Rafael Torres Sánchez

Exchange rate behavior and exchange rate puzzles: why the 18th century might help

This article explores the behavior of exchange rates in Spain during the XVIII century. We posit that exchange rates were the result of both government intervention over nominal values of currencies and the estimate that the market of bills of exchange- gave to the value of the currency. We analyze the exchange rates quoted in London on three Spanish cities between 1699 and 1826. After a brief overview of the functioning of the Spanish monetary system and of exchange rate determination, we assess the extent to which the exchange rate responded to market fundamentals by testing some theoretical models of exchange rate determination. The results suggest that purchasing power parity held during the XVIII century, with the exchange rate tracking quite closely the behavior of inflation differentials. Deviations from PPP appeared at the end of the century, due mostly to changes in the real exchange rate caused by the bilateral trade balance between Spain and Great Britain and, maybe, to productivity differentials.

Alimentando a Marte: la política de suministros militares al ejército español en el XVIII

Any army is based on its relations with society and the underpinning political and organisational arrangements. Army victualling is an essential part of this relation otherwise the army would be incapable of operating. The sheer amount needed, moreover, sucks in a huge amount of economic and social resources. This article analyses how the Bourbon state went about its armyvictualling procedures, which methods it chose and the knock-on effects for the state itself and the country as a whole. We conclude that the Bourbon state turned to businessmen throughout the whole century because this option allowed it to maintain its authority and pursue mercantilist policies.

The Habsburg Fiscal and Financial Inheritance

When the new Bourbon king Philip V came to Spain in 1700 he inherited a declining empire from the previous Habsburg monarch Charles II (1665–1700). It had been run ragged by nearly 200 years of continual struggles across the globe and also many internal territorial problems. Its finances and resources were by now entirely unable to maintain any substantial war effort, and the international supremacy of Spain’s imperial forces had hence been slipping away. By the middle of the seventeenth century this financial and military decadence had become irreversible. Nonetheless this unquestionable decadence did not spell the collapse of either the monarchy or the empire. The unity and variety of territories making up the Spanish monarchy were maintained and Philip V finally inherited an empire — and therewith some subjects and finances — upon which the sun still never set.

In the Wake of the English

The advent in Spain of a new monarch in 1759, Charles III, King of Naples, implied no immediate and radical change in fiscal policy, but it did in terms of military policy. Charles was in favour of a bigger show of overseas force, both militarily and diplomatically, and exploited the favourable juncture of the war raging at that time between France and Great Britain. This meant abandoning Spain’s policy of neutrality and buckling slightly under French pressure, leading to the signing of the third Pacte de Famille in August 1761. The Spanish government was coaxed in this direction by French promises of help in the recovery of Minorca and Gibraltar. Another decisive factor tipping the balance was its confidence in the traditional defensive capacity of the Americas. The war was not expected to last much longer, so Spain could hope to sustain it with no great outlay. The Americas would defray its military expenditure with the help of resources sent from Spain. Spain boasted significant liquidity at that time, tantamount to a complete year’s revenue (Registro). The fact that Spain entered the Seven Years’ War without making any changes to its fiscal or financial system is very telling. No new taxes were brought in, there were no hikes in existing taxes and no public debt was created. Spain, in other words, was confident of defraying war expenses from its current resources rather than financing it, thereby running completely counter to the tenets of a fiscal-military state (Torres, 2013).

The Efficacy of Spain’s Fiscal-Military State

From the second half of the seventeenth century many changes were brought in and many feats pulled off in the long process of reforming the Spanish state. The most notable were the establishment of its unchallengeable authority and entitlement to control resources, and the modification of the taxation and expenditure policy (something the Habsburgs had never managed to do). The question now is whether these changes spelled efficacy, that is, whether the fiscal-military state was efficient in its priority and almost sole objective of mobilising the necessary wherewithal for ensuring security and stability: the two assets of most interest to any society. Assessing the efficiency of resource mobilisation is tricky. It is very difficult to measure and even more complicated to make any comparisons with other states, but this is essential if we are to going to have any hope of refuting the hackneyed theories that have always placed more emphasis on coercion than efficiency.

The Spanish System

French inspiration as the driving force behind the construction of Spain’s fiscal-military state was short-lived. The War of Succession had stimulated measures that brought Spain into line with the French model. The introduction of a direct tax in the conquered regions, the venality of public posts, the strengthening of the relationship between private financiers and the Real Hacienda or increasing centralised control over public finances were none of them easy to introduce. The direct tax in the Crown of Aragon was stunted in its growth, the spiralling dependence of private financiers and the state reached a dead end in the bankruptcy of 1739 and the institutions for controlling public money lived an uncertain existence. In some ways these limitations in Spain’s situation did indeed faithfully reflect the model that had inspired it. But Spain’s fiscal-military state went down a very different path, straying well away from the French example in the end, finally constituting what we might call ‘the Spanish system’.