SUN SETS ON EMPIRE
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In the summer of 1588 the "Invincible Armada" of King Philip II of Spain headed towards the Low Countries. You and I, dear reader, can spot the error already.
Philip would have done better to call his fleet an "almost invincible armada", or perhaps even better, "The Best Little Armada We Could Put Together at the Time". Calling an armada "invincible" is like calling Worldcom stock "unbeatable"; it is a challenge to the gods...and an invitation to destruction.
The Armada's mission was simple, but not easy - to pick up soldiers in the Netherlands and transport them to England. It had been 500 years since anyone had attempted an invasion of England. The last assault, led by William, Duke of Normandy, was a big success. Philip was ready to have a go at it again.
The reasons for the campaign were not so simple. In the jargon of today, he might have labelled his effort a "War Against Terror", for English pirates had been terrorising Spanish shipping for years. The pirates were not necessarily sponsored by the English crown. But they, literally, found safe harbour in English ports.
Of course, there was more to it. Religion, for example. Just as George W. Bush's WAT has a subtext of religion, so did Philip's. Henry VIII of England had rejected the authority of the Pope and set himself up as head of the Church of England. Then when his daughter Elizabeth ordered the execution of her Catholic rival, Mary Queen of Scots, Philip - who had been King of England 30 years prior, when he was married to Mary I - thought the time had come for action.
By 1588, Spain had become a powerful empire - with colonies in the New World that had made them rich. Money poured into Spanish coffers during the 16th century - the country imported it like America imports big screen TVs today, giving little in return. Finally, like all empires...Spain needed to find a way to destroy herself. Whereupon, the English fleet appeared on the horizon.
History records the Battle of Gravelines as one of the most important naval engagements ever. The Spanish ships were trapped against the Flemish coast. The Spanish commander, the Duke of Medina, decided to use a portion of his fleet to hold off the English, while the rest made their way to open water.
The English engaged the defending Spanish ships with a 10-to-1 numerical advantage. Soon, 3 of the huge Spanish galleons were sunk, with 600 Spaniards killed and more than 800 others wounded. "The decks ran with their blood," said eyewitness accounts.
Most of the English ships, having done their work and run out of ammunition, sought their ports. The Spanish, badly battered and realising their cause was doomed, decided they could not fight their way back through the Channel. Instead, they sailed north...intending to make their way around Scotland - they had neglected to bring maps of the area - and thence back to Spain by the open Atlantic.
What the English began the weather finished. On September 18th, the Spaniards ran into one of the worst storms ever to smash into Scotland. In high seas off Cape Wrath, the Invincible Armada proved vincible; it broke up. Ships sank. Others ran out of food and water. Sailors manned the buckets day and night in an effort to keep the leaky vessels above water...but many soon ran out of energy or died of scurvy, dysentery, and fever.
Do empires really make people better off, we ask again today? We know the answer - no. What Spaniard was better off because of the Invincible Armada? How many Athenian lives were improved by the campaign against Corinth? Even if the campaign had been a success...what possible good could have come from it? But what does it matter? Once a nation is lured into it, the trend has to run until it comes to an end. Bubbles and empires have a logic of their own; that they will end in grief is a foregone conclusion. Still, they are entertaining to historians and stock market kibitzers.
The sun was never supposed to set on Philip's Spanish empire. But it sank along with the armada in 1588. Financially, Spanish fortunes had begun taking on water many years before.
"The Spanish Crown had already defaulted on its loans in 1557, and further defaults occurred in 1575, 1596, 1607, 1627, and 1647," explains Marc Faber. "Because of these defaults by the Spanish Crown, major financial centres in Europe such as Antwerp, Genoa, and Lyons, which had been the prime financiers of the Spanish loans, also experienced several devastating financial crises."
"Moreover, the 16th century was highly inflationary. Between 1500 and 1600, prices in Europe rose by almost five fold as a result of the huge increase in gold and silver in circulation, which had been shipped from the Spanish possessions in the Americas. And when the shipments of precious metals began to diminish after 1580, the entire Spanish peninsula experienced a terrific depression, which lasted for a good part of the 17th century."
"The British Empire was in many ways probably the most successful empire in history," continues Faber, "because, unlike the Roman and Spanish Empires, it didn't depend on its colonies for its wealth."
Britannia acquired her empire a little like America seems to be putting hers together - by inattention. Little by little, with no master-plan to guide it, Britain assembled its component parts...and awoke one day to find itself in the pink.
"Yes, I remember when I was a child," said one of our London editors last week, "the map at school was covered in pink. And everything that was pink was British."
For a time, Britain enjoyed the rosy cheeks of the master race. "However," Faber writes, "over time, the empire proved to be extremely costly to maintain and in the 20th century [Britain] gradually had to give up its overseas possessions and lost out to other nations economically."
To whom did it lose out? To America, certainly...but also to the poor Swiss!
Throughout the 20th century, the sun set every single day on the Swiss Federation. But that didn't stop the Swiss franc from rising, nearly every day, against the British pound. In 1915, a British pound could have been exchanged for 13 Swiss francs and a half-pound of cheese. Today, a pound brings you only 2.3 Swiss francs. And forget the cheese.
And while the British economy grew sluggish in the 20th century, the Swiss economy boomed. By the end of the century, GDP per person in Britain was only around $20,000. The Swiss, meanwhile, were producing $28,550 in GDP per capita.
But pity the poor yodellers. They never got the glory of empire. They never got to admire themselves on maps or in headlines. What Swiss president gets to send troops to remote hell-holes...to join a peace- keeping mission...or fight terrorists? How often do the Swiss get to cheer on their heroes...and mourn their dead? Who even knows who the president of Switzerland is? Who could care?
The poor Swiss had to mind their own business...and watch the sturm and drang of the world pass them by, like gophers watching a combat of bull elephants.
Bill Bonner
P.S. Even gold cannot scoff at the laws of supply and demand. A big increase in the supply of gold in 16th-century Spain caused a big decrease in its value - compared to the things for which one might want to exchange it.
But here at The Daily Reckoning we like gold, not because it breaks the laws, but because it is law-abiding.
Gold from the New World petered out in the 17th century and prices stabilised. Since then, few discoveries of new gold have been big enough to upset prices. In ancient Rome, by contrast, the denarius kept losing value for centuries - until it disappeared completely.
"All...problems [in Rome]," explains Faber, "required vast sums of money to be solved, or, as was usually the case, to be postponed. But each time a new problem cropped up, the money printing press was turned on, which led to a further debasement of the currency and higher and higher inflation rates - two factors whose importance in the fall of Rome cannot be overlooked."
How long will the world's latest imperial currency - the dollar - survive? We don't know...but the temptation of central bankers in the 21st century is little different from those of the 1st, 2nd and 3rd - to increase the supply of money and credit whenever it is needed. Sooner or later, this is bound to turn the dollar into an artefact of monetary history - like the denarius.
When? We don't know. But when we find out, we hope to have a few gold coins in our pockets...
Editor's Note: This essay first appeared in The Daily Reckoning. Bill Bonner is the founder and editor of the Daily Reckoning. He is also the author, with Addison Wiggin, of the New York Times and international best-seller: "Financial Reckoning Day: Surviving the Soft Depression of The 21st Century" (John Wiley & Sons).
Bill's eagerly awaited sequel, "Empire of Debt", will be published later this year.
