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 (that was in fact not that high, as stated above) 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 (e.g., the imperial territories of Charles V). 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. 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 (the Black Death 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. The total amount of silver imported added up to about 3,915 metric tons of silver. 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.

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 (1598–1621) introduced the purely copper "vellon" coinage.

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 mid-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.

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 class, the lower clergy, government officials, and many others all found their standard of living reduced as commodity prices 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 and 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 Andalusia, the wool of Castile, the metallurgical products and ships of the Basque country.

A multitude of small investors, Genoese and others, obtained from the Crown long-term securities () as collateral for their loans. Also short-term loans known as could be converted into long-term . 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.