The Most Important City in the World
Written by Paul Siluch
October 6th, 2023
Seville, Spain was once the most important city in Spain. In Europe, as well. Possibly even the world for a time. We visited for a very brief week last month and I was struck by an economic parallel between what happened to Seville and our modern predicament.
What made Seville so important?
From the year 1500 through 1600, all imports of Spanish silver and gold came through the port of Seville. This was the Golden Age of Spain when newfound riches looted from the Incas and Aztecs poured in, all of it funneled through the port of Seville by royal decree. Spain’s power grew with every galleon-load of bullion, and it used this money to fund further exploration by Columbus, Magellan, and many others. In time, every country bent the knee to Spanish wealth. And it all arrived through Seville.
Right Person, Right Time
Since the year 711, the Muslims of North Africa had ruled Spain. By 1492, Catholic armies under King Ferdinand and Queen Isabella finally drove them out for good. This was also the year Queen Isabella agreed to fund a small expedition by a chap named Christopher Columbus to sail west to find a shorter route to India.
As everyone knows, he stumbled upon a new world we eventually called America. Columbus visited three more times before he died and, to the end, thought it was India or Japan.
Like most explorers of his day, Columbus hoped to find gold. He certainly found gold, even though the bigger impact over time was the importation of New World crops such as corn, potatoes, tomatoes, tobacco, sweet potatoes, and chili peppers. These were curiosities back then. Nothing mattered but a hull full of gold coins and booty.
The gold of the royals and on the temples went back to Spain first. What followed was something in much greater abundance: silver. After torture to learn the secret location, the conquistadors discovered a mountain in Bolivia known as Cerro de Potosi, which was so rich, it was said to be made of pure silver. Some of the richest silver mines that have ever existed were found in Peru and Bolivia.
This is a solid silver urn made to hold communion wafers, weighing 1,000 pounds. It is displayed in the Cathedral of Seville today.
Now picture a ship carrying 50 of these - 25 tons of silver bullion - from the New World to the Old.
Month after month, year after year, for a century, silver poured into Seville. From there, it gushed into the Spanish economy in a shimmering sluice.
The amount of treasure that didn’t make it to Spain tells us a lot about how much did make it. A total of 681 ships were captured, sunk, or lost over four hundred years (Spain’s Ministry of Culture). Tens of thousands sailed successfully, delivering their precious cargoes to the wharves of Seville.
To gain an idea of the wealth aboard each ship, here are the two largest shipwrecks:
- The Nuestra Senora De Atocha sank off the Florida Keys with a cargo of silver and emeralds estimated to be worth around $400 million today. Its 24 tons of silver and jewels earned it the title of the most valuable shipwreck in the world by Guinness in 2014.
- The giant San Jose galleon could be the biggest of them all. It was sunk by British navy ships in 1708 and went down with 200 tons of gold, silver, and emeralds estimated to be worth up to $17 billion today. The ship lies somewhere in very deep waters and recovery has been stalemated by contested ownership rights between Spain and Colombia.
1715 Fleet - Queens Jewels LLC/Reuters
Corrupt officials skimmed their take, pirates captured a few galleons, and storms sank many more. After that, the Spanish crown took twenty percent of all silver that arrived in Spain. Close to 20,000 tons of silver was delivered through Seville from 1500 to 1600.
That’s 40,000 of the urns shown above.
The Spanish dollar - the famous ‘piece of eight’ - became so prolific and so widely used, it was adopted as the first world currency.
Seville, We Have a Problem
Silver made Spain powerful, allowing King Ferdinand and Queen Isabella to do almost anything they pleased. They built castles, palaces, churches, funded more expeditions, and started wars. Spain became the richest country in Europe as Spanish silver hit Europe like a firehose.
The Spanish galleons doubled the amount of gold in circulation in Europe. Silver in circulation tripled from 1500 to 1650. It wasn’t money-printing like we know today, but the effect was the same.
The flood of money hooked Spain like an addict. Royalty spent its riches freely as soon as the ships arrived, then spent riches yet to arrive. The government defaulted several times when shipments of bullion sank before the treasury could pay back lenders.
Catedral de Sevilla
We like to say in our business that professional advice makes a difference. Spain should have listened. As the silver poured in, Spain could have used bankers and lenders who understood complex terms and interest rates. How to invest and lend, whom to lend to and who not to.
Unfortunately, the Spanish Inquisition sent 150,000 Jews – Europe’s best and most experienced moneylenders - and many learned Muslims - fleeing to other countries. Those they needed most, they chased away.
The Spanish king granted tax exemptions to thousands of newly appointed nobles they called Hidalgos, allowing thousands of men to live lives of leisure. In other words, they did not need to work.
The labour shortage that still lingered from the Black Death a hundred years before, coupled with too many Hidalgos, meant wages went up while exports went down. In desperation, Spain pushed the Bolivian and Peruvian mines to deliver more and more even as they depleted. Successive kings expanded the Spanish empire until it was too large to manage and began to collapse. The Spanish state eventually had to spend 65% of royal revenue to pay off debt (Spain's Road to Empire: The Makings of a World Power, Henry Kamen).
“Spain owned the cow, but others drank the milk.”
- Henry Kamen
Inflation is a bit like sex. Every generation thinks they invented it. The 1940s generation after World War II experienced inflation. The Baby Boomers had their own bout of rising prices in the 1970s. But both of these were short-lived.
The world has a similar problem today. Prices are going up just about everywhere. Canada and the U.S. about 4% a year, the UK about 7%. Turkey’s inflation is 59%. Ouch.
We know what caused it: money printing. The solution to the pandemic shutdown was forcing people to stay home and sending out money that we borrowed or printed.
And what happened? Well, what happened is what always happens when more money chases fewer goods: inflation.
“Too much of a good thing is marvelous.”
- Mae West
Prices in Spain rose between 400% and 600% from 1500 to 1600. Wages moved in lockstep. Spread over a hundred years, it doesn’t sound like much, but after centuries when the cost of things and wages never moved, it was a true monetary shock. Higher costs in Spain sent industries fleeing to lower-cost jurisdictions like Britain and Holland.
More money can be a good thing, stimulating purchases and increasing trade. Too much money can addict a country and make it sick.
This is exactly what happened to Spain and it is happening here today. Spain discovered virtually free and endless silver, and today we have discovered the digital printing press. The US continues to print and spend like the Spanish of the 16th century. Labour shortages, rising prices, and foreign wars are happening today just as they happened then.
The Bill Comes Due
The bills came due for Spain, when 65% of its revenues were spent servicing its debts. We are not at that point yet, but we are on a similar path.
- Canada now spends 7% of revenues on interest. This is expected to rise to 9% over the next few years (Department of Finance). We hit 30% in 1995 when we were deemed “an honorary member of the Third World” by the Wall Street Journal.
- The U.S. spends 9% of revenues on interest costs today and is projected to spend 18% by 2032 (source: CBO).
Today’s spending on interest is far below Spain‘s 65% interest rate debacle. But we got to this point very quickly and now interest rates are making it worse.
Despite all the wealth that continued to flow into Spain after 1600, its debts and the over expansion of its empire and armies caused a slow collapse. Influence shifted to England and France as those nations used technology in textiles and coal to grow. They were more efficient, more productive, and had less debt.
The good news?
Inflation can be tamed. We did it in the 1970s, and empires as far back as the Romans survived bouts of inflation two thousand years ago. It requires reduced spending, efficient and fair taxation (usually after a period of high taxation to pay down the debt), and freer trade. Canada’s recovery after 1995 was seen as draconian at the time, but it paved the way to a far better balance sheet, lower taxes, and more benefits to citizens.
Spain did many of these things after its decline and by the 1700s had achieved a revival, of sorts. Its empire was never the same (it lost Spanish North America and most of its South American possessions revolted), but it did achieve stability. It took bold leadership to do it.
“Fear is the mind-killer.”
― Frank Herbert , Dune
Back to the world of 2023…
Canada’s index has fallen 5% in September and the U.S. S&P 500 is down 7% since August. There is a great deal of pessimism in the air, thanks to all the usual suspects: rising interest rates, the ongoing war in Ukraine, and fears of a federal government shutdown in America.
October is often when events come to a head, with markets hitting bottom. It also marks the end of the seasonally weak summer period, as shown below. This graph – a composite of 1,4, and 10-year historic cycles – typically makes its low in November with most of the damage done by early October.
Outside of technology and energy stocks, most of the market today is down sharply and deeply oversold. It is not pleasant to look at statements at this time of year, something we should be used to, but we never are.
A year-end rally then typically occurs.
