Abstract

Under what conditions elite competition may disrupt political stability? I study the Spanish Empire on the eve of the wars of independence. I emphasize the role merchant elites played in maintaining the empire unified, and how their interests misaligned in the late eighteenth century creating incentives for political secession. An implicit political arrangement existed, where the Crown maximized tax revenue through its control of the transatlantic trade. It did so by coopting specific American elites located at key nodes (mainly in Lima and Mexico City), which themselves gained rents from their privileged trading positions. The political organization was stable while Spain held sea supremacy in the oceans. The advent of the British Navy after the 7 years war disrupted the Spanish trade networks, affecting the distribution of rents and the corresponding institutional equilibrium. The Spanish Crown tried to adapt by decentralizing its oceanic trade routes, and by coopting a larger set of regional elites within the empire. The tactic backfired: it gave major power to new de-attached local elites creating incentives for political fragmentation.