Thursday 25 April 2013

How the City ruined the middle classes

Spainfloridatreasure2012220The riches which should have brought wealth have brought poverty.’

That is what the Spanish economist González de Cellerigo wrote around 1600, and it is worryingly relevant to our own time. Cellerigo was a lawyer in the chancery who worked in Valladolid, the landlocked city where Christopher Columbus died. We don’t know much about him apart from that, except through his writings – mainly the Memorials he published that year, and especially the one with the least snappy title, About the policy restoration necessary and useful to the republic of Spain.

Cellerigo’s thinking was relevant to the middle classes then. But it is also relevant to our own, because he was one of a handful of economists over the previous four decades who grasped what happens when huge amounts of money flood into a nation, as unimaginable sums had flooded into Spain – gold and, above all silver, in treasure ships from the New World.

The Spanish monarchs had agonized about why money was losing its value, prosecuting, occasionally executing, people for causing inflation, and now they knew: too much money chasing too few goods causes the value of money to fall.

The staggering influx of wealth into Spain during the previous century had operated rather as the cascade of wealth into the City of London has operated in our own time. Instead of financing production, it was frittered away on interest payments for debt, buying luxury goods from abroad, raising prices and, in the case of sixteenth-century Spain, on the purchase of Eastern luxuries from the Portuguese empire.

By 1660, the amount of silver in Europe had tripled. Spanish money was worth a third of its value in 1505, and most of the massive injection of wealth which had been siphoned off by the Spanish kings had been wasted servicing debts incurred for their incessant European wars.

Bankers profited. The Spanish crown did not. Financial services grew ever more complex. Worse, Spain soon forgot how to make things on its own behalf, believing that the import of money itself was sufficient for its economy. As much as 80 per cent of the goods shipped from Spain to its new colonies had been imported from elsewhere in Europe.

The business of money for its own sake, the sophistication of financial services, tends to price other productive businesses out of existence, and that was the ruinous effect it had on the Spanish economy. Gold – and therefore money – became more important than the wealth it represented. Of course it drove out productive wealth: it seemed more important than that. Also, the more precious metal there was, the more bankers could extend their credit. The more interest-bearing debt there was in circulation, the more power went to bankers and the more prices rose.

This was the Spanish tragedy in a nutshell. A tiny elite emerged to manage this extraordinary influx of wealth into Spain, which paradoxically destroyed the nation’s productive capacity.

What González de Cellerigo realized, and his predecessors did not, was that this was no accident. The discovery of the wealth of the New World had destroyed the power of the Spanish empire, not through some kind of mistake, but by virtue of economic laws.

Cellerigo didn’t beat around the bush. He articulated what few had really understood before. Spain would have been better off without the Americas. The influx of gold had not been mishandled; it was a disaster in itself. And here is why:

"Our commonwealth has come to be an extreme contrast of rich and poor, and there is no means of adjusting them one to another. Our condition is one where there are rich who loll at ease or poor who beg, and we lack people of the middle sort, whom neither wealth nor poverty prevents from pursuing the rightful kind of business enjoined by natural law.” 

Cellerigo’s diagnosis was that the huge influx of bullion had driven out the middle classes, leaving instead a desperate upper middle class of hidalgos who were snobbish about work (in fact were forbidden to do anything wealth-creating) and looked desperately to well-paid sinecures in the burgeoning bureaucracies, and a desperate lower middle class who had lapsed into poverty and dependence.

The Renaissance Spanish economy was constructed to encourage people to buy government bonds, or juros, rather than investing in business. As in our own time, the economy provided a far better return for people investing in money itself rather than productivity.

The fate of the Spanish at their zenith offers us a terrible glimpse of our own future, and still we have not developed the kind of understanding that Cellerigo did from his office in Valladolid, watching the extraordinary decline of Spain, not despite the influx of wealth but because of it.

Our politicians have not yet seen that the measures taken to make speculation the central purpose of the UK economy – the miscalculations of Big Bang and all that followed – are creating the same small elite and pushing the middle classes slowly into poverty and dependence.

That is what will happen, first for our own generation retiring with our miserable apologies for pensions, and then in the next generation – unable to buy homes and condemned to eking out an existence, in jobs we do not want, just to pay the rent. Unless we learn Cellerigo’s lessons ourselves, in our own time, the decline of Spain is likely to herald our future.

And that, plus a rather more detailed argument about the peculiar way our politics developed over the past three decades, is the key message of my new book Broke: Who Killed the Middle Classes? (published today).

 Let me know what you think!


pablopatito said...

Very interesting. Do you think the UK would have been better off if it hadn't discovered black gold in the North Sea?

David Boyle said...

Definitely. North Sea Oil turned the pound into a petrocurrency and destroyed what remained of British manufacturing because it was so difficult to export with a high pound. Perhaps if the proceeds had been invested in modernising manufacturing it wouldn't have been such a disaster, but they weren't.

Anonymous said...

An excellent analysis. But then we were warned, were we not, by the myth of King Midas? I shall put your book on my 'to buy' list.