|Philip II of Spain|
In a new EHES working paper, Carlos Álvarez-Nogal and Christophe Chamley analyze a contract that provides a splendid illustration of this matching between regular expenditures, erratic revenues from the fleet and scattered but stable local revenues. The contract also provides an example of smooth conversion of short-term debt into long-term funded debt, long before the debt refinancings in England.
|The asiento, a financial contract used|
by Philip II
The Maluenda brothers were successful merchants from Burgos who used their network in trade to develop financial activities. On July 13, 1595, they signed an asiento that committed them to deliver twelve monthly disbursements, of 27,000 ducats each (the first was doubled), in Lisbon. (For simplicity, all the numbers are rounded here. The exact numbers are reported in the paper). The total was therefore 350,000 ducats which is in the upper range of asientos for that period. To put this amount in perspective, a total of 5 million ducats of asientos for a given year would be high, the revenues of the Crown, net of Americas' income, were about 10 million ducats, and GDP per capita in Castile was probably not lower than 2 ducats per month.
The financing of the disbursements (350,000 ducats) was divided in three parts. First, the Crown made an immediate cash payment for the disbursements until August: 75,000 ducats was paid from the royal coffers in Madrid which the bankers had to deliver in Lisbon as soon as possible. This transfer may have been used for urgent or start-up costs.
The credit part of the contract was therefore only for 275,000 ducats. This part operated like a credit line today with a monthly interest of one percent. The contract identified sources of revenues on which it had first claim. The Crown had much flexibility for the use of these sources of revenues and for the timing of the repayments. Whatever the choices of the Crown, a central and repeatedly emphasized principle of the contract was that an interest of one percent had to be charged on the balance due in each month. The rich documentation shows that this principle was strictly applied.
The repayment of the principal of the credit was divided in two tranches, which can be called here Tranche A for 100,000 ducats, and Tranche B for 175,000 ducats. (In addition, interests would have to be paid). Tranche A paid for, roughly, the rest of the monthly disbursements in Lisbon until the end of the year 1595, while Tranche B paid for the disbursements of the following year, until June. The contract devotes much space to the explicit connection between tranche and disbursements.
Each tranche had a first claim on the incom
|Lisbon in the early modern period|
The Maluenda brothers exercised the option soon after the signature of the contract and, not surprisingly, in the menu of instruments, they selected almost exclusively the annuities on two heads. The sales proceeded briskly and were recorded, following a contractual requirement, in trimestral reports, with the names of the buyers, amounts of each annuity and dates of sale. (All this data is in the attachments).
The asiento illustrates the remarkable flexibility of the credit line with a monthly fixed interest rate. The fast sales of the annuities, even before the bankers had made any disbursement on Tranche B (about 105,000 of ducats sold at the end of 1595, before the disbursement of Tranche B), had freed the fleet of 1596 from the claims of Tranche B. It was therefore decided to shift 40,000 ducats in Tranche A from the fleet of 1595 to the fleet of 1596. The payments from the fleet of 1595 were staggered, beginning in December 1595. The attachments to the contract report the careful computations of the royal accountants about the interest on the balance due, prorated for the exact days of payment by the Crown. It is remarkable that for Tranche B, the cumulated sales of annuities exceeded at any time the cumulated disbursements to the Crown!
In November 1596, Philip II stopped the payment on all asientos, for the third time. On Tranche A, 40,000 ducats was still due. They were eventually paid by the Crown.
The method of Álvarez-Nogal and Chamley, to extract from the archives all available information and to focus on one contract, can be compared with the "coding" procedure of all asientos by Drelichman and Voth (2011), as presented in a study that received a prize. In that study, they take the same asiento as a standard bearer for their method which produces tables of "agreed upon cash-flows" from which they compute their own measure of a rate of return. Their method is not historical and in their data reporting, they do not respect the archival evidence in the contract, from page 3 on. The "coding" misses the elegant and logical structure that has been described here, and it turns the contract on its head since the payments depended on the interest, one percent per month, that is specified in the contract and precisely observed in its execution. They inexplicably dismiss the most interesting option for the long-term funded debt (which had already been described in the literature). Ignoring the attachments, they claim instead ("we know with certainty") that Tranche B had not been paid by the payment stop of November 1596, and that it was subject to a debt reduction, when actually, it had entirely been paid, in advance, by selling annuities. In fact, the Chamber of Accounts found in 1606 that for the entire asiento, the Maluenda brothers had been overpaid 4000 ducats.
The working paper can be downloaded here: