Spanish Price Revolution

Background

One of the first historical references to the beginning of the Spanish price revolution phenomenon occurred during the festival of San Giovanni in Florence on June 24, 1491. This festival of celebration was in honor of a newly issued Florentine coin, which many believed would bring economic prosperity to the country. However, shortly after this celebration, the leader of the country, Savonarola died from a physician’s misdiagnosis. The country faced widespread poverty and conflict, as Savonarola’s son (and later his son’s replacement) could not support and defend the country. In response to the devaluation of currency and political turmoil, prices surged to unprecedented rates in the 1490s as the economy started to fail.

Despite this tale of the failure of the Florentine coin, most historians look at the end of the Renaissance as the start of the Spanish Price Revolution. An era often considered a time of peace for the Western Europe population, the Renaissance was a period where Western Europe experienced equilibrium in the price of commodities and labor. It also was a period where there was a high concentration of wealth in the hands of a few (The Bubonic Plague had wiped out nearly a third of the population a century before). Additionally, Europe experienced technological advancement in the mining industry, the stream of currency through debasement from royals, and the emergence of Protestantism. Everything from the market economy to colonization was going Western Europe’s way.

However, that would all change following the discovery and exploration of the New World abroad. While Spain enjoyed a plethora of economic opportunity in the New World, the financial pressure it faced after the discovery halted any and all progress as prices inflated across Europe. This would mark the beginning of what would become a widespread phenomenon known as the Price Revolution.

The Réponse de J. Bodin aux paradoxes de M. de Malestroit

The “alleged” first scholar to make a quantity-theory link between the influx of American “treasure” and the Price Revolution was the renowned French philosopher Jean Bodin in his 1568 response to a 1566 treatise by the Royal Councilor Jean Cherruyt de Malestroit. Malestroit argued that lower quality coins were the chief culprit of price influx—similar to the periodic inflations of the fourteenth and fifteenth centuries. Bodin responded by dismissing this argument contending that the growing influx of silver from the Spanish Americas was the primary cause of price inflation. Championed for his “quantity theory of money,” Bodin was able to “demonstrate” that the inflation of prices in France was due far more to Spanish-American influx than to any change in coin debasement.

In Chapter 13 of Earl Hamilton’s (a contemporary price revolution theorist), American Treasure and the Price Revolution in Spain, Hamilton writes that after meticulous research into Spanish treatises, letters, and other relevant documents of the day, he found that no Spanish writer of the sixteenth century had voiced opinions similar to Bodin’s views. Unfortunately, this was not true. Less well known is an even earlier Spanish publication in a treatise from 1556 by the cleric Azpilcueta Navarra, of the Salamanca School, which made virtually the same claim about the role of Spanish-American silver in the rise of prices. Azpilcueta Navarra, Jean Cherruyt de Malestroit, Jean Bodin, and early debate about the history of the price revolution in many was the reason historians, philosopher, and economist tried to formulate their own explanations to the price revolution.

Malestroit Debasement Theory & Copper “Vellon” Coinage

Despite, the claims of Jean Bodin, Malestoit did put forth several valid claims about the price revolution that continues to hold value today, particularly his argument explaining the different price indexes of the day and the explanation to why the Spanish prices rose the least and the Brabantine the most. Spain, unlike almost all other European countries of this era, underwent no debasements of the gold and silver coinages during most of the period, but in 1599 when the new Spanish king Philip III (1598-1621) introduced the purely copper “vellon” coinage that all changed. Following Henry VIII of England and his infamous “Great Debasement” program that began 1526, the Spanish King Philip III tried to cement his Spanish legacy through changes in “coinage” strategy. Previously, Spanish Kings (at least from 1471) issued a largely copper fractional coinage called blancas, with a nominal money-of-account value of 0.5 maraved, but with a very small amount of silver to convince the public that it was indeed precious-metal "money". The blanca issued in 1471 had a silver fineness of 10 grains or 3.47% (weighing 1.107g). In 1497, that fineness was reduced to 7 grains (2.43% fine); in 1552, to 5.5 grains (1.909% fine); in 1566, to 4 grains (1.39% fine). By the start of the seventeenth century, inflation took hold of Spain as the gap between nominal and silver-based prices dramatically shifted. The purely copper coinage had done its damage to Spain. The differences between the silver-based and vellon-based price indexes in Spain showed that the purely copper coinage other European countries used made up a much smaller proportion of the total coined money supply (something the Spanish Kings had overlooked and Malestoit was able to pinpoint).

The Alternative Explanations for the Price Revolution: Population & Agricultural Growth

If the influx of Spanish silver was not the initial cause of the European Price Revolution then the best explanation for the Price Revolution is population growth. This theory developed under Earl Hamilton argues that prices were not driven by specie (which, at most, sets a floor to prices) but by the actions of monopolists (or governments) whose positions in this period were enhanced by the steady population growth in Western Europe (The resurgence of population after the plague is linked to 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.

The significant increase of European population in the period 1460-1620 meant that there were now more people to be fed, clothed, and housed raising the demand for goods of all kinds. Agricultural products then became crucial to the European market. Producers were unable to respond to the rising demand as new and less fertile land were cultivated. Essentially, marginal costs were increasing and per capita yields were shrinking, while demand continued to rise. The price of agricultural commodities, especially grain, rose sooner and faster than those of other goods, and the inflation of agricultural prices eventually caused a general increase in price level in all industries. Until the middle of the 17th century, the number of mouths to feed outran the capacity of agriculture to supply basic foodstuffs, causing the vast majority of people to live in a constant state of hunger. Until food production could catch up with the increasing population, prices, especially those of the staple food, bread, continued to rise. Hamilton’s theory pointed to evidence of agricultural prices grow, slow nonagricultural price growth and poor timing (of the specie outflow to the East) as tangible evidence of the failure to fix prices and feed the growing populous. Hamilton also pointed to monopolistic and other non-competitive techniques as the typical pricing behavior for European products and factor markets of the period.

Effect of Price Revolution on Genoa/“The Age of Genoa”

Unlike many other states of the period, Genoa gambled the majority of their economic interest on the Spanish monarchy—bankers invested their money in the crown and farmers of Spanish revenue, while Genoa’s merchants and nobles settled in Spain (Naples and Sicily) marrying local nobility and monopolizing majority of the trade. As long as New Spain was sending silver and gold to Seville, Genoa could flourish. Genoa became a large credit market as the capital of Italian cities was all drained towards Genoa. A multitude of small investors, Genoese and others, obtained from the Crown long-term securities (juros de resguardo) as collateral for their loans; the contracts specified that these securities would be sold if the Crown did not repay the loans. In essence, the Genoese bankers had worked out an interest rate swap. Furthermore, the Crown sold silver spot in Spain to the Genoese in exchange for future delivery of gold in Antwerp, where the gold was used to pay Spanish troops fighting in the Low Countries. Genoa benefited from the Price revolution as they enjoyed the advantage of “increasing returns to scale in international financial services”. Genoa during the price revolution was a snapshot of global finance at its best. Unfortunately, The decline of Spain in the 17th century brought also the decline of Genoa (due to the Spanish crown's frequent bankruptcies), in particular, Genoa's merchant houses. Later in 1684, Genoa was bombed by a French fleet as punishment for its alliance with Spain and Genoese banker Ambrogio Spinola role in the Eighty Years' War in the Netherlands.

Landowners

Conditions in 16th century Europe support the view that the separation of constantly rising prices and fixed rents destroyed landowners. But this did not apply to Spain, where rent was not fixed and the power of landowners allowed them to raise rent and replace their tenants based on the tenants’ ability to meet payments.

On the other hand, the price revolution brought impoverishment to those who lived on fixed income and small rents, as their earning could not keep pace with Spanish prices. Small landowners of the hidalgo class, the lower clergy, government officials and many others all found their standard of living reduced as the price of commodities rose beyond their means. The situation of the peasants is less clear, for it is difficult to reconcile agricultural prosperity and the great rural emigration to the towns, which in turn makes it difficult to explain the alleged extension of cultivation in Spain. But one thing is certain—wages lagged behind prices.

Sellers & Traders

But landowners and the rich were not the only ones gaining from the price revolution. Anyone with something to sell or trade could reap the benefits of inflation, particularly manufacturers and merchants. However in the second half of the century, when the conditions of the Price Revolution got worse and relentless inflation began to make Spanish enterprise less competitive in the international and colonial market, not all merchants and manufactures found life enjoyable. Only the more powerful merchants were able to survive foreign competition and in doing so prospered boundlessly. Enormous fortunes were made in the Indies trade (whose expansion was related directly to the rise of prices) and this encouraged more investment and profitable returns. Profitable returns were distributed beyond the merchant houses of Seville to entrepreneurs in other parts of Spain, as the American market took the oil and wine of Andalucía, the wool of Castile, the metallurgical products and ships of the Basque country. To at least the end of the 16th century there was still money to be made in Spain for selected merchants and manufactures.

The Crown

The Crown, like its ally, the aristocracy, was less crippled by the price revolution than the majority of its subjects. Certainly the cost of administration, and of paying, feeding, and equipping its armed forces, rose for the Crown just as the cost of goods did for the private consumer; unlike other countries, Spain was willing to spend at a higher level to maintain their status as a world power. However, the aristocracy in contrast lost less of its savings than the Crown. The aristocracy could raise rents to increase revenue and not face the full consequences of the Price Revolution. The aristocracy allowed prices to remain high, while inflation alleviated the burden of loans, which became a substantial part of their income.