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 31
There is one simple measure that allows for comparisons of state capacity: the ability to tax. From K. Kivanc Karaman and Sevket Pamuk (2010), we compile data on the total tax take per capita in the early modern period. In figure 33, we plot the total tax revenue; in figure 34, we depict revenue per capita. France stands out for the high total amount of taxes raised; in terms of per capita taxation, the Dutch Republic takes first prize. Taxes were rising almost everywhere after 1500 as the power of the political center grew, and states struggled ever harder for resources to fight their foes (Tilly 1990). Every single European state with the exception of Spain collected higher taxes per capita in 1700 than it had done in 1600. As we discussed in the introduction, Spain went from one of the most successful revenue collectors to no more than a middling position—not as far behind as Russia, the Ottoman Empire (not shown), or Poland, but nowhere near the performance of the Dutch Republic or England. While Spain’s sixteenth-century performance is flattered somewhat by taxes on mineral wealth, the overall picture remains unaltered if one corrects for it. Spanish decline in terms of taxes raised, then, had two components: a weakening grip of the tax authorities and disappointing demographic performance.
FIGURE 33. Total tax revenue, various European powers. Source: Karaman and Pamuk 2010.
State borrowing—especially in the form of asientos—had some deleterious effects on the ability to tax. The estates of the military orders, over which the Crown held the right of patronage, were administered by the Fugger family, as were the quicksilver mines at Almadén (Ehrenberg 1896). As part of the resolution of Philip’s first bankruptcies, the Genoese received the monopoly for the sale of playing cards (Braudel 1966). These forms of administrative outsourcing did not help to raise state capacity. Yet they were part of a much bigger problem for Spain: it largely failed to build an integrated tax system that directly collected information on taxpayers; almost all taxes were farmed out or assessed wholesale for larger cities.
FIGURE 34. Revenue per capita, various European powers. Source: Karaman and Pamuk 2010.
Many historians of early modern Europe have observed that states made war, and war made states (Tilly 1990). War could also unmake them in short order: As a result of 350 years of nearly constant warfare, Europe became a collection of a few, consolidated nation-states. Weak powers disappeared; those that built effective tax-and-spend infrastructures survived and prospered. Timothy Besley and Torsten Persson (2009, 2010) argue that a history of warfare is one of the reasons why some countries today have much more capable states than others. Early modern history suggests that the link between warfare and institutional improvements was not straightforward. Some states survived and prospered despite being at peace, such as Switzerland. If war was the key driver of institutional improvements, Spain, France, and Britain should have emerged with wonderful institutions. All three fought numerous wars between 1500 and 1800, and had enormous financing needs. And yet their institutional paths diverged dramatically. This suggests that more attention needs to be paid to the fact that war could not only unmake states by seeing them destroyed as independent entities; it could also undermine state building depending on the exact historical circumstances.
Underlying the broad patterns traced out in figure 33 were different approaches to state building. The path to capable states differed by country. The English model saw a consensually strong executive—a monarch whose parliament permitted a tremendous increase in the debt burden, taxation, and scale of military ambitions, in exchange for greater control over the legislative process, independence of the courts, and a recognition of parliament’s power to chose the monarch. The French absolutist model, begun by Cardinal Richelieu and perfected under Louis XIV, has frequently been portrayed as pushing through far-reaching reforms against the continuous, often-violent opposition of major groups in society. Revisionist historical research has suggested a more nuanced picture (Mousnier 1979; Oestreich 1969), stressing the extent to which even absolutist rulers governed a polycentric system based on a consensus among the elites. While some of the legal writings and official propaganda—from Denmark to France and beyond—emphasized the sole power of the sovereign, the emergence of a strong state (with the support of major social groups) is not altogether different from the English path.19
One key difference between England and France, on the one side, and Spain, on the other, was the degree to which the political center successfully asserted its dominance—over independent-seeking regions as well as individual magnates. In other words, state building was much more successful outside the Iberian Peninsula than within it. As a simple example, it is useful to compare the progress in unifying taxation, jurisdiction, and representation in Britain after the Act of Union (1707) with the Unión de las Armas, the Count-Duke of Olivares’s attempt to centralize fiscal and military power in 1624. After 1707, the Scottish church was integrated into the Church of England; Scottish peers and Members of Parliament sat in Westminster; taxation quickly became unified; and Britain’s extensive eighteenth-century wars were fought with Scottish and English taxes, using Scottish and English troops.20 In contrast, Spain remained a composite state after 1492 (Elliott 1992)—and arguably, to the present day. While the Crown’s political position in Castile was relatively strong after the Comuneros Revolt had been vanquished, the Cortes—representing the cities—regularly turned down royal requests for higher taxation. Outside Castile, the Crown’s position was even weaker; the oath of allegiance, sworn by the Aragonese nobles after the accession of a new king, famously declared,
We, who are as good as you,
swear to you, who are no better than us,
to accept you as our king and sovereign,
provided you observe all our liberties and laws,
but if not, not. (Herr 1974)
This is not the language of absolute monarchy. Until the arrival of the Bourbon kings, there was no successful attempt to unify representation, legal systems, or taxation. In one famous episode, the Madrid government tried to raise taxes on the non-Castilian territories in a major way. During the Thirty Years’ War, under the Count-Duke of Olivares, the government was strapped for cash and tried to increase contributions (Elliott 1986). After being refused by the representative assemblies outside Castile, it invoked royal prerogative to allocate military costs directly through the Unión de las Armas. Revolts in Portugal, Catalunia, and Naples followed over the next decade; Portugal regained its independence in 1640, and the other two rebellious territories could only be brought back into the fold by backtracking on reform. Despite eventually repressing two of the revolts, Olivares’s experiment in fiscal burden sharing and centralization was a failure—and a costly one. For another two-thirds of a century, until the Bourbon reforms of the early eighteenth century, the ancient freedoms—and this increasingly meant freedom from taxation—were left essentially untouched.
Such a patchwork of privileges combined with high taxes on the remaining individuals and income categories created huge inefficiencies (Grafe 2012). In the language of economics, they violate the principle known as Ramsey taxation, which states that distortions created by tax should be equalized across sectors and individuals so as to minimize overall efficiency losses.
Internal tariff barriers remained in place. Some of these were part of a broader set of ancient “liberties” (fueros). For example, the fueros de Bizkaia created a customs barrier between Vizcaya, Guipuzcoa, and Alava, on the one hand, and Castile, on the other (Grafe 2008). Similarly, the system of puertos secos continued to exist into the late seventeenth century. Despite some tinkering, a system that maximized internal market fragmentation remained untouched for centuries after the marriage of the Catholic Kings and even after the Bourbon accession to throne. The terms of unification with the crowns of Aragon, Navarre, and Portugal in each case required the continuation of such arrangements.
The persistence of these ancient “freedoms” are not only responsible for the continuation of economically harmful rules; they
also serve to illustrate a particular type of internal weakness, and one that goes to the heart of Spain’s early modern failure to build a more capable state. As Grafe (2012) points out, officials in all Spanish-ruled territories happily disregarded direct royal directives if they undermined long-standing exemptions and privileges. This practice made perfect legal sense; since the king was bound to uphold the old liberties as part of his compact with his subjects, he could not legally require officials to do the opposite. In these cases, as the Spanish phrase has it, the king’s law would be obeyed, but not put into practice: la ley se obedece, pero no se cumple (MacLachlan 1988).
Of course, such reluctance to follow orders could only persist because officials feared no direct sanctions from the center. Being fined, removed, stripped of honors, or sent to prison was not even a remote prospect; the whole apparatus of sanctions that a sovereign state typically applies to run its administrative machinery were almost never within the reach of the court in Madrid. Spain failed to develop an administrative infrastructure that could overcome opposition based on old custom and ancient legal agreements. Even in terms of collecting taxes, there was no centralization of administrative processes and no homogenization of rules; Spain never developed the equivalent of the French intendants, introduced by Cardinal Richelieu, who supervised the collection of direct taxes. Significant revenue bypassed royal coffers. Elliott (1963a, 99–110) estimated that the Spanish church controlled up to three times the resources available to the Spanish Crown under Ferdinand and Isabella. While the ratio shrank in later years, the Catholic Church in Spain continued to receive significant income. Its influence was so widespread that it actually served as one of the most important fiscal arms of the states. The so-called three graces were taxes collected by the church on behalf of the Crown. Together with the tercias reales—taxes on the salaries of ecclesiastics—they accounted for a full third of fiscal revenue in the sixteenth century.21
Far from being able to impose its will with ease, and riding roughshod over the opposition of merchants, nobles, and clergy, the Spanish monarchy often found it impossible to force through the application of royal decrees and directives. Every attempt to centralize, tax more equitably and efficiently, and do away with the patchwork of ancient privileges that undermined the efficiency of the Spanish state and economy was quickly met with attempts at rebellion (Portugal, Catalonia, Vizcaya, and Sicily) or conspiracies (Andalusia and Aragon) (Elliott 1963b). The ease with which local resistance could be organized, the inability of the Crown to fully disarm local magnates, and the gentle touch—at least under the Habsburgs—with which rebellious regions were treated all suggest that the government in Spain was simply too weak to mount an effective attempt to centralize, streamline, and professionalize tax collection as well as the administering of the judicial process. As Elliott (1963a) elegantly put it, “Such strength as it [the Spanish monarchy] possessed derived from its weakness.”22
To understand why state capacity stagnated in Spain while it surged elsewhere, we need to take a closer look at a contrasting example: Britain. There, the rise of a unified, bureaucratized, centralized tax structure was not a simple or linear process (Brewer 1988). In the sixteenth century, tax farming was used for indirect taxes; local agents often supervised the collection of local direct taxes. Charles I’s experiment with ship money ran into massive opposition (Kimmel 1988). Challenges were not just based on the dubious legal basis for the writs but also the supposed, regionally based special privileges (Braddick 2000). London, for example, claimed to be exempt from ship money payments due to its special status, just like Seville or Zaragoza would have argued that any rise in the excise taxes of Castile was not relevant, since they had agreed on a lump sum in lieu of ordinary taxation. In other words, before the civil war, Britain’s tax system did not look particularly streamlined or efficient.
It was only in the 1680s and 1690s that an effective end was put to tax farming in England. Brewer (1988) argues that by 1700, the process of reforms after the Glorious Revolution had produced an efficient and effective bureaucracy—one that was centrally directed, paid regular salaries, and monitored agents using a fixed hierarchy with clear incentives. William Pitt’s reforms in the 1780s, a good century later, achieved similar benefits by streamlining the collection of direct taxes—and laid the foundation for the introduction of the first income tax in history to be successfully collected on any significant scale.23 By the end of the period, the single most impressive feature of the British state was arguably its ability to raise taxes, and do so in a way that not only failed to snuff out economic growth altogether but also actually allowed it to proceed—no matter how slow the process may have been.
WINDMILLS OF DECLINE: HETEROGENEITY, STATE CAPACITY, AND SILVER
What accounts for these differences? Why did Britain successfully centralize its administration, streamline tax collection, and build a more powerful, capable state apparatus than Spain? The pressures of war—the leading explanation in the tradition of Tilly (1990)—cannot be the answer, since both powers were frequently at war (with each other and the rest of Europe). We emphasize two factors: different starting conditions and the availability of silver revenues in the case of Spain.
HETEROGENEITY
The lands ruled by Spain’s Habsburg and Bourbon kings were vastly more heterogeneous than those ruled by English monarchs from Henry V to George III. While both had inherited territories with preexisting linguistic, cultural, and economic differences, these were arguably much greater on the Iberian Peninsula. A simple statistic bears this out: the territory ruled by Philip II contained seven predecessor states in 1300; in England, it was one (or three if we use Britain as a unit of observation, and add Scotland and Ireland).24 Linguistic fragmentation in England was also much lower—0.05 instead of 0.41 in Spain on the Alesina et al. (2003) scale. In both places, local magnates controlled significant armed forces for some time. And yet this phenomenon disappeared in England after the civil war. In seventeenth-century Spain, though, the arsenals of grandees, such as the one of the Duke of Medina-Sidonia, were once sufficient to equip small armies (Anderson 1988).
Why should initial heterogeneity matter? Nicola Gennaioli and Hans-Joachim Voth (2012) build a simple model of investments in fiscal capacity that rationalizes the importance of starting conditions. Assume that two rulers try to centralize tax collection, but are faced with different levels of domestic opposition. Domestic opposition—potential and real—makes it more costly to push through centralizing reforms, such as the abolition of customs barriers, application of general rules of taxation, and so on. To obtain greater revenues in the future, rulers have to invest up front. Both rulers have the same incentive to raise more revenue, driven in part by the threat of war.
If one country is more heterogeneous than the other, with more powerful grandees and greater linguistic, cultural, and administrative fragmentation, the cost of centralization will be greater. In this case, the ruler of the more homogeneous territory will be more inclined to undertake investments in fiscal infrastructure—and state building will be greater. These effects will be amplified by military competition. The more important money becomes for winning wars—a direct result of the military revolution after 1500—the greater the importance of raising revenue. The more costly war is, the more difficult it will be for a state to recover from a string of adverse shocks to its position, such as a bad draw in a military confrontation.
If growing financial resources strengthen the center’s military might, as they typically did in the early modern period, then each successful centralizing step makes the next one less costly; vanquishing the opposition becomes progressively easier. According to the logic of the model in Gennaioli and Voth (2012), small differences as a result of luck on the battlefield, say, or a consequence of different starting conditions can produce large divergence in state capacity over the long run. In this framework, initial fragmentation determines the path of state building as international competition heats
up. While tax pressure is low, the incentive to improve tax collection and push aside local magnates is low, too. As warfare become more intense and more costly, stronger states have an incentive to improve their institutions and strengthen tax collection.
Weaker powers, on the other hand, may find it optimal to “give up” and not even try to improve state capacity. Those that started the race with greater obstacles—having inherited more powerful local institutions and a greater diversity of old state infrastructures as a result of recent territorial expansion—will be increasingly hamstrung. An excess of local power, the ability to defy the center, and the capacity to check an absolutist agenda were more damaging to both economic performance and political development, especially in the case of Spain. In this sense, the marriage of equals between Ferdinand and Isabella cast a long shadow over Spain’s development in the early modern period. While it initially concentrated power in the Catholic Kings’ hands, it also hampered the forging of a unified, functional state with a large internal market and effective, incentive-compatible taxation.
SILVER
The second key explanation for declining state capacity in Spain emphasizes the incentives to push through reform against potential opposition. Spain’s treasury, in contrast to Britain’s, had access to significant mineral wealth. The silver mines of Potosí, once they could be successfully exploited, created a torrent of silver; a substantial share of it found its way into the coffers of the Castilian Crown.