QUESTION: Am I correct in saying that Spain collapsed because of debt and not hyperinflation?
ANSWER: YES! The history of Spain is a classic example of economic and fiscal mismanagement. Christopher Columbus was the greatest example of a politician today. He embarked upon a journey not actually knowing where he was going, and yet amazingly when he did get someplace, he did not know where he was. Then he returned not knowing where he had even been calling all the people Indians and he accomplished all of this using the taxpayer’s money in Spain.
Spain became the richest nation in Europe thanks to wanderings of Columbus. Nonetheless, the amazing Decline and Fall of Spain is perhaps the greatest lesson if someone wishes to write “How NOT to Manage Government For Dummies.” The Spanish became both the richest nation yet the greatest debtor, not that dissimilar from the United States and succeeded in ending up as the poorest.
However, Spain became a serial defaulter beginning in 1557 followed by 1570, 1575, 1596, 1607, and 1647 ending in a 3rd world status without hyperinflation. Their economic model was one of conquest and plunder, rather than developing domestic industry and a viable economy. The lesson to be learned from Spain is precisely what Adam Smith wrote in his 1776 Wealth of Nations:
“Like an improvident spendthrift, whose pressing occasions will not allow him to wait for the regular payment of his revenue, the state is in the constant practice of borrowing of its own factors and agents, and of paying interest for the use of its own money.”
Spain was far from a nation united. In 1469, Ferdinand II born in 1452, was heir to the throne of Aragon and he married princess Isabella of Castile in a political union. The marriage in October 1469 aided not merely the union of both states, but assisted Isabella to take the throne of Castile. Eventually, the two grew to love each other despite the political union. Ferdinand II was the son of John II. He came to the throne of Aragon upon his father’s death in 1479. This is when the Spanish Inquisition was established in 1478 and Roman Catholicism was the state religion outlawing all others. This led to the expulsion of the Jews in 1492.
For centuries in Europe, prosecutors had been extorting confessions and even Shakespeare noted in his play the Merchant of Venice that the practice of torture will make any man say anything. The European practice of trial by Inquisition became notorious. The Spanish Inquisition under Tomas de Torquemada (1420-1498), over the objections of the Pope, was used for the confiscation of wealth and personal hatred that served Spain – not the Vatican.
Torquemada usurped the Inquisition from the Church being an advisor to the Spanish Crown thereby benefiting the state making it the Spanish Inquisition. Torquemada convinced the Spanish Crown that the Moors and the Jews were threats to the state, and once he usurped the Inquisition, he quickly expanded its subject-matter jurisdiction far beyond heresy and apostasy, into witches, sorcery, sodomy, polygamy, blasphemy, usury, and a host of other offenses that he envisioned. This had the impact of causing the economy to decline as people hoarded cash and were afraid of showing too much of anything without political connections.
The expulsion of the Jews led them to flee to Amsterdam and as a result, this set in motion the decline and fall of Spain. The Jews developed insurance, banking, and the first stock exchange all in Holland and eventually it was the merger of the Dutch and English in 1689 that transfer that knowledge to Britain giving birth to the Bank of England in 1694 and the London Stock Exchange.
As Spain moved toward bankruptcy, they turned to much more aggressive confiscation of wealth using the law interwoven with religion. The more they turned against their own people for money, the more capital fled and hoarded. Spain thus collapsed in massive deflation.