American silver and the decline of Spain

• Main Author: Drelichman, Mauricio
• Format: Dissertation
• Language: English
• Published: ProQuest Dissertations & Theses 01.01.2003
• Subjects: Economic history; Silver
• ISBN: 9780496659609; 049665960X

The rich mines of modern-day Mexico and Peru provided Spain and its Crown with a steady stream of silver between the mid sixteenth and late seventeenth centuries, thrusting it to a position of hegemony in Europe and beyond. By the beginning of the seventeenth century, however, Spain entered a period of economic, political and military decline, lagging behind the rest of Western Europe until well into the twentieth century, and never recovering the position of dominance it once had. I argue that the windfall acquisition of precious metals is intimately linked to the decline of Spain. Following the Dutch Disease literature, I first build an open economy, general equilibrium model to show how the large wealth shock reduced the competitiveness of Spain's manufactures, stifling specialization and innovation. The predictions of the model are tested using a Markov-switching econometric specification and a combination of existing price series and new expenditure data obtained from account books of hospitals, monasteries and royal households. The evidence is strongly consistent with a Dutch Disease episode between 1550 and 1580, a protracted enough period to seriously affect the main export industries of Spain. Silver revenues also enabled the Spanish kings to command a large amount of credit; their absolute control over the resources of the kingdom allowed them to use that credit in the pursuit of an overambitious imperial adventure. Inflated expectations about the metal flows and a succession of costly military campaigns stressed the finances of the Crown, which resorted to the sale of privileges, tax exemptions and titles of nobility to raise additional revenues. I develop a theoretical framework to show how such a policy, by reducing the opportunity cost of rent seeking, can drive an economy to an equilibrium where productive activity is reduced to a minimum as the best human resources strive to obtain the largest possible share of state-sanctioned benefits. I document how the decline of Spain can be analyzed in the context of such a model, where high rent-seeking equilibria are extremely persistent, making it very difficult for an economy to emerge from them without external intervention.