Background[edit]
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 (the Black Death had wiped out nearly a third of the population a century before).[3] Additionally, Europe experienced technological advancement in the mining industry, the stream of currency through debasement from royals, and the emergence of Protestantism.[3]
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.[4] Furthermore, depopulation – specifically in southern Spain – resulted in a high rate of inflation.[4] 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.[4]
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%.[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 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.[5]
Causes[edit]
Influx of gold and silver[edit]
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.[6] 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.[6]
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.[7] 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.[7] 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.[7] 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 16th century.[8] The total amount of silver imported added up to about 3,915 metric tons of silver.[8] 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 Cadiz by the Dutch and British East India Companies.[9] 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[edit]
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 c.1460 to c.1510. Production peaked in the 1530s, thereafter slowly declining for the next thirty years. After 1560, the decline in European silver production was rapid.[10] Flynn contends that imports of silver from Spanish America is behind this decline in European silver mining.[11]
Long term decline of inflation[edit]
The inflation of c. 1520–1640 eventually petered out with the end of the initial rush of New World bullion. 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.