The Saga of Spanish Silver: an Austrian Perspective – Part 3: The Flood

Christian Frausto Bernal / Foter / CC BY-SA

For part one of this series go here. For part two of this series go here.

The enormous availability of large amounts of silver had many consequences on the European economy.

As we have seen, the economy of Spain was based on raw materials: it could export large quantities of quicksilver, grain, wine etc, but was heavily reliant on imported manufactured goods, both for domestic consumption and to supply the Colonies. This gave Spain a heavily negative trade balance, which was reinforced by the Crown’s expensive military ventures, mainly in Italy and The Netherlands. As a contemporary writer said, silver had on Spain “the same effect as rain on a roof”: in short it quickly found its way elsewhere.

Apart from silver imports, the Crown’s most important revenue were sale taxes, mostly coming from Castilla, The Netherlands and Milan. The Protestant part of The Netherlands went into open rebellion over fiscal and religious matters, and that important source of revenue was lost forever despite desperate (and expensive) attempts to recover it. Still, the Spanish King had huge incomes, by far the largest in Europe and probably rivaling those of the Chinese Emperors who, however, had the advantage of a much larger tax base. Even so, sale taxes in Castilla started to seriously decline due to an unforeseen consequence of the arrival of so much silver: price increases.

According to John Lynch between 1550 and 1620 prices increased threefold in Spain and twofold in France and England. Incredibly, many contemporary thinkers failed to understand the connection between the sudden increase in money supply and price increases. It was left for exponents of the Salamanca School to expose this correlation. In 1556 Martìn de Azpilcueta Navarro wrote:

“We see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth and labor are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labor were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce and where and when it is scarce.”

Thirteen years later Fr Tomàs de Mercado published the first embryonic study concerning the quantity theory of money and the relation between American treasure and price inflation.

However, inflation alone doesn’t explain the dramatic increase in prices.  To give an example, wheat in France was always more expensive than in Spain in the 1550-1620 period despite considerably lower inflation. The supply and demand mechanism had a huge part in it as well: around 1460, after a century-long slump which followed the Black Death, European population started to grow at a very fast pace. In short there was an ever growing mass of people to be fed, clothed and housed and supply struggled to meet demand. This was especially true in the agricultural sector. Pressed by high demand, producers started to farm less fertile lands (most of which had laid fallow since the Black Death or even Roman times). This led to increased marginal costs and lower yields per capita while demand kept on increasing at least until 1620.

Increased population, however, meant another thing: more abundant and cheaper manpower. Traditionally historians and economists have struggled to understand why pay increases lagged so much behind price increases. As usual Marxists and other Leftists have put the blame on “exploitation” or “greedy capitalists”, but their explanations are based on their own moral values, not on cold analysis. The reason, however, is astonishingly simple: labor supply increased at a much faster rate than demand, driving prices down. In Spain, where emigration to the Colonies and very tight immigration politics kept the labor supply increase low, pays increased much faster than in the rest of Europe.

Despite large capitals available, Spanish industrial production rose modestly between 1500 and 1550 and stagnated between 1550 and 1620. This has traditionally been one of the hardest questions to answer about the so called “Price Revolution”: why, despite ready availability of large capitals, not to mention a large “captive” market for finished goods, did Spain fail to develop into a highly advanced economy like France or The Netherlands, and instead went into a rapid economical and political decline in the XVII century?

High inflation surely had a hand in this, but let’s not forget that Spanish-ruled Milan and Antwerp had high inflation in the same period, yet still retained very healthy industrial production growth, mostly fueled by booming demand from Spain and the Indies. Keynesian scholars have traditionally put the blame on the Spaniards’ “hoarding tendencies” but this makes little sense: interest rates dropped sharply between 1560 and 1620 in Spain, meaning simple hoarding was impractical. Those living on fixed incomes (like a salary or interests from a patrimony) were those hardest hit by the “Price Revolution”. It is often argued that Spanish investors, spurred by high commodity prices, invested heavily in agricultural and mining activities, ignoring industry. However, while the mining industry had a noticeable increase in output in the early XVII century (for example the mines in Almaden saw their yearly refined quicksilver output increase from 250 tons in 1570 to 400 tons in 1610), it’s difficult to find out more about agricultural output. It’s especially difficult to reconcile the alleged increase in production with a steep increase of emigration from the countryside to the big cities: after all, the true agricultural revolution was still in the far future and, as proven in certain areas of Italy, increased production was definitely linked to the ready availability of large quantities of cheap manpower.

One effect of the availability of such large quantities of silver coinage that is often overlooked is the sharp drop in interest rates that occurred after 1550. The first beneficiary was, of course, the Spanish Crown. Philip II took the profligate tendencies of his father and predecessor to new heights. He became so heavily indebted that he defaulted on the Crown’s debts four times: in 1557, 1560, 1575 and 1596. These defaults obviously had the immediate effect of seeing Spain’s “bad debtor State” status increase greatly. Even so, due to the general and massive drop in interests, by his death in 1598 Philip II was only paying an overall 40% yearly interest on his debts. Most of these debts were taken with the Crown’s traditional creditors, chiefly the great banking families of Genoa and Augsburg. These four massive defaults, coupled with the rise of more efficient and aggressive competitors, from England, France and The Netherlands, had the effect of greatly weakening these time-honored establishments and most of them did not survive the Thirty Years War (1618-1648). The chief casualty was of course the Fugger banking family.

Lower interest rates, however, also meant that ordinary entrepreneurs could now afford to go into debt to either increase their production or start a new venture. Coupled with increased demand (due to a rapidly increasing population), this resulted in the creation of fortunes at the same moment in which Spain was frittering her own away. The most interesting side effect of this drop in interest rates and availability of silver was the boom in trade with Asia. But that will be detailed in the fourth and final chapter.


Farres, Octavio Gil, Historia de la Moneda Espanola, Madrid 1976, Apartado

Hamilton, Earl J. American Treasure and the Price Revolution in Spain, London 1965, Octagon Books

Lynch, John, Spain 1516-1598: From Nation-State to World Empire, Oxford 1991, Basil Blackwell

Richards, John F. (editor) Precious Metals in the Later Medieval and Early Modern Worlds, Durham SC 1983, Carolina Academic Press

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