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October 27, 2009
Exclusive: Applying Economic Lessons from Spain’s Hapsburgs to America Today
I recently toured an exhibition at the National Gallery of Art in Washington, D.C. on loan from The Royal Armory in Madrid, Spain. The Royal Armory was established when the Spanish Crown of the Habsburg dynasty was at the height of its international power. Armor and weapons drawn from the unsurpassed holdings of the Royal Armory are shown alongside portraits of emperors dressed in the same armor, painted by such masters as Peter Paul Rubens, Anthony van Dyck, Diego Velázquez, and Alonso Sánchez Coello. There are also several large and magnificent tapestries comparing Hapsburg [also known as Habsburg – ed.] rulers with the generals and leaders of the ancient Roman Empire. At the entrance of the exhibit is a copy of part of a massive mural depicting imperial armies in battle.
In 1492, the same year that Ferdinand and Isabella sent Christopher Columbus off to discover the New World, the last Muslim stronghold of Granada fell to complete the Catholic Reconquest of the Iberian Peninsula. It was through Isabella’s son-in-law that the Hapsburgs got their foothold in Spain. With Spain as its political base, and gold and silver flowing in from its Latin American colonies, the Hapsburg dynasty became the dominant power in Europe. It controlled rich parts of Italy including Naples, Sicily, and Milan, and Central Europe from the Low Countries through the Holy Roman Empire (Germany) to Austria and Hungary. The Hapsburgs held off the Ottoman Turks whose resurgent wave of Islamic conquest in the 16th century swept across the Balkans and nearly captured Vienna.
The Hapsburgs went into decline in the 17th century, and while any such momentous event has many causes, it was the economic collapse of Spain which not only sapped the empire of strength but served to build up the power of its rivals.
The demands of empire require a strong and growing economy, but Spain did not keep up with the economic expansion that was taking place in other parts of Europe. Madrid’s financial base fell out from under its empire. Spain could continue to consume in the short term because of the flow of precious metals from American mines, but it could not produce the goods it needed at home, which in the long-run proved fatal to its standing as a Great Power and as an advanced society.
Spanish imports were double exports and the precious metals became scarce within weeks of the arrival of the American treasure fleets as the money flowed to Spain's many creditors. What industry there was, along with banking and shipping, were in the hands of foreign owners. As a modern historian, Jaime Vicens Vives, has concluded “this was one of the fundamental causes of the Spanish economy's profound decline in the seventeenth century, maritime trade had fallen into the hands of foreigners.” This, plus the “opening of the internal market to foreign goods,” produced a “fatal result.” Spain's exports were at the same time under heavy pressure by competitors in third country markets. A nation that cannot control its domestic market will seldom be able to sustain itself in foreign markets which are inherently less accessible and more unstable.
Yet, Spanish leaders were deluded by a sense of false prosperity. Consider the statement of a prominent official, Alfonso Nunez de Castro in 1675: “Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.” A few years later, the Madrid government was bankrupt. The Spanish elite had foolishly elevated consumption, a use for wealth, above production, the creation of wealth.
Historians have traced the flow of Spanish gold and silver across the markets of Europe. Those who “served” Spain by establishing industries to manufacture goods for the Spanish market gained the money. Spain’s rivals, France, England, and the Netherlands (which started a successful revolt in 1568) prospered by their trade surpluses, and reinvested the money to expand their own capabilities. Another modern expert on Hapsburg history, Henry Kamen, has cited contemporary sources who referred to 17th century Spain as “the Indies for the foreigner.” The military empire of the Hapsburgs became the economic colony of other powers, or, to use a current phrase, Spain was the “engine of growth” for the rest of the continent.
Where there was jobs and prosperity, there was also rapid population growth, and rising tax revenue. Rival powers were able to field and finance military forces that could defeat the once superior Spanish forces both on land and at sea. The irony is that Spain was ruled by a warrior aristocracy tempered by centuries of constant warfare against Islamic hordes and perceived Christian heretics. These nobles looked down on merchants and manufacturers and disparaged their mundane professions, only to find that without a strong domestic business class they could not afford the fleets and armies that guarded the empire they had built.
Today, the American “empire” is also trying to consume more than it produces. The U.S. trade deficit is nearing Spain’s nadir of imports being double exports. The U.S. trade deficit averaged over $700 billion a year during the 2005-2008 period. $963 billion went to China, who uses the gains from trade to support a military expansion and foreign policy that threatens American interests all around the world. Like Imperial Spain, the United States is undermining its own strength while building up the power of rivals by ignoring the strategic consequences of trade and capital flows; and the rise of new centers of industry and technology overseas.
Both government spending and private consumption are financed heavily by debt, much of it held by foreigners. Washington is printing money, the modern equivalent of digging gold out of the ground, rather than earning the means to pay its bills. And the political elites have been indifferent to the fate of domestic business and industry.
World Bank President Robert Zoellick warned September 27th that the United States must brace itself for the dollar to be usurped as the world's reserve currency as American dominance wanes in the wake of the financial crisis. He said it was time for a "responsible globalization," in which decision-making was shared between “old powers” like the United States and developing countries such as China and India. This is what Beijing has been demanding. The scandal is that as U.S. Trade Representative and later Deputy Secretary of State, Zoellick was a vocal advocate of the very “free trade” and “corporate globalism” policies that brought about the shift in the balance of power he now wants Americans to accept as their fate. Zoellick is typical of many in government and academics who are so blinded by pet sophistries that they cannot connect the dots or understand basic cause and effect relationships even when right in front of them.
On October 19th, Federal Reserve Chairman Ben Bernanke told a conference that trade imbalances played a central role in the worst global financial crisis since the 1930s. “To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows,” he warned.” But all he could suggest was reducing the Federal budget deficit. Even if this could be accomplished (problematic given the 2009 $1.4 trillion deficit), this would not be sufficient to balance trade. Congress attempted to constrain the transmission of Federal spending into increased imports with “Buy America” provisions in the stimulus bill, but President Barack Obama raised objections to this as a general policy.
Reading through all the grand statements about change, rebalancing and competitiveness that have accompanied economic discussions during the last two years, I am reminded of an observation by one of the great historians of Imperial Spain. In his book The Count-Duke of Olivares: The Statesman in an Age of Decline, J. H. Elliott discussed the letter sent out in 1622 by Phillip III on the subject of reform, “Everyone was agreed on the need to restore trade and industry – ‘the sole basis for the conservation and increase of monarchies’, in the words of the royal letter. Yet so far, in spire of all the pious expressions of hope, nothing of substance had been achieved.” So it was then, and so it is now.
What is clear today is that the forces that generated the trade imbalance, lasses-faire corporatism and irresponsible borrowing, cannot correct it. Only government intervention based on a complete turn in policy can end these self-weakening modes of behavior. As the nation’s first Treasury Secretary Alexander Hamilton had written in his famous "Continentalist" essays, "There are some who maintain that trade will regulate itself [but] this is one of those speculative paradoxes...rejected by every man acquainted with commercial history." Richard B. Morris, in his seminal biography of Hamilton, observed that his "brand of conservatism meant holding to the tried and proven values of the past, but not standing still....He could scarcely be expected to allow government to stand inert while the economy stagnated or was stifled by foreign competition."
Americans must learn more from history than that Imperial Spain was decorated with great works of art and was ruled by lavishly costumed nobles.
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.
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