Legacy of Spanish Dollar
This is a very interesting story about the ramifications of Spain’s New World discoveries of gold and silver from the 16th century.
Spain was using paid mercenaries then like all other European countries to wage wars. Mercenaries were paid in gold and silver as legal tender. The new world discoveries of metals led to rising inflation, especially in sky high mercenaries’ wages. All other European nations, therefore, were forced to reform their war funding mechanism except Spain. This eventually led to the rise of the citizen armies in those countries. Spain however continued waging wars (literally) using its old funding mechanism of looted new world metals. The lack of reform eventually led to the drain in Spain’s national resources and ultimate decline in power.
Are there any important lessons to be learned from this important 16th-century episode? I am not a professional economist, let alone a monetary economist. However, I have an instinctive aversion to using free money as a tool for building wealth. In Milton Freedman’s style, I believe that the main purpose for currency is to facilitate exchange transactions to maintain necessary economic activity including its growth. However, the real economic growth and development come from productivity improvement which in turn comes from hard but necessary fiscal reforms. There is no free lunch with free money. Instead, it causes more long-term harm than benefits, as was the case with Spanish silver in this story.
With fiat money, we have increasingly relied on monetary policies to address our economic problems instead of dealing with the hard choices in fiscal reforms. As a net result, we have continually increasing debt to GDP ratio and growing inequality without comparable productivity improvements to show for.
It’s a bit ironic that the US currency name was derived from the Spanish silver dollar.
Disclosure- I am personally being somewhat benefited with the rising stock market wealth and can’t ignore my own hypocrisy . 🤭