State Finance in History


On the left: the cradle of civilization. (One can still see today why).

On the right:  regime switches when agents have different preferences about a regime, demonstrate if their expectation of a switch is sufficiently high compared to their individual cost of demonstration and rationally infer other's preference from the mass of demonstrators in each period. "Demonstration" may be replaced by "investment" in a mcro-economic model. Regime switches occur as surprises but seem "obvious" ex post. (See how the probability distribution sharpens after a switch). The expected payoff of demonstration with a cost c when all agents  with a cost less than c demonstrate is pictured on the right. Red under perfect information, blue under imperfect information. (See "Coordinating Regime Switches").

Political conflict on taxation between the Crown and the Cortes

More details on the page on "Castile".

This work seems to enrage a couple of economic historians who claim to have read historical documents when in fact they have not. You don't need to be an expert:  their flagship contract is here, original document, transcription and translation. We write for those who are prepared to make the effort toward a real understanding of the finances of Philip II in his historical context. We trust their judgement. See the page "Castile". Here is a first answer:

  • "Answer to 'Duplications by Drelichman and Voth' (with Carlos Álvarez-Nogal), September 5, 2015 (pdf). (accepted for publication by the Economic History Review).

Drelichman and Voth have written a note (September 2015) as a reply to our "Maluenda paper" (see the page "Castile") which, to be polite, casts some doubt on their archival methods. Their note also implicates a top journal in economic history. There will be an answer, at some point, in particular on what is not written in the note.

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.

Local currency

The sardex: in the FT (September 19, 2015)

A very good illustration of the model "Saving Traps", ST (see the page "Articles"). There have been many examples before, e.g., the Capital Hill babysitting coop (see Sweeney and Sweeney in "Saving Traps"). The sardex works, to some extent, like the endogenous money in ST. It would be the same if agents traded only in sardex. The difference is that they trade both in the sardex network and outside the network with the rest of the economy, in euros. The aggregate quantity of Sardex is zero. The critical feature is that each agent can have a credit. Assume, for example, that all agents are identical in size (only different goods) and that the total quantity of credit is M. The model is isomorphic to a Sardex with no credit and a total supply of Sardex equal to M.

What is the superiority over the Euro? In my view, the critical feature is the local monitoring of the credit. The authors emphasize the personal relations in setting the network. There authors state that the problem of defaults is minor and that they rely on courts only as a last resort. Practically, that means that human relations are more efficient in enforcing credit than "anonymous" banks. Since the Sardex is used only for local transactions, people may also consider a default on the credit balance as an act of disloyalty against the local community. It would be interesting to know more about cases of defaults. Also, the organizers can increase the total credit to the local economy and run a local monetary policy. There is probably an optimal size for such a local currency: more members mean more trading possibilities (externality), but possibly less credit monitoring and enforcement.