This book is a meticulous and relevant work of economic history. The authors have collected precise and detailed data—at times contrasting different sources, including sources from Simancas and Genoa—to answer a specific, timely puzzle: the persistence of sovereign debt.

Sovereign debt is different than private debt because there is no third party to enforce the contract; the borrower is the third party. Hence, the lenders have to rely on the goodwill of the borrower or on reputational concerns. However, given some rulers' myopic behavior these checks might not be enough. In a democratic regime, the ruler could simply default and let the next ruler deal with the problem (Argentina). In a premodern regime, the ruler could accuse the bankers of treason, expropriate their assets and execute them, promising to never expropriate bankers in the future (Philip IV of France with the Templars).

What could prevent a ruler's myopic behavior? The authors claim that the need for more funds in the near future, and the ability to distribute those funds to troops, were enough to convince Charles I and Philip II of Spain to pay back their loans. During the sixteenth century, Spain was involved in long and expensive wars against virtually all its neighbors (the Ottoman Empire, France, and England) and internal rebellions (Independence of the Netherlands, Revolt of the Comuneros). Since the army was composed mainly of mercenary troops, paying those troops in a timely fashion was the difference between victory and defeat.

The main sources of revenue for the Crown were tithe taxes in Castile and taxes on silver from the New World. Due to the volatility of these sources, especially the silver, the ruler could not ensure a smooth money supply to the troops. Thus, there was a need for short-term financing.

Genoese bankers provided short-term loans in years when the silver fleet was delayed or its cargo insufficient. In years of high revenue, the bankers were repaid through a system of sophisticated contingencies dependent on the arrival date and amount of silver delivered. The Genoese, in turn, securitized their claims on the silver and sold participations to other bankers, and even to middle-class investors, thus spreading the risk of a late fleet over many individuals.

In such a sophisticated and robust system, how can we explain the (in)famous defaults? Moreover, how can we explain the quick resolution of credit after a default? The authors' argument relies on implicit state-contingent clauses. Bankers understood that in the case of a bad military outcome—e.g., the defeat of the Armada—they would receive a haircut on their loan. If the military operations were successful, the bankers were compensated for the implicit risk with a higher nominal interest rate.

The authors make a colossal effort to gather all the existing and necessary data to test this hypothesis, including matching the contracts from both sides (i.e., from the king and the bankers). They show how bankers were compensated for higher risk with higher nominal interest rates, how the settlement after default was quick and universal, and how bankers maintained a cohesive body in order to balance their bargaining power vis-à-vis the king.

In addition to this explanation of cycles of default and reputational harm, the results also highlight the sophistication of the financial institutions developed in sixteenth-century Spain (see also Thomas J. Sargent and François Velde, The Big Problem of Small Change [2003], for a discussion of the first experiment with fiat money in sixteenth-century Castile). These Spanish financial innovations—state-contingent debt, perpetuities, securitization, and the myriad clauses regarding the silver fleet—did not appear in the United Kingdom until centuries later. Moreover, the authors show that Spain's debt level was as sustainable, if not more so, than that of England and France in their prime.

These results raise the question, why did the Spanish economy decline in the seventeenth century? Traditional explanations—imperial overreach and archaic institutions—seem incorrect. During the fourteenth and fifteenth centuries Castile had one of the highest incomes per capita in Europe (Carlos Álvarez-Nogal and Leandro Prados De La Escosura, Economic History Review [Feb. 2013]). It also had one of the most democratic regimes. The parliament (Cortes) and the cities had veto power over the king in many areas, including the raising of new taxes. However, during the seventeenth century both the economic and military powers of the state and the economic conditions of the citizens deteriorated. One traditional explanation for the economic decline is a “Dutch disease” created by the high inflation due to the silver coming from America. In light of the evidence of the book, this is unlikely, since most of the silver ended up in Genoa, not in Castile. The authors propose an alternative explanation based on an institutional “resource curse.”

Silver taxes meant that the king did not need the Cortes to raise new revenue. As a consequence, the frequency with which the king summoned the Cortes decreased dramatically during the sixteenth century and never fully recovered. Without the parliament—and despite the sophistication of the financial institutions—Spain was not able to lift the yoke of premodern institutions, as shown by Regina Grafe (Distant Tyranny: Markets, Power, and Backwardness in Spain, 1650–1800 [2012]).

Lending to the Borrower from Hell does well at both the micro and macro levels. It is an example of ambitious data collection in an attempt to answer the big questions. More importantly, the book advances our understanding of the first global hegemon's decline, while also burying its black legend.