The Borrower from Hell

International finance in the 16th and 17th century

I sometimes wonder how bankers in the 16th and 17th centuries forced kings and emperors to repay their loans. After all, the lenders had no legal means to force a king to repay and obviously couldn’t use violence to get back their money.

For example, Philip II of Spain ( king from 1556 until 1598) borrowed huge amounts of money to finance his many wars against the Dutch, the English, and the Turks. During his reign, he defaulted four times.

Did the lenders have a way to enforce their claims? And if not, why would they lend Philip II money again after he went bankrupt multiple times? Which banker in his right mind would lend him those vast sums? I decided to find out.

Thus, I stumbled upon a journal article called

“Lending to the Borrower from Hell: Debt and Default in the Age of Philip II.”

Philip II had a considerable debt: sometimes it was as high as 60 % of GDP¹. He defaulted on his loans (refused to repay them) four times, but somehow, his Genoese bankers did force him to pay back. They did so by denying him the service of temporal smoothing. This is lending money for a short time to smooth over a short period of cash not being available. A modern variant of this is Payday lending: you run out of money before the end of the month and borrow money to smooth over the remaining days until you receive a paycheck. You then pay back the loan with interest.

In the case of a 16th or 17th-century king like Philip II, he might be out of money temporarily because taxes were not collected yet, or a silver fleet from Cuba had not arrived yet, or had been conquered by a Dutch pirate, or was shipwrecked. Since there was always an army (which consisted of mercenaries) to be paid, he had a problem. If the bankers who had borrowed him money refused to send coffers filled with silver to an army in for example the Low Countries, its soldiers went unpaid and would refuse to fight any longer and start to plunder the countryside or city they found themselves in. Not a great way to win hearts and minds. That’s why Philip II needed his bankers to smooth over the months before he would receive money again. Thus, he was forced to repay his loans to stay in their good graces. In general, his debt was restructured, and grudgingly he resumed paying back after a few months, no doubt complaining bitterly about the greedy bankers.

There you have human folly for you: Philip II was emperor of an empire on which the sun never set, which stretched from Italy to Spain to the Netherlands to Peru to the Philippines (named after him). He received enormous amounts of silver from Latin America. Still, he was so hungry for war that he needed to borrow enormous amounts of cash to finance them.

I guess bankers were also compensated with noble titles² and estates, or advantageous marriages for their sons and daughters. For example, Catharina Welser, the daughter of a famous German banking family called the Welsers, married an archduke who was the second son of an emperor. The Genoese banking family Spinola lent huge sums to Philip, and thus a scion of the family, Ambrogio Spinola was a marquis and became the supreme commander of the Spanish troops in the Netherlands. He is depicted in Velazquez’s painting The Fall of Breda, also called Las Lanzas (the Lances). He is the magnanimous guy in the middle. The other one offering him the key to the city in surrender is Justinus van Nassau, a long-deceased relative of the present Dutch king Willem-Alexander.

Back then, war was a gentlemanly affair

Sometimes the way things were done in the past is not so different from today’s. For example, in 2001 Argentina refused to pay back its debts. Eventually it was forced to pay because it needed loans from the IMF. In the process the debt was restructured, meaning in negotiations it was reduced to 30% of its original value.³

1. 60 % is actually not so bad if you compare it to the debt of the United States: on March 1 it was 764 % of GDP! I was dismayed to learn the Dutch debt is even higher at 980.4% of GDP.

Edit: No idea where I found these numbers, but they're off by a lot! The right numbers are: for the US: 128.14% of GDP, for the Netherlands 52.4% of GDP in 2021. (source: https://worldpopulationreview.com/country-rankings/countries-by-national-debt ) Suddenly I feel so much better about the Dutch national debt!

Thanks, Nicozonnetje, for pointing out my error.

2. In the 19th century, this happened to the banking family of the Rothschilds. Members of the family were elevated into the nobility of Austria, England, and France.

3. Actually, a comment about the Argentinian debt-crisis of 2001 on the blog Astral Codex Ten inspired this post.