"The Problem with Phony Money…"
by Bill Bonner
"Yesterday, we visited the museum in the center of Salta. It is a museum of the history of the city and the province, set in the repurposed town hall in the main square. We had begun the day by going to mass in the old cathedral across the square - an ornate and opulent example of Spanish colonial architecture. The cathedral is magnificent. It is a classic cruciform building with barrel-vaulted ceilings and a large cupula in the center. Behind its altar, in the apse, is one of the most spectacular, over-the-top sanctuary adornments we have ever seen.
There is so much gold leaf over so many decorative elements, sparkling, shining, reflecting light in every direction; it takes your breath away.
‘Spain First’: Salta had never seemed like an attractive city. But yesterday, we were surprised. After mass, we stopped for coffee at one of the outdoor cafes on the plaza. The arcaded square - with the cathedral on one side and the town hall on the other - was splendid. In the center was a park with palm trees, green grass, and a huge granite monument. Couples necked on the benches and families with young children strolled by. Nearby, a blind accordion player gave us fine renditions of tango favorites. The weather was perfect.
The museum is large with collections focused on three periods. There is the pre-Hispanic period, with clay pots, arrowheads, and petroglyphs, some thousands of years old. Then there is a display of the colonial period followed by one of the War of Independence. It was the colonial period we found most interesting. In particular, one room showed us samples of money used in the colonies and explained a bit about how the economy of the era worked. We learned two things that may be of interest. First, phony money always causes problems. Second, ‘Spain First’ didn’t work well back then, either.
Motley crew: To put these insights in perspective… Francisco Pizarro and his army had butchered 2,000 Inca in the Battle of Cajamarca in 1532. But his motley crew of adventurers and desperados were soon at each other’s throats, jealous of each other’s booty, fame, or honors. Six years later, Pizarro defeated his former partner Diego de Almagro in battle, and had him garrotted and then beheaded. Later, Almagro’s followers assassinated Pizarro.
The best way to deal with this restless and murderous energy was to channel it into more exploration and conquest. There were more cities of gold to be found, they believed, and so they set out. In 1582, Salta was founded by Spanish conquistador Hernando de Lerma. The Inca had conquered this area of present-day Argentina about 100 years before the Spanish arrived.
Rather than reconquer it, the Spanish simply took over from the Inca, leaving the locals as vassals. Other conquistadores romped through what is today Peru, Bolivia, and Chile, leaving the Spanish crown with a vast empire in the New World. The immediate and obvious effects were beneficent. Longer-lasting and less obvious consequences were not. Especially when the Spanish made their Trumpish policy decisions.
Gold mine: The New World was literally a gold mine for the Spanish crown. Pizarro demanded the Inca fill a room about 22 feet long, 17 feet wide, and eight feet high with gold, and twice with silver, over several months as the price for letting the captive Inca emperor, Atahualpa, go free. The Inca dutifully filled up the room. But Pizarro had Atahualpa strangled anyway.
The first ships, riding low in the water with heavy cargoes of gold and silver, were not long in leaving for the royal treasury in Spain. Free money, like free love and free booze, is thrilling - at first. The headaches come later. The gold, arriving from the New World, greatly increased the money supply in the old one. Prices rose, slowly, all across Europe, with the general price level up 500% from 1550 to 1700.
In Spain, though, the damage was much greater. The free money made many of the richest and best-connected families richer still - without additional work or effort. Without producing anything, they were then able to buy goods and services. Economic historians claim that this led to a decline in Spain, leaving it the ‘poor man of Europe’ for the next 300 years.
As Spaniards became accustomed to the influx of new money, they needed more and more of it to keep up with rising prices. According to the museum in Salta, this led them to squeeze every ounce of gold, and later silver, from their colonies. So although Spain soon had too much money, Salta had too little. This forced the royal governors to operate an economy without real money. Instead, it declared base metals - copper, iron, etc. - as ‘money’. The short explanation alongside the display of colonial coinage describes the results: The phony money did not provide accurate and stable price information; it did not give people a way to preserve and protect their wealth; ‘it created much confusion and many errors.’
In short, it did what the credit-based US dollar has done since the 1970s. You could buy the average house in 1970 for about $25,000. Now, it’s about $200,000 - seven times more. Plus, the phony dollar has distorted the rest of the economy, created bubbles, misdirected investments, and wasted valuable time and resources. Nothing new there, in other words.
Inevitable consequences: The other thing that greatly retarded economic progress in the Spanish colonies was the ‘Spain First’ policy. Then, like now, the crown and the cronies thought they could gain an advantage by forcing people to trade on their terms. They wanted win-lose deals, with themselves as the winners. So they set up a monopoly on trade with the colonies - carefully controlled so that only Spain (and its insiders) could benefit. This, too, led to the inevitable consequences.
The museum commentary tells us that all trade had to be funnelled through specific ports, such as Buenos Aires, where it was approved and taxed by royal administrators. Shortages, delays, and higher prices on both sides of the trade resulted. It also helped create an entire industry whose purpose was to dodge the regulations. Foreign ships, foreign entrepreneurs, and foreign bankers were soon gaming this system, establishing their own system of contraband commerce. ‘Spain First’ slowed economic growth in the Spanish colonies. But it probably sped up the development of Britain’s hustling merchant fleet."