State Finance in History 


On the left: the cradle of civilization. (One can still see today why).

On the right:  regime switches when agents have different preferences about a regime, demonstrate if their expectation of a switch is sufficiently high compared to their individual cost of demonstration and rationally infer other's preference from the mass of demonstrators in each period. "Demonstration" may be replaced by "investment" in a micro-economic model. Regime switches occur as surprises but seem "obvious" ex post. (See how the probability distribution sharpens after a switch). The expected payoff of demonstration with a cost c when all agents  with a cost less than c demonstrate is pictured on the right. Red under perfect information, blue under imperfect information. (See "Coordinating Regime Switches").

For me, the value of a climb is the sum of three inseparable elements, all equally important: aesthetics, history, and ethics. Together they form the whole basis of my concept of alpinism (Walter Bonatti).

New paper: "Reexamining an asiento between Philip II of Spain and Tomás Fiesco" with Carlos Álvarez-Nogal (February 8, 2017). See the page "Castile".

Changing the view on the asientos of Philip II

contract in the same box provide detailed information on the accuracy of the accountants of Philip II (see Figures 4 and 5 of the paper).

  • Latest revision of a previous paper (resubmission to the Economic History Review)

Salient features:

  • A steady flow of 13 monthly payments to the Crown in Lisbon (mesadas) by the Maluenda brothers, from June 1595 on (first page of the contract).
  • Reimbursements by the Crown through a credit line with a claim on the previous metals coming from annual fleets of 1595 and 1596. An interest is charged at the rate of one per cent per month on the balance due. The rate is stated in the contract, repeatedly with illustrations. There is no agreed cash transfer date. The repayments are flexible and depend on the contractual rate and the timing of the transfers (as for a credit card).
  • An option enables the Maluenda to sell long-term funded juros for more than half of the loan part of the contract. For most of the contract, the cumulated cash receipts and sales of juros by the Maluendas exceed the cumulated amount of their payments in Lisbon.

On asientos and finances of Philip II

 At this stage, one can say that almost all the work on the finances of Philip II that has been published in the economic journals in the past thirty years has been deeply flawed for two reasons: Templates have been taken of the shelf from some theoretical economic models and they have been misplaced on historical events, leading to incorrect interpretations. Second, the data collection has been for the most part secretive and unverifiable. It did not meet the criteria that would be prerequisites in the fields of scientific inquiry. What could be verified has turned out to be contradicted by the archival documents. The role of asientos in the finances of Philip II, who led the superpower of his time, has to be reevaluated.

In the second half of the sixteenth century, under Philip II in Spain,  the public debt reached, for the first time in history , the "modern" level about 60 % of domestic production. Most of the long-term debt, perpetual bonds called juros, was guaranteed by the fixed contribution of cities to the central government. Each city paid its contribution (encabezamiento) to the central government after deducting interests juros issued on itself. The bondholders had a direct control over the service of their bonds through their local government. This control reinforced the credibility of the public debt and reduced its cost to the central government. The contributions of 18 major cities were determined by a simple majority vote in the Cortes. Their total imposed de facto a ceiling on the service of the debt and therefore on its amount.

In September 1575 Philip II decreed the suspension of payments on the medium-term debt (asientos) underwritten by Genoese bankers. The usual interpretation of this decree is a bankruptcy due to lack of resources or cash. Based on archives in Simancas, Valladolid and Madrid, the authors show that this interpretation is incorrect. The payment stop was the result of a conflict between Philip II and cities. The King wanted to triple the encabezamiento and thus get rid of the ceiling on the domestic debt, something that was opposed by the Cortes. This showdown is similar to the conflict in the United States where in 2011 and 2013, a fraction of the Congress tried to prevent an increase of the legal ceiling of the public debt. In Castile, the economic crisis that was caused by the payment stop forced the Cortes, after more than two years of protracted negotiations, to accept a doubling of the encabezamiento. The main commercial fairs which had been interrupted by the credit market freeze, would never regain their pre-crisis activity.