Price revolution
The Price Revolution, sometimes known as the Spanish Price Revolution, was a series of economic events that occurred between the second half of the 16th century and the first half of the 17th century, and most specifically linked to the high rate of inflation that occurred during this period across Western Europe. Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1.2% per year compounded, a relatively low inflation rate for modern-day standards, but rather high given the monetary policy in place in the 16th century.
Generally it is thought that this high inflation was caused by the large influx of gold and silver from the Spanish treasure fleet from the New World, including Mexico, Peru, Bolivia and the rest of the Spanish Empire.
Specie flowed through Spain increasing its prices and those of allied European countries. Wealth then spread to the rest of Western Europe as a result of the Spanish balance of payments deficit, or was directly introduced to countries like Great Britain and France, using piracy to attack the Spanish fleet. This enlarged the monetary supply and price levels of many European countries.
Background
Most historians look at the end of the Renaissance as the start of the Price Revolution. An era that was often considered a time of peace for the Western European population, the Renaissance was a period when Western Europe experienced equilibrium in the price of commodities and labor. It also was a period when there was a high concentration of wealth in the hands of a few. Additionally, Europe experienced technological advancement in the mining industry, the stream of currency through debasement from royals, and the emergence of Protestantism.The severe 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.
In 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. The annual inflation rate ranged from 1% to 1.5%. Since the monetary system of the 16th century was based on specie 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 in Peru led to a fall in the price of metals relative to rising prices for other commodities in Europe. This process is only remedied if the purchasing power of the metal is equal to its production costs.
Causes
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, this influx drove up the Spanish price level and caused a balance of payments deficit. This deficit occurred on account of Spanish demand for foreign products exceeding 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 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 the 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 Zacatecas, Guanajuato and Taxco mines in Mexico and the Potosí mountain in Peru. The production of the Potosí 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, 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 16th century. The total amount of silver imported added up to about 3,915 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 Contratación in Seville, not including the specie shipped directly to Cádiz by the Dutch and British East India Companies. The influx of these precious metals and the resulting money supply shocks help explain the price increase in Spain during the 16th century.
European silver production
Some accounts emphasize the role of increased silver production within Europe itself. According to Nef, the output of silver mines in Bohemia, Germany and Hungary increased rapidly from to. Production peaked in the 1530s, thereafter slowly declining for the next 30 years. After 1560, the decline in European silver production was rapid. Flynn contends that imports of silver from Spanish America is behind this decline in European silver mining.Quantity theory of money
The first scholar to make a quantity-theory link between the influx of American "treasure" and the Price Revolution was Martín de Azpilcueta in 1556, although French philosopher Jean Bodin is more often credited, because of his 1568 response to a 1566 treatise by the Royal Councilor Jean de Malestroit. Malestroit argued that lower-quality coins were the chief culprit of price influx—similar to the periodic inflations of the 14th and 15th centuries. Bodin dismissed this argument, contending that the growing influx of silver from the Spanish Americas was the primary cause of price inflation. Championed for the 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.Earl Hamilton, a contemporary price revolution theorist, found that no Spanish writer of the 16th century had voiced opinions similar to those of Jean Bodin despite having conducted meticulous research into Spanish treatises, letters, and other documents. This, however, was not true; less well known is an even earlier Spanish publication in a treatise from 1556 by the cleric Martín de Azpilcueta of the Salamanca School, which made virtually the same claim about the role of Spanish-American silver in the rise of prices.
Debasement
Regardless, Malestroit did put forth several valid claims about the price revolution that continue to hold up today, particularly his argument explaining the different price indexes and why the Spanish prices rose the least and the Brabantine the most. Spain, unlike most other European countries of this era, underwent no debasements of the gold and silver coinages during most of the period, but that all changed in 1599, when the new Spanish king Philip III introduced the purely copper "vellon" coinage.Following Henry VIII of England and his infamous "Great Debasement" programme that began 1526, the Spanish King Philip III tried to cement his Spanish legacy through changes in coinage strategy. Previously, Spanish kings issued a largely copper fractional coinage called blancas, with a nominal money-of-account value of 0.5 maravedí, 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%. In 1497, that fineness was reduced to 7 grains ; in 1552, to 5.5 grains ; in 1566, to 4 grains. By the start of the 17th 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 difference between the silver- 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.
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 16th and beginning of the 17th 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.