Jeremy Baskes is Professor of History and Director of Latin American Studies at Ohio Wesleyan University. He is the author of Indians, Merchants, and Markets: A Reinterpretation of the Repartimiento and Spanish-Indian Economic Relations in Late Colonial Oaxaca, 1750-1821 (Stanford, 2000).

STAYING A FLOAT

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

By JEREMY BASKES

Stanford University Press

Copyright © 2013 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8047-8542-6

Contents

Figures and Tables…………………………………………………ixAcknowledgments……………………………………………………xiii1. Introduction: Risk and Uncertainty………………………………..12. Staying Informed: The Risks of Poor Information in Atlantic World
Trade…………………………………………………………….173. The Institutions of Trade and the Reduction of Market Risk: The Convoy
System……………………………………………………………434. Comercio Libre and the Rise of Commercial Risk……………………..695. The Rising Demand for Credit and the Escalation of Risk in the
Post-1778 Era……………………………………………………..1106. Trade in War and Peace…………………………………………..1467. Underwriting Risk: The Structure and Organization of Insurance
Partnerships in Late Eighteenth-Century Cadiz…………………………1798. Insuring Against Risk: Analysis of Insurance Policies and the
Perception of Risk in Atlantic World Trade……………………………2059. War and Commercial Crisis: The Profitability of the Cadiz Insurance
Industry in the 1790s………………………………………………25610. Conclusion: Staying Afloat………………………………………274Notes…………………………………………………………….283Bibliography………………………………………………………363Index…………………………………………………………….381

CHAPTER 1

Introduction: Risk and Uncertainty

Risk was pervasive in early modern, oceanic commerce. At virtually everyjuncture of a long-distance venture, merchants encountered risks thatthreatened to sink their investments and generate painful losses. Thisever-present danger was even reflected in the basic language of trade: toengage in a commercial transaction was expressed in Spanish as correr unriesgo, “to take a risk.” Given the prevalence of risk, it is not surprising thatearly modern traders were deeply aware and profoundly concerned aboutthe many dangers that their business dealings might face and dedicatedconsiderable energies to reduce or accommodate them. Despite the centralityof risk in governing commercial behavior, however, historians ofthe Spanish empire have virtually ignored its role. This book seeks torectify this omission by elevating risk and uncertainty to the center ofanalysis. Not only does this approach require the exploration of new issues,but analyzing familiar topics through the lens of risk managementproduces wholly different perspectives about the activities and behaviorsof Spain’s Atlantic traders.

Merchants engage in business with the goal of making profits. Riskrepresents an obstacle to the success of mercantile ventures, an event ordanger that has a potentially negative consequence on the outcome ofbusiness deals. If not for risk and uncertainty, merchants could developcommercial strategies confident that all scenarios were known and thatno surprises would arise. In classical economic theory entailing perfectcompetition, “practical omniscience on the part of every member of thecompetitive system” is assumed. Entrepreneurs operate from positions ofperfect knowledge in which “the future will be foreknown.” Under suchtheoretical conditions, commerce would benefit from stability and predictability.In reality, however, business is always conducted with somedegree of risk and uncertainty. Economic actors are not omniscient.

In the early modern world, risk and uncertainty were pervasive, especiallyin long-distance, transoceanic trade. The central argument putforth in this book is that much of the commercial behavior of Spanishmerchants should be understood as their responses to the ever-presentriskiness of trade. Economic historian Peter Musgrave has argued that it isimpossible to understand the early modern commercial world withoutconsidering the centrality of risk and uncertainty. In their efforts to mitigaterisk, he argues, early modern merchants often engaged in “odd economicbehavior,” adding that “without [considering] uncertainty and itsconsequences, much of the economic and social history of the pre-modernworld is, if not completely inexplicable, at least deeply mysterious.” Tounderstand the behavior of Spanish imperial merchants, the historianmust take into consideration the tremendously uncertain conditions underwhich they operated.

Early modern Spanish merchants did not accept passively the businessclimates that they encountered. Instead, they sought to shape or influencecommercial environments and institutions. The Atlantic world was fraughtwith risks, any one of which could derail a merchant’s plans or even devastatehis financial empire. As a consequence, merchants engaged in risk-reducingstrategies, developed risk-mitigating institutions, and soughtwhat ever means possible to reduce the uncertainty and ambiguity thatpervaded early modern trade.

Economists make an important distinction between risk and uncertainty.According to Frank H. Knight, an early twentieth-century Americaneconomist whose pioneering work emphasized their difference, riskwas “a quantity susceptible of measurement” whereas uncertainty was”unmeasurable.” A risk was a phenomenon whose probability could becomputed, allowing economic actors to pass it onto others, to buy protectionagainst such a risk. The Atlantic world mercantile community, forexample, had some sense of the frequency of shipwrecks. While any individualaccident was unpredictable, the law of large numbers allowed thecomputation of the probability of a ship sinking. Knowing the probabilityof any one ship becoming lost in a shipwreck allowed shipowners to pooltheir risks so as to convert the danger into a fixed cost. Rather than bearthe entire (albeit small) risk of having one’s vessel wrecked, shipownerscould eliminate the risk altogether by paying a small premium determinedby the probability of a shipwreck. As such, no shipowner would suffer atotal loss; instead, the cost of the premium would be known in advance.The consolidation (pooling) of risk is most often accomplished throughthe acquisition of insurance in which traders pass onto a company or partnershipthe risk that they prefer not to endure themselves. By purchasinginsurance, shipowners and merchants reduced significantly the riskiness oftheir ventures.

Far more problematic for economic actors, Knight argued, were unmeasurablerisks, nowadays termed in the economics literature “Knightianuncertainties.” These risks occur without any predictable pattern andthus cannot be addressed through insurance or other pooling mechanisms.”Business decisions,” for example, “deal with situations that arefar too unique, generally speaking, for any sort of statistical tabulation tohave any value for guidance.” To weather these risks and profit from hisventures, a businessmen had to rely on his judgment (experience, risktolerance, business acumen, etc.) to guide his decisions. Obviously, merchants’judgment was highly imperfect and variable. Two veteran earlymodern merchants might employ their vast experiences to assess themultitude of factors that affected a potential deal and yet make whollydifferent decisions. The issues were so vast and unpredictable that merchantscould not mea sure with much precision the probability of a venture’ssuccess. Put differently, long-distance trade entailed a notable element ofgambling. Each transaction was distinct, the variety of influencing factorsnumerous, and its outcome thus uncertain. Merchants anticipated thattheir successful ventures would outweigh their failures, but the probabilityof success of any individual transaction was impossible to determine. Tradewas uncertain.

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

* * *

This is a book about the ways in which merchants of the Spanish Atlanticworld sought to deal with the endemic risks and uncertainties of long-distancecommerce. Risk management (here understood to be the totalityof 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 ofinternational merchants and that many aspects of Spanish imperial tradepractices can only be understood fully when examined through the lensesof 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 prudentmerchant needed to consider. One major source of uncertainty resultedfrom the poor information that merchants inevitably possessed inthe planning and execution of their business activities, an issue examinedin Chapter 2. As Knight explains, “the fundamental uncertainties of economiclife are the errors in predicting the future and in making presentadjustments to fit future conditions.” One way that traders sought to reducethe uncertainty was by increasing their knowledge of the businessand political climates that affected their interests. But good informationwas difficult and expensive to obtain in the early modern world as newstraveled slowly and imperial politics were anything but transparent. As aresult, business was most often conducted with only limited knowledge ofrelevant factors, what economists refer to as “bounded rationality,” contributinggreatly to the uncertainty surrounding long-distance trade, andcomplicating the already difficult judgments merchants were forced tomake about the future. Few activities exhausted more of a merchant’s timethan writing letters to all corners of his business empire, trying to reducethe imperfection of his information. Knowledge of commercial and politicalconditions throughout the Atlantic world helped merchants penetratethe fogginess in which they engaged their trade. Although merchantsunderstood the importance of good information, the communication technologiesof the day were underdeveloped, especially so in the Spanishempire, resulting in the sporadic and slow movement of intelligence. Informationreceived from the other side of the Atlantic was better thannone, but it was always dated and might, if no longer accurate, even lead amerchant to make costly, ill-advised decisions. Long-distance trade movedat a snail’s pace and required decisions about unpredictable markets andunknowable circumstances well in the future, and “the longer it is, themore uncertainty will naturally be involved.” Even the best informedlong-distance merchants operated largely in the dark.

Imperfect information increased greatly the costs and risks of doingbusiness. One of the greatest dangers emerged from unpredictable andchanging market conditions. Merchants guided their commercial decisionson reports they received regarding existing supply and demand inmarkets throughout the Atlantic world and beyond. But given the slowmovement of information and goods, market conditions could changeradically between, for example, the dispatch of intelligence from America,its receipt in Spain, and the corresponding shipment and arrival of goodsback to America. The danger of market risk plagued all early modernmerchants, 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 economicactivities are undertaken. According to Nobel laureate Douglass North,institutions “determine transaction and transformation costs and hencethe profitability and feasibility of engaging in economic activity.” Theseinstitutions, however, are not fixed. Indeed, institutional economists predictthat when faced with elevated risk and other costly obstacles to economicgrowth, economic actors will design new (or adapt existing) institutionsor economic practices to lower costs, reduce risks, and make feasibleeconomic activities that would otherwise be too dangerous or expensive toundertake. “The major role of institutions in a society is to reduce uncertaintyby establishing a stable (but not necessarily efficient) structure tohuman interaction.”

Merchants responded to the uncertainty of market risk, sudden fluctuationsin supply or demand, by either creating new or adapting existinginstitutions. Chapter 3 examines market risk in the Atlantic world as wellas the institutional responses designed to reduce such risks. Merchantsthroughout turned to economic institutions to lower the frequency orseverity of market shifts. One institution that merchants outside of theSpanish empire relied upon heavily to reduce commercial risk was thevertically integrated trading company—for example, the English, Dutch,or French East India Companies, the Royal African Company, or theHudson Bay Company. By concentrating trade in a single entity withsanctioned monopoly privileges, merchants benefited by exercising moredirect control over supplies in distant markets, allowing them to reducethe likelihood of sudden saturation of markets. Trade became less volatileand risky, and thus more feasible. According to Knight, a larger businessentity, such as a corporation, faces reduced risks due to “the extension ofthe scope of operations to include a large number of individual decisions,ventures, or ‘instances.'” Decisions and the intelligence informing themwere aggregated, and thus uncertainty was lessened.

In the Spanish empire, monopoly trading companies did not developfor the most important routes. Instead, there emerged a complex array ofregulations on commerce which had the consequence of performing someof the same risk-reducing functions as the chartered companies. Historianshave failed to adequately appreciate these parallels; instead they havestressed only the negative, monopolistic aspects of the Carrera de Indias.Until commercial reform in the last de cades of the eighteenth century,granting of trade licenses in Spain was tightly controlled and severely limited,restricting the total amounts involved in transatlantic commerce toquantities that could be reasonably consumed in the colonies. The numberof open ports was also kept deliberately few. One explicit goal of regulatedcommerce was to match supply and demand, to prevent the gluttingof markets. Until they were terminated in 1739 to Peru and 1778 toMexico, the flotas and galleons that ran between Spain and the colonieshelped to regularize trade, making supplies more predictable and reducingthe degree of market risk. Limited licensing and or ga nized fleets loweredrisk by making trade less volatile. They functioned in a somewhat similarfashion to chartered companies in other Atlantic world empires.

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

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

Relative to its neighbors, Spain’s continued decline throughout most ofthe eighteenth century led reformers to prescribe changes to the regulatedSpanish commercial system. Indeed by the second half of the century, aBourbon modernizing ideology that painted the commercial system as anobstacle to Spain’s development had triumphed, making the Carrera de Indiasa central target for restructuring. Initiated in 1765, the zenith of reformwas the 1778 promulgation of comercio libre (free trade), which openedthe Spanish imperial commercial system to many more ports and led theCrown to greatly increase the number of ships and volume of cargo licensedto trade in the Spanish Atlantic world. Chapter 4 examines the impact oftrade reform. The 1778 legislation has traditionally been depicted as a singularlyrevolutionary transformation in Spanish commerce, one that ledto a spectacular increase in transatlantic trade and the emergence of a morecompetitive, entrepreneurial class of traders. In fact, the period after 1778has even been dubbed a “golden age” in Spanish trade. All of these assumptionsare scrutinized in this chapter. First, a new body of scholarshipleaves little question that the actual growth of trade was a small fraction ofthat which historians have traditionally suggested. Deregulation of thecommercial system did lead to commercial expansion, but nowhere nearwhat has been accepted in the dominant historiography. Second, the stillsubstantial growth of commerce after 1778 had both positive and negativeconsequences. Growing competition expanded trade, lowered prices forconsumers, and increased Royal tax revenues, but also led to increasinglyvolatile markets and a major surge of commercial bankruptcies in the late1780s and turn of the 1790s. The argument developed in Chapter 4 is thatthe promulgation of comercio libre altered the institutional arrangementsthat had helped regularize supply and mitigate uncertainty in the pre-reformera. It would be incorrect to paint the pre-reform era as risk-free,but the Bourbon reforms dismantled several of the practices that tradershad relied upon to deal with pervasive uncertainty. Believing that the newpost-1778 commercial environment of free trade was too unpredictable,some experienced Spanish traders withdrew from Atlantic world commerce,reinvesting into ventures perceived to be less risky such as landownership, silver mining, and financial ser vices, including the provisionof insurance. In short, Chapter 4 argues that to term the fifteen years followingthe introduction of reform a “golden age” is misleading. Tradedid experience growth to the benefit of Crown tax revenues and, perhaps,consumers, but the end of regulated commerce also led to increasedriskiness, the growing unpredictability of trade, and corresponding financialdislocations. While the ensuing bankruptcies might merely havereflected less competitive merchants failing to adjust to the new, morecompetitive environment, the start of the wars of the French Revolutionand Napoleon makes difficult any such long-term assessment. The warsfinished off many of the merchants who had managed to adjust to thenew trade regime.
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