concepts

I’m currently reading A History of the World by Andrew Marr (it’s a good read so far). There’s an interesting chapter about the consequence of Spain gaining a large quantity of gold and silver from the Incas during the Sixteenth Century. Almost overnight, Spain became very rich taking home unprecedented quantities of gold and silver. These were stolen from the Incas and the mines that the Spanish came to control.

The gold was used by the Spanish monarchy to pay off its debts and also to fund its ‘religious’ wars. Therefore, gold started to trickle out to other European countries who benefited from the Spanish wealth.

The Spanish also were able to purchase an unprecedented quantity of imported goods from around the world – including Europe and China.

Impact of inflow of Gold on Spanish economy

For me, the most interesting thing is the theory that the sudden influx of gold actually contributed to Spain’s relative decline and low living standards in future centuries. How could an influx of gold cause this?

One theory suggests that – because the Spanish had so much gold, they could easily buy commodities from other countries without producing them itself. Because consumer goods could easily be bought, there was little incentive to produce goods and undertake the necessary investment and develop the technology to produce goods. Therefore, it is argued this ‘easy wealth’ was a factor in limiting economic development.

In macro terms, we could see Sixteenth-Century Spain has a country with a very large trade deficit – financed by capital inflows (stolen gold). But, this is an unbalanced economy – consumption enables high current living standards, but when the gold dried up, Spanish business and industry had been left behind other European nations. Nations without a windfall of gold had a much greater drive to create wealth rather than just consume it.

Therefore, the sudden inflow of gold was not good for the long-term development of the Spanish economy. But, partly explains why the Spanish economy came to lag behind the rest of Europe until the post-war period.

Great Britain, by contrast, arguably, gained just about the right amount of gold. National hero Francis Drake was really just a pirate. He attacked Spanish ships and took some of the gold. (It is estimated about 10% of Spanish gold was lost to piracy). Francis Drake gave a good portion of his stolen gold to Queen Elizabeth I – who used this windfall to pay off the UK national debt. (so, I suppose piracy is one way to deal with a national debt).

However, Great Britain never gained enough of the Latin American gold to become just a nation of consumers. The prospect of gold actually motivated a rapid expansion in naval technology. It was around this time, that Britain’s navy and shipbuilding capacity increased rapidly. This sowed the seeds of Britain’s future Empire. But, it was an Empire which was at least partly based on industry and production. We may have exploited natural resources in countries like India, but we also had the incentive to manufacture goods – and this motivation contributed to the industrial revolution.

It is an irony of history that had Great Britain received a huge windfall of gold, the industrial revolution may not have started in Great Britain – because the incentive for business to take risks and develop industry would not have been as strong. Therefore, be careful what you wish for!

Read more