to Madrid where many of the asientos had been negotiated before 1575 and where the government and the bankers resided. After the crisis, some of these activities did not return to Medina del Campo.
7. CONCLUSION
The analysis of the credit crisis 1575-1577, which is based on new archival material, is revealing on the structure of the Castilian credit market and throws light on the actions of Philip II and on his political relationship with the cities of Castile. The cities’ relative autonomy limited the state’s power and enabled them to bargain with the king. In some way, the involvement of the cities in the collection of revenues and the service of the domestic debt benefited the Crown because it enhanced the credibility of the debt and lowered its cost. Their fixed contributions, however, negotiated and voted in the Cortes, imposed a de facto ceiling on domestic public debt and on the ability of the king to refinance the short-term debt as long-term debt. The payment stop of 1575 was protracted because Philip II decided to remove this ceiling through a very large tax increase and the cities resisted until the economic burden became too high.
By issuing the decreto, Philip II could channel some of the realm’s irritation against the Genoese bankers, but he protected them in practical situations. The numerous petitions to the king, the protection of the Genoese bankers against Castilian creditors, the reports of Philip II on the credit market before he became king, letters during the crisis, all these show that the «Prudent king» was aware that a large part of asientos were financed by the bankers’ intermediation of credit and savings in Castile, and that the suspension of payments would put an economic squeeze on the Cortes. In an early example of a struggle on the debt ceiling between an executive and a representative assembly, the temporary victory of Philip II was achieved at a high economic cost for the realm.
As the ceiling on the service of the juros was lifted, all the asientos were refinanced into juros. This point is important and has been neglected in the literature. The settlements of each of the three financial crises under Philip II included a complete refinancing of the asientos into juros Footnote 75 . The debt to the bankers was not reduced to an intermediate level. It was reduced to 0. This fact is not surprising once it becomes clear that: first, temporary adverse shocks to the budget should be absorbed through unfunded debt, asientos; second, an accumulation of asientos which corresponds to a permanent shock, should be converted to funded debt, juros; third, the crises happened when the conversion process could not take place because of the effective ceiling on the further emission of juros. The settlements enable the Crown to refinance the unfunded asientos into funded juros.
The routine refinancing of unfunded debt into funded long-term debt in 16th-century Castile is remarkable. France and England struggled to refinance their unfunded debt after 1700 and the wars of Louis XIV, and they took the indirect route of a refinancing through charter corporations. In France, this led to a failure after the disaster of John Law. England took more than 20 years after the Glorious Revolution to significantly reduce its unfunded debtFootnote 76 . In a previous study (Álvarez-Nogal and Chamley Reference Álvarez-Nogal and Chamley2015a, Reference Álvarez-Nogal and Chamley2015b), we analysed an example of such a refinancing through an asiento in 1595, and we will address the issue in coming work.
SUPPLEMENTARY MATERIAL
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APPENDIX
Each fair can be traced by a number of documents. The merchants and the bankers wrote contracts contingent on fairs that were named by their dates. If a fair was delayed, it was merged with a later fair but it kept its name (its scheduled date). Hence, some asientos may have been signed at a date posterior to payment dates. For example, the fair of May 1570 was delayed but kept its name. On 4 January 1572, Agustín Gentil signed an asiento with the promise to deliver 160 000 ducats “in the May fairs of 1570 and 1571that are being held together now”.
TABLE A1 DATES OF THE FAIRS OF MEDINA DEL CAMPO (1556-1580)
For May fair of Medina del Campo, the schedule for payments was between 15 July and 10 August. For the October fair, the payments were scheduled for December. The sources are not very accurate on the exact day of the beginning and the end of the fairs. We have put a unique month for the date of the fair, but a fair could be held over more than a month. We have references on the fair of May in 1560 but no information on the exact date of its holding. We do not yet have data on the fairs of May 1556 and October 1560.
