The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (9 page)

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 sixteenth century—the country imported it the way the United States imports big-screen televisions, giving little in return. What a magnificent system of imperial finance. Ships went west with soldiers and came back with gold and silver. It was almost as good as America’s system. In 2005, ships went west from Long Beach and Seattle almost empty. They came back full to the gunwales with Asian-made goods. And like America’s system, Spain’s trade was almost too good to be true.

Anything that must come to an end must come to an end somehow. Great empires look for ways to destroy themselves. They usually have little trouble finding them. In 1588, Spain found the English fleet—and the North Sea.

History records the Battle of Gravelines as one of the world’s most important naval engagements. 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.
⁶

The English engaged the defending Spanish ships with a 10-to-1 numerical advantage. Soon, three 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.
⁷

Most of the English ships, having done their work and run out of ammunition, sought their ports. The Spanish, badly battered and realizing 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 (though they had neglected to bring maps of the area) and thence back to Spain by the open Atlantic.

What the English began, the gods finished. On September 18, 1588, 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. Some ships sank; others ran out of food and water. In an effort to keep the leaky vessels above water, sailors manned the buckets day and night, but many soon ran out of energy or died of scurvy, dysentery, and fever.

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 long before.

“The mines of Brazil were the ruin of Portugal, as those of Mexico and Peru had been of Spain; all manufacture fell into insane contempt . . .,” explained Alfred Thayer Mahan in his opus,
The Influence of Sea Power upon History, 1660-1783,
“The tendency to trade, involving of necessity the production of something to trade with, is the national characteristic most important to the development of sea power.”
⁸

Prices rose sharply in the sixteenth century. As a result of the increase in the money supply caused by the gold and silver shipped in from the colonies, prices in all of Europe went up 400 percent. Then, when the mines and robberies eased off after 1580, the inflationary boom was over. A long depression began on the Iberian Peninsula. The Spanish and Portuguese were victims of their own good fortune.

3

How Empires Work

Nothing is born but from another living thing. No empire ever arose without some link to its predecessors. But the system of imperial finance in the United States bears little resemblance to its immediate predecessor, the British Empire. There are no colonies from which we buy raw materials at discount prices. And there are few U.S. factories for turning raw materials into salable products. Nor does the American imperium bear much likeness to the imperial finance systems of the Germans, the Austro-Hungarians, the Romans, the Greeks, or the Mongols. But there is a slight family resemblance in the Spanish colonial empire.

Ships went to the New World from Spanish and Portuguese ports armed with soldiers, provisions, and colonial administrators. They came back laden with gold and silver. Gold and silver was real money. It could not be easily replicated, counterfeited, or called into being with the stroke of a keyboard. Still, the increase in money—with no corresponding increase in productive output—was fatal to the Iberians. They spent without really earning.They consumed without producing.When the flow of easy money stopped, they found that real money had made them really poor, not rich.

America’s impoverishment is even more ridiculous. She is sustained by foreign wealth, but without real money. It is merely paper money without the paper—electronic registration of units of paper money. It is a mirage—a chimeric representation of something that doesn’t exist anywhere. For every additional dollar the U.S.Treasury calls into being, there is no extra dollar of savings, no extra dollar of profit, not even the paper dollar itself.At least the gold taken from Latin America is still around today and is still valuable.The dollars created by the Treasury are likely to disappear completely.

The United States entered the empire business in the late nineteenth century. She was able to straighten herself out for a few years but the lure of it later became irresistible. Between 1917 and 1971, the country was transformed from a simple republic that mostly minded its own business to a grandiose empire with imagined interests and real troops nearly everywhere.

In normal places at normal times, people go about their normal lives earning a living the best they can. But an empire changes the way people think. The common householder turns away from his humble house and his spouse and begins to think about the fair world beyond his kith, kin, and ken. He looks outward and sees how much better the world could be if he and his fellow citizens could run it their way. He sees that he must play a greater role in global affairs, that he must walk on the world stage, not as a bit player, but as the main character—the hero. He must play the lead role.

Instead of sticking to their looms, fields, and factories, the imperial citizens begin to appreciate the financial logic of empire: They enjoy the loot that comes from the far edges of the imperial system. Gradually, they neglect their own commerce and depend on their subordinates, lackeys, and subject peoples to support them.While administrative commands, fashions, and proclamations flow from the center of the empire to the extremities, there also is an important flow in the other direction. Rome brought in its wheat from Egypt (Romans needed bread), its gladiators from the Balkans (Romans wanted circuses), its soldiers from Gaul, and its money from foreign treasuries and tax collectors from Judea to Britannia.

A modest republic pays its own way. In 1952, nearly 90 percent of the federal government’s borrowings came from domestic investors. Americans saved their money and used some of it to support the programs of the Eisenhower administration. But the maturing empire of 2005 depended on a global debt market and the savings of foreigners. From less than 5 percent of Treasury bonds in overseas hands in 1952, the total approached 45 percent, while the percentage of lending coming from domestic sources had been cut in half.

Americans still grow their own wheat, but the trucks to move it may be manufactured in Europe or Asia, and the pans it cooks in are probably made in China.They get their electronic paraphernalia from Taiwan, clothes from Malaysia, and automobiles from Japan. They get scientists from India and classical musicians from Korea. And money comes from all over the Eastern Periphery to keep it all going.

Reading the history of empires, we learn that the central power tends to weaken as the periphery states grow stronger. Eventually, the subordinate states get tired of supporting the imperium. They stop paying tribute and show up at the gates of Rome.

France and England built their own empires in the eighteenth and nineteenth centuries. Napoleon’s conquests took less than a dozen years to complete, but the empire collapsed even faster. By the end of the nineteenth century, all that was left of the French empire were a few islands no one could find on a map and some godforsaken colonies in Africa that the French would soon regret ever having laid eyes on. Almost all were lost, forgotten, or surrendered by the 1960s with nothing much to show for them except what you find in the Louvre—and a population of African immigrants who now weigh heavily on France’s social welfare budget.

England’s empire was much grander, stretched further, and left more debris when it broke up. But the end result was about the same: The pound was degraded and the British were nearly bankrupt.

Germany lost its overseas colonies after World War I. It then created another empire—by conquest—in the late 1930s and early 1940s. The enterprise ran into Russia’s empire in the East—resulting in history’s largest and bloodiest land battles. In the end, thanks partly to American intervention on the side of the Russians, the German empire was destroyed. The Russians’ empire collapsed under its own weight 44 years later.

While the Romans were still kicking Sabine derrieres, Athens was already a mini-empire. By 431 BC, Athens had become an empire, with subject states throughout the Aegean. In that year, on some pretext not worth recalling, the first Peloponnesian War began between Sparta and Athens and its allies.

Pericles decided that the best offense was a good defense. He brought the Athenians within the city’s walls hoping that the enemy would exhaust itself in futile attacks.

But bubonic plague broke out in the besieged city and killed a quarter of the population—including Pericles. Thence, a nephew of Pericles, Alcibiades, stirred the Athenians to an offensive campaign. A great armada was assembled to attack Syracuse, a city in Sicily allied with Athens’ foes.

The campaign was a complete disaster. The armada was destroyed and the army sold into slavery. Sensing a shift in the wind, other Greek city-states broke with Athens and went over to Sparta. In 405 BC, the remaining ships in the Athenian fleet were captured at the battle of Aegospotami. Not long after, Athens’ walls were breached and the city became a vassal state to Sparta.

The Athenian empire was replaced by the Spartan empire, which was eventually supplanted by the Macedonian empire, which then became the empire of Alexander. When Alexander died in 323 BC, his empire died with him. The next great chapter of imperial history was written by the Romans, who defeated what was left of the Greeks at the Battle of Pydna in 168 BC.

One empire died. Another was born. Nature can’t bear a vacuum and abhors a monopoly. A world without an empire is a world with a hole in it. An empire fills the empty spot. But Nature is a fickle mistress. No sooner has an empire been born than Nature hardens her face against it. An empire has a monopoly on the use of force, or attempts to have one. An empire claims for itself the exclusive right to use preemptive force against any power that may pose a challenge. Nature tolerates it for a while. But she nurtures rivals and encourages competitors. Sooner or later, they find their opportunity.

Athens ran the first recorded empire in the West. America runs the current one; it took over from Britain after World War I. For the first eight decades, Americans denied any imperial role or purple ambitions. But by the early twenty-first century, they were warming up to empire. In March 2004, the
New York Times
reported that it was now respectable to describe the United States as an empire. “Today,” said the
NYT,
“America is no mere superpower or hegemon, but a full blown empire in the Roman and British sense.”

“No country has been as dominant culturally, economically, technologically and militarily in the history of the world since the Roman Empire,”
¹
added the columnist in the same paper.

Robert Kaplan’s book,
Warrior Politics:Why Leadership Demands a Pagan Ethos,
gave this assessment:

Our future leaders could do worse than be praised for their tenacity, their penetrating intellects and their ability to bring prosperity to distant parts of the world under America’s soft imperial influence.The more successful our foreign policy, the more leverage Americans will have in the world. Thus, the more likely that future historians will look back on the twenty-first century United States as an empire as well as a republic, however different from that of Roman and every other empire throughout history.
²

The June 11, 2005, edition of
IHT
ran Roger Cohen’s “Globalist” column, which contained this remark: “We guarantee the security of the world, protect our allies, keep critical sea lanes open and lead the war on terror,” said Max Boot of the imperial burden.“. . . the Pax Americana in Asia, as in Europe, has been conducive to a half-century of growth, peace and prosperity.”
³

Paul Kennedy went further, pointing out that the imbalance is even greater than in the Roman era.“The Roman Empire stretched further afield,” he notes, “but there was another great empire in Persia and a larger one in China.”
⁴