February 26, 2006
Throughout the 16th century, a monumental mass of stolen gold sailed across the Atlantic from Latin America to Spain. Estimates suggest that Spanish gold stocks were five times greater in 1592 than when Columbus set sail a hundred years earlier. Spain rapidly became the most bling nation on earth.
Had Hello magazine existed in the late 16th century, its spiritual home would have been the gold-embossed cribs of colonial Seville. The Spaniards devised an extraordinary system, which consisted of armed flotillas of up to 40 frigates each, which transported the plundered gold from their Inca colonies.
Once the precious metal was docked in Cadiz, Spain went on the batter, buying up almost everything it could get its hands on. Land prices went through the roof and the nobility started to build bigger and bigger villas, with more ornate bathrooms, ballrooms and dining rooms.
Visitors to Spain were amazed by the opulence. But Spanish chroniclers of the time worried that the gold-rich Spaniards – who had a long tradition of quality tradesmen – were giving up working hard, leaving fields fallow as they indulged their newly refined tastes for imported goods.
It was cheaper to buy from Holland, France or even England than make things at home. Given that the gold supply seemed limitless, the Spaniards could not see the problem. But the gold was disappearing out of Spain to pay for luxuries as quickly as it was coming in. In fact, gold went through Spain like a dose of salts.
However, during the gold period, Spain felt on top of the world and some people made fortunes.
The shipping companies or individual maritime entrepreneurs who braved the seas, organised the flotillas and docked the gold, amassed great wealth. For every ounce of Inca gold they delivered to Spain, they took a cut.
This business created the incentive for them to innovate with boat size and navigational techniques. Up until the late 15th century, boat design had not changed much in centuries, but then the Portuguese started building caravels (from the Arabic word Carib).These were long, narrow-hulled boats with the distinctive three triangular sales. They were built for speed, and more importantly, to carry heavy cargo for long distances. They were ideal for gold.
The Spanish merchants refined the caravels to suit their purposes. Not only did the merchants gain fortunes, but daring shipsï¿½ captains achieved worldwide fame.
They were all part of the infrastructure which turned gold into money. They were the first global bankers, the alchemists, who by their efforts, turned a pretty metal into a currency which bought all sorts of goodies.
The landlord class in Spain, who swirled sycophantically around the king, also gained enormously. They saw their estates quadruple in value as the gold, when it was turned into ducats, caused a massive increase in the money supply. This drove all prices up. Spain was experiencing a massive injection of credit, not unlike Ireland today, and property prices did what they always do when there is too much money sloshing around: they went up.
Boom-time Madrid became swamped with Dutch, French, Italian and English tradesmen and entrepreneurs keen for some of the action. They took orders, sent them back to Rotterdam, Carcassonne or Norwich, made the stuff for half of what it could be made for in Spain, and took a cut.
The losers were Spanish manufacturers who saw themselves priced out of their own market. Their well-paid, uncompetitive workers eschewed trade for the promised fortune of speculation and exploring or simply just spending the cash that streamed in from the hapless, enslaved Indians of Peru.
As the leading economic historian Peter Bernstein said: ï¿½ï¿½There was an abundance of metals without any productive development, a rise in prices without any monetary alterations. In short, 16th-century Spain was characterised by a separation between money and merchandise.ï¿½
By the end of the 16th century, Spain began to revert to the pastoral backwater it occupied before the gold arrived, except this time without the wherewithal to pay its bills. It experienced repeated financial crises in 1596,1607,1627 and 1647.
Fast forward to today and some of this may sound familiar to you.
Three events last week should make us sit up and read a few history books. Look closely and the experience of colonial Spain is beginning to resemble modern Ireland.
The continued decline of manufacturing Ireland accelerated a little last week with the closure of NEC in Ballivor. If it were not for the multinationals, there would be precious little manufacturing here. On the other hand, the startling profits of AIB and the 23 per cent increase in new car sales in January show that the monetary or credit economy is booming.
Letï¿½s go back to history for a second. In the ancient world, the most valuable commodity was gold. In the 21st century, the most valuable commodity is credit. Credit is a commodity and itï¿½s time we looked at it in this light.
Countries import and export credit. For example, Germany and China export credit, Ireland and the US import credit. It is a commodity like any other.
It is internationally traded, it has a price and it bestows enormous advantages on countries (and people) where it is ample.
However, like gold of old, it is a double-edged sword.
Not enough of it and the country never gets off the starting blocks. Too much of it and the country goes into reverse, inebriated by its excesses.
Now examine the similarities between both ages. Those who import credit, facilitate its distribution and get a cut from this activity are todayï¿½s banks. They are the 21st century equivalent of the merchants who plied the Atlantic. Realising that this was a good business, they too have made innovations, not dissimilar to the maritime advances of the old merchants.
In the same way as the purpose of building faster boats was to get as much gold as possible from the Americas to Spain, the aim of financial engineering, equity release, car finance and multiple credit cards is to get as much credit into the economy as possible. The more credit, the greater the return.
In the old days, gold allowed the Spaniards to buy fine clothes, trinkets, ornaments, armour and exotics.
Today, credit allows us to buy fancy cars, slate wet-rooms, shaker kitchens and Neff fridges. Credit drives up prices as far too much money chases far too few goods.
This is particularly evident in property, as it was in colonial Spain.
As prices increase, workers either look for higher wages or leave industry to get on the speculation bandwagon. Real businesses that make real stuff get priced out and eventually close down. As happened in Spain, the credit runs through the country like a dose of salts, leaving inflated expectations and underwhelming ability in its wake.
When we read about the economy here, we are really reading and living in two distinct entities – one is the credit economy, the other the crushed economy.
The credit economy dominates the crushed economy and ultimately squeezes the life out of it through a combination of finance, prices and human psychology. We have seen this down throughout the ages and, although history may not always repeat itself, so far economic history certainly has.