Price revolution

Background

The shortage of precious metals during the late 15th and early 16th centuries eased in the second half of the 16th century. The Spanish mined American gold and silver at minimal cost and flooded the European market with an abundance of specie. This influx caused a relative decrease in the value of these metals in comparison with agricultural and craft products. Furthermore, depopulation – specifically in southern Spain – resulted in a high rate of inflation. The failure of the Spanish to control the influx of gold and the price fluctuations of gold and silver from the American mines, combined with war expenditures, led to three bankruptcies of the Spanish monarchy by the end of the 16th century. During the 16th century prices increased consistently throughout Western Europe, and by the end of the century prices reached levels three to four times higher than at the beginning of the century. The annual inflation rate ranged from 1% to 1.5%. Since the monetary system of the 16th century was based on specie (mostly silver) this inflation rate was significant. The specie-centered monetary organization had its own price-level stabilization property: rising commodity prices led to a fall in the purchasing power of the monetary metals, and therefore less incentive to mine them and more incentive to use them for non-monetary purposes. This stabilizing adjustment of the money supply led to long-run stability of price levels regardless of permanent shifts in money demand over time. Therefore, the long-run inflation can only be explained either by the devaluation of coins or by shifts in the supply of the specie. An increase in the productivity of mining led to a fall in the price of metals relative to rising prices for other commodities. This process is only remedied if the purchasing power of the metal is equal to its production costs.

Influx of gold and silver

From an economic viewpoint the discovery of new silver and gold deposits as well as the productivity increase in the silver mining industry perpetuated the price revolution. When precious metals entered Spain it drove up the Spanish price level and caused a balance of payments deficit. This deficit occurred because Spanish demand for foreign products exceeded their exports to foreign markets. The deficit was financed by the metals that entered these foreign countries and in turn increased their money supply and drove up their price levels. The increased importation of specie to Spain started in Central Europe around the beginning of the sixteenth century. According to Michael North (1994) central European silver output doubled between 1470 and 1520, and increased even more in the 1520s with the new mine of Joachimsthal. Also during this time Spanish and Portuguese brought a large amount of gold from the New World to Europe. Starting in the 1540s a growing amount of silver was shipped to Europe from mines in Mexico and the Potosi mountain in Peru. The production of the Potosi mine increased greatly in the 1560s after mercury deposits had been discovered in the Andes, as mercury was necessary to process the silver. Based on the records of Earl J Hamilton (1934) the total imports of specie from the Americas during the 16th century amounted to around 210 million pesos, with 160 million of these pesos being imported in the second half of the century. The total amount of silver imported added up to about 3915 metric tons of silver. However these numbers underestimate the total amount imported to Spain because Hamilton only counted imports recorded by the official Casa de Contraction in Seville, not including the specie shipped directly to Cadiz by the Dutch and English East India companies. The influx of these precious metals and the resulting money supply shocks help explain the price increase in Spain during the sixteenth century.

European silver production

Some accounts emphasize the role of the increase in silver production within Europe itself, which took place at the end of the 15th and beginning of the 16th centuries.

Black Death

Demographic factors also contributed to upward pressure on prices with the resurgence of European population growth after the century of depopulation following the Black Death. The price of food rose during the years of the plague, and then began to fall as the population of nations decreased. At the same time prices of manufactured goods rose because of a displacement of supply. As the nations began to recover and repopulate after the Black Death, the increase in population placed greater demands on agriculture. Later on, increased population placed greater demands on an agricultural area that had contracted significantly after the 1340s, or had been converted from arable to less intensive livestock production.

However, population growth and recovery in countries such as England are not consistent with inflation during the early stages of the price revolution. In 1520 at the beginning of the price revolution England’s population was roughly 2.5 million people. This is about half of the English population of 5 million in 1300. Critics of the population argument raise the question that if England at the beginning stages of the price revolution was very unpopulated, how could any renewed growth from such a low level immediately spark inflation? It can be argued that population growth led to a price increase in the agrarian sector because of an increase demand for food. “Marginal lands” that were not very fertile and far away from markets were unable to adopt the technological developments to offset the lower returns of farming. In turn this led to a higher marginal cost to farming and resulted in a price increase for grains and other agricultural goods that surpassed the price increase for non-agrarian commodities during the sixteenth and beginning of the seventeenth century. The resurgence of population after the plague is linked with the “demand-pull” explanation of the price revolution. This “demand-pull” theory states that an increase in the demand for money and the growth of economic activity produced the rise in prices and a pressure to increase the supply of money.

Urbanization

Some accounts emphasize the role of urbanization. Urbanization contributed to increased trade between Europe's regions, which made prices more responsive to distant changes in demand, and provided a network for the flow of silver from Spain through western and central Europe. Urbanization is often connected with the increased velocity of money theory because the frequency of transactions increases as urban centres grow relative to rural areas. This may also imply the argos theory of economics. For example, in England, many lands held as common lands were enclosed so that only the landlord could graze his animals. This forced his former tenants either to pay an increased rent, or to leave their own farms. An increase in the number of people unable to afford their farms led to migration into the cities in search of employment. This in turn led to an increase in the velocity of monetary transactions, but was frustrated by the high demand and inelastic supply of food.

Decline of inflation

The inflation of c. 1520–1640 eventually petered out with the end of the initial rush of New World bullion, though prices remained around or slightly below the levels of the first half of the 17th century until the onset of new inflationary pressures in the latter decades of the 18th century.