The loans extended by Spinola and De Negro in 1595 and 1596 covered nearly 15 percent of the royal budget in any one year. No prudent banker would hold that much risk in his own portfolio. De Negro therefore contacted business and family acquaintances who were looking for a good investment, including his Genoese relative, Gio Girolamo. Would he be interested in purchasing a part of his loans? The Madrid bankers charged a 1 percent intermediation fee. Gio Girolamo would then receive interest and capital repayment on the same terms as they received, which were stipulated in the original asientos.
Gio Girolamo took the offer to his occasional partners, the brothers Lazzaro and Benedetto Pichenotti. They decided to establish a separate partnership with the sole purpose of investing in Spanish asientos; Gio Girolamo put up 50 percent of the capital, with the Pichenotti brothers supplying the other half.9 At the beginning they moved cautiously. The partnership first invested in a 208,000-ducat asiento, subscribed by Spinola and De Negro on February 24, 1596.10 Their contribution, 5,265 ducats and 4,500 ecus, represented less than a 5 percent stake in the loan.11 If all went smoothly, by the time the loan was fully repaid, in March 1600, they would have earned a return of 10 percent per year.12 The Madrid bankers would send the interest and principal repayments of the loans in the same fashion as they received them from the Crown.13 No interest or principal were due until 1598; the Genoese partners had to wait for two years to collect the first proceeds of their investment.
Back in Madrid, Spinola and De Negro were coming under increasing pressure to supply more funds. The new president of the Council of Finance, the Marquis of Poza, was taking a hard line with the bankers, demanding large sums on short notice. Word had it that he had threatened Ambrosio Spinola, the leading financier of the time, with prison if he did not make a number of previously agreed-on disbursements.14 The reason for the marquis’s short temper was obvious to anyone with an interest in political matters: in addition to the prolonged fighting in Flanders, the Anglo-Spanish War was putting extraordinary pressure on the treasury. A combined English and Dutch expeditionary force had sacked Cádiz in July 1596; the navy needed to be reinforced; and Spain’s involvement in the French Wars of Religion required a constant stream of funds. Poza was impatient, but he was also offering good terms. On July 26, Spinola and De Negro agreed to lend over 1 million ducats, disbursed over fourteen months in Flanders, to be fully repaid by March 1599. The loan would yield 17.6 percent annually—a good return by any standard. Perhaps because of the more enticing terms, Gio Girolamo and the Pichenotti brothers also signed up for a share of this asiento, contributing 30,000 Flemish ecus (some 29,300 ducats).
Each asiento bore the same two words on top of its first page: “El Rey” (the king). From 1556 to 1598, this meant Philip II of Spain, his Catholic majesty, the first monarch in history on whose domains the sun truly never set. Stretching from Flanders to northern Africa and from the American continent to the Philippines, the Spanish Empire had no peers in Philip’s time. The vast territories were run by a detail-loving bureaucracy, generating reams on reams of documents on the most arcane aspects of government.
Philip’s father, Emperor Charles V, had spent much of his life traveling from one of his European possessions to the next and leading his troops in battle. Philip II preferred to put in long hours at his desk instead, studying an impressive volume of state papers personally and deciding on all the important matters himself.15 Often working from his austere chamber in the palace-monastery of San Lorenzo de El Escorial, he would make major strategic decisions based on detailed exposes and minutes from his advisers, delving into the tiniest minutiae, and frequently driving ministers and military commanders to desperation. In one famous example, the king first decided on the invasion attempt of England known as the Invincible Armada. The outfitting of the fleet in Lisbon took a long time, not least because the king repeatedly diverted battle-ready ships to other operations. Philip II attempted to direct every aspect of the monumental enterprise from Madrid. The fleet only reached its intended strength after four years, when Philip finally delegated full operational command to the Duke of Medina-Sidonia.16 Reports that reached Philip’s hands were always read, and were often returned full of his personal annotations in the margin. Every document that received his approval—including all the asientos—bore his unmistakable signature: “Yo, el Rey.”
By 1596, Philip had slowed down. He was an old man, nearly seventy years of age, and for the past decade had been afflicted by crippling attacks of gout. He had stopped writing in his own hand; his signature, when the arthritis allowed him to put it on paper, had become an unreadable scribble. He barely left his chambers at El Escorial, which he had built to fulfill a vow made before the Battle of St. Quentin, his first victory as king. From the late 1580s, Don Cristóbal de Moura, councillor of war and state, had become his principal minister and confidante. In 1592, Philip made him his sumiller de corps—gentleman of the bedchamber. The sumiller was the first person the king saw every morning and in whose company he spent the better part of the day.17 This gave Moura, born into a modest family of the Portuguese petty nobility, unrestricted access to the king and a strong say over the affairs of state. In any system of centralized government, access to the power holder is a key determinant of power (Schmitt 1954).18 It also makes the ruler dependent on the information provided by subordinates. In theory, Philip still insisted on reserving all major decisions to himself; even at the end of his life, he only authorized his son to sign noncritical documents on his behalf. Yet Moura’s influence over the king was steadily increasing. By the late 1590s, “the voice of Philip II was increasingly heard in the form of the handwriting of Don Cristóbal.”19
It was Moura who nudged Philip II to appoint the Marquis of Poza to the presidency of the Council of Finance in June 1596. Moura and Poza were old friends, and had stayed on good terms while they both vied for favor as well as advancement at the royal court. On taking office, Poza had to deal with a dire situation. The humiliating disaster at Cádiz, beyond its psychological impact, had also resulted in the loss of a fleet ready to set sail for the Indies.20 The war at sea required new galleons, and the soldiers in Brittany and Flanders might mutiny if they went unpaid for much longer. What really alarmed the president, though, was the short-term debt. There were 14 million ducats outstanding—or so he believed—well in excess of a full year’s revenue (Castillo 1972). While this turned out to be a gross exaggeration, almost 800,000 ducats had to be repaid in July, and another 1.8 million were due between October and December.21
Poza was no friend of the bankers who underwrote the asientos. In his letters to Moura, he spewed invectives against their money-grabbing ways. At one point he wrote that had it been up to him, he could not have enough of their blood.22 As soon as he took office, Poza began to hatch plans to “unencumber” the king’s revenues—a euphemism for stopping all payments on asientos, thereby forcing negotiations to convert them into perpetual bonds at lower interest rates.23 He started assembling evidence of wrongdoing and overcharging by the Genoese. At the same time, Poza negotiated new, large asientos like the ones subscribed by Spinola and De Negro. Offering attractive terms was easy; at this stage, he probably had no intention of making good on them.24 There was a relatively recent precedent: the suspension of payments in 1575. The situation then had been similar: the Dutch Revolt was raging, the Mediterranean fleet required enormous expenses to hold the strategic advantage gained at the Battle of Lepanto, revenues were flagging, and short-term debt seemed unmanageable. Despite much turmoil, the Crown had emerged in a solid financial position and had not needed to take out short-term loans for another seven years. With a steady hand, the procedure could be made to work again.
In 1574, when his ministers were urging him to issue a bankruptcy decree, Philip II had delayed it for one more year, hoping for an extraordinary shipment of silver, a lull in the wars, or some other intervention that would allow him to avoid reneging on his promises.25 The king placed a high value
on his word and did not take the decision to suspend payments lightly. This time around he embraced the idea much more quickly, perhaps thanks to Moura’s influence. The monarch even suggested that his ministers and the president look at the 1575 precedent for guidance.
The decree suspending payments was issued on November 29, 1596. To the few bankers old enough to have been around in 1575, the text sounded eerily familiar. The king declared that he was saddened that few lenders were willing to continue supplying funds and shocked at the high interest they had been charging him over the last few years.26 The document proceeded to call into question the legality and morality of the interest charges as well as that of the lending business as a whole. To rectify the situation, no asiento debt would be paid until all contracts, disbursements, and repayments had been duly scrutinized, and the interest brought into line with what was “customary.” A special committee—the Junta del Decreto—was established to that end.
The timing of the suspension was strategic: over 1.2 million ducats were due just two days later. A few financiers tried to secure a special status for themselves. Some, like Ambrosio Spinola, sought to leverage their financial power, exploring whether the king might continue to service their asientos in exchange for further loans. Others, like the Sauri brothers, appealed to emotion, noting that if they were not paid, many friars, widows, and orphans (to whom they had sold loan participations) would suffer.27 These efforts were for naught. It quickly became clear that strength was in numbers, and the bankers joined in a negotiating group that would become known as the Compañía del Medio General—the Company of the General Settlement.
Meanwhile, back in Genoa, Gio Girolamo, the Pichenotti brothers, and countless small investors like them cursed their luck. For two decades, lending to the Spanish Crown had worked well—sometimes even spectacularly well—with high returns and prompt payment, at least most of the time. Some investors, like Ambrogio Doria, took to writing increasingly angry letters to their correspondents in Spain, most of which went unanswered.28 Others waited with trepidation. The experience of 1575 told them what to expect: there would be capital reductions and lengthened repayment terms. In all probability, they would be subject to the same losses that the bankers in Madrid were exposed to. This principle, called la misma moneda, would likely leave them with low-interest perpetuities, rather than the attractive cash returns and timely repayment of principal that their contracts had promised.29
The negotiations in Madrid opened with some theological pageantry. The Junta del Decreto consulted with the confessors of the king and prince, who were of the opinion that the bankers had engaged in usury and, according to an old law, should forfeit their capital. The Company of the Settlement replied with its own set of theological opinions, pointing out that the king himself had declared the interest to be legal and had suspended the application of any other laws to that effect. As intellectually stimulating as the legal and canonical jousting might have been, it did not last for long. The Crown had been prescient in amassing a small war chest to continue funding the military campaigns while the suspension was in place.30 Nonetheless, both the Crown and bankers knew that the king would eventually need to settle in order to regain access to credit. The bankers, on their part, were also under pressure, as the moratorium brought business to a screeching halt, cutting deep into their profits.31
The investigations of the Junta del Decreto into the outstanding asientos yielded a pleasant surprise. When all short-term debts were added up, the total came to just over seven million ducats, about half the treasury’s initial estimate. Accounting discrepancies were not unusual, as no early modern state had a treasury capable of keeping track of fiscal accounts and outstanding debt in a timely fashion. This error, however, was as large as any that there had ever been. Royal finances were much healthier than Poza had believed; perhaps the decision to declare a bankruptcy had been a mistake.32
There was certainly an upside to the detailed accounting exercise: the Crown realized that it had much more leeway to reach a quick settlement, and one was struck in short order. Bankers and Crown came to an agreement in November 1597. All outstanding asientos would be converted into a combination of perpetuities to be issued over the next few years. The swap implied a 20 percent loss to the bankers in present value terms. New short-term loans were arranged almost immediately. One of them included a large number of bankers from the Compañía del Medio General. Its rate of return was so high—89 percent—that it almost certainly was a poorly disguised form of granting additional compensation for the default.33
At the same time, in Genoa, Gio Girolamo and the Pichenotti brothers waited. They eventually started to receive the same mix of long-term bonds that the Madrid bankers had negotiated with the Crown. Because part of the asientos they invested in had been repaid before the default, they did not lose the full 20 percent agreed to in the settlement. Once the accounts were closed, in late 1600, they had lost 1.32 percent per year for their share in the first contract they invested in, and 5.19 percent annually for their participation in the July 26 one. Their overall annualized loss was thus 4.27 percent.34 Di Negro must have felt gloomier than we found him at the beginning of our story. As a result of investing in the Spanish loans, his company’s overall profit rate slipped to 2.4 percent. Enormous riches were now an ever more distant dream, but he probably took some comfort in his earlier prudence. Less than 10 percent of his capital had been invested in financial assets. Even as he found himself a spurned creditor of the most powerful monarch on earth, the impact on his overall financial health was small. His company would live to trade and invest another day.
ASIENTOS AND THE SYSTEM OF CASTILIAN SOVEREIGN FINANCE
The 1596 bankruptcy that affected Di Negro and the Pichenotti brothers did not represent an innovation in Philip II’s financial management. The king had already defaulted three times during his reign—in 1557, 1560, and 1575. The suspensions were widely discussed by contemporaries and ultimately reached mythical status as successive generations of financial historians cited them as egregious examples of repeated sovereign default. Spain went on to become the current “world record holder” for the number of sovereign defaults in history.35 Modern journalists like to refer to the plight of Philip II and his bankers as an early instance of irrational confidence and fiscal mismanagement.36 This book revolves around one central question: How could Philip II borrow so much and default so often?
The story that opens this chapter traces the funds from small investors in Genoa to the treasury of Philip II and back. We also know what the borrowed funds were used for: war. War in Flanders, war in the Mediterranean, war in the English Channel, war in the Atlantic—always war. Philip II cultivated an image of restraint and thoughtfulness that earned him the moniker “the Prudent King.” And yet he was at war in every single year of his long reign.37 Military ventures could bring much glory—such as his victories at Saint-Quentin and Lepanto—or the disgrace that followed the rout of the Armada. Battlefield successes could confer strategic advantages: the War of the Holy League confined the Ottomans to the eastern Mediterranean and secured the shipping routes of European states. They could link territories together; the famous Spanish Road that connected northern Italy with the Low Countries was a result of the 1559 treaty of Cateau-Cambrésis, which concluded the so-called Italian Wars between Spain and France. Victories could even add whole empires to a king’s possessions, as in the case of the acquisition of Portugal in 1580. What wars almost never did was to bring in ready money. The financial tools pioneered by German bankers and refined by the Genoese could mobilize resources, and then transfer them where needed—but those resources had to come from somewhere else. Philip II relied on two main sources of funding: American silver and the thriving economy of Castile.
Although known the world over as the king of Spain, Philip II never held such a title. He was instead the ruler of several separate kingdoms, each with their own fiscal, judicial, and military institutions. There was no uniformity of
taxes, rules, laws, or forms of representation. Among all of Philip’s territories, Castile was by far the most important. It comprised some two-thirds of the land area of modern-day Spain, including virtually all of the northern Atlantic coastline, the central plateau, and Andalusia in the south. Castile also accounted for over three-quarters of population and economic activity. The Kingdom of Aragon, whose relative standing had declined steadily since its heyday in the late Middle Ages, was a distant second.
Castile experienced strong economic growth during the sixteenth century. Its population expanded from 4.8 million in the 1530s to 6.8 million in the 1590s.38 Fiscal pressure increased at the same time, multiplying the Crown’s resources. By a strange twist of fate, Castile was the sole kingdom to exert jurisdiction over Spain’s possessions in the New World along with their rich silver mines.39 This was not trivial; in the last decade of the century, taxes on treasure remittances amounted to one-quarter of the total revenue.40 Philip II was not poor. Still, transforming Peruvian silver ores or the tithes of a town in Extremadura into powerful armies on the battlefields of Flanders required complex financial engineering.
Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II (The Princeton Economic History of the Western World) Page 3