Great Wave

by Fischer, David Hackett;

  The Second Stage: Discovery and Cultural Response

  In the early and middle years of the sixteenth century, the price-revolution entered another phase. It did so when the long inflation broke through the boundaries of the old price system that had prevailed in the mid-fifteenth century. As it rose beyond the range of fluctuations in the preceding equilibrium, it became visible as a new trend. Individuals and governments began observe that prices were rising in a secular way. Their responses added another dynamic which carried the price-revolution to a different stage.

  When the price-revolution became visible, people sought explanations. Many looked for someone to blame. In England, members of Parliament attributed rising prices to “covetous and insatiable persons seeking their only lucre and gain.” Others blamed the price-revolution on export merchants, who were thought to have sent so many goods abroad that “corn, victual and wood are grown unto a wonderful dearth and extreme prices.” In 1555, Parliament forbade exports of food and wood when prices rose above a fixed level.26

  These laws had less effect than did the individual actions of ordinary people. Their responses to inflation caused more inflation. The daily choices that people made in the face of rising prices, tended to drive prices even higher. This happened in many ways—some highly rational, others not. One response was the hoarding of goods. Another was speculation. A third was panic buying. A fourth was the degradation of commodities.

  Figure 2.05 shows another feature of most price revolutions: in late stages, sharp surges in the cost of energy. In these Spanish data, forest products include ashes, firewood, charcoal, resin and pitch. General prices are a weighted commodity index, averaged among four regions of Valencia, Andalusia, Old Castille and New Castille. Prices of forest products rose higher in Andalusia than in Valencia but lower than in Old Castille or New Castille. The source is Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501–1650 (Cambridge, 1954), 224.

  Farmers kept grain from the market in fear of famine in their own households. Millers hoarded flour in hope of profits to come. Communities and entire states blocked the movement of grain beyond their boundaries. Merchants cornered local markets. Bakers added sawdust (and worse things) to their bread, and defied the market-assizes by selling smaller loaves for larger prices. These responses caused prices to climb higher, and also increased their volatility.

  Social Imbalances

  Some people, more than others, were able to respond to rising prices. As a consequence, social imbalances began to develop. At the beginning of the price-revolution, wages had risen more or less together with the cost of food and shelter. While they did so, there was a heady sense of high prosperity. In later stages of the price-revolution that pattern changed. Money-wages lagged behind the rising cost of living, and real wages fell sharply. By 1570 real wages were less than half of what they had been before the price-revolution began.27

  This decline of real wages, once begun, continued into the early seventeenth century. Most vulnerable were workers who had few skills and no capital of their own. “The real victims of economic forces in this age,” writes Peter Ramsay, “were the evicted agrarian smallholder and the landless laborer of both town and country.”28

  By comparison, landlords and capitalists tended to do better. Returns to capital kept pace with commodity prices and even leaped ahead in some decades of the sixteenth century. Overall, rates of interest rose during the sixteenth century despite a proliferation of usury laws and condemnations by Catholic and Protestant moralists. The Hapsburgs were forced to pay their bankers annual interest as high as 52 percent. These were exceptionally high rates, but in the developing money markets of early modern Europe, rates of interest rose during the sixteenth century.29

  Returns to landowners also increased during the price-revolution. A landlord who was secure in the possession of his property held many private remedies for rising prices firmly in his own hands. Manorial customs provided landlords with a broad range of opportunities for increasing their own income in rents, fees, fines, forfeitures and obligatory services. There was more than one way for a feudal lord to increase his income from tenants. Most of all, he could raise the rent. During part of the sixteenth century, rents and land prices rose even more rapidly than food and fuel. One study finds that English rents increased ninefold from 1510 to 1640, while grain went up by a factor of four and wages barely doubled. In Belgium, land prices increased elevenfold; in Holstein, they multiplied by a factor of fourteen during the same period.30

  Contemporary observers counted the movement of rent itself as a leading cause of rising prices. A husbandman in Hales’s Discourse of the Common Weal was made to say to landowners, “I think it is long of you gentlemen that this dearth is, by reason you enhance your lands to such a height, as men that live thereon must need sell dear again, or else they were not able to make the rent.”31

  Increases in rent caused much rural unrest. In England, a leading demand in Kett’s Rebellion (1549) was that copyhold rents should be rolled back to rates that had prevailed 65 years earlier, during the first year of Henry VII (1485). Similar complaints were heard throughout western Europe.32

  Figure 2.06 shows that real wages (deflated by consumable prices) fell throughout Europe from the late fifteenth century to the mid-seventeenth century. The data are eleven-year moving averages for Southern England and Alsace, and twenty-five-year fixed averages for France. The source is Phelps-Brown and Hopkins, A Perspective of Wages and Prices, 62.

  Figure 2.07 compares rents per acre on landed estates with an index of consumable prices in England. The source is Eric Kerridge, “The Movement of Rent, 1540–1640,” Economic History Review 2d ser., 6 (1953–54) 16–34.

  As always, some of the worst exploitation occurred in the east, where serfdom and forced labor had persisted. “In Poland,” writes historian Stanislas Hoszowski, “landowners benefitted most, while the disadvantages fell on the peasants. . . . The rise in cereal and food prices encouraged landowners to change feudal cash payments into labor rents. They created new demesnes, forcing their peasants to work on them unpaid. Minimum production costs and the large profits to be derived from the system encouraged the nobility to extend the estates at the expense of peasant farms and to exploit peasants on an ever increasing scale.” Hoszowski concludes that the price-revolution actually strengthened the feudal system in eastern Europe. Everywhere, it made the dominant elites richer and stronger than they had been before.33

  The growing gap between returns to labor and rewards to capital was one of the most important social consequences of inflation in the sixteenth century. These trends caused inequality to grow, in a society that was grossly unequal before they began.

  Great wealth and grievous poverty increased in the mid-sixteenth century. In England, the numbers of beggars and vagabonds and homeless people were observed to rise rapidly during the price-revolution. The growth of inequality created a set of social imbalances that grew increasingly dangerous throughout the western world.34

  Figure 2.08 finds evidence in fragmentary data that interest rates nearly doubled in the mid-sixteenth century, outpacing the rise of prices in the same period. The source is Homer, A History of Interest Rates, 121,137,140.

  Monetary Imbalances

  Another imbalance developed in the monetary system. Once again, as in the medieval price-revolution, individuals and institutions responded to inflation by taking actions which expanded the supply of money. In western Europe, historian Georg Wiebe estimated that the supply of silver increased from approximately 10,000 tons in 1550, to more than 23,000 tons by 1600, and above 34,000 tons in 1660. Subsequent research challenged these numbers in detail, but confirmed the general trend.35

  The largest part of this increase was American silver and gold, which flowed abundantly into Europe after 1500. The cause of the price-revolution of the sixteenth century has often been attributed to this single factor: large imports of American metal, which increased the quantity of
money in circulation, and reduced its purchasing power by expanding its supply.

  In light of much historical research, this monetarist explanation must be revised, without being rejected. American treasure could not have been the first cause of a price-revolution. Prices began to go up as early as 1480, many years before American silver and gold arrived in Europe. In England and Germany, prices nearly doubled during the half century before American silver could have had a significant effect on their economies.36

  Further, major fluctuations in the flow of treasure from America did not correlate with variations in price-movements, in time or space. In Spain, where the impact of American treasure was comparatively large, the pace of inflation actually lagged behind other parts of Europe. Moreover, the largest proportionate increases in Spanish prices occurred during the first half of the sixteenth century—not the second half, when American treasure had its greatest impact.37

  Similar disparities also appeared in northwestern Europe, where one of the largest inflationary surges occurred during the period from 1552 to 1560, when imports of gold and silver were comparatively small. From 1570 to 1590, on the other hand, silver imports from America rose at a rapid rate while prices actually fell a little.38

  Yet another difficulty for a monistic monetary model appears in recent collaborative research by chemists and historians on the diffusion of American silver in Europe. The largest trove of American treasure was found in the fabulous silver mountain at Potosí, which became a monument to earthly abundance, cruelty, and greed. Spanish conquerors discovered the silver of Potosí in 1545, and forced Indians to mine a vast quantity of precious metal, at terrible cost in human suffering. Nearly half of all the silver produced in America from 1521 to 1610 came from Potosí alone.

  The silver of Potosí was highly distinctive in its chemical composition, which allows a metallurgical test of its diffusion. The results are instructive for students of this event. Silver from Potosí appeared in the coinage of Spain, Genoa, Milan, and Venice, but not until after the mid-sixteenth century. It was found on the Atlantic coast of France, but not in large quantity until the 1590s, more than a century after the price-revolution began. None was discovered in Belgium, England, the Netherlands or most other parts of France. The inventors of this test concluded, perhaps prematurely, that South American silver had little impact on the coinage of northern Europe in the sixteenth century. It would be more accurate to say that its impact was not felt until the later stages of the price-revolution.39

  Figure 2.09 compares Spanish prices with the arrival of precious metals from the New World. The evidence shows that American treasure contributed in a major way to the momentum of the price revolution, but did not set it in motion, or sustain it to the end. The data are from Hamilton, American Treasure and the Price Revolution in Spain, 35, 228.

  In short, the price-revolution came first; American treasure followed later. The test of timing is decisive here. One of the few clear and simple laws of historical causality is that the effect cannot precede the cause. The old idea that American treasure was the first cause of the price-revolution in Europe during the sixteenth century will not do.

  Nevertheless, the monetary model retains its relevance in other forms. It does so in ways that are more complex and also more interesting than a simple monetarist idea. The gold and silver of America did not set the price-revolution in motion, but powerfully reinforced its momentum. The effect of vast new supplies of gold and silver was to support an existing economic trend and to intensify its effect.40

  Further, one may observe in the timing of this complex relationship an historical pattern that monetarism alone is powerless to explain. Monetary theory explains why an increase in the supply of money drives up prices. It cannot explain why the money-supply increases in the first place, except by introducing the monetarist’s favorite diabolus ex machina in the form of corrupt and incompetent politicians who are believed to be too stupid or weak to understand the monetarist’s favorite remedies.

  To approach the price-revolution in broadly historical terms is to discover a more mature explanation. In every price-revolution, one finds evidence of frantic efforts to expand the supply of money, after people have discovered that prices are rising in a secular way. The price-revolution of the sixteenth century caused the rulers of Spain (who were hard-pressed to keep up with inflation) to redouble their efforts to extract gold and silver from their American dominions. Two

  Figure 2.10 compares prices and coinage in France. It finds more evidence that expansion of the money supply contributed strongly to price-inflation in the middle and late years of the sixteenth century, but was not as important in early stages of the price-revolution. Fluctuations in coinage also caused movements around the central trend, but had less effect on the central tendency. The source is Frank Spooner, The International Economy and Monetary Movements in France, 1493–1725 (Cambridge, Mass., 1972), 273.

  tendencies powerfully reinforced each other. Together they created a dynamic of high importance in the history of that troubled age.

  The same processes worked in other ways. Another monetary factor (small by the measure of American treasure but still important) was the mining of precious metals within Europe, which also expanded during the sixteenth century. The great inflation created a voracious hunger for a larger circulating medium. Old mines were reopened at heavy expense. Once again, most of this activity came after the price-revolution had begun.41

  In Russia, the Tsars made major efforts to encourage production of gold and silver. In 1567, Ivan IV actively recruited mining experts abroad. Thirty years later, Tsar Fedor Ivanovich asked his ambassador in Italy to pay any price for miners. There was an air of desperation in these acts. Increased supplies of European and Russian silver also contributed to rising prices.42

  It is important to observe that the correlation between the rise of prices and the minting of money in western Europe was itself variable through time— another vital clue. The association was comparatively weak in the early sixteenth century. It became stronger in the period from 1550 to 1610. This finding strongly suggests that monetarist factors operated as historical variables. They were more powerful in the second stage of the price-revolution than in the first.43

  After the mid-sixteenth century, intelligent observers began to discover that a relationship existed between prices and the size of the money supply. The quantity theory of money was invented during the second stage of this price-revolution. In 1556, Spanish scholar Martin de Azpilcueta proposed the thesis that “money is worth more when and where it is scarce than when it is abundant.” Further, he perceived that “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.” Twelve years later, French writer Jean Bodin developed the same idea. Other monetarist models were invented by the Polish scientist Nicolaus Copernicus, by the Florentine Davanzatti, by many English observers, and by other writers throughout Europe during the middle decades of the sixteenth century. These discoveries were made at a particular moment in the price-revolution.44

  At the same time that these monetarist theories appeared in the mid-sixteenth century, other observers came to a different conclusion that the primary cause of rising prices was the growth of population. An example was England’s Alderman Box, who wrote to Lord Burghley in 1576, “Now the time is altered . . . for the people are increased and ground for plows doth want, corn and all other victual is scant, [and] many strangers [are] suffered here, which make corn and victual deare.” He recommended that “waste grounds” should be given to husbandmen—a remedy that found little favor among the possessing classes.45

  A few people argued a third proposition that the cause of rising prices was an increase in both population and money. Thus George Hakewill wrote, “The plenty of coin and multitude of men . . . either of which asunder, but much more both together, must needs be a means of raising prices of all t
hings.” This was the most accurate explanation, but also the most complex. It had less appeal than simple monetary or demographic models.46

  Fiscal Imbalances

  The response of governments to rising prices created a third sort of imbalance, fiscal in its nature. By the mid-sixteenth century, large deficits were growing in the public accounts of European states. The problem was compounded by regressive taxation, and by the persistent tendency of the rich to shift the weight of taxes to poor and middling people.

  By and large, the heaviest tax burdens fell upon the peasantry. In many parts of Europe the nobility were exempt from the most onerous forms of taxation. In Spain, for example, the privileged class called hidalgos were released from some taxes, though they were still compelled to pay a sales tax. During the sixteenth century, the hidalgos preserved and even expanded their special privileges at a time when the poor were groaning under their heavy burden and the government was unable to pay its bills.

  As the price-revolution continued, the revenues of European states fell far behind expenditures. In desperation, governments borrowed heavily. The Spanish government kept going by mortgaging its annual treasure fleet before the ships arrived, to foreign bankers at ruinous rates of interest. Spain also issued annuities called juros, pledging an income to private lenders for many years into the future. By 1543, a large part of Spanish revenue went to pay the interest on a public debt that was soaring out of control. The effect was to weaken the spring of government itself.47

  These many responses to rising prices—social, demographic, economic, monetary, fiscal—interacted in combinations of increasing power. For example, the price-revolution caused falling real wages and rising returns to land and capital, which caused the growth of inequality, which increased the political power of the rich, which led to regressive taxation, which reduced government revenues, which encouraged currency debasements, which drove prices higher. This was merely one of the more simple linkages in a causal web of high complexity.