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The Price Revolution: A Monetary Interpretation

Published online by Cambridge University Press:  03 March 2009

Douglas Fisher
Douglas Fisher
Affiliation:
Professor of Economics at North Carolina State University, Raleigh, NC 27695.
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Abstract

This article presents tests of the role of money in the price revolution (1525–1618). The hypothesis is that American specie drove European prices, and that the mechanism was the quantity theory of money buttressed by the specie-flow mechanism. Specie entered Spain, increasing Spanish prices, and then spread over Western Europe as a result of the Spanish balance-of-payments deficit, enlarging European monetary bases and price levels. Empirical verification is achieved through Granger-causality tests.

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Articles
Information
The Journal of Economic History , Volume 49 , Issue 4 , December 1989 , pp. 883 - 902
Copyright
Copyright © The Economic History Association 1989

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References

I am grateful to Vincent Smith for his comments and Angela Redish for her comments and the use of her French monetary data; the editor and referees of this JOURNAL also provided very detailed and useful comments on the various drafts of this article.Google Scholar

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7 The documents are: de Malestroit, Sieur, Les Paradoxes du Seigneur de Malestroit, conseillor du Roi et Maisire ordinaire de ses comptes, sur le faict des Monnoyes presentez à Sa Majeste au mois de Mars MDLXVI (Paris, 1566)Google Scholarand Bodin, Jean, La Response de Maistre Jean Bodin, advocat en la Cour, au Paradoxe de Monsieur de Malestroir touchant l'encherissement de toutes choses et le moyen d'y remedier (Paris, 1568).Google Scholar

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12 Ibid.

13 Ibid., p. 33.

14 Ibid., p. 34.

15 According to Morineau, M. in Incroyables gazettes et fabuleux métaux: Les retours des trésors americains d'après les gazettes hollandaises (XVIe–XVIIIe siécles) (Cambridge-Paris, 1985) the yearly inflow into Western Europe (in millions of rix-dollars) is 6 in the 1550s and 1560s, 7 in the 1570s, 10 in the 1580s, and 13 in the 1590s.Google Scholar

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19 Cipolla, Carlo M., “The So-Called ‘Price Revolution’: Reflections on the Italian Situation,” in Burke, Peter, ed., Economy and Society in Early Modern Europe (New York, 1972), p. 45.Google Scholar

20 Ibid.

21 The profit inflation argument (with reference to the period of the price revolution) occurs in Keynes, John Maynard, A Treatise on Money. Vol. 2: The Applied Theory of Money (London, 1930), pp. 152–;Google ScholarNef, John U. in “Prices and Industrial Capital in France and England: 1540–1640,” Economic History Review, 7 (05 1937), pp. 155–85, considers its relevance to English and French experience during the same period.CrossRefGoogle ScholarSee also Outhwaite, Inflation in Tudor and Early Stuart England.Google Scholar

22 Hammarstrom, Ingrid in “The ‘Price Revolution’ of the Sixteenth Century: Some Swedish Evidence,” Scandinavian Economic History Review (No. 2, 1957), says, “The Swedish price figures give no ground for inferring any influx of foreign silver … into Sweden before 1560” (p. 147). This is a modest claim and surely cannot be taken (as it has been) as hard evidence of an absence of specie inflows into Sweden. In contrast, Attman, in “American Bullion in the European World Trade,” is of the opinion that there was a general flow of specie (mostly silver) to the Baltic area; he mentions Sweden in particular (although he has little data for the pre-1600 period).Google Scholar

23 Flynn, “A New Perspective on the Spanish Price Revolution”.Google Scholar

24 Ibid., p. 393.

25 McCloskey, Donald N. and Zecher, J. Richard, “How the Gold Standard Worked, 1880–1913,” in Frenkel, Jacob A. and Johnson, Harry G., eds., The Monetary Approach to the Balance of Payments (Toronto, 1976), p. 365.Google Scholar

26 Clough, Shepard B. and Rapp, Richard T., European Economic History (3rd edn., New York, 1975).Google Scholar

27 Elsas, Moritz John, “Price Data from Munich, 1500–1700,” Economic History (Supplement to Economic Journal), 3 (02. 1935), pp. 63–78.Google ScholarThis also appears in Brown, E. H. Phelps and Hopkins, Sheila V., “Wage-Rates and Prices: Evidence for Population Pressure in the Sixteenth Century”, Economica, 24 (11. 1957), pp. 289–306,CrossRefGoogle Scholarand “Builders' Wage-Rates, Prices and Population: Some Further Evidence,” Economica, 26 (02. 1959), pp. 18–38, who are actually a little hard to pin down on these questions.CrossRefGoogle ScholarSee also Postan, Michael M., “Money, Population and Economic Change in Late Medieval Europe: Note”, Economic History Review, 12 (08. 1959), pp.77–82.Google Scholar

28 Ramsey, Tudor Economic Problems, p. 117.Google Scholar

29 Doughty, “Industrial Prices and Inflation in Southern England.”Google Scholar

30 Using the annual numbers in Wrigley, E. A. and Schofield, R. S., The Population History of England, 1541–1871: A Reconsideration (Cambridge, MA, 1981), a regression of ln(Pop) on trend for 1541–85 yields a compound growth rate of 0.60 percent (when inflation was 1.30 percent). For the 1586 to 1618 period population growth continued at 0.60 while inflation was 1.06 percent.Google Scholar

31 Flynn, “A New Perspective on the Spanish Price Revolution,” p. 389.Google Scholar

32 Also see Flynn, Dennis O., “The Microeconomics of Silver and East-West Trade in the Early Modem Period,” in Fisher, Wolfram, et al., eds., The Emergence of a World Economy, 1500–1914 (wiesbaden, 1986), pp. 37–60. If the price index actually employed is not a Divisia index, then it is conceivable that it will incorrectly capture the changes in relative prices.Google ScholarA fixed-weight index such as the commonly used Laspeyres is subject to this problem it is only absolutely correct when relative prices do not change at all (see Hicks, John R., Value and Capital [Oxford, 1946]). The indices employed in this paper are all fixed-weight Laspeyres indices (rather than Divisia) and hence could give credence to relative-price effects that would not turn up in a Divisia index.Google ScholarActually, the proponents of this view have not got so far as really to prove their arguments, so this must stand as a counterconjecture under the circumstances. Note that in a paper by Loschky, D., “Seven Centuries of Real Income per Wage Earner Reconsidered,” Economica, 47 (11. 1970), pp. 459–66, the Phelps Brown-Hopkins series for England is recalculated using a Paasche index (to account for the changes in the weights produced by the change in relative prices). Inflation from 1521–30 to 1581–90 is 140 percent by the Laspeyres index and 127 percent by the Paasche, suggesting that there is no real reason to recompute for the present article. Also interesting is Loschky's argument that the Malthusian crisis of the sixteenth century (in terms of the behavior of the real wage) disappears if a Paasche-based real-wage index is used.CrossRefGoogle ScholarThe details of these calculations are disputed by Lydall, H. F. and Brown, E. H. Phelps, “Seven Centuries of Real Income per Wage-Earner Reconsidered: A Note,” Economica, 49 (03. 1982), pp. 201–5.CrossRefGoogle Scholar

33 McCloskey, “Note,” p. 1333.Google Scholar

34 Lindert, Peter, “English Population, Wages and Prices, 1541–1913,” Journal of Interdisciplinary History, 4 (Spring 1985), pp. 609–34.CrossRefGoogle ScholarThe velocity argument appears in dough and Rapp, European Economic History, and Verlinden, et al., “Price and Wage Movements in Belgium”. Counterarguments are provided by Cipolla in “The So-Called ‘Price Revolution’, “whose reference is to the behavior of Italian interest rates, and, as I shall discuss in a moment,Google Scholarin Bordo, Michael D., “Explorations in Monetary History: A Survey of the Literature”, NBER Working Paper, 1821 (01 1986), p. 102.Google Scholar

35 Miskimin, Harry A., “Population Growth and the Price Revolution in England,” Journal of European Economic History, 4 (Spring 1975), pp. 179–86.Google Scholar

36 Gould, J. D., “The Price Revolution Reconsidered,” Economic History Review, 17 (12. 1964), pp. 249–66.CrossRefGoogle Scholar

37 This is not the place to consider in detail the view that this period was, indeed, one of expansion in Western European economies. It does, though, bear mentioning, particularly for the English case, as in Nef, John U., “A Comparison of Industrial Growth in France and England from 1540 to 1640,” Journal of Political Economy, 44 (06, 08, 10. 1936), pp. 289–317, 505–33, 643–66,CrossRefGoogle Scholarand Jack, Sybil M., Trade and Industry in Tudor and Stuart England (London, 1977).Google Scholar

38 Friedman, Milton, “The Quantity Theory of Money—A Restatement,” in Friedman, Milton, ed., Studies in the Quantity Theory of Money (Chicago, 1956), pp. 3–24.Google Scholar

39 Lindert, “English Population, Wages and Prices”.Google Scholar

40 Bordo, “Explorations in Monetary History”.Google Scholar

41 See the discussion in Glassman, Debra and Redish, Angela, “New Estimates of the Money Stock in France, 1493–1680,” this JOURNAL, 45 (03. 1985), pp. 31–46,Google Scholarand “Currency Depreciation in Early Modern England and France,” Explorations in Economic History (January. 1988).Google Scholar

42 Hamilton's data (in American Treasure and the Price Revolution) have been questioned from time to time (for example, by Phelps Brown and Hopkins in “Builders' Wage-Rates, Prices and Population,” by M. Morineau in Incroyables gazettes erfabuleux méraux, and by Flynn in “The Microeconomics of Silver and East-West Trade”). In any event the data are not available on an annual basis, so little can be gleaned from them (at least in terms of the tests in this paper, which employ only annual data).Google Scholar

43 The data, other than the Spanish, are taken from Brown, E. H. Phelps and Hopkins, Sheila V. in “Seven Centuries of the Prices of Consumables, Compared with Builders' Wage-Rates,” Economica, 23 (11. 1956), pp. 296–314, and “Builders' Wage-Rates, Prices and Population”; they are annual.CrossRefGoogle ScholarGenerally the data refer to the prices of consumables, and they are certainly narrowly based in terms of referring only to particular areas (or even cities) and products. The Spanish data are from Hamilton, as already noted. See the discussion of the quality of the English index in Ramsey, Peter H., “Editor's Introduction” to The Price Revolution in Sixteenth Century England (London, 1971), pp. 1–17, and D. Loschky, “Seven Centuries of Real Income per Wage Earner”.Google Scholar

44 During the period from 1501 to 1525 there was a very slight upward drift in the price levels of most European countries. I concentrate on the most likely period for the quantity theory, between 1525 and 1585, based on both price and money stock behavior (taken separately).Google Scholar

45 Gould, “The Price Revolution Reconsidered”, Cipolla, “The So-Called ‘Price Revolution’, and Doughty, “Industrial Prices and Inflation in Southern England”.Google Scholar

46 The Great Debasement covered the period from 1544 to 1551 and the recoinage was in 1560; Doughty credits Gould with this interpretation. Doughty, in “Industrial Prices and Inflation in southern England,” specifically says, “if there were such a phenomenon as a ‘price revolution’ in England, it occurred between 1540 and 1560, during the period of the Great Debasement and the Elizabethan recoinage. In this short 20-year period, prices more than doubled for both industrial and agricultural products …” (p. 183).Google Scholar

47 Ramsey, in “Editor's Introduction,” p. 4, attributes the price rises in 1556 and 1557 to “the catastrophic harvests of the preceding years”. He lists oversensitivity to agricultural crises as one of the problems with the Phelps Brown-Hopkins data.Google Scholar

48 See Akaike, Hirotugu, “Statistical Predictor Identification,” Annals of the Institute of Statistical Mathematics, 22 (1970), pp. 203–17.CrossRefGoogle Scholar

49 Many of the tests were carried out further, up to ten years, so as to identify much longer lags, if they exist. The reason for this was the suspicion, occasionally voiced in the literature, that the lags in this period were very long. These tests were unproductive.Google Scholar

50 The use of the F-test requires that the residuals from each of the regressions be “white noise”. In addition, there is a problem of potential “nonstationarity” that arises in data (such as these) dominated by a time trend. Typically, as in Nelson, Charles R. and Plosser, Charles I., “Trends and Random Walks in Macroeconomic Time Series,” Journal of Monetary Economics, 10 (09. 1982), pp. 139–62, one might wish to “difference” the data to be assured of stationarity, but in the case of the sixteenth-century data, the logs of the index numbers are used. This generally appears to produce satisfactory results, as judged both by scatter-plots of the (logged) series and by the Q-statistics calculated both before and after the causal restriction is applied. I return to this topic below, when I consider results for some detrended (but not differenced) data.CrossRefGoogle Scholar

51 The Granger test is certainly not foolproof. For one thing, it is a test only of predeterminateness and not of contemporary (t) causation; for annual data this may well be a serious concern. Then, it may seem that a lagged variable is affecting a current variable when in fact the lagged variable is merely adjusting to the expectation (of economic agents) of the current variable. In this case the current variable is really “causing” the lagged variable. Finally, as with all regression models, causal variables may have been omitted from these equations; in this case one would expect inconsistent estimates of the coefficients.Google Scholar

52 Results for the period from 1586 to 1618 show no causal influence among these prices except for one running from English to Spanish prices.Google Scholar

53 Speaking of the English result, one would not expect a reverse flow of specie from England to Spain, but there were times when there were substantial direct flows from the New World to England. Drake brought back a considerable amount of specie, for example. The reverse causation with Spain could be interpreted in terms of the monetary approach in the sense that English prices influenced Spanish prices without the need of accommodating specie flows from England to Spain.Google Scholar

54 Glassman and Redish “New Estimates of the Money Stock in France”, and Spooner, The International Economy and Monetary Movements in France.Google Scholar

55 Glassman, Debra and Redish, Angela, in “An Empirical Analysis of Depreciation and Price Change in Early Modern France,” mimeo, University of British Columbia (06 1986), p. 20, have studied the entire period from 1522 to 1647 using monthly data on French grain prices and found prices Granger-causing money and not the converse. From my point of view, which regards the periods from 1525 to 1585, 1586 to 1618, and, perforce, from 1618 to 1648 as potentially dissimilar in monetary/price regimes, this result may well not hold up after it is subjected to stability checks. When the entire period from 1525 to 1618 is tested in the manner of Table 4, there is indeed evidence of “reverse” causation (as well as of direct causation). As the results in Table 4 make clear, however, the reverse causation disappears when the period is broken in two. A serious possibility of heteroscedasticity affects regressions running over such long periods as that between 1522 and 1647.Google Scholar

56 I also differenced the data, but the differences of such highly smoothed data as I have here prove to contain no causal information on these tests.Google Scholar

57 The reserve-creating country (Spain) would show the traditional money-causes-prices relation; see Putnam, Bluford H. and Wilford, D. Sykes, “Money, Income and Causality in the United States and the United Kingdom: A Theoretical Explanation of Different Findings,” American Economic Review, 68 (06 1978), pp. 423–28. This is a testable implication of the theory that cannot be appraised in the present state of the Spanish data.Google Scholar