The Way of Empire (today the way of America)

Bill Bonner, reckoning today from Youghal, Ireland...

The government in Spain, short of revenue for its expensive imperial projects, increased the fiscal burden and manipulated the coinage, triggering inflation and further damaging the Spanish economy.

~ Christopher Storrs

Inflation and war…war and inflation. Evil and stupid. Fool and knave.

They follow patterns too.

You send a beautiful armada to deal with the English. It is so impressive, its huge oak ships rising out of the water… as much as 150 ft. long and 50 ft wide, with as many as 60 cannon poking out of its portals. Flags flying. Three tall masts and billowing grand sails. They were the magnificent aircraft carriers of their day; each one took 2 years and 2,000 stout trees to build.

Named after saints…carrying a priest onboard for daily services…and adorned with a golden lion wearing a crown (for the royal vessels) – could there be any doubt who ruled the sea?

You hold a sacred mass…the Pope himself blessed the fleet. Surely it is an Invincible Armada!

And then, whaddya know…it sinks.

Spain – part of the Habsburg Empire – was the first empire on which the sun never set. It had the Philippines in the East… Central and South America in the West…and in Europe, it was the hegemon…the indispensable nation of its time.

So, when English terrorists began attacking Spanish ships, Philip II decided to take forceful, resolute action. His was the leading empire of the time…with the largest military budget in the world…and the 16th century equivalent of a reserve currency. That is, Spain was getting boatloads of gold and silver from the New World, thereby stimulating the Old World economy with newly minted money.

Does any of this sound familiar? Alert readers will notice two important themes.

The Money

First, inflation. Or, more broadly, the Dutch Disease….commonly understood as the paradox that happens when good luck – finding billions in gold and silver that could be easily stolen – turns your economy into a sh*thole.

We usually think of gold as a protection against inflation. In this instance it was the cause of it. Typically, gold protects against inflation because it is so hard to get. You have to find it, and mine it…so it is very difficult to add to your money supply. And since gold is priced on the open market – like everything else – the quantity of it available as money tends to increase in line with everything else…at a rate more or less even with GDP growth. If supplies fall short, the price of the gold rises and miners are inspired to work harder. If there is ‘too much’ gold, on the other hand, the price of it tends to fall…and miners become unprofitable.

It was just a quirk of larceny and stroke of luck that the Spanish found so much above-ground gold and silver in the hands of the Aztec and Inca and were able to seize it and send it back to Spain. The adventurer, Pizarro, captured the Inca chief, Atahualpa, for example. The conquistador demanded a room full of gold for his release. The Inca dutifully filled the room…but Pizarro killed him anyway.

This increase in the Spanish money supply had one immediate effect – it made Spain rich – and one secondary effect…it caused inflation that made Spain poor.

Spain was still rich in July 1588, when the big fleet assembled and sailed north towards the English Channel. With 137 ships…including the great galleons and Atlantic-class caravels…it was intended to escort barges full of soldiers, horses, food and weapons from Flanders across the Channel for an invasion of England.

This was more or less the same naval force that had won the battle of Lepanto in 1571, a crucial battle of Christian Europe against the infidels of the Muslim world. And it was fought in the old-fashioned way…with sword, knife, musket and pistol. This was the battle the Armada of Philip II was prepared to fight again.

Which brings us to our second theme: the surprising, and largely unwelcome, twists of war.

The Guns

The surprise to the Invincible Armada was that the English didn’t fight like the Ottomans. Or the Romans or Greeks before them. The Battle of Gravelines was not just another infantry battle, based on floating platforms moved by galley slaves.

Unnoticed by most of the rest of the world, the English had made technical progress. Their ships were smaller, swifter, but with less firepower. They had already proven effective in the hands of English privateers – terrorists! – such as Sir Francis Drake. They came at the enemy from windward. This left their prey heeled over with their underbellies (below the waterline) and rudders exposed.

Rather than come alongside, throw over grappling hooks and try to board the ship, the English just tried to sink it (or, better yet…knock down its masts and destroy its rudder so it was helpless). In this, they were successful. First, they broke up the Spanish formation off Calais by sending fireships in among the moored vessels. The Spanish panicked, cut anchors and dispersed the fleet.

Then, at the Battle of Gravelines, the following day, the two fleets faced off. The Spanish executed the maneuver that they had used with such success at Lepanto. They fired their cannon once…and prepared to board the enemy ships. They could only fire once because their cannons were not set up to be reloaded – not in the heat of battle. The English, meanwhile, kept their distance…and continued to blast away. By the time they had run out of ammunition, they had damaged and/or sunk so many of the Armada vessels that the battle was effectively won.

The End

The Armada was vincible, after all. The wind, then, blew from the south, and gave the Spaniards an escape route…to the north. The surviving vessels, many in rough shape, tried to sail around Scotland and Ireland so as to rejoin the Iberian peninsula without encountering English warships. Alas, many ran aground in Ireland, where their ships were stripped and sailors were killed mercilessly. Others died from cold, hunger and disease. (They were not prepared for a long ocean voyage.) Few made it back to Spain.

And while war did its damage, the new money did even more. It set off a now-familiar pattern of actions and reactions. The conquistadores grabbed huge new quantities of gold and silver. This increase in the basic money supply caused prices in Spain and Portugal to rise 500% over the next 150 years. Rising prices – along with higher interest rates – forced the Spanish emperor to borrow more and more money just to keep his expensive empire in business. It also provided a substitute for real output on the Iberian peninsula. The Spanish and Portuguese had money. They could buy things; they didn’t need to make them. ‘Let others sweat,’ they may have said to each other. ‘We conquer.’

But by neglecting their own commerce and manufactures, the Spanish and Portuguese set themselves up for a Big Loss. By the time the Invincible Armada set sail, the flow of new money from the colonies was already on the decline. After the battle of Gravelines, Spanish power sank too…and never recovered. Then, the Spaniards could neither conquer nor sweat. War and inflation had condemned them to 4 centuries of marginal, sh*thole status.

Regards,

Bill Bonner