Why Nations Fail

A S
MALL
 D
IFFERENCE
 T
HAT
 M
ATTERED
Absolutism crumbled in England during the seventeenth

---

century but got stronger in Spain. The Spanish equivalent of
the English Parliament, the Cortes, existed in name only.
Spain was forged in 1492 with the merger of the kingdoms
of Castile and Aragon via the marriage of Queen Isabella
and King Ferdinand. That date coincided with the end of
the Reconquest, the long process of ousting the Arabs who
had occupied the south of Spain, and built the great cities
of Granada, Cordova, and Seville, since the eighth century.
The last Arab state on the Iberian Peninsula, Granada, fell
to Spain at the same time Christopher Columbus arrived in
the Americas and started claiming lands for Queen Isabella
and King Ferdinand, who had funded his voyage.
The merger of the crowns of Castile and Aragon and
subsequent dynastic marriages and inheritances created a
European superstate. Isabella died in 1504, and her
daughter Joanna was crowned queen of Castile. Joanna
was married to Philip of the House of Habsburg, the son of
the emperor of the Holy Roman Empire, Maximilian I. In
1516 Charles, Joanna and Philip’s son, was crowned
Charles I of Castile and Aragon. When his father died,
Charles inherited the Netherlands and Franche-Comté,
which he added to his territories in Iberia and the
Americas. In 1519, when Maximilian I died, Charles also
inherited the Habsburg territories in Germany and became
Emperor Charles V of the Holy Roman Empire. What had
been a merger of two Spanish kingdoms in 1492 became
a multicontinental empire, and Charles continued the
project of strengthening the absolutist state that Isabella
and Ferdinand had begun.
The effort to build and consolidate absolutism in Spain
was massively aided by the discovery of precious metals in
the Americas. Silver had already been discovered in large
quantities in Guanajuato, in Mexico, by the 1520s, and
soon thereafter in Zacatecas, Mexico. The conquest of
Peru after 1532 created even more wealth for the
monarchy. This came in the form of a share, the “royal fifth,”
in any loot from conquest and also from mines. As we saw
in 
chapter 1
, a mountain of silver was discovered in Potosí
by the 1540s, pouring more wealth into the coffers of the
Spanish king.
At the time of the merger of Castile and Aragon, Spain
was among the most economically successful parts of

---

Europe. After its absolutist political system solidified, it
went into relative and then, after 1600, absolute economic
decline. Almost the first acts of Isabella and Ferdinand after
the Reconquest was the expropriation of the Jews. The
approximately two hundred thousand Jews in Spain were
given four months to leave. They had to sell off all their land
and assets at very low prices and were not allowed to take
any gold or silver out of the country. A similar human
tragedy was played out just over one hundred years later.
Between 1609 and 1614, Philip III expelled the Moriscos,
the descendants of the citizens of the former Arab states in
the south of Spain. Just as with the Jews, the Moriscos had
to leave with only what they could carry and were not
allowed to take with them any gold, silver, or other precious
metals.
Property rights were insecure in other dimensions under
Habsburg rule in Spain. Philip II, who succeeded his father,
Charles V, in 1556, defaulted on his debts in 1557 and
again in 1560, ruining the Fugger and Welser banking
families. The role of the German banking families was then
assumed by Genoese banking families, who were in turn
ruined by subsequent Spanish defaults during the reign of
the Habsburgs in 1575, 1596, 1607, 1627, 1647, 1652,
1660, and 1662.
Just as crucial as the instability of property rights in
absolutist Spain was the impact of absolutism on the
economic institutions of trade and the development of the
Spanish colonial empire. As we saw in the previous
chapter, the economic success of England was based on
rapid mercantile expansion. Though, compared with Spain
and Portugal, England was a latecomer to Atlantic trade,
she allowed for relatively broad-based participation in
trading and colonial opportunities. What filled the Crown’s
coffers in Spain enriched the newly emerging merchant
class in England. It was this merchant class that would form
the basis of early England economic dynamism and
become the bulwark of the anti-absolutist political coalition.
In Spain these processes that led to economic progress
and institutional change did not take place. After the
Americas had been discovered, Isabella and Ferdinand
organized trade between their new colonies and Spain via
a guild of merchants in Seville. These merchants controlled

---

all trade and made sure that the monarchy got its share of
the wealth of the Americas. There was no free trade with
any of the colonies, and each year a large flotilla of ships
would return from the Americas bringing precious metals
and valuable goods to Seville. The narrow, monopolized
base of this trade meant that no broad class of merchants
could emerge via trading opportunities with the colonies.
Even trade within the Americas was heavily regulated. For
example, a merchant in a colony such as New Spain,
roughly modern Mexico, could not trade directly with anyone
in New Granada, modern Colombia. These restrictions on
trade within the Spanish Empire reduced its economic
prosperity and also, indirectly, the potential benefits that
Spain could have gained by trading with another, more
prosperous empire. Nevertheless, they were attractive
because they guaranteed that the silver and gold would
keep flowing to Spain.
The extractive economic institutions of Spain were a
direct result of the construction of absolutism and the
different path, compared with England, taken by political
institutions. Both the Kingdom of Castile and the Kingdom
of Aragon had their Cortes, a parliament representing the
different groups, or “estates,” of the kingdom. As with the
English Parliament, the Castilian Cortes needed to be
summoned to assent to new taxes. Nevertheless, the
Cortes in Castile and Aragon primarily represented the
major cities, rather than both the urban and rural areas, as
the English Parliament did. By the fifteenth century, it
represented only eighteen cities, each of whom sent two
deputies. In consequence, the Cortes did not represent as
broad a set of groups as the English Parliament did, and it
never developed as a nexus of diverse interests vying to
place constraints on absolutism. It could not legislate, and
even the scope of its powers with respect to taxation was
limited. This all made it easier for the Spanish monarchy to
sideline the Cortes in the process of consolidating its own
absolutism. Even with silver coming from the Americas,
Charles V and Philip II required ever-increasing tax
revenues to finance a series of expensive wars. In 1520
Charles V decided to present the Cortes with demands for
increased taxation. Urban elites used the moment to call for
much wider change in the Cortes and its powers. This

---

opposition turned violent and quickly became known as the
Comunero Rebellion. Charles was able to crush the
rebellion with loyal troops. Throughout the rest of the
sixteenth century, though, there was a continuous battle as
the Crown tried to wrest away from the Cortes what rights
to levy new taxes and increase old ones that it had. Though
this battle ebbed and flowed, it was ultimately won by the
monarchy. After 1664 the Cortes did not meet again until it
would be reconstructed during the Napoleonic invasions
almost 150 years later.
In England the defeat of absolutism in 1688 led not only
to pluralistic political institutions but also to the further
development of a much more effective centralized state. In
Spain the opposite happened as absolutism triumphed.
Though the monarchy emasculated the Cortes and
removed any potential constraints on its behavior, it
became increasingly difficult to raise taxes, even when
attempted by direct negotiations with individual cities.
While the English state was creating a modern, efficient tax
bureaucracy, the Spanish state was again moving in the
opposite direction. The monarchy was not only failing to
create secure property rights for entrepreneurs and
monopolizing trade, but it was also selling offices, often
making them hereditary, indulging in tax farming, and even
selling immunity from justice.
The consequences of these extractive political and
economic institutions in Spain were predictable. During the
seventeenth century, while England was moving toward
commercial growth and then rapid industrialization, Spain
was tailspinning toward widespread economic decline. At
the start of the century, one in five people in Spain was
living in urban areas. By the end, this figure had halved to
one in ten, in a process that corresponded to increasing
impoverishment of the Spanish population. Spanish
incomes fell, while England grew rich.
The persistence and the strengthening of absolutism in
Spain, while it was being uprooted in England, is another
example of small differences mattering during critical
junctures. The small differences were in the strengths and
nature of representative institutions; the critical juncture was
the discovery of the Americas. The interaction of these sent
Spain off on a very different institutional path from England.

---

The relatively inclusive economic institutions that resulted in
England created unprecedented economic dynamism,
culminating 
in 
the 
Industrial 
Revolution, 
while
industrialization did not stand a chance in Spain. By the
time industrial technology was spreading in many parts of
the world, the Spanish economy had declined so much that
there was not even a need for the Crown or the land-owning
elites in Spain to block industrialization.