Five for silver, Six for gold.... Could somebody tell me where all my fucking money's gone please?

("Yes Cardinal, this truly is an intelligent use of the riches that have given us a head start on the path to a modern technological economy! Would you like me to kill some Jews now?")

A wise man once said that history repeats itself, the first time as tragedy, the second time as farce. Another wise man corrected him; history repeats itself, he said, the first time as tragedy, the second time as tragedy.

In the centuries following the discovery of South America by the intrepid Catalan explorer Joan Colom (joke), Spain became the nexus for the world trade in silver and gold. Gold and silver from Mexico, and later silver from Bolivia flowed into Spain, where it was converted into musket-balls, mercenaries and manufactured and luxury goods produced elsewhere. It was also used to fund not one, but TWO classes of workshy idlers, the religiosos (priests, nuns, monks and other undesirables), and the hidalgos (people whose noble standing prevented them from partaking in any economically productive activity whatsoever) .Of these two groups, the clergy’s influence was the more damaging; the hidalgos were useless mouths, but the clergy ably drove out and hunted down the country’s most skilled administrators, the Jews and conversos (Jewish converts to Christianity, of varying degrees of sincerity). As if that wasn’t enough, the regime also persecuted and eventually expelled the Moriscos, experienced small farmers and peasants of Muslim descent, leaving vast productive areas of Murcia and Valencia suffering from acute skilled labour shortages.

So the precious metals left Spain and passed through Amsterdam, Lyon and London on their way to China, goods moved westwards along the chain, and silver moved eastwards. The merchants of Holland, England and Germany used their profits from this trade to invest in production of goods which could be exported to the Spanish empire (legally or illegally) in exchange for silver which could be traded eastwards for luxuries that could once again be traded to Spain, or sold in the domestic market.

The Spanish paid more in silver for less return than anybody else in the chain, and had to run an empire on the proceeds. Spain’s late 17th century decline was built on this economic problem, its social system prevented it from remedying the problem through trading or more extensive manufacture. South America was awash with silver, but the state was constantly bankrupt. It was a country that produced nothing and ate up imports, it was not just a case of a government living beyond its means, it was a closed social system that sucked in little more that it could repay over a long period of time until its economy was destroyed. While Spain’s Dutch and English creditors squeezed her dry, they used their profits to trade further afield, and begin to industrialise their countries. Eventually , Spain’s status as a great power disappeared, by the time of the Treaty of Utrecht , Spain, despite its vast empire, was an also-ran in European power games. Spain became an underdeveloped cultural and economic backwater.

This is the situation the US, UK and Spanish economies are facing today: they have reached this point in an analogous process, but much faster. Spain continued functioning as an economic basket-case for 300 years, it has taken only 30 years of financial deregulation to bankrupt us. We even have the vast unproductive classes, but in a hilarious twist, they are working harder than ever before.

But how did this crazy situation come about? Stay tuned to the blog that reckons it has all the answers.....

Next.... Credit Card Keynesianism- Oooooh, what a carve up!