Philip II of Spain inherited what was considered Europe's most wealthy nation with no apparent economic problems. By 1598, Spain was essentially bankrupt and Philip III inherited a nation seemingly doomed to decline. How did these economic problems come about?
When Philip inherited the throne in 1556, to all people he appeared to be Europe's most wealthy monarch. However, behind the glamour of royal life, the economic troubles that were to plague Philip throughout his reign, were developing. His inheritance from his father, Charles V, hardly helped him.
When Philip inherited the lands given to him by his father, he inherited with it many economic problems. Charles left Philip with an empire that neither Spain's military or economy had acquired. In order to keep up with the demands placed on it by its empire, Spain had to try to upgrade itself into a world power quickly.
One of the main problems Philip faced with his empire was that each part was supposed to be self-financing and yet the majority of the time Castille ended up paying for much of Philip's policies. For example, the Italian states paid 400,000 ducats to the cost of the Battle of Lepanto which affected them most directly, but Castille paid 800,000 ducats.
Philip was forced heavily to rely on taxes in Spain and in 1561 the servicio tax was made a regular one, the excusado was introduced in 1567 and the crusada tax, together were known as the “Three Graces” reaching as much as 1.4 million ducats per year in the 1590's. However this was still not enough money and the Cortes had to be persuaded to grant the millones tax in 1590. The end result of all this taxation resulted in a tax increase of 430% between the years 1559 and 1598. This hit the Spanish peasantry hard, since the nobility were tax exempt. Between the same time the average wage only increased 80% and so the Spaniards witnessed a tax revolution as well as a price revolution.
During Philip's reign the price of goods increased fourfold had presented a serious problem for him. Initially the population growth in the 1530' to 1580's had proved beneficial with farmers doing more arable farming and ploughing the land. Yet the yield per acre did not increase and more food was available only because more land was being used. Also much of Spain was infertile land and the more fertile land near the Mediterranean Sea was not ploughed due to the fear of pirates. Plague in the 1560's and an increase in demand saw some of Spain import wheat and Philip's ineffectual attempts to reduce the price rise of 1557 meant that by the 1580's the whole of Spain was importing wheat and making do with bread substitutes.
In 1556 trade for Spain had great potential with good contacts in the Netherlands, Spain was able to export a lot of wool. However, soon Spain's wool trade was in decline and mid-way through Philip's reign saw a decline from 400,000 sacks of wool exported per year to 25,000. Despite the Spanish trade fairs which encouraged trade, Spain did not capitalise on its merits and banditry from Barcelona to Madrid often saw a loss in the American bullion being transported. Furthermore, when the Aragonese traded at Medina del Campo they were given no special privileges.
During the later stages of Philip's reign bullion began to pour in from America. In the first half of the C16 American bullion had numbered 200,000 ducats per year. In the 1560's this quadrupled and by the 1590's this amount had increased fourfold.
However, more often than not this money went straight to Philip's war efforts. In 1587 he was paying more than 100,000 men. Philip's wars did not bring the benefits they were expected. Firstly they were not self-financing. From 1567 to 1600, over 80 million ducats was sent to the Netherlands but also Philip's troops (in Italy, France and the Netherlands) spent their money there and those countries received the benefits of the soldiers pay.
Throughout Philip's reign there was also a massive shortage in industry; 80% of the arms used to suppress the Moricos revolt of 1568 were imported. The war with the Netherlands made the markets unstable and deterred potential investors who preferred to invest into Philip's debt buying bonds from him and gaining interest. Philip's selling of these juros (bonds) was costly since it provided immediate cash but at the price of mortgaging the future economy. Philip also sold land - allowing nobles to have jurisdiction over the alcabala tax which also proved costly in the long run.
Philip's weakness for grandiose projects also put Spain into serious economic difficulties. The Armada cost 10 million ducats and the building of the Escorial cost 5.5 million ducats despite Philip's reduction in household expenditure and reforms of his Council of Finance. Philip never raised enough cash to cover his expenditure and as a result had to declare state 'bankruptcies' in 1557, 1560, 1576 and 1596. As the reign went on Spain's economic problems grew worse and eventually Spain had amassed a debt of 85.5 million ducats whilst his average annual income was 9.7 million.
The economic problem of the lack of investment in industry was to cause serious problems later in Philip's reign, since many foreign competitors seized the monopoly Spain had once had in trade with America and provided them with cheaper prices. The successes of places such as Seville was not as it seemed at the time. It was, in fact, superficial prosperity and more an account of foreign investment than a mark of any real Spanish success. A further problem which faced Spain as well was the growing decline in the demand for Spanish gold, not only because of foreign competition but also because colonies in America and the Indies had evolved and were able to provide for themselves more and more.
The economic problems of Spain were also serious in relation to Philip's military; not just the effect of fighting wars on three fronts but also the lack of good local militia. Raids on Cadiz in 1587 and 1596 cost Philip an estimated 20 million ducats. The example of the Moriscos revolt had shown Philip how poor his militia was and he tripled expenditure on them and fortified many Spanish ports as well as building up his navy between 1560-1574 at a cost of 3.5 million ducats.
The reign of Philip was an economic disaster though it was seriously weakened from the start. He was unable to keep up with the demands of imperialism. In order to solve his financial problems and establish a firm foundation for future expenditure, Philip needed a prolonged period of peace in which he could reform his exchequer and invest in Spanish industry. He never achieved this, instead doing the reverse with fighting multiple wars and drawing investment away from industry by using bullion as loans thus allowing the Genoese financiers a strong hold over Philip's economy.
Although during Philip's reign Spain was at the height of its power and influence, its wealth was illusory and soon to fall into rapid decline. Philip's excessive expenditure had made the economic foundations of Spain very fragile. This was added to by other factors such as plagues, bad harvests and population growth. However, although the economic problems of Philip's reign were very serious in the words of John Lynch “disaster was not complete”. For the time being Spain could escape the consequences of its own folly through the money it earned in America. This money provided an injection into the dwindling life of its mother country.
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