Quick Take: Why Economic History is Mostly Bullshit

State bankruptcies and sovereign defaults have been used as propaganda tools, not as meaningful datapoints

The most consistently-deployed lie in the Black Legend toolkit about the Spanish Empire is that King Philip II, ruler of that empire at the height of its power, declared bankruptcy several times.

Just like the claims that Donald Trump once said all Mexicans are rapists — he did not say that — the one about Philip II has a clear ideological motivation. And, just like all the most successful lies, it's widely believed even by people who find it inconvenient and/or offensive. And it’s all over Google:

I’m going to explain this specific case a bit more, so you can see why most of the Google results on this subject are wrong, and what that means, generally speaking, for economic history.

Countries don’t actually declare “bankruptcy” because bankruptcy is a very specific system, developed in modern capitalism, to deal with debtor claims on a person or company. Various countries have different bankruptcy arrangements with their own courts, laws, etc. The US, for example, has Chapter 11 of the Bankruptcy Code, often invoked, designed to allow for a company reorganization under bankruptcy laws.

What countries do is find themselves in default, that is, non-payment of debts due, most often referring to an inability to disburse interest payments before a previously agreed deadline. Many countries have become experts in these defaults. Argentina is a superstar, for example. There are multiple lists of sovereign defaults, and Wikipedia has one.

The problem here is that all those lists are bogus because the concept of sovereign default didn't exist until the 20th century. Even its roots only go back to the 18th century, when the British government began borrowing from financiers in the City of London by issuing bonds. Her Majesty's government didn't do this out of preference but out of cost: London, the world's only financial center at the time, had a large concentration of capital from merchants and various investors and thus could tap these financiers to lend money at lower interest rates than, for example, the King of France received from bankers.

This resulted in the massive issuance of bonds. And these issues were extraordinarily efficient because the United Kingdom ended up winning the Napoleonic Wars and paying off the principal and interest on the debt. Many historians have convincingly argued that the low interest rates on British government borrowing allowed by the massive purchase of bonds by the likes of the Rothschild family decisively contributed to British victory.

However, this also tells us is that any attempt to apply the concept of sovereign default to earlier times is ridiculous. The Spanish empire of the 16th and 17th centuries, like Capetian and Valois France in the 14th and 15th centuries, financed itself by borrowing from Italian (often Lombard) and German bankers.

These loans were repaid when possible, and when they couldn't be repaid (almost always because of what came to be known in finance as “force majeure,” meaning events outside of the borrowers’ control, like having your silver fleets sunk by a storm of taken by the piratical, rogue English state) they were renegotiated, often to the advantage of the king, who — unlike the bankers — had troops armed to the teeth.

Philip II never declared bankruptcy, and he never defaulted on any terms agreed with the buyers of Spanish bonds, because Spain didn’t issue bonds: he merely renegotiated the terms of the loans (to the mutual satisfaction of both parties) like a lot of people have done since the dawn of time…

…and you, reader, have done every time you renewed your adjustable mortgage or consumer loan. Felipe II did it multiple times, and he always did it to the benefit of the Spanish crown, which explains why Spain didn’t collapse under his rule but reached the zenith of its global power.

This is not a new interpretation of mine, but rather the view of numerous historians who have written on the subject, for example in this academic study and this one.

As I have explained to many people in many continents over many types of drinks (remember, I worked for both the Wall Street Journal and Bloomberg News: this is the kind of thing financial journalists bicker about when tipsy), applying the concept of sovereign default to a 16th century state is an anachronism. It’s the same sort of anachronism as saying that Spartacus was the first Communist or that liberals and conservatives have always existed throughout history.

Quick Take: Bipartisan Systems Are the Bane of Human History

In fact, if you stop and think about it, the idea that Philip II had to pay interest to German bankers to satisfy the idea of ​​justice of 21st century economists is the reductio ad absurdum of liberalism.

The problem is that these are the kind of systematic anachronisms and shoddy interpretations that economic history is made up of. The lack of data when we speak about things such as like-for-like interest rates in 2nd century Rome or the 10th century Chola Empire is one thing, and is a serious issue indeed; but the attempt to make historic situations spanning millennia conform with the narrow definitions used by modern economists and politicians really is what makes economic history often insufferable.

Then again, it’s worth pointing out that even in modern times the issue of deciding who is in default and who isn’t has been politicized to the point that modern commentary on the subject often is often worthless too.

Take Argentina and other Latin American republics. At the beginning of the 19th century, most became independent from Spain and immediately began their international journey by defaulting on loans they had received from their British patrons in the full knowledge that default would be almost certain and would let said republics forever indebted to the British Empire. Default was, indeed, the intent of the lender, since it almost always activated covenants (clauses) that were more lucrative for the lender than prompt repayment, such as trading rights. Still, this left the Latins with a very Protestant scarlet letter that they have never been able to remove.

The rules on who gets the scarlet letter are rather flexible. Default purists are full of talk about how important it is to have a long track record of seriousness and compliance with your debtors; and that's why they prefer to forget the two times the United Kingdom defaulted on its debt in the 20th century, something you can never mention in polite company; both cases had zero to negligible consequences for the United Kingdom's international credit.

That’s possibly the reason why Russia’s economy hasn’t suffered any consequences from the 2022 default Western countries of NATO triggered by making it technically unable to service euro-denominated payments. The “default,” just like Spain's "bankruptcies" in the 16th century, has had zero effect on Russia’s borrowing capacity. The same applies (with caveats) even to Argentine, the poster child for true blue serial defaulters! It’s regularly regained lost access to markets soon after defaults, for example under the presidency of Nestor Kirchner (2003-2007) following the “Corralito” collapse of 2001.

Too many economists develop “laws” on the basis of these shoddy constructions. This explains why

Curtis Yarvin

has compared modern economics to Newtonian physics, to the detriment of modern economists. If you know anything about particle physics you will understand why:

'Most bad economic theories are not wrong per se. They are bounded. They are useful and valid within a certain envelope, like Newtonian physics. Outside this envelope, like Newtonian physics, they are wrong and their results are just ridiculous.'

The truth is that, to go back to the previous example, Russia has reduced its external debt in recent years, becoming less dependent on foreign capital, which is what really matters. When you have plenty of capital, any bank is willing to lend you much more than you need to repay; if you don’t believe me, get a millionaire friend to go to the bank with you and see for yourself.