When safety becomes risky. Essays on venality, safe assets, and the bubble for offices in early modern Spain

Laburpena

This dissertation, which is structured as a four-paper thesis, aims to analyze the potential existence of an asset bubble in the market for offices (i.e., licenses to be a public officer) in 17th century Castile. In order to examine whether this idea holds true, I have constructed a unique database which contains 1,813 sales, 2,794 resignations, and 370 leases of four different types of offices (regidores-veinticuatros, procuradores del número, escribanos del número, and other escribanos) in 8 major Castilian cities (Burgos, Córdoba, Granada, Madrid, Málaga, Seville, Valladolid, and Zamora) from 1543 to 1710. Chapter I focuses on collection process, main characteristics and limitations of the database. This is mainly based on original manuscripts from the Council of Finance and the Chamber of Castile. Besides sales and resignations, the dataset includes other relevant variables, such as perpetuaciones, leases, wages, and arrangements with creditors, that allows an extensive study of the evolution of the market for offices in Castile. The main limitation of this database is that secondary sales are underreported before the 1580s. However, this problem may be overcome due to the fact that this period is rich in primary sales, and both primary and secondary sales are statistically equivalent. Chapter II studies the institutional evolution and size of market for offices, while analyzing office profitability. I differentiate between the “patrimonialization” process (i.e., conversion of offices into a part of family patrimony) and institutionalization (i.e., the process through a formal market for offices was created). The latter played a key role in the development of property rights, reduction of transaction costs, and expansion of the market for offices. Also, the value at market prices of the most relevant offices in the eighteen cities with voting rights at the Cortes is estimated. The estimates result in 2,807,012 ducats in 1581, 5,358,871 ducats in 1599, and 10,919,189 ducats in 1640. These number are equivalent to 6.2, 7.1, and 8.8 percent of overall consolidated public debt of the whole kingdom in 1581, 1599, and 1640 respectively. Finally, it is shown in this chapter that offices were economically profitable. Offices with fixed earnings display wage-to-price ratios between 2.6 and 5.7 percent, while variable-pay offices had ratios between 6 and 12 percent on average. Additionally, offices could be leased, and the standard return to capital of leases was close to 5 percent. Chapter III analyzes how offices became financial assets during the 16th century. In particular, it is studied how the combination of offices, censos (long-term loans), and pactos de retroventa (repurchasing agreements) allowed office-holders to lease out offices, and create sophisticated financial vehicles, such as Office-Backed-Censos and repo transactions. This chapter also shows that offices fulfilled all conditions to be regarded as safe assets. This means that offices did not suffer from adverse selection, were very liquid, and increased their value during worsening economic times (the latter is analyzed through several dynamic panel models, such as DOLS, PDOLS and AMG, that are suitable for the characteristics of the dataset). To conclude, chapter IV studies the evolution of office prices during the 16th and 17th centuries. First, it is demonstrated that markets for offices were integrated along Castile. The analysis of prices also shows that the boom-bust cycle took place between 1595 and 1630-40. Most plausible fundamental variables that could provoke this cycle (expansive monetary policies, Dutch Disease, perpetuaciones, and servicio de millones) are ruled out. Hence an explanation is provided based on the Aoki et al.’s (2014) model that fits with the timing of the boom-bust and the aforementioned evidence. This model proves the tendency of economies to overvalue safe assets, and concludes that bubbles can arise due to a safe asset shortage. This indeed happened in Castile from the late 1590s onwards. The kingdom suffered from a shortfall of haven assets since 1593-1596 due to juros’ loss of safety caused by the Crown’s debt-management. Castilian investors then substituted juros for silver and offices, and provoked the office bubble. The bust, which took place in the late 1630s and 1640s, could be explained because of the reduction in office profitability, and a harsh economic and political crisis that probably restricted access to credit and deteriorated political fundamentals of offices. Finally, it is shown that the so-called Office Mania coincided with some traditional patterns of bubbles (low interest rates, growing credit, speculation, and arrangements with creditors). Also, this mania fulfilled all criteria to be considered a bubble by Quinn and Turner (2020). It is to say that satisfied the “bubble triangle” (marketability, increasing credit and money, and speculation), and it was triggered by a government policy (i.e., the bad practices in debt management)