If there’s a familiar story in history, it’s that when a nation starts to debase its currency - terrible things generally follow. It doesn’t happen immediately - but it does inevitably conclude the tale. You’d be hard-pressed to find an example of a currency debasement scenario that didn’t end poorly.
Examples abound: the Roman Empire in the 3rd Century AD, Weimar Germany, modern-day Argentina, Zimbabwe, Venezuela, and, of course, the Spanish Empire.
As we explored last week in The Empire of Gold, the Spanish Empire went down the path of destruction in part because of the fabulous wealth it stole from the New World. And that story is fundamentally true.
But what is less well known - and what we’re going to explore today - is that it wasn’t just rampant wealth that destroyed Spain.
It was the collapse of trust in its money.
Trust in currency is the single most crucial component of monetary power.
And consider, for a moment, how much more trust matters today - when a currency has no intrinsic value except what the government says it has.
We live inside a system of fiat trust. We “trust” that the “full faith and credit” of the US Government means something until it suddenly doesn’t.
Which makes the story of Spain’s collapse all the more epic and relevant.
Because it wasn’t the battles it lost, the destruction of the Spanish Armada, Sir Francis Drake, or any of its countless enemies.
It was the coins in its pocket.
And here’s the thing - as a real estate guy, I’d love to tell you that hard assets like real estate perfectly hold their value during times like these.
It doesn’t.
Not always.
I’ll share why at the end.
The Spanish crown relied heavily on this silver to fund its armies, fleets, bureaucracies, and wars across Europe and the Americas.
To keep the system running, Spain established official mints. Coins minted in Potosí were supposed to be of a standard weight and purity - trusted not only in Madrid but also in Venice, Istanbul, and Manila.
Trust, not metal alone, was what truly sustained the empire.
Here’s what I find most fascinating about this story. Usually when you hear about currency debasement, it’s driven by leadership. The Emperor of Rome debases the solidus to quietly expand his ability to pay for his armies, which inevitably leads to disaster.
In this case, though, the debasement happened as a result of poor internal controls. And because Spain attempted to lead such a massive, global Empire in an era before quick transportation or communication.
Mint officials and local elites at Potosí discovered they could quietly reduce coins' silver content without changing their weight or appearance and make an absolute killing for themselves in exchange.
The coins looked legitimate.
They felt legitimate.
But they were anything but.
Over time, the real silver content of Potosí coinage plummeted, and officials pocketed the difference. Some estimates suggest that by the 1630s-1640s, certain coin issues had 20-30% less silver than officially required.
The coins minted at Potosí seemed legitimate. They carried the right royal stamps and the right weight.
But something was wrong.
Across the Atlantic - in Seville, Genoa, and Amsterdam - merchants began noticing that Potosí silver didn’t stretch as far. Contracts priced in silver weren’t adding up. Shipments bought less.
I want to dig into this point because it’s a fascinating foray down history. So, practically speaking, how would merchants have started discounting the value of the Potosi coins? After all, they seemed good, right?
Here’s the thing - they seemed legitimate at first. However, they had a slightly different feel. They wore down faster. They sounded different when tapped - true silver rings in a way that lighter, debased metal does not.
All of this together, in the trading houses of Seville and elsewhere, would have quickly spread like wildfire through the merchants. The Potosi coins swiftly became suspect, and coinage from more reputable mints (like Mexico City) became favored. The result was that Potosi coins began to be worth less on the open market.
When the coins were melted down for bullion - a common practice then - the truth was discovered.
There was less silver inside than there should have been, sometimes by 20%, sometimes by 30%.
Word spread even faster - from one merchant’s table to another, from one port to the next.
Soon, traders across Europe and the Americas began discounting Potosí coins - or refusing them altogether.
Confidence cracked. And once trust cracks, it rarely repairs itself.
In some cases, coinage was rejected entirely in favor of trading in pure bullion (whose value was assured). In other words, merchants now questioned the value of all coinage. Even perfectly good ones.
By the early 1640s, the scandal exploded into public view.
The Spanish Crown, horrified, launched an investigation. Several mint officials were arrested, tried, and executed. Quite gruesomely, I must add - usually being drawn and quartered.
But by then, the damage was already done.
A monetary system built on trust had begun to rot from within, and no amount of arrests or reforms could restore it to its former glory.
But as you can imagine, borrowing became harder when Spanish silver lost its credibility.
Credit dried up.
Spain, already overextended militarily, defaulted on its debts multiple times (1557, 1575, 1596, 1607).
The armies weren't paid.
Shipments stalled.
Enemies like England, France, and the Dutch Republic seized the opportunity to rise.
Spain still had silver. But it no longer had trust.
And trust is, ultimately, the critical ingredient to building a world-class empire or business.
No amount of gold or silver can repair the damage when belief collapses - whether in a currency, a system, or leadership.
Ultimately, our current economic system relies even more on trust than the Spanish did. At least their currency - albeit debased - still had something of intrinsic value. Our current system operates entirely on trust. And arms and taxation authority (which do count for something).
Another timeless lesson here for all investors is that trust is a complicated thing. It’s easily broken. What destroys an Empire’s foundation can just as easily destroy your investment business (more easily).
There are many parallels to today. The critical difference is that all currency is being effectively debased - all over the world. So it’s not like people have a huge number of options in where to hold their wealth.
So, how do real assets weigh into this equation? We should be concerned with safeguarding ourselves, our families, and our businesses.
While the data is lacking on what happened to Spanish real estate, we do have real-world data on real-world extreme currency debasers and their hard assets.
In particular, we could look at the examples of Argentina, Zimbabwe or Venezuela, but I’m going to focus instead on Weimar Germany. Weimar Germany is an interesting case study because it most closely resembles a modern, Western Democracy, and the fallout is illustrative.
To begin with, in all currency debasement scenarios, the value of real estate in local currency absolutely skyrocketed. Like by massive amounts. The issue is that nobody wants the local currency. So you have to evaluate the value of the property in USD or Gold Terms, which - when done - demonstrate that tangible assets preserved and protected the value of the holders, but not quite as much as we’d like.
However, here’s where things get sticky. In Weimar Germany, with inflation spiraling out of control, the government imposed price controls and rent caps. They also increased taxes. So property owners in Weimar Germany were hit with a double whammy - they coudn’t raise rents to keep pace with out of control inflation, and they also got hit with steadily rising taxes (and presumably all other expenses too).
Interestingly, agricultural land performed exceptionally well since food was valuable and farmers could barter it out.
In short - nothing is foolproof, not even real assets. But ultimately, if the currency is going to nothing, you want something that remains standing after the smoke clears. Real assets do provide that value.