Asientos and public finance in Castile under Philip II

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.

An asiento with foreign exchange: Tomás Fiesco on April 3, 1591

The asiento between Philip II of Spain and Tomás Fiesco (April 3, 1591) is a textbook contract for steady monthly disbursements (mesadas) towards the army of Flanders in foreign currency (escudos), and reimbursements by the Crown in domestic currency (ducats). This asiento is also the main verifiable evidence in Drelichman and Voth (2015), “Risk sharing with the monarch: contingent debt and excusable defaults in the age of Philip II, 1556-1598.” We analyze the contract in our text-based method, with a complete transcription and translation of more than half of the contract for the reader. There is in the contract no contingent debt, excusable default or penalty. An option enables the king, presumably after good news upon the arrival of the fleet, to reduce, with no penalty whatsoever, the size of the contract (both receipts and payments by the Crown, pari passu). The interest charge was of 1 percent per month in domestic currency (ducats), as in other contracts. Special attention is devoted to the exchange rate that played a critical role in the contract’s profitability. It was set at the signature of the contract, and according to some market evidence, with a commission of 4.4 percent.

 The contract (copy of the original in the archives of Simancas)

Political conflict on taxation between the Crown and the Cortes

It reflects on the state of economic history that Carlos and I had to write this:

  • "Answer to 'Duplications by Drelichman and Voth' (with Carlos Álvarez-Nogal), September 5, 2015 (pdf). 

War of attrition between the parliament and the executive in Castile, 1575

The paper discusses more evidence for the interpretation (2014 EHR article) of the three financial crisis under Philip II by the political economy inside of Castile between the Crown and the Cortes. Focusing on the main crisis (1575-77), additional archival evidence: the financial education of Philip II and his use of the financial weapon against the Pope at the beginning of his reign, the financial intermediation of the Genoese bankers inside of Castile, the stop of the commercial fairs in Medina del Campo in 1575-77, the legal protection of the bankers by the Crown against the claims of their creditors in Castile, the numerous petitions by the creditors of the asentistas to the Crown for the recovery of their deposits.

  • Data available upon request.
  • Soft version (VoxEU: October 21, 2013)

The recent showdown over the US debt ceiling can be thought of as a game of chicken over the repayment of sovereign debt, with potentially severe consequences. This column describes an analogous historical episode in 16th century Spain, in which city delegates in the Cortes resisted tax increases, and Phillip II responded by suspending payments on a portion of the sovereign debt. By the time the cities caved to a doubling of their tax contribution two years later, the resulting bank failures and credit freeze had caused lasting economic damage.

An asiento in domestic currency (ducats): the Maluenda brothers on July 13, 1595

Men of finance raised funds for loans, asientos, to Philip II by trading short-term financial instruments in credit markets and by selling long-term annuities, juros. These activities are illustrated by an asiento with the Maluenda brothers (July 13, 1595), where short-term credit secured by the equity of the fleets from the Indies were, for more than one half, converted into funded life annuities that were sold by the Maluendas. The analysis of this asiento contradicts a previous publication a few years ago that was highly praised and yet gave a completely false account of the contract itself with not reference to the complete dossier in the archives of Simancas, which for that particular asiento, contains more than 400 pages including the contract, monitoring attachments, and posterior audit. The main documents are available here.

  • The sources in the archives of Simancas, AGS, CCGG, leg. 92-1, asiento 07/13/1595. The help and the authorization to post are gratefully acknowledged. (España. Ministerio de Educación, Cultura y Deporte. Archivo General de Simancas).
    • The contract  (14 pages).
    • Attachments (47 pages), next to the contract: they have been written by the royal accountants who monitored the implementation of the contract. See Table 3 in "Analysis" for a list of the attachments.
  • Blog post (June 19) in positive check, blog of the European Historical Economics Society

  • Refinancing short-term debt with a fixed monthly interest rate into funded juros under Philip II: an asiento with the Maluenda brothers, final version (!) to appear in the Economic History Review). This posted version is the same as in the EHR except for the following additions, Figure 2 in the text and in an Appendix, Figures 2-4, and the commented transcription of the contract. The text of the paper is identical to the published version.

    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.