Staying Afloat

Risk and Uncertainty in Spanish Atlantic World Trade, 1760-1820

Jeremy Baskes

• Publisher: Stanford University Press
• Year: 2013
• ISBN:
  9780804786355
• Edition: 1
• Topic: Historia
• Subtopic: Historia de Latinoamérica y el Caribe

Early modern, long-distance trade was fraught with risk and uncertainty, driving merchants to seek means (that is, institutions) to reduce them. In the traditional historiography on Spanish colonial trade, the role of risk is largely ignored. Instead, the guild merchants are depicted as anti-competitive monopolists who manipulated markets and exploited colonial consumers. Jeremy Baskes argues that much of the commercial behavior interpreted by modern historians as predatory was instead designed to reduce the uncertainty and risk of Atlantic world trade.

This book discusses topics from the development and use of maritime insurance in eighteenth- century Spain to the commercial strategies of Spanish merchants; the traditionally misunderstood effects of the 1778 promulgation of "comercio libre, " and the financial chaos and bankruptcies that ensued; the economic rationale for the Spanish flotillas; and the impact of war and privateering on commerce and business decisions. By elevating risk to the center of focus, this multifaceted study makes a number of revisionist contributions to the late colonial economic history of the Spanish empire.

Chapter 1

Introduction: Risk and Uncertainty

Risk was pervasive in early modern, oceanic commerce. At virtually every juncture of a long-distance venture, merchants encountered risks that threatened to sink their investments and generate painful losses. This ever-present danger was even reflected in the basic language of trade: to engage in a commercial transaction was expressed in Spanish as correr un riesgo, “to take a risk.” Given the prevalence of risk, it is not surprising that early modern traders were deeply aware and profoundly concerned about the many dangers that their business dealings might face and dedicated considerable energies to reduce or accommodate them. Despite the centrality of risk in governing commercial behavior, however, historians of the Spanish empire have virtually ignored its role.¹ This book seeks to rectify this omission by elevating risk and uncertainty to the center of analysis. Not only does this approach require the exploration of new issues, but analyzing familiar topics through the lens of risk management produces wholly different perspectives about the activities and behaviors of Spain’s Atlantic traders.

Merchants engage in business with the goal of making profits. Risk represents an obstacle to the success of mercantile ventures, an event or danger that has a potentially negative consequence on the outcome of business deals. If not for risk and uncertainty, merchants could develop commercial strategies confident that all scenarios were known and that no surprises would arise. In classical economic theory entailing perfect competition, “practical omniscience on the part of every member of the competitive system” is assumed. Entrepreneurs operate from positions of perfect knowledge in which “the future will be foreknown.” Under such theoretical conditions, commerce would benefit from stability and predictability. In reality, however, business is always conducted with some degree of risk and uncertainty. Economic actors are not omniscient.²

In the early modern world, risk and uncertainty were pervasive, especially in long-distance, transoceanic trade. The central argument put forth in this book is that much of the commercial behavior of Spanish merchants should be understood as their responses to the ever-present riskiness of trade. Economic historian Peter Musgrave has argued that it is impossible to understand the early modern commercial world without considering the centrality of risk and uncertainty. In their efforts to mitigate risk, he argues, early modern merchants often engaged in “odd economic behavior,” adding that “without [considering] uncertainty and its consequences, much of the economic and social history of the pre-modern world is, if not completely inexplicable, at least deeply mysterious.”³ To understand the behavior of Spanish imperial merchants, the historian must take into consideration the tremendously uncertain conditions under which they operated.

Early modern Spanish merchants did not accept passively the business climates that they encountered. Instead, they sought to shape or influence commercial environments and institutions. The Atlantic world was fraught with risks, any one of which could derail a merchant’s plans or even devastate his financial empire. As a consequence, merchants engaged in risk-reducing strategies, developed risk-mitigating institutions, and sought what ever means possible to reduce the uncertainty and ambiguity that pervaded early modern trade.

Economists make an important distinction between risk and uncertainty. According to Frank H. Knight, an early twentieth-century American economist⁴ whose pioneering work emphasized their difference, risk was “a quantity susceptible of measurement” whereas uncertainty was “unmeasurable.” A risk was a phenomenon whose probability could be computed, allowing economic actors to pass it onto others, to buy protection against such a risk.⁵ The Atlantic world mercantile community, for example, had some sense of the frequency of shipwrecks. While any individual accident was unpredictable, the law of large numbers⁶ allowed the computation of the probability of a ship sinking. Knowing the probability of any one ship becoming lost in a shipwreck allowed shipowners to pool their risks so as to convert the danger into a fixed cost. Rather than bear the entire (albeit small) risk of having one’s vessel wrecked, shipowners could eliminate the risk altogether by paying a small premium determined by the probability of a shipwreck. As such, no shipowner would suffer a total loss; instead, the cost of the premium would be known in advance. The consolidation (pooling) of risk is most often accomplished through the acquisition of insurance in which traders pass onto a company or partnership the risk that they prefer not to endure themselves.⁷ By purchasing insurance, shipowners and merchants reduced significantly the riskiness of their ventures.

Far more problematic for economic actors, Knight argued, were unmeasurable risks, nowadays termed in the economics literature “Knightian uncertainties.” These risks occur without any predictable pattern and thus cannot be addressed through insurance or other pooling mechanisms. “Business decisions,” for example, “deal with situations that are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance.” To weather these risks and profit from his ventures, a businessmen had to rely on his judgment (experience, risk tolerance, business acumen, etc.) to guide his decisions. Obviously, merchants’ judgment was highly imperfect and variable. Two veteran early modern merchants might employ their vast experiences to assess the multitude of factors that affected a potential deal and yet make wholly different decisions. The issues were so vast and unpredictable that merchants could not measure with much precision the probability of a venture’s success. Put differently, long-distance trade entailed a notable element of gambling. Each transaction was distinct, the variety of influencing factors numerous, and its outcome thus uncertain. Merchants anticipated that their successful ventures would outweigh their failures, but the probability of success of any individual transaction was impossible to determine. Trade was uncertain.⁸

There are several ways to deal with risk and uncertainty. Again, measurable risks can be passed onto a third party, notably an insurer. Knightian uncertainties, however, were by definition too unpredictable or unique to be quantified and thus eliminated by finding others to assume them, to accept a payment to take them on. Long-distance commerce entailed many uncertainties that could never be eradicated, but merchants did attempt, with varying success, to limit their impact. While their unpredictability made them uninsurable, they could be minimized or reduced. No matter how greatly a trader sought to avoid risks and uncertainties, however, they were inevitably central factors determining the success or failure of long-distance trade. No merchant could ignore these factors.

• • •

This is a book about the ways in which merchants of the Spanish Atlantic world sought to deal with the endemic risks and uncertainties of long-distance commerce. Risk management (here understood to be the totality of efforts, individual and systemic, that aimed to reduce risk and uncertainty) was vital to the business decisions of long-distance merchants. Indeed, this book argues that managing risk was the principal concern of international merchants and that many aspects of Spanish imperial trade practices can only be understood fully when examined through the lenses of risk and uncertainty.

The riskiness (both measurable and unmeasurable) of early modern, Atlantic world trade arose from a multitude of factors, all of which a prudent merchant needed to consider. One major source of uncertainty resulted from the poor information that merchants inevitably possessed in the planning and execution of their business activities, an issue examined in Chapter 2. As Knight explains, “the fundamental uncertainties of economic life are the errors in predicting the future and in making present adjustments to fit future conditions.”⁹ One way that traders sought to reduce the uncertainty was by increasing their knowledge of the business and political climates that affected their interests. But good information was difficult and expensive to obtain in the early modern world as news traveled slowly and imperial politics were anything but transparent. As a result, business was most often conducted with only limited knowledge of relevant factors, what economists refer to as “bounded rationality,” contributing greatly to the uncertainty surrounding long-distance trade, and complicating the already difficult judgments merchants were forced to make about the future. Few activities exhausted more of a merchant’s time than writing letters to all corners of his business empire, trying to reduce the imperfection of his information. Knowledge of commercial and political conditions throughout the Atlantic world helped merchants penetrate the fogginess in which they engaged their trade. Although merchants understood the importance of good information, the communication technologies of the day were underdeveloped, especially so in the Spanish empire, resulting in the sporadic and slow movement of intelligence. Information received from the other side of the Atlantic was better than none, but it was always dated and might, if no longer accurate, even lead a merchant to make costly, ill-advised decisions. Long-distance trade moved at a snail’s pace and required decisions about unpredictable markets and unknowable circumstances well in the future, and “the longer it is, the more uncertainty will naturally be involved.”¹⁰ Even the best informed long-distance merchants operated largely in the dark.

Imperfect information increased greatly the costs and risks of doing business. One of the greatest dangers emerged from unpredictable and changing market conditions. Merchants guided their commercial decisions on reports they received regarding existing supply and demand in markets throughout the Atlantic world and beyond. But given the slow movement of information and goods, market conditions could change radically between, for example, the dispatch of intelligence from America, its receipt in Spain, and the corresponding shipment and arrival of goods back to America. The danger of market risk plagued all early modern merchants, no matter from where they operated their businesses.

The cost of conducting business is influenced by the political, legal, economic, and cultural institutional framework in which such economic activities are undertaken. According to Nobel laureate Douglass North, institutions “determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity.”¹¹ These institutions, however, are not fixed. Indeed, institutional economists predict that when faced with elevated risk and other costly obstacles to economic growth, economic actors will design new (or adapt existing) institutions or economic practices to lower costs, reduce risks, and make feasible economic activities that would otherwise be too dangerous or expensive to undertake. “The major role of institutions in a society is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure to human interaction.”¹²

Merchants responded to the uncertainty of market risk, sudden fluctuations in supply or demand, by either creating new or adapting existing institutions. Chapter 3 examines market risk in the Atlantic world as well as the institutional responses designed to reduce such risks. Merchants throughout turned to economic institutions to lower the frequency or severity of market shifts. One institution that merchants outside of the Spanish empire relied upon heavily to reduce commercial risk was the vertically integrated trading company—for example, the English, Dutch, or French East India Companies, the Royal African Company, or the Hudson Bay Company. By concentrating trade in a single entity with sanctioned monopoly privileges, merchants benefited by exercising more direct control over supplies in distant markets, allowing them to reduce the likelihood of sudden saturation of markets. Trade became less volatile and risky, and thus more feasible. According to Knight, a larger business entity, such as a corporation, faces reduced risks due to “the extension of the scope of operations to include a large number of individual decisions, ventures, or ‘instances.’”¹³ Decisions and the intelligence informing them were aggregated, and thus uncertainty was lessened.

In the Spanish empire, monopoly trading companies did not develop for the most important routes. Instead, there emerged a complex array of regulations on commerce which had the consequence of performing some of the same risk-reducing functions as the chartered companies. Historians have failed to adequately appreciate these parallels; instead they have stressed only the negative, monopolistic aspects of the Carrera de Indias. Until commercial reform in the last decades of the eighteenth century, granting of trade licenses in Spain was tightly controlled and severely limited, restricting the total amounts involved in transatlantic commerce to quantities that could be reasonably consumed in the colonies. The number of open ports was also kept deliberately few. One explicit goal of regulated commerce was to match supply and demand, to prevent the glutting of markets. Until they were terminated in 1739 to Peru and 1778 to Mexico, the flotas and galleons that ran between Spain and the colonies helped to regularize trade, making supplies more predictable and reducing the degree of market risk. Limited licensing and organized fleets lowered risk by making trade less volatile. They functioned in a somewhat similar fashion to chartered companies in other Atlantic world empires.

Scholars have tended to view the regulated Spanish commercial system solely as a vehicle of the mercantile elite to garner excessive monopoly profits by excluding competition. Because this widely embraced view of the trade system is at odds, to some degree, with the risk-reducing rationale for regulation put forth here, it is also examined in Chapter 3. Monopoly, in this context, had two distinct features. First, monopoly was geographical; the Andalusian cities of Seville (until 1717) and Cadiz (thereafter) enjoyed Crown-granted, exclusive access to the Spanish American markets. Similarly, legal ports in the colonies were limited to a choice few, Veracruz and Callao (Lima) being the most important. Seville/Cadiz became an international hub with all of the financial and commercial institutions necessary to facilitate transatlantic trade, a concentration of trade institutions that provided certain economic efficiencies. Wealthy merchants from all corners of the Atlantic world migrated to Andalusia to partake in commerce. While non-Spaniards were excluded from trading directly with the colonies, a perfectly comprehensible policy given Spain’s mercantilist goals, there were no obvious trade barriers to Spanish merchants of a certain size and wealth, assuming they relocated to Andalusia.

Spaniards from every region of the peninsula matriculated into the Andalusian consulados, the powerful merchant guilds of Seville and Cadiz. The dominance of Spanish-Atlantic trade by members of the consulado is a second monopoly characteristic identified by historians who argue that the wealthy consulado merchants exploited their political and economic power to earn excessive profits. Chapter 3 challenges this traditional argument, suggesting that there were far too many traders involved in Spanish imperial trade to have permitted even the largest and wealthiest to exercise monopoly and dictate commodity prices. Merchants engaged in Atlantic world trade were usually wealthy, and for good reason, but their individual interests trumped any class or institutional alliances that might have pressured them to collude on prices. In any event, there were too many of them to have functioned as a cartel. Wealth might have gained them a foothold in the commercial system, but once they entered, they faced considerable competition from similar traders.

Relative to its neighbors, Spain’s continued decline throughout most of the eighteenth century led reformers to prescribe changes to the regulated Spanish commercial system. Indeed by the second half of the century, a Bourbon modernizing ideology that painted the commercial system as an obstacle to Spain’s development had triumphed, making the Carrera de Indias a central target for restructuring. Initiated in 1765, the zenith of reform was the 1778 promulgation of comercio libre (free trade), which opened the Spanish imperial commercial system to many more ports and led the Crown to greatly increase the number of ships and volume of cargo licensed to trade in the Spanish Atlantic world. Chapter 4 examines the impact of trade reform. The 1778 legislation has traditionally been depicted as a singularly revolutionary transformation in Spanish commerce, one that led to a spectacular increase in transatlantic trade and the emergence of a more competitive, entrepreneurial class of traders. In fact, the period after 1778 has even been dubbed a “golden age” in Spanish trade.¹⁴ All of these assumptions are scrutinized in this chapter. First, a new body of scholarship leaves little question that the actual growth of trade was a small fraction of that which historians have traditionally suggested. Deregulation of the commercial system did lead to commercial expansion, but ...