Much has already been written about the Manila Galleon, the system of annual commercial sailings between Manila and Acapulco that dominated trans-Pacific trade for two and a half centuries from the latter part of the 16th-century until the early 19th, a development which is often taken to mark the beginning of “globalization”. Juan José Rivas Moreno reviews much of that as background, but unlike perhaps any other book on the subject to date, he turns his gaze to what was going on in Manila itself.
In The Capital Market of Manila and the Pacific Trade, 1668-1838: Institutions and Trade during the First Globalization, Rivas Moreno attempts to answer the question as to how the Manila Galleon was financed. He first needs to explain why one needs to ask the question at all; the trade was so profitable (with margins of several hundred percent), that financing hardly seems to be the issue—and, as he illustrates, there was so much money sloshing around Manila that finance per se was rarely a problem.
The cash in question consisted of Mexico-minted silver pesos.
But sometimes what matters is to ask the question. The nature of the trade is that Asian goods would arrive in Manila (mostly from China, but increasing from other places, especially India and Southeast Asia). These were purchased and paid for (in cash) by Manila-based (Manileño) traders; the goods were then aggregated and shipped in the Galleon to Acapulco where they were purchased (in cash) by (on the whole) Mexico-based wholesalers.
The cash in question consisted of Mexico-minted silver pesos (the famous “pieces of eight”), the only payment that the Chinese trusted and would accept. Manileños needed to front-up the cash to pay the Asian suppliers, money which would only be returned some nine months later once the Galleon returned to Manila the next season. The Mexican side of the trade did not send buyers to Manila to disintermediate the Manileños and buy the Asian trade goods directly; attempts to do would have been futile:
While the Asian leg of the trade was open to anyone that came to sell to Manila, the American leg was the consuetudinary right of the registered citizens (vecinos), encompassed in the formula of the “City and Commerce” by the reglamento of 1593. Local Manileños of Spanish descent were the only ones with the right to freight in the Galleon.
Rivas Moreno here takes issue with the conventional view that the Galleon trade was controlled out of Mexico:
Manileños had family and business relations with their counterparts in Mexico, but they were far from mere agents. Many of them remained in Manila, where they married, raised their children, and died. Their profits were often spent in Manila and their prosperity was tied to the city.
Manila was awash in cash.
Fortunately (or otherwise, as Rivas Moreno discusses later), Manila was awash in cash: margins were such that the retained earnings from its commercial activities meant there was more finance available than trade opportunities. I admit to having had some skepticism that Manila would have been large or complex enough to constitute the capital market of the title. But Rivas Moreno is convincing: but as markets go, this one was more than a little peculiar. It turns out that the major accumulators of capital were the obras pías, various charitable institutions with religious foundations which had an expansive view of “good works”: from supporting religious, education, medical and social institutions to providing cash for scholarships and dowries. Wealthy Manileños would deposit sums in so-called “legacy funds”, usually with a specific purpose.
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.
Funds were “managed”, not just doled out. Furthermore, each was managed independently by fund managers who, in modern parlance, needed to chase yield. Just as today, these funds helped finance the government, not just trade.
There were more peculiarities: why, other than hope for salvation, might someone deposit funds with an obra pía? One reason was social: this was the way one gained status. Another was that the people depositing were also the ones who accessed the funds for trade finance. The system was self-enforcing in that delinquent traders would find themselves locked out. Furthermore, while fund managers wanted yield and traders wanted lower rates, there was in fact considerable overlap between fund managers and traders; what might in other cases be seen as a conflict of interest seems to have kept rates stable.
Rivas Moreno discusses the various financial mechanisms that could be or were used, but the most common were correspondencias, “sea loans” in which capital plus a fixed premium would be returned once the ship returned safely to port. This was not a loan—it did not compound, nor was capital due if the ship sank—nor was it a profit share. Rivas Moreno discusses these and their particular characteristics and advantages in detail, something perhaps of most interest to historians of other trading regimes such as the East India Company, to which the author makes direct comparisons.
The system was very stable: every Manila citizen (a status which—in curious resonance with Hong Kong’s current permanent residency—“could be granted to those willing to reside in the city for at least eight years” and which could be held by “foreigners”) had access to the Galleon’s freight holds; the profits (via the funds in the obras pías) went back to support and develop the city. In a perhaps somewhat Panglossian passage, Rivas Moreno writes:
The emergence of the correspondencia funds in 1668 meant that the returns of the trade that accrued to them as proceeds of the correspondencias were then redistributed across the city as welfare, making the legacy funds central to the urban fabric of Manila. For the citizens, this meant that the maintenance of hospitals, dowries, schools, scholarships, etc., was directly linked to the trade through the premia which the obras pías could charge in the correspondencias, which in turn relied on the profit margin of the trade. Thus, the city of Manila as a beneficiary of the welfare generated by the obras pías also had a vested interest in maintaining profit margins—and premium rates—high: this was a rent-seeking arrangement encompassing the entire city.
The downside? Rivas Moreno argues that the Philippines suffered from the “Dutch disease”: there was so much money to be made from trade or finance, that no one bothered to invest in domestic agriculture and production. Locally-produced goods could not even compete in the domestic market.
“The gravest threat for profit margins was the possibility of glutting Spanish American markets with Asian goods.”
Of equal interest is Rivas Moreno’s description of how the Manila Galleon remained commercially, financially and logistically stable for so long, despite war, politics and various calamities. Goods could only be purchased for cash and in particular “specie”: coins and the peso in particular. Mexican wholesalers worked to control the supply of these, creating what was in effect a buy-side monopsony. That Manileño sellers were prevented from traveling out of Acapulco to other markets left the Acapulco Fair as the only place where transactions could be concluded. However the Fair needed to wrap up in time for the Galleon to catch the winds back to the Philippines so the sellers had a limited time in which to do their deals. The buyers would wait them out, driving down prices.
The reaction of the Manileños was to restrict supply; this, Rivas Moreno argues, again contrary to the conventional narrative, not government regulation for mercantilist reasons, was the reason why the Galleon was limited to a single ship per year. Furthermore, this, rather than tax evasion or corruption, was also the reason for secrecy regarding what each galleon actually carried: it prevented the buyers from playing the sellers off against each other. Rivas Moreno uses game theory (even identifying the Nash equilibrium!) to demonstrate why the single annual Galleon (albeit a huge one) was optimum, but his common sense explanations work just as well.
This arrangement, while economically inefficient, was convenient for both sides. “The gravest threat for profit margins was the possibility of glutting Spanish American markets with Asian goods”; when this finally happened starting in the late 18th century (due to changing politics and the entry of the USA as an independent trader) that the Galleon system broke down. The final ship sailed in 1815.
Rivas Moreno calls into question traditional narratives about the rise of capitalism.
Rivas Moreno’s objective is not merely to discuss the financial system in Manila but to place it in contrast with used by the East India Company and its Dutch equivalent and to call into question traditional narratives about the rise of capitalism:
The emergence of the correspondencia legacy funds in 1668 represented a revolution in the financing of the Pacific trade. Long-distance trade created unprecedented requirements of capital mobilisation and lock-in and supposed unprecedented challenges in monitoring and enforcing contracts. Solving these issues allegedly led to the emergence of “modern” and impersonal capital markets, establishing a direct causal link between long-distance trade and financial development. But the very question of modernity, which still today remains associated with the birth of capitalism, sits uneasily with the case of Manila.
In doing so, and in giving so much agency to Manila and the Manileños, he questions some parts of the conventional narrative of the Manila Galleon that have prevailed for a century or so. Some of his analysis may prove controversial. But The Capital Market of Manila and the Pacific Trade nevertheless helps explain why the trade was so stable and for so long.
It is no criticism to note that the book leaves some questions unanswered. The funds Rivas Moreno uses as the basis of his discussion only came about in 1668, by which time the Galleon had been in operation for almost a century, raising the question as to how trade finance functioned earlier. Nor does Rivas Moreno explore in any detail how the Chinese financial and monetary system dovetailed with that of Manila which was the major source of the silver that underpinned the Chinese monetary system and, from the 18th century, the exclusive supplier of the milled coins that became China’s de facto currency.
Rivas Moreno variously dates the introduction of the so-called “pillar dollar” (a “milled coin” designed to prevent clipping), to 1680 or the 1730s (it was 1732). He also implies that the later Mexican coin (the so-called “Eagle dollar”) in the same model wasn’t up to snuff: yet it was this latter coin that (as “dollars Mex”) went on to capitalize many of Hong Kong’s original companies and which became the basis for the Japanese Yen, Chinese Yuan and the Hong Kong dollar. The Mexican peso, like the Spanish coins before it, also commanded a premium, much to the annoyance of American traders. Manila by that time was well out of the picture, its place in economic history supplanted by Hong Kong.