Download PDF | (Palgrave Studies in Economic History) Juan José Rivas Moreno - The Capital Market of Manila and the Pacific Trade, 1668-1838_ Institutions and Trade during the First Globalization-Palgrave Macmillan 2024.
303 Pages
Introduction
1.1 Globalising Institutions The Early Modern era witnessed the twin developments of the establishment of new direct trade between Europe and Asia and America, a spur of intercontinental trade of unprecedented dimensions that some have described as the “first wave” of globalisation,1 together with a protracted period of economic growth and military innovation that culminated with the First Industrial Revolution at home and imperialism abroad, leading historians to question whether the development of long-distance trade and of industrialisation were related.2 As a result, the Early Modern period has often been analysed from a teleological perspective, trying to discern through backwards readings of historical processes the ultimate causes of Europe’s predominance in the nineteenth century.
The debate regarding Europe’s supposed superiority has led to the revisionist stance of the Great Divergence question.3 This criticism, exemplified in the work of Kenneth Pomeranz, brought evidence from Asia to qualify the extent to which Europe was on an inevitable track to predominance, and called into question the validity of a-historically searching for nineteenth-century hegemony in Eighteenth- and Seventeenth-century historical processes.
While the debate of the Great Divergence managed to change the focus into reciprocal comparisons between the experiences of Europe and Asia, the Spanish empire has remained in the fringes of this debate, referred to exclusively either as an example of institutional failure, or simply as a source of silver. No substantial efforts have been made to place the Hispanic Monarchy, one of the largest and most resilient polities of the Early Modern era, into a global context save for a few exceptions.4
The closely related discussion on the importance of trade for economic growth in the Early Modern era, exemplified by the encyclopaedic work of Findlay and O’Rourke, has similarly approached the trade of the Hispanic world as an enabler, focusing exclusively on the silver transfers to Europe and elsewhere, but has failed to fully incorporate this important branch of global trade into the wider economic perspective of the world, ignoring for example the impact that American demand may have had on European industrial output, and the competition within Spanish America between European and Asian textiles.5
The assessment of silver shipments exclusively as balance of trade settlements risks hindering the transformative effects that it had for the financial and monetary history of Europe. Underscoring these debates is the question of how Europe managed to escape the trap of distance. The financing of long-distance trade has long been associated with the emergence of “modern” capital markets. The establishment of direct trade across continents presented challenges of unprecedented dimensions that required financial innovations to persist in time. Larger amounts of capital needed to be locked-in for unprecedentedly longer periods of time, while the vastness of the new mercantile landscape difficulted the monitoring and enforcement of contracts. Innovations were necessary to organise trade, structure investments, and for the emergence of impersonal capital markets capable of surpassing the constraints of personal networks or cultural coalitions.
In this debate, the emergence in Early Modern Europe of the joint-stock corporations, the East India Companies, casts a long shadow. For some historians, like Niels Steensgaard, the joint-stock corporation, whose alleged superiority was its capacity to interiorise protection costs, revolutionised the organisation of direct trade with Asia.6 For others, like Emmer and Gaastra, the joint-stock company was the best way to channel resources from the home market to the trade, achieving an advantage in scale,7 to the point that Emmer argued that incorporation was the sine qua non of sustained and meaningful trade between Europe and Asia.8 More sophisticated still is the process presented by Gelderblom and Jonker on the one hand,9 and Ron Harris on the other.10 Both identify liquidity, the necessity to pool unprecedentedly large amounts of capital for equally long periods of time, as the core problem of Early Modern direct trade with Asia.
Thus, they relate the birth of the corporation with the birth of globalisation. For both (although in different manners), the joint-stock corporation provided the tools to solve this problem and enable sustained long-distance trade between Europe and Asia. The corporation implied gains regarding the mobilisation of capital and the solution to the fundamental problem of how to sustain intercontinental trade in the context of the Early Modern era. Consequently, the joint-stock corporation has emerged as the normative model for how persistent trade with Asia would be organised. This book analyses the business model of the European companies as one of scale. According to Harris, the complex organisational structure of the joint-stock corporation solved the problem of obtaining enough initial capital to launch intercontinental trading enterprises because it managed to create impersonal markets for the first time, thus being able to acquire an unprecedented scale of operations.11
However, the East India Companies never truly solved the problem of how to acquire enough working capital to maintain operations, especially given that in the trade with Asia, this meant acquiring large amounts of silver which merchants in the content demanded to settle transactions. To palliate this problem, the East India Companies scaled operations, expanding continuously the volume of their trade, its composition, and its circuits.
The English (EIC) and Dutch (VOC) East India Companies tried several strategies simultaneously to solve the problem of working capital, including dealing in intra-Asian trade, the issuance of bonds and corporate loans, and, importantly, the attempts to control markets through force, both abroad and at home. But this strategy also resulted in the expansion of costs. Navies, armies, forts, had to be maintained, rising extra-commercial costs and lowering the profitability of the trade. This explains the failure of the East India Companies at lowering transaction costs as identified by Jan de Vries, and the failure of the first wave of globalisation in delivering price convergence.12
The present book argues that liquidity was determinant when it came to decisions on how to organise long-distance trade with Asia. Against the model of scaling and vertical integration of the East India Companies, the book proposes the alternative model of trade organisation represented by the Pacific exchange, the other instance of persistent long-distance trade with Asia during the period. From the conquest of Manila in 1571 by Miguel de Legazpi to the extinction of the direct trade with Mexico in 1821, America and Asia were directly linked through the intermediation of Manila. The Pacific trade, based on the exchange of Asian commodities and goods (primarily textiles) for Spanish American silver specie, was large, with an estimated annual amount of 2–4 million pesos (approximately 50–100 tons of silver) shipped across the Pacific Ocean,13 and it was the most direct intermediation between Asian demand for silver and American supply.
This trade rested on the financing originated in the city of Manila through retained earnings from its commercial activities. From 1668, capital pooling institutions emerged in the city in the form of legacy funds that mobilised working capital for investment in the trade, the so-called obras pías (lit. trans. “pious works”).14 Research has revealed 264 individual funds that operated in the city between 1668 and 1833, capable of pooling large amounts of capital without the need of incorporation, but more remain to be identified by future historians. The capital market of Manila, which adapted European institutions to satisfy of Asia’s demand for silver specie, represented an alternative manner to organise and finance long-distance trade.
The case of Manila poses several questions. First, how could Manila pool such large volumes of cash and transform it into working capital for the operation of the transpacific trade and the intra-Asian commerce that supplied the goods for the Galleon? Second, why was the capital market of Manila different? The Manila trade never adopted a joint-stock corporate form or used instruments such as bills of exchange that were important in European trade, even though Manileños were acquainted with them. Why did Manila opt for an alternative path?
A third question that derives from this is whether the innovative elements of Europe’s financial revolution were a necessary requisite for long-distance trade, or, as was the case of Manila, alternative institutional arrangements could work equally well to finance the Eurasian trade, and if so, what determined the appearance of one model or the other? This links to a further question, how could the model of Manila persist for so long and defeat all interloping attempts from “more efficient” businesses like the European companies; were they truly so efficient? or the most efficient? or was their organisational form just a response to problems that they alone faced or that were of a different magnitude in the context of Manila? The aim here is to show that the city’s capacity to intermediate Asia’s demand for a silver means of payment and Spanish America’s large production of a reliable coin dictated the process of institutional formation in Manila. The argument is that Manila enjoyed the most direct access with fewer costs to America’s silver specie. To maintain its intermediary position between Spanish America and Asia, the city specialised in the provision of silver pesos, and in the process, it developed institutions and instruments that enhanced this advantage by pooling cash, offering working capital as pesos, and internalising the risks inherent in the exchange.
Through specialisation, Manila managed to reach a degree of economies of scale in the provision of liquidity in Asian waters and organise its intermediation as efficiently as any of the existing alternatives. In other words, the nature of the trade was the determinant factor behind the process of institutional formation in Manila’s capital markets. The organisation of the Pacific trade differed from the companies’ model of vertical integration and scaling. Instead, Manila followed a model of “Horizontal Specialisation”, that is, a process through which transaction costs were unilaterally reduced because each participant in the commercial chain specialised in a specific aspect of the trade. Through specialisation, each link in the chain could achieve a degree of economies of scale, and thus reduce overall transaction costs. In the case of the Pacific exchange, Manila specialised in mobilising cash as working capital, the American terminal specialised as silver and coin producer, and the Asian terminal specialised as a producer of textile manufactures. Through specialisation, Manila provided a comparatively efficient intermediation between American and Asian markets. This enabled the city to mitigate the Fundamental Problem of Exchange and capture the profits from this intermediary role.
Furthermore, it will be argued that relative ease of access to liquidity—in the context of a similar trade environment of silver for goods—determined the differences between this model of horizontal specialisation and the European joint-stock companies’ model of vertical integration and scaling: the East India Companies evolved to operate in a context of liquidity constraints, while the Manila trade evolved to maximise its advantages in a context of abundance of liquidity. The case of Manila also qualifies the causal relationship between the economic context and the process of institutional formation as outlined by New Institutional Economics. North’s assumptions that institutions are exogenous to the forces of supply and demand extracted institutions from the realm of the market mechanism,15 leading to institutional analysis based purely on the capacity of institutional frameworks to lower transaction costs (however either might be defined).16
This approach has tended obscure the process of how institutions came to being, since institutions are measured on their conduciveness for growth independent from the context in which they emerge, without considering how well they solved the problems that motivated the agents to create them in the first place, and leading to reductivism.17 The case of Manila represents a counterfactual in which institutions equally capable of pooling large volumes of capital were created and adapted based on the imperatives of the trade they financed. Institutions cannot be considered exogenous and impervious to the economic context in which they operate, neither is their capacity to promote growth an act inherently derived from the quality of their design. Rather, the quality of their design has to be analysed within the historical and economic context in which they emerged. In the case of Manila, this was the global specie trade, the Asian demand for a silver means of payment, and the capacity of Manila to satisfy that demand and maintain its intermediation. The capital market of Manila demonstrates that many claims regarding uniqueness or superiority of the joint-stock corporation for trade with Asia are teleological, based on the outcome rather than the causes. A different process was possible. What needs to be understood is the underlying causes of the difference, and this was access to liquidity. To understand how Manila solved the challenge of financing longdistance trade requires both a comparative analytical framework and connecting institutional processes with the real economy of the Pacific trade.
The framework therefore explores the capital market of Manila in relation to the nature and evolution of the Manila trade (encompassing both its Pacific leg and its intra-Asian leg) and the comparative evolution of the European East India Companies, especially the English Company. Placing Manila in the mirror of the European companies through a reciprocal comparison—as described by Austin and Pomeranz18—allows us to better understand what was different in the city’s alternative model of Horizontal Specialisation. Both the English East India Company and the Manileños faced the challenges of long-distance trade, and both were invested in a transcultural trade of large proportions with Asia.
Yet both developed radically different business models and organisational forms. The comparison serves the purpose of questioning the conditions upon which an institutional regime or another is “successful” in obtaining its goals, as well as linking the theory on transaction costs with the economic fundamentals in which institutional frameworks developed. Much of the foundation of the historical literature on institutions and trade remains focused on theoretical analysis,19 but it still remains to be more forcefully integrated with the economic reality of trade in the Early Modern era. This reciprocal comparison, especially its emphasis on how access to liquidity as a source of working capital impacted business strategies, bridges this gap and provides a novel explanation of the Pacific exchange.
There are three reasons for choosing the English East India Company. The first is a matter of space. Reconstructing the capital markets of Manila is in itself a daunting task, and a complete survey of the joint-stock companies is not possible, neither is it the purpose of this book. In the measure the European companies are reviewed here, it is to place the Manila trade in context to better understand its financial and organisational model. The second is that there is a wider literature that has developed a broad range of models for the EIC,20 which provides a greater range for analysis. The third reason is that the EIC surpassed the VOC in trade and power during the eighteenth century. This makes the EIC a more relevant comparison for the period of this dissertation, but it is also important because there is a tendency to consider the EIC as superior organisationally to the VOC, an example of “finer” vertical integration or trade organisation.
1.2 Institutions and Trade The literature regarding institutions and trade has placed the emphasis on the study of transaction costs and how institutions mitigated them. This has been established as the link through which institutional and organisational innovation impacted trade. This section reviews the relationship between institutions and the way they mitigated transaction costs. North defined institutions as “the rules of the game in a society”, the set of constraints devised by human beings that direct social and economic interaction.22 According to his model, the economy is embedded in the institutional framework, and growth stems from this institutional framework and spills to the economy at large. North relies on the idea of transaction costs, as explained by Coase and Williamson.23 He argued that institutions emerge to lower the costs of transacting, which are essentially information and enforcement costs. Transaction costs permeate all economic activity.24 In this model, economic growth is ultimately reliant on the success of the institutional framework to create the right incentives. North argued that changes in relative prices in themselves were not enough to lead Europe beyond Malthusian constraints.25 Secure property rights, however, provided the right incentives for investment and invention.
The entwined nature of property rights and the government led to a deeper study of the structure of the state. Economic growth is impossible without institutions that protect private property rights, and such institutions are impossible without “credible commitment” of the ruler, a term that denotes a constitutional arrangement of checks and balances and limited government capable of preventing the state from succumbing to its predatory instincts.26 The importance of both transaction costs and the state are obvious when it comes to trade.27 According to North, the high transaction costs of Early Modern trade led to institutional and organisational innovation in a push to partially integrate faraway markets.28 High transaction costs forced merchants to cooperate and pool resources together, and the chartered joint-stock company emerged. Capital pooling could not be achieved without the reassurance of credible commitment against the expropriation of property.29 North’s model of transaction costs and political ordering of the state has been the basis for some empirical tests on Early Modern trade and growth, including the work of Acemoglu, Johnson, and Robinson.30 The application of Northian constitutionalism implied a dualistic understanding of institutions divided into inclusive (or good) institutions and extractive (or bad) institutions.
This eschatological reduction is not only an oversimplification of the institutional landscape of the Early Modern world, but the method employed by Acemoglu et al. represents a logical contradiction: countries with extractive institutions could have long-distance trade but did not manage to capture the profits derived from it, even though North’s model clearly states that good institutions are a pre-condition for the emergence of trade.
The problem with North’s constitutionalism is double when it comes to Manila. First is the empirical issue that Manila had the capacity to pool large amounts of cash and supply capital at low rates in the absence of a similar constitutional ordering to that described by North. A large literature has discredited the idea that composite monarchies like the Hispanic Monarchy had the drive and the capacity to extract the large amounts of resources as claimed by NIE, instead of focusing attention to the bargained and negotiated nature of sovereignty.31 Manila, and the Hispanic Monarchy at large, had legal ways to protect private property. Neither is the adjective “extractive” much of a predictive variable when ascertaining the volume and growth of trade. When the fiscal burden of England and Spain in the eighteenth century is compared quantitatively as Grafe and Irigoin did,32 it turns out that England was the more extractive of the two. Similarly, Yun-Casalilla and Comín Comín question extractiveness as the root of the problem.33 Lack of fiscal capacity constrained the action of the state, and instead ended solidifying highly inegalitarian modes of production and redistribution of wealth.34 The relationship between constitutional ordering and increased volume of trade is not as simple as envisioned by NIE. The second problem is that it suffers from an empirical contradiction. Long-distance trade without the right institutions should not be possible since there are no guarantees to protect investment. Yet there was trade, and there was long-distance direct trade with Asia long before the 1688 Glorious Revolution.
Thus, the available evidence from England, collected by Gregory Clark, contradicts North’s assumptions that institutional reform and credible commitment allowed the pooling of capital, and thus worked to lower interest rates, permeating to private credit.35 The reality is that private rates were already low before the Glorious Revolution, and it was the government’s interest rates that were exceptionally high for European standards, supporting Epstein’s suggestion that the English Financial Revolution reflect a process of catching up rather than breaking ahead,36 and the anomality to explain was not the low interest rates following 1688, but the high public rates that preceded it. Similarly, since NIE’s evidence of credible commitment at work is based on the low interest rates, it is important to highlight that the Hispanic world, operating on a completely different constitutional order, had low interest rates by the eighteenth century.37
If the price of money was not substantially different, neither is the causation attributed to the constitutional ordering by NIE a plausible explanation. Vertical integration through the firm was another way to solve high transaction costs.38 The history of the Early Modern joint-stock companies, especially the EIC and VOC, have advanced this interpretation. Niels Steensgaard, argued that when a comparatively more efficient institution enters the game, less efficient ones will disappear following the Smithian logic of competition: either they will adapt and mimic the more successful counterpart, or they will be expelled from the game, a theory used to explain Portugal’s quick decline in Asia when challenged by the Dutch.39 Others, like Erikson, ascribe to the companies informational advantages and outsourcing efficiency that others lacked.40 These theories present problems in terms of deficient predictive power and lack of economic context.
While Steensgaard’s model of internalising protection costs may explain the advantage of the Dutch over the Portuguese, it cannot explain why other joint-stock companies with the exact same model fared worse, or why the joint-stock corporation worked in Asia but was a failure in America, where eventually the Portuguese defeated the Dutch West India Company.41 It also fails to explain why the joint-stock companies were eventually expelled from trading activities in Asia by private merchants organised around partnerships. Efficiency in these writings is rarely associated with company fundamentals such as profit margins or debt ratios. The role of the government and violence is sometimes minimised, and in some cases, Asian trade is paradoxically a fixture of the background rather than the backbone of the enterprise. While Steensgaard did not explicitly address transaction costs in his book, some historians like Ann Carlos and Stephen Nicholas clearly state that the vertical integration of the chartered companies served as a more efficient alternative to the open market.42 The data to reach this conclusion is missing, not only because of the problems associated with the accounts of the East India Companies, but because of the impossibility to define—let alone measure—the “market” across such a vast expanse as Asia and across such a long period of time. However, focusing the analysis of efficiency on transaction costs risks forgetting about fundamentals. Transaction costs are not a substitute for fundamentals.
This thesis argues that the joint-stock companies problems arose when mounting expenses put stress on the economic fundamentals of their trade. When it comes to Manila, the question of Company efficiency, whether it was through better internalising of protection costs or better informational flows, is paradoxical. Manila, like the Portuguese Estado da India, always resisted integration. A fundamental aspect of it was because Manila was an intermediary in a trade predicated on arbitraging the price of pesos and Asian goods between Asia and America. As an intermediary, Manila partially caused such transaction costs. If integration was to occur, it would likely be by bypassing Manila. And yet, Manila successfully defeated the interloping attempts of the EIC, the VOC, and the Real Compañía de Filipinas (RCF), a joint-stock company chartered by Spain.
This, as will be discussed in Chapters 5 and 6, is an indication that Manila was at least as efficient as the existing alternatives of the time, the East India Companies. Absent from much of this literature was the inefficiency in commercial terms of the Companies, forced to maintain armies, forts, and navies to internalise those protection costs and which lowered their profit margins and thus, their capacity to compete in prices with private merchants. Dealing with liquidity constraints that arose from long-distance trade and its unprecedented capital demands was a fundamental factor behind the decision to form joint-stock corporations. Gelderblom & Jonker explain how the shares of the VOC, supported by their dividend, were able to perform as money substitutes, channelling liquidity in the form of cash into the VOC and solving the issue.43 The work of Ron Harris develops a holistic explanation of the institutional formation process. Harris deconstructed every institutional structure into individual “building-blocks”, arguing that their capacity to be exported to different cultural settings, and to be mixed with others to produce a resulting overall institution, depends on their history and setting.44
The main strength of the joint-stock corporation, however, resides it is legal components, which were capable of offering security and guarantees to investors as well as informational advantages.45 What the combination of the jointstock and the legal personhood of the corporation achieved was the creation for the first time of impersonal markets, capable of bringing “impersonal cooperation”, and thus to obtain resources beyond the limitations that family firms and state enterprises had managed to achieve before them.46 The enhanced capacity to pool resources and mobilise capital is what unites the transaction costs literature with the more historical approaches of historians like Steensgaard, Harris, and Gelderblom and Jonker. This book wholly agrees with placing liquidity at the centre of the analysis, a result of the increased demands posed by a new way of long-distance trading. What the case of Manila’s capital market shows is that there was an alternative path to achieving impersonal cooperation that went beyond the networks of mercantile dynasties and cultural groups, and yet did not need incorporation or constitutionalism as defined by North. Neither did it have recourse to chartered proto-national banks or to the spillover effect of public debt to form.47
Instead, in Manila, religious institutions of an urban nature evolved to provide the intermediary link between the broader population and trade finance. These were the brotherhoods and religious orders that played such a fundamental role in structuring the capital markets elsewhere in the Iberian world, but whose analysis until now has been confined to local and public debt markets.48 Manila shows that, given the right economic context, these institutions could also mobilise the necessary resources to finance long-distance trade.
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