An idea of the influence and reach of the church can be gleaned by surveying its property holdings. Church property, once acquired, could not be sold, mortgaged, or alienated in any way. One way to acquire and entail new properties were the bequests of wealthy landowners—a common occurrence in a society that saw good deeds on earth as a way to achieve eternal salvation. Much more important, however, was the role played by ecclesiastical organizations in providing long-term financial arrangements for owners of small-and medium-size fields. During economic downturns, it was common for landowners to sell their land to a cathedral or monastery; in exchange they received a sum of money and entered into a perpetual lease (censo). By the end of the seventeenth century the church was the largest landowner in Spain, and a large portion of its income was derived from land rents and mortgage payments. Cadastral data from the mid-eighteenth century reveal that the church held 12.3 percent of the land in the crown of Castile and accounted for 19.5 percent of agricultural production. When the personal holdings of ecclesiastics are added, the amount of land controlled by “dead hands” reached 24 percent. Yet the cadastral surveys only identified the person directly exploiting the land rather than the holder of eminent domain. Many plots that belonged to the church but were held in tenancy or perpetual leases by peasants therefore would have been wrongly classified as belonging to those peasants. As large as the 24 percent figure may seem, it was just a lower end on the share of real estate accumulated by convents, hospitals, cathedrals, monasteries, and ecclesiastics themselves over the centuries (Marcos Martín 2000).
Although no cadastral data are available for the sixteenth century, the Censo de los Millones, taken for the purpose of allocating the new excises voted in 1591, offers an idea of the relative economic weight of the church. According to its findings, the church concentrated roughly one-sixth of the landed wealth of Castile, although clergy constituted a much smaller share of the population.16 As an example, in 1500 a full 20 percent of the buildings in the city of Seville belonged to churches and clergy; by 1561, the cathedral and second-largest church alone owned 23.9 percent of all buildings in the city. In Toledo, the Cathedral chapter owned about 30 percent of the buildings in the city by the end of the sixteenth century.17
Starting with Ferdinand the Catholic, the kings of Spain became close allies and staunch supporters of the Papacy. In chapter 2, we discussed how this earned Ferdinand and his successors the privilege of royal patronage, which entailed the authority to appoint bishops and prelates. Church positions were profitable; their endowments and revenue streams made them highly coveted by members of noble families. Royal patronage therefore gave the Crown yet another tool with which to keep a short leash on both the nobility and clergy. As an extension of the right of patronage, Ferdinand also claimed the masterships of the military orders along with the sizable rents they generated. The Papacy formally recognized the takeover with a bull in 1523.
Finally, the Inquisition was a formidable tool of social and political control in both Spain and the colonies.18 It depended directly on the Crown, which had a dedicated council to oversee it. The inquisitors, designated by the monarch and vested with full judicial powers, busied themselves with eradicating heresy, unholiness, and moral deviations. Between the establishment of the Inquisition in 1484 and its dissolution in 1837, perhaps some 125,000 individuals suffered its scrutiny. Death sentences were rare, imposed perhaps in less than 1 percent of the cases, and even then not always carried out.19 Physical torture and punishment, however, were liberally used to elicit confessions as well as ensure that morals were respected and the tenets of the faith were not challenged. The Inquisition was completely autonomous from a financial point of view. It relied exclusively on the fines it imposed and goods it expropriated to finance itself, without either receiving or making transfers to the Crown.
REVENUES
At the beginning of the sixteenth century, the Crown had a wide variety of revenue streams at its disposal. As Castile entered its imperial period, new taxes and income sources were added, while the existing ones were expanded or otherwise modified as the need and opportunity presented themselves. The balance between different sources of income was the result of complicated historical processes; custom, vested interests, and the relative strength between the Crown and kingdom all contributed to the particular fiscal structure of Castile. We now provide an overview of the most significant revenue streams and trace their evolution throughout the reign of Philip II.20
DIRECT TAXES
The medieval fiscal structure relied heavily on direct taxes. The most important among these were the servicios—contributions voted by the Cortes and apportioned among the different municipalities of the kingdom. Each municipality was free to collect its quota as it best saw fit; poll taxes and impositions proportional to wealth were both common. These received the collective name of pechos, and the contributors thus were called pecheros—a word that became synonymous with commoners. Nobles, clergy, and the indigent were exempt. Servicios were the original taxes supplied to the king by the Cortes, and they had both an ordinary and extraordinary component (in the sense discussed above). Their approval, which was valid for a multiyear period, normally signaled the culmination of an assembly. Although symbolically important, the nominal amount of servicios did not change much during the second half of the sixteenth century. In 1555, they accounted for about 14 percent of the total revenue; by 1596, this had shrunk to 3.5 percent as a result of inflation and fiscal expansion.
REVENUES COLLECTED THROUGH THE CHURCH
From the early thirteenth century, the Crown had frequently collected one-third of the ecclesiastical tithes (tercias) as a levy to finance crusade operations. King Alfonso X the Learned made the tercias permanent in 1255, fixing them at two-ninths of the tithes collected by every parish. Subsequent papal bulls added the cruzada (1485), a contribution that rewarded the kingdoms that fought against the infidel; the excusado (1565), the full amount of the tithes of the second-richest parishioner in each parish; and the subsidio (1568), one-tenth of the income of ecclesiastics.21 Because of the difficulty of assessing the value of the latter two taxes, the Crown regularly negotiated a yearly lump-sum payment with the bishops in their stead. The cruzada, subsidio, and excusado were collectively known as tres gracias—the three graces. Overall, revenues collected through the church fluctuated between 13 and 18 percent of royal income in the second half of the sixteenth century.
INDIRECT TAXES
The main indirect tax—and indeed, the most important source of revenue—was the alcabala, or sales tax. Legally, the alcabala was payable by everybody regardless of social status and was applicable to every transaction at the same rate of 10 percent. In practice this was never applied, as for an early modern economy, it would have been both extremely onerous and impractical to collect. Instead of direct collection, the Crown opted for one of two systems, which were employed in different periods or sometimes concurrently in different parts of the kingdom. The first option was farming out the collection of the tax in a figure called arrendamiento. The cities often objected to it, since the arrangement made the tax farmers the residual claimants of the collected amounts, which prompted them to behave in an overzealous or downright abusive manner in the hopes of squeezing additional taxes out of the populace. The alternative, which became increasingly common in the sixteenth century, consisted of a negotiated yearly payment between the king and Cortes, which then apportioned the total amount among the different jurisdictions. This system was called encabezamiento. Participant cities were free to collect their quota in any way they saw fit; they usually did so by taxing only certain easy-to-monitor goods, such as those sold through licensed establishments. Sales taxes under the encabezamiento averaged a rate between 2 and 3 percent.
In the second half of the sixteenth century, the alcabala eclipsed all other sources of revenue, representing roughly a third of royal income. Because of this, the value of the encabezamiento was the main bargaining tool that the C
ortes had when trying to extract concessions from the king. This could result in tense standoffs, such as the one that emerged in the Cortes of 1573, when the king requested a tripling in the encabezamiento’s value. When the Cortes balked, the king threatened it with pulling out of the agreement altogether and collecting the tax at the 10 percent statutory rate. Knowing that he did not have the fiscal structure to follow through with it and that any attempt at forcibly raising taxes would be unpopular, the Cortes called the king’s bluff. The negotiations dragged into 1575, and the impasse became a determining factor in that year’s bankruptcy. With a default in royal debt looming, both the king and Cortes compromised, agreeing to a doubling of the encabezamiento, which nonetheless came too late to avoid a suspension of payments. Only two years later, the Cortes complained that the tax was too high a burden on economic activity; having settled his debts and finding himself in a better financial position, the king agreed to a minor reduction.
Another major increase in indirect taxes came after the defeat of the Armada in 1588. The outfitting of the fleet had cost a full two years’ worth of revenue. The destruction of a good portion of it coupled with the impending threat of British and French invasion required that its power be restored as quickly as possible. The Cortes was asked to vote a new set of excises, known as the servicio de los ocho millones (or simply, millones), after the eight million ducats it was supposed to raise over six years. The tax was approved in 1591, but not before the Cortes extracted a degree of control over its use. This was the first time that the powers of a representative assembly in a large European state included control over expenditure, but it was not to last (Stasavage 2011). Within a decade, the king managed to pack the commission overseeing the millones, which retained control only in name. The Cortes was asked to reauthorize the tax repeatedly. The millones soon became permanent for all practical purposes.
There were also several taxes on specific large-scale economic activities. The most important were those on the production of silk in Granada (renta de la seda) and the taxes on migratory sheep flocks (servicio y montazgo). These taxes, however, reached their peak in the late fifteenth and early sixteenth centuries, and were in frank decline by the time Philip II took power.22
After the excises, the most important indirect taxes were the internal and external customs. The former, called puertos secos (literally, “dry ports”—internal customs collection points), experienced relative stagnation and decline throughout the modern period. At the same time, the large expansion in Atlantic trade switched the center of gravity to the import and reexport duties collected at the port of Seville as well as, to a lesser extent, at the northern ports. There were several duties imposed at different times and ports; the most crucial ones were the almojarifazgo and avería. Also significant was the derecho de las lanas, which taxed exports of merino wool. By 1596, custom duties amounted to approximately 10 percent of the total revenue. The granting of monopolies was also a modest revenue source during Philip’s reign, accounting for between 7 and 13 percent of revenue throughout the period.
There were also a large number of minor income streams—many of them carryovers from medieval times. Since taxes were stipulated in nominal terms, most of these were progressively eroded in value as a result of the silver inflation of the sixteenth century.
AMERICAN SILVER
Early Spanish conquistadores in the New World were single-minded in their quest for precious metals. Their initial military ventures yielded considerable quantities of gold and silver, accumulated by Inca and Aztec rulers. And yet the hoards seized by Cortes, Pizarro, and their men were nothing compared to the torrent of treasure that eventually poured out of the rich silver mines in Potosí and Zacatecas. The city of Potosí’s sixteenth-century coat of arms did not exaggerate when it boasted:
I am rich Potosí
Treasure of the world
The king of all mountains
And the envy of all kings.
The Potosí and Zacatecas deposits were discovered in the mid-1540s. Before silver could be extracted in a viable way, some technical issues had to be resolved. Since classical Greek times it had been known that mercury formed an amalgam with certain types of silver and iron sulphides, which could then be separated from the raw ores and purified by evaporating the mercury. American ores, however, would not amalgamate with mercury, making their refining difficult and inefficient. Ten years passed until Bartolomé de Medina, a Spanish merchant, discovered that he could solve the problem by adding copper to the ore. American ores were in fact poor in copper, which is a required catalyst for mercury and silver to amalgam. This refining method became known as the patio process, because it required the amalgamated ore to rest for weeks on a hot and sunny stone-paved area, which was usually fenced or walled to ward off intruders. In colder Peru the refining took place in small rooms with a central fire, but the process nonetheless retained its name.23
Once silver was smelted in Potosí, it made its way on mule back to Lima to be assayed. From there, a fleet carried the bullion to Panama. It was then transported over the isthmus and onward to Havana. Mexican silver, produced in Zacatecas, was transported overland to Veracruz and then by sea to Havana as well. There, the precious cargo would accumulate until the next treasure fleet sailed for Seville. The fleets would initially ride the Gulf Stream, sailing in parallel with Florida’s coast. Then, having reached as far north as modern-day Virginia Beach (near Cape Hatteras), they started to sail east. They would pass Bermuda and then make their way to Spain, escorted by large armed convoys that protected them from enemy fleets, pirates, and privateers.
The vast majority of silver production was in private hands. The Crown enforced a trading monopoly; all silver as well as any other goods of colonial provenance had to make their way through the city of Seville, where they were deposited in the House of Trade to be assessed and taxed.24 Only after the king had collected his share were they released to their owners. The convoys that protected the treasure ships also ensured that they all sailed into port to be taxed. While small amounts of contraband were always present, they did not reach a significant scale until the seventeenth century, when the king’s penchant for confiscating the private holdings of silver deposited in the House of Trade made smuggling treasure more attractive.25
Silver reaching Seville was taxed at a flat rate of 20 percent—the royal fifth. In the second half of the sixteenth century, silver revenue grew to reach 25 percent of all royal income, second only to the alcabala. Bullion flows were highly volatile. Production at the American mines suffered from large swings, caused mostly by mortality among the workforce. The sailing of the silver fleets was strongly dependent on Caribbean weather patterns. In many years fleets were delayed or forced to cancel their sailing altogether; on a few occasions both yearly fleets were prevented from leaving Havana, resulting in a cash crunch on the peninsula. This caused wide swings in the amounts of silver reaching the House of Trade year after year, and hence in the royal revenues they generated.
Sometimes the Crown would seize silver shipments, to be used for urgent spending needs. Such seizures had a long lineage, going back to the days of Charles V. The first confiscation occurred as early as 1523, when two hundred thousand ducats were taken to pay for the army that would fight the rebel king of Navarre. The practice, though sporadic at first, slowly became a standard feature of royal policy. The total share of private treasure confiscated fluctuated with the Crown’s spending needs, but on several occasions affected the entire treasure landed in Seville. Instead of their bullion, the disgruntled owners of the confiscated silver normally received nonredeemable juros yielding between 5.5 and 7.14 percent (Ruiz Martín 1965). Under Philip II, such forced conversions of treasure into juros were rare.
FIGURE 4. Crown revenues, 1555–96
A RECONSTRUCTION OF YEARLY REVENUES, 1555–96
In figure 4, we present the evolution of Crown revenue between 1555 and 1596 in real terms.26 The coverage period, dictated by data ava
ilability, consists of Philip II’s entire reign except for the last two years.
The graph tells the story of Castilian revenues in clear terms. Most income streams were stable as a result of tax farming or lump-sum payment negotiations with the cities or the church. Direct taxes, monopolies, and customs revenue barely show any variations throughout the period. Revenues collected through the church rise substantially when the subsidio and the excusado are introduced in 1571. The sales taxes—alcabalas—jump in 1575–77 after the Cortes approved a doubling of rates plus a one-time surcharge. This was followed by a reduction as a result of bargaining between the king and Cortes in 1576.27 The year 1591 saw the introduction of the millones—new excises worth a total of eight million ducats, spread over six years.
The least stable of all revenue streams was silver taxation. This value was modest until the early 1570s. It reflected difficulties in attracting workers for exploiting the mines. The Spaniards eventually introduced the mita, or forced labor service, which was used extensively to provide workers for the mines, and production increased quickly. The jagged profile of the annual revenue series also reflects the irregularities in the sailings of the Atlantic fleets. Years of low silver revenue were normally the result of one of the two fleets failing to make the crossing, either because of insufficient production or adverse weather. While a missed sailing created short-term liquidity problems, it did not cause a serious financial setback. Silver that did not cross the Atlantic one year would likely arrive the next, and a wide array of lenders and financial intermediaries was ready to make up the shortfall in the meantime.
DEBT
The large fluctuations in income and expenditures required the extensive use of debt instruments. Since the late Middle Ages, the Crown borrowed in long-term debt markets. In the early sixteenth century, Charles V started borrowing from international bankers short term as well. Throughout the sixteenth century, the credit system of the Spanish Crown acquired many of the characteristics associated with modern sovereign debt. While there were no freely transferable bearer bonds, liquidly traded in secondary markets (developed a century later in the Netherlands), the Genoese introduced contingent clauses and complex collateralization in their loans to Philip II. These elements have only reemerged as financial instruments for sovereigns in the early twenty-first century.
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 12