Spanish Money and Banking

A History

G. Tortella, J. García Ruiz, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137317131
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book incorporates advances in financial and monetary history and theory and shows the relevance of Spain's story to modern banking, monetary and development theory. It studies the early development of banking and monetary institutions and shows how financial and monetary mismanagement contributed to the decline of Spain in the early modern era

1

Introduction

1.1 Distinctive traits

The history of the Spanish banking and monetary system shows some distinctive traits, which make its study interesting. In the first place, it is a long history, and its evolution shows not a steady progression, but an alternation of booms and busts which somehow follow the ups and downs of the Spanish economy and politics. Other distinctive traits are the following:

1.1.1 Wealth of precious metals

Although Spain has traditionally enjoyed an abundance of mineral wealth, precious metals have not been among the most plentiful. Silver and gold were mined since Roman times at least, but the relative abundance of precious metals in medieval Spain was more due to trade with Africa, Eastern Europe, and the Middle East than to the output of local mines. This in fact was the case with the whole of Western Europe in the late Middle Ages: it produced less gold and silver than its expanding economy required, but its favourable trade balance with those areas brought in extra inflows of gold and silver (Vicens Vives, 1959, Chs. 18, 21, 22; Bautier, 1971, pp. 161–9; Vilar, 1972, pp. 61–82; Le Goff, 2010, pp. 139–42).

The discovery of America, as is well known, put into Spanish hands the fabulous wealth of Mexican and Peruvian gold and silver mines. For over a century the inflow of precious metals, especially silver, contributed to remarkable prosperity in Spain and vested enormous power in the hands of Spanish kings. Then the classical example of big power overreach occurred. The finances of the Spanish Crown were in trouble since the mid-sixteenth century (Carande, 1965), and provoked recurring suspensions of payments from the second half of that century on. This ruined Spanish bankers and in the end caused shortage of gold and silver in the country, which had seemed to own unlimited supplies of precious metals. All this brought about the decline of Spain in the seventeenth century, with its concomitant recourse to debasing the currency (the vellón episodes) and to repeated military defeats and political retrenchment.

The economy recovered gradually during the eighteenth century, but a monetary problem subsisted. Because silver was abundant in Spain its coins had a high tenor of this metal. In other words, silver was undervalued in the Spanish monetary system; as a consequence, the famous pesos or reales de a ocho were internationally appreciated and increasingly exported. This was helped by the fact that Spanish products were overpriced and the country tended to have an external commercial deficit. This also thwarted its industry. This monetary problem plagued Spain until the mid-nineteenth century, when a series of monetary reforms finally aligned Spain’s bimetallic (gold–silver) ratio with that of the rest of Europe.

1.1.2 Silver standard

As most European countries, Spain practised a bimetallic standard in the early modern period. Increased economic integration during the nineteenth century, as well as the vagaries of the bimetallic ratio, made most countries, following England, to adopt the gold standard. For a series of reasons we examine in Chapter 5, Spain chose a divergent path and adopted a silver standard. It thus became one of the few Western countries to use a different monetary system from the last decades of the nineteenth century until the Great Depression. The silver standard became in fact a fiduciary standard, as the price of silver fell throughout this period. The Spanish monetary authorities, however, showed restraint in the creation of money. In spite of this moderation, there is no doubt that its monetary system contributed to isolate the Spanish economy. The consequences of the silver-fiduciary standard were complex: while the isolation of the Spanish economy was on the whole bad, the non-subjection to the gold straitjacket and the economic isolation turned out to be very helpful at the height of the Great Depression.

1.1.3 Relatively early ‘central’ bank

It seems somewhat paradoxical that, in spite of the relative underdevelopment of its banking sector, Spain should have created rather early an official bank: the Bank of Saint Charles (Banco de San Carlos), founded in 1782. As most other banks of its nature, the Saint Charles was created to solve a pressing public financial problem. The relative inexperience of its founders and managers, however, and the mounting fiscal problems it was supposed to solve, soon put it in a situation of de facto suspension of payments. After several decades of virtual inaction, it was thoroughly reorganized and, through a series of reforms and readaptations (it was renamed as Spanish Bank of Saint Ferdinand or Banco Español de San Fernando), it slowly converged towards adopting the structure and functions of a central bank under the name Bank of Spain (Banco de España). This process was not concluded until late in the twentieth century.

1.1.4 Late development of a modern banking sector

The Bank of Saint Charles was the first joint-stock bank in Spanish history. It would take more than 60 years for another joint-stock bank to be established in Spain: the Banco de Isabel II, in 1844. In the following years some other joint-stock banks were created, most of them short-lived. From the mid-1850s, however, the number of joint-stock banks grew by leaps and bounds, to nearly 60. Unfortunately, this was an ephemeral episode, and the number of banks fell to less than 15 in the early 1870s. From then on the number of banks grew very slowly and their size was rather modest, so that the Bank of Spain could be seen figuratively as a giant among pigmies (and only few of them at that). A clear discontinuity took place after the 1898 defeat in the Spanish–American War. In a few years Spanish public finances were put in order and a series of new modern banks were created – some of them with capital repatriated from the former colonies. A similar discontinuity was taking place in the whole economy, which started to diversify and modernize at around these same years: basic industries developed, agriculture started a slow process of modernization, urbanization accelerated, and demographic transition took place. Economic growth and banking growth proceeded in a parallel fashion for most of the twentieth century.

1.1.5 Slow diffusion of banknotes

The diffusion of banknotes was also a very gradual affair. Although their circle of acceptance expanded somewhat during the booms of the early 1840s and 1860s, their diffusion became really widespread only in the last decades of the nineteenth century, so that one can say that it was the peseta and the Bank of Spain’s monopoly of issue that made banknotes popular.

1.1.6 ‘Mixed banking’ and ‘banking repression’

As in some other countries, these phenomena took place in the twentieth century. The big joint-stock banks that were established in the early decades practiced mixed banking with the active support of the Bank of Spain and the government. They actively promoted industrial firms and public utilities, acted like holding companies and controlled industrial groups, while at the same time dealing in commercial banking, attracting deposits, making short-term loans, and discounting. This went on roughly until the end of the Franco dictatorship. The banking crisis of the late 1970s and early 1980s put an end to this banking schema, which had been accompanied by active banking repression – tight government controls of interest rates, restriction of competition, government intervention in banks’ policies such as distribution of dividends, fields of investment, creation of branches, and so on – which the banking sector as a whole had accepted gladly during the dictatorship, as it permitted almost riskless profits. While it is true that banking repression was common in the world after the Great Depression, it was more intense and longer lived under Francoism than in most Western countries. The panorama changed radically in the last quarter of the century, with liberalization and industrial crisis, which were accompanied by mergers, divestment, and internationalization.

1.2 Banking and money in the medieval and early modern periods

The first banking transaction recorded in Spanish history is contained in the opening passages of the Poema del Cid, the epic poem written in the twelfth century narrating the exploits of the medieval Castilian hero in the mid- and late-eleventh century. The Poema contains many economic references: the Cid’s exploits have two aims, to clear his name and to become rich and powerful. The hero had incurred the king’s displeasure and had been ordered to leave Castile. His exploits are seen as an enterprise to restore his honour and riches as the best way to regain the king’s goodwill, and to return to Castile enjoying the esteem of the people. The first thing the hero needs is money to pay his men and to provide victuals, so he tells one of his lieutenants (Martín Antolínez, whose pay he promises to double) to contact two Jewish bankers (Rachel and Vidas) in the city of Burgos and ask them to lend him 600 marks; the Cid has nothing to offer as collateral, so he contrives a ruse whereby he deposits two boxes full of sand with the bankers telling them they are filled with gold jewellery from the Moorish kings’ tribute. Confiding in his word, the bankers lend him the 600 marks (one half in gold, one half in silver) and even pay Martín Antolínez, thirty marks (five per cent of the loaned sum) as the commission he has asked for. So this is how the Cid managed to get the capital necessary to finance his enterprise.

When after a series of conquests, which make the Cid rich and powerful as intended, he sends an emissary back to Castile to offer the king gifts, the bankers ask him for the money the Cid owes them. They claim they would even accept the return of the principal without interest, they are in such need. They are promised much more and they reply: ‘May God allow it! Otherwise we will leave Burgos and go to meet him’.

This is the last we hear about the loan and we do not know whether the money was in fact returned and whether some interest was paid. We do not even know whether the bankers opened the boxes and found out the Cid’s deceit. However, the story is full of subtle twists. The Cid was banished from Castile by the king because he had been accused of covertly keeping a share of the Moorish tribute the Castilian king sent him to collect in Seville. The accusation was false, and the proof is that he had no money to finance his enterprise. But he lied to the bankers, telling them that what was in the boxes was the part of the tribute he had retained, and he asked them to keep his secret. So he had to lie to the bankers, who believed him, because he had been honest with the king, who did not. It is paradoxical that the bankers trusted him when, by implication, he was telling them that he had deceived the king. So much for the proverbial Jewish mistrust and avarice.

Be it as it may, the poem gives us a lot of information about medieval banking in Spain. It was written around 1150, and refers to events which took place some 70 years before, so we are not dealing with Renaissance banking here, but with a much earlier period. It shows that there were well-known Jewish bankers in medieval Burgos, a commercial city whose wealth derived from the wool trade; bankers charged interest: when they were asked for the loan, Rachel and Vidas answered: ‘We must gain something in our dealings’, and were ready to renounce to it when they saw the loan in peril. It is interesting also that bankers paid commission to intermediaries who brought business to them. Martín Antolínez asked for the commission as a matter of fact: ‘I brought you good profit’. And of course loans on collateral appear to have been common: both lender and borrower seem to take depositing specie as collateral as a normal part of the transaction. Whether the story is literally true or not, it gives us a glimpse on banking in medieval Castile.

We find historical references to bankers later on in the Middle Ages, established in the main commercial centres of the two largest kingdoms, Castile and Aragón, such as Medina del Campo, Burgos, Valladolid, Segovia, Toledo, Madrid, Seville, Barcelona, Valencia, Mallorca, Saragossa, and so on. These earlier bankers were most commonly money changers: words such as cambio, canvi, campsor were used to designate them. In northern Castile they were especially active in trade fairs and in the pilgrimage road to Santiago de Compostela, a road which attracted travellers from all over Europe (Ruiz Martín, 1970, pp. 5–12; García de Valdeavellano, 1960, pp. 71, 136). In Aragón, where fairs were less important, those early bankers were involved in financing trade and commerce, largely maritime. Bills of exchange were used in fourteenth-century Barcelona, but banking was the object of state and municipal regulation since at least a century earlier (Usher, 1967, pp. 237–46). This city was also the cradle of one of the earliest municipal banks, the Taula del Canvi (1401), whose name, literally meaning ‘Table of Change’, is another clear indication of the main activity of bankers in medieval Spain. The Taula, however, was mainly devoted to attracting deposits and servicing the city’s financial needs. Its role has been decried for unfairly competing with private moneylenders (Vicens Vives, 1959, pp. 212–13; Usher, 1967, Ch. X). In spite of its shortcomings, the Taula was imitated in other Aragonese cities, such as Valencia, Gerona, and Saragossa, and had a remarkably long life.

The expulsion of the Jews from Spain in 1492 was a severe blow to the banking system. As already reflected in the Poema del Cid, Jews played a prominent role in the Spanish medieval credit system, as they did in many other European countries (Sánchez Albornoz, 1956, pp. 114, 190–227). The Jews’ absence could not be wholly filled by native Christians. As Carande (1965, p. 263) wrote, ‘Spanish merchants, largely due to their own shortcomings, were subject to the competition of foreigners [...] and saw themselves displaced by them in their own country’; another – Christian – minority, the Genoese, stepped into the breach. This was the case especially in Seville, the city whose trade with the Americas (and silver inflow therefrom) turned it into a great commercial centre during the reign of Charles V (1516–56). In the long run, however, the Seville bankers’ close links with the chaotic finances of the Spanish Crown drove many of them to bankruptcy or closure, and prevented the Spanish banking system from developing as those in northern Europe did. In early-sixteenth-century Seville, nonetheless, bankers (mostly converted Jews and Genoese) flourished. They financed the large flows of trade which went through its harbour, usually combining the normal financial activity (deposit taking, giro payment, lending to public and private borrowers) with money changing and trading in their own name. They also lent to the Crown, whose political and military enterprises required increasing amounts of financial resources. The most common instrument in these operations was the asiento, a contract to supply a specified amount of merchandise (most commonly, specie) at some predetermined location, typically, in Italy or the Low Countries. These deals were extremely profitable, and attracted financiers from all over Europe. The risks involved, however, were high and increasing. The asientos were usually payable against the silver shipments arriving from the Americas, and ‘any delay in the arrival of the silver fleets caused such tightness in the money market that the solvency of the bankers was severely threatened’ (Pyke, 1966, p. 87).

The monetary system – the set of monetary units – which Spain used through the early modern period well into the nineteenth century was created by Ferdinand and Isabella, the Catholic Monarchs, at the close of the Middle Ages. As in many other matters, in those monetary, the Catholic Monarchs marked the transition from the medieval to the early modern era in Spain. They put an end to political and economic confusion and set the basis of the national state. Not everything they did was successful (witness the Inquisition, mercantilism, and the imposition of religious and cultural uniformity), but many of the things they did left a deep imprint – for better or worse.

The Catholic Monarchs found a chaotic monetary situation upon their joint assumption of the crown, ‘one of the most deplorable our history registers’, according to the author of an official history (Surrá, 1862, p. 31). Their monetary reform of 1497 established a trimetallic system whose main units were: the excelente, a gold coin (also called ducat, escudo, or doblón); the real de plata, a silver coin (later known as real de a ocho, peso duro, thaler, or dollar) and the blanca, a vellón coin. (Vellón is a confusing word; it has two meanings: one, tuft of hair or fleece of wool; two, an alloy of copper and silver. The first meaning derives from vello, which means body hair. The second from the French billon, meaning this alloy.) There was a medieval relic, however, not even the Catholic monarchs could do away with, and this was the maravedí. Originally a gold coin used by the Almoravids, who invaded the Peninsula from Africa in the eleventh century, the maravedí underwent a series of metamorphoses until finally it became a pure unit of account. The Catholic monarchs used it to establish the equivalences between their three monetary units: the excelente was worth 375 mrs, the real de plata 34 mrs, and the blanca 0.5 mrs. These coins changed names, but they remained the basic monetary units for three and a half centuries. Only the blanca disappeared in the long run and was confusingly replaced by the real de vellón, a new unit created by Charles II in 1686.

Although the Catholic Monarchs probably hoped that their trimetallic system should be in use throughout all their kingdoms, in fact it worked almost exclusively in Castile; the Aragonese kingdoms maintained a silver system directly derived from the Carolingian division of the libra (pound) into 20 sueldos (solidus, shilling) or 240 dineros (denarius, penny). These monetary systems converged slowly due mostly to Gresham’s Law, which operated at full speed in the seventeenth century. Navarra, although annexed by Ferdinand, originally King of Aragón, adopted the Castilian system early in the sixteenth century. The gold–silver relation established by the Catholic Monarchs was of 10.11 (that is, one unit of gold was equivalent to 10.11 units of silver). No great changes took place in the Spanish monetary system during the sixteenth century, except for the substantial inflow of silver, and, to a lesser extent, gold, from the Americas, especially during the second half, that is, the reign of Philip II (1556–98). This entailed a gradual modification of the official gold–silver ratio, which was about 12.1 by 1600 (Hamilton, 1948, p. 83). Spain exported a large amount of the bullion it imported in order to finance her European wars and her commercial deficit. In spite of this and of the three state bankruptcies under Philip II, however, the monetary system was not gre...

Table of contents

• Cover
• Title
• 1  Introduction
• 2  Money and Banking in the Twilight of Empire
• 3  Banking in War and Peace
• 4  Banks and Railways: From Boom to Bust
• 5  The Peseta and the Bank of Spain
• 6  A Renewed Banking System
• 7  From Dictatorship to Republic: Spain and the Great Depression
• 8  Banking under Franco
• 9  Transition to Democracy, Oil Crisis, and Further Bank Reforms
• 10  The Challenge of the European Market
• 11  The Bursting of the Bubble: Savings Banks, a Death Foretold
• 12  Conclusions
• Chronology
• Data Appendices
• Bibliography
• Index