Readying for Surrender: The Lack of Money and Decline of Military Power in History

We look at 17th century Spain as an example of how a great power can decline and fail when it takes on too much debt.  A lesson for the US.  

Transcript

Readying for Surrender: The Lack of Money and Decline of Military Power in History

March 2025

“Look back over the past, with its changing empires that rose and fell, and you can foresee the future, too.”

Marcus Aurelius

“The accumulation of debts is a most fearful evil.”

Thomas Jefferson

“Blessed are the young, for they shall inherit the national debt.”

Hebert Hoover

My first history book, discovered at age 13, was about the battle of Iwo Jima.  From there, I consumed all of World War II.  Then, the gradual acquisition of historical knowledge spread to political, religious, social, and even women’s history.  When I need something of pure diversion, I will return to the military history of my long-vanished youth.  Yet, in terms of truly understanding the ebbs and flows of history, one should turn not to the armies or generals but rather to economic history.  I may not have enjoyed it as much as Iwo Jima, but I would have learned more from Milton Friedman and Anna Jacobson Schwart’s A Monetary History of the United States, 1867 – 1960.  

From the time of the Egyptians to the modern-day United States, it is not necessarily about the armies that shape history but rather the ability to support them.  Our minds quickly drift to the great captains when we think of military history.  Alexander of Macedon, Hannibal Barca, Julius Caesar, Genghis Kahn, Yi Sun-sin, Horatio Nelson, Napoleon, Ulysses Grant, or George Patton.  But these military leaders were the outliers.  

What about those captains who lost, not because of lack of competence, but rather lack of resources for men, material or money?  Hamilcar Barca, Nicias, Belisarius, and all those English Kings such as Richard I, John, Edward III, or Charles I.  In the case of Richard, it was not the genius or military prowess of Phillip Augustus wherein he tended to better his Plantagenet counterpart, but rather that Richard had squandered his money in the Holy Land and on a ransom to an Austrian Duke. 

For much of history, nations that lose wars or even win them are not brought low because they lack strong armies or capable generals but because of a simple lack of money.  

Let’s start with Spain. In 1492, two momentous events co-occurred: Colombus and the completion of the Reconquista, a 700-year period in which Christian Kingdoms, primarily led by Castille, conquered the Muslim states that had held most of the Iberian Peninsula since Berber invasions in the 700s.  

Yet that other occurrence, Columbus’ discovery of the New World and the subsequent conquests of the Aztecs in the 1510s and the Incas in the 1530s brought incredible wealth.  

Earlier, Castille had united with the other major Christian Spanish power, Aragon, to form a relatively united state. In reality, both nations were still ruled as separate entities, but by the time Queen Isabelle of Castile and Ferdinand of Aragon’s grandson, Charles, took power, he was, in effect, King of Spain.  

Charles’ father was a Habsburg, the Holy Roman Emperor. His mother was the sole heir of both reining kings.  And because Aragon at the time controlled most of Italy, Charles was at the same time Holy Roman Emperor Charles V, Spanish King Charles I, the ruler of the Netherlands, much of Germany, and the aforementioned Italy.  He was the most powerful Western European monarch since Charlemagne.  As ruler of Spain, he had the gold and silver from the New World.  He also had the finest European army, centered on the Spanish Tercio, to do his bidding. Well, as long as he paid them.  

Charles’s various realms represented the first global empire since the great Khans.  However, unlike the Mongols, revenues from American silver mines were crucial to financing Charles’s expansive military endeavors.  The problem with ruling such a vast and diversified empire was the need for cash to defend it.  At any one time, Charles was fighting Valois France, newly Lutheran German princes, Italian entities, and, largest of all, a highly powerful Ottoman empire both in the Balkans and in the Western Mediterranean.  

Charles V and his son, Philip II, also extracted substantial tax revenues from their Castilian subjects. Yet compared to Spain’s northern neighbor France, the Ottomans in the East and South, Spain was relatively poor.  For example, Spain’s combined population in 1500 was around 6.5 million.  France’s, by comparison, was nearly 18 million.  The Ottomans ruled over 25 million. Even England considered a secondary state at the time, was nearly 4 million.  Having previously exiled the Muslims and Jews who formed much of the middle class, Spain did not possess significant industries as did the English and Charles’ possession, the Netherlands.  In some years, the Netherlands produced more revenue than Spain, subbing out the American treasure.  

From 1500 to 1650, Spain is said to have brought 180 tons of gold and a staggering 16,000 tons of silver, triple the current European silver reserves. A large amount came from a mountain in modern-day Bolivia known as Cerro de Potosi, which is supposedly made of silver. 

Authors Joao Pereira dos Santos, Nuno Palma, Carlos Javier Charotti, writing for VOX EU, note Spain was a first-rank European power around 1500. However, its economic growth was cut short at the end of the 16th century, giving way to a sustained decline and then falling behind Western Europe.

I recently completed a book on the life of the 1st Duke of Buckingham, George Villiers, called Scapegoat.  Author Lucy Hughes-Hallett makes the case for the costs of the Anglo-Spanish War of 1625-1630.  The war ended with the signing of the Treaty of Madrid in 1630, resulting in a status quo ante bellum. However, the conflict resulted in English cloth merchants losing access to profitable markets in Flanders (a Spanish possession), leading to widespread discontent. It also increased divisions between the Parliament of England and the English monarchy, which would ultimately result in the First English Civil War in 1642.

One of the refrains throughout Scapegoat as Buckingham continues with his war schemes is “no money, no money, no money.”  Hughes Hallet notes that without the direct power of taxation, English Kings James I and Charles I and their favored minister, Buckingham, fought wars with one arm behind their backs. This lack of critical power eventually led to the English Civil War, Charles’s death, and the clear supremacy of legislative and economic power in the hands of Parliament.  

Our founders knew their English history and were aware of these events, so they needed to put the power not just of laws but also of laws dictating taxation and revenue in the legislative body, not the executive. Though it is hard to see that today, as budgets, tax proposals, and revenue concepts emanate from the executive, who often thinks of the legislature as a rubber stamp for their schemes, the power still resides where it does.  

A contemporary of Charles I of England, Phillip IV of Spain, and the great-grandson of Charles V did not have such impediments to his desire to squeeze revenue.  

In a terrific piece called “Debt Has Always Been the Ruin of Great Powers. Is the US Next?” 

In the February 22, 2025, issue of the Wall Street Journal, historian Niall Ferguson provides a clear narrative of what happens to nations that cannot manage their debts.  

Charles V, Phillip II, and his son Phillip III were able to command vast resources from the Americas, but that came to an end in the mid-17th century. Spain kept spending even though the treasure quantities began to diminish, or the sheer introduction of so much hard currency meant inflation.  Each bar of silver was worth less each year.  So, the Spaniards went the route of our present-day Republic.  

As Ferguson writes, 

“With every passing decade, the Spanish empire relied more on borrowing. It issued juros, long-term bonds held mostly by the Castilian elite. It also raised funds by selling asientos, short-term IOUs, to bankers in Genoa and elsewhere.

The system was stable until 1600. The total stock of juros grew by a factor of 3.4 between 1594 and 1687, at a time when the revenues of the crown stagnated. Payments on the juros went from absorbing half of the Spanish revenue in 1667 to 87% just 20 years later. As Philip IV told the Council of the Indies even earlier, in 1639, “I recognize that the introduction of the jurors has caused the enormous ruin we experience.”

Between 1607 and 1662, the Spanish crown defaulted on part of its debt five times. Not coincidentally, the growth in per capita GDP that had characterized the “Golden Age” of the 16th century was followed by contraction in the 17th century, further reducing the crown’s tax revenues.

The geopolitical repercussions were unavoidable. In 1640, Portugal regained its independence after 60 years of dynastic union. The Peace of Westphalia in 1648 marked the formal recognition of Dutch independence and the effective end of Spain’s predominance in Europe. The Treaty of the Pyrenees in 1659 further underscored its diminished status as Spain ceded territory to France.

This is but one example.  We love those UNESCO sites, but the linkage between great building projects and indebtedness to state ruin is linked like a steel chain.  Build massive pyramids, the Egyptian fourth dynasty collapses.  Renaissance Popes redo the entire Vatican, including St. Peter and the Sistine Chapel, and they get a Reformation based on their unholy thirst for revenues.  The Bourbon French monarchs built a Versailles and, like the Spanish before them, spent money on fights over everything from religion to putting another Bourbon on the Spanish throne to replace the Habsburgs, and they got the French Revolution.  

The Bourbons, with no central bank that could issue banknotes and no restraining influence of Parliament to limit taxes and borrowing, simply ran up debt.  Yet, there was no liquid bond market where government debt could be bought and sold.  So they either sold offices, creating bureaucratic bloat, or, before the Revolution itself, tried to raise taxes.  

Niall Ferguson cites a Scot named Adam Ferguson for a law: (what the heck was in Scottish waters during the 18th century that produced the likes of Adam Smith, David Hume, and Adam Ferguson in a few generations?) But I digress. 

“Ferguson’s Law states that any great power that spends more on debt service than defense risks ceasing to be great. The insight is not mine but originates with the Scottish political theorist Adam Ferguson, whose “Essay on the History of Civil Society” (1767) brilliantly identified the perils of excessive public debt.” 

Niall Ferguson adds, “An expense, whether sustained at home or abroad, whether a waste of the present or an anticipation of future, revenue if it brings no proper return, is to be reckoned among the causes of national ruin.”

The striking thing is that the US began violating Ferguson’s Law last year for the first time in nearly a century. Annual defense spending—to be precise, national defense consumption expenditures and gross investment—was $1.107 trillion in 2024, according to the Bureau of Economic Analysis (BEA), while federal expenditure on interest payments (the government long ago gave up on paying down principal) topped out at $1.124 trillion.  

We have seen nothing like this since the era of isolationism. Between 1962 and 1989, US defense spending averaged 6.4% of GDP; debt service was less than a third of that at 1.8%. Even after the end of the Cold War, the federal government was still spending, on average, roughly twice as much on national security as on interest on the debt. Not anymore.

Because of the restraining influence of Parliament, Britain was able, at times during the Napoleonic Wars and both World Wars, to escalate its defense spending to nearly 150% of GDP.  But that was before the social safety nets that are now in place.  Britain could regain its spending and disband its armies and navies to reacquire fiscal stability.  It is not able to do that today.  And neither is the United States.  

There are many in the Trump administration whose answer is based on the quasi-isolation the US maintained before World War II.  The so-called “the US is not the world’s cop” position.  That is one debate.  What is not is that the US never had complete isolation.  From the inception of the Republic, the US has been brought into international situations ranging from North African pirates to Napoleonic-era assaults on shipping and sailors to South American interventions.  American warships steamed into Tokyo in the 1850s and were part of the Chinese Boxer Rebellion in 1900.  The Japanese destroyed the US gunboat Panay in 1937 on a Chinese River. U boats pulled us into World War I and Pearl Harbor into World War II.  This was during the era of the Pax Brittanica when the UK did the heavy lifting of global policing.  After World War II, with the inception of the Cold War, our involvement was necessary.  But the Soviets collapsed 30 years ago, so why do we have that role today?  I will name a few events later.    

Yet this debate on whether to isolate or not is slowly becoming mute. After the 1680s, the Spanish descended to second-tier status. The same was true for the French after the Franco-Prussian War and the British after World War II.  

What are the implications for America today? Geopolitically, the US finds itself in a situation comparable to Britain’s in the 1930s. Its military commitments are global, as they have been since 1945, and it confronts a new axis of authoritarian powers. 

Our situation is worse.  As noted, Britain, after the Napoleonic wars, did not have to maintain a social safety net and no full-on entitlements.  And let’s be clear.  DOGE is illusory, fake, performative.  The magician shows one hand while the trick is in the other.  We will cut US AID!  That line item to an everyday America, $1 billion, is nothing to sneeze at, but in terms of the federal budget, it is a rounding error on rounding error.  If you take ALL US spending on all foreign aid, you get about $74 billion or 1.2% of all spending on the federal budget.  As noted, interest spending is just the amount to maintain the debt, which is $881 billion or over 10 times that amount or 880 times more than the US AID spends.  

The only way back to fiscal solvency is the reform of entitlement spending, which covers roughly 50% or $3 trillion. It is also the fastest-growing part of the budget. For all the talk of Ukrainian aid and defense, defense is declining as a percentage of GDP. Social Security, Medicare, and Medicaid are growing fast.  

To put it more precisely, you have a family that is deeply in debt and is spending more on credit card interest payments than on healthcare.  But grandma is sick; the parents are aging, so the Healthcare costs will rise.  However, this family approaches their debt by buying socks and underwear at Walmart instead of Nordstrom.  They cut their streaming services from three down to two.  They go to pick up their food instead of paying an Uber Eats fee.  What is not on the table?  They keep their country club memberships, drive Lexus instead of Toyota, send their kids to private colleges, and do not downsize the home to reduce mortgage payments.  

Now, as Matt Taibbi notes, “The national debt is totally unlike a family budget for about a gazillion reasons, not the least of which is that families cannot raise money by fiat or deflate the size of their debt unilaterally and that family members die instead of existing infinitely. True, but you get the picture.

In other words, they tinker with the fringes of their budget but never get to the real cause of their indebtedness.  This is DOGE. This is entitlements.  

In the absence of radical reform of America’s principal entitlement programs—which successive administrations this century have either failed to achieve or ruled out—the only plausible way that the US can come back within the limit of Ferguson’s Law is, therefore, through a productivity miracle, which will not happen.  Why not?  One party is in love with the regulatory state, and the other is with central industrial management, picking winners and losers through tariff policy. Both of these approaches will curb innovation, investment, and productivity.  This does not mention that we spend 36% of our federal budget on the 15% of Americans who, by definition, are nontax paying and not productive.  

And the backboneless types who are in government today, and over the past 30 years, do not want to touch anything, just kick the can down the road.  Well, that is not fair.  George W Bush tried and was pilloried.  Paul Ryan tried was depicted as pushing a grandma off of a cliff.  Nikki Haley talked about it in 2024, but she has no political perch today because she is on the wrong side of Trump.  And the Democrats? AOC complains the spending is too little.  Bernie Sanders talks about tax increases, but his spending boondoggles would eat that up in a minute.  

But at least we can continue to raid defense. Right? As my new favorite political phrase from British Prime Minister Harold Macmillan notes, “Events, my Dear Boy, Events.”  We need not go into my beloved history too far for these events.  China invades Taiwan, just as Putin invaded the Ukraine.  Except that Taiwan accounts for 60% of the world’s semiconductors and nearly 90% of the most advanced chips used in our tech systems. Imagine Xi having this hold over us.  Or a 9/11-style attack that entails a major international response.  Or Iran gets the bomb and uses it on Tel Aviv. Or Putin, after taking over the Ukraine, threatens the Balkan states or Finland.  Or a revolution in Mexico.  Or one in Panama that closes the Canal. Or other pirates like the Houthis.  Events.

The United States is an international trader.  There is no such thing as fortress USA, and as the 220-year-old Marine hymn notes, “From the Halls of Montezuma To the shores of Tripoli; We fight our country’s battles In the air, on land, and sea.” Tripoli? Barbary pirates’ incursions in 1801.  Our isolation was always a myth.  

The difference was not that we were fighting pirates in the first days of the 19th century; it was that the United States was economically capable of doing so and much more. Today, the marines would either not exist or go unpaid.