Price Revolution
Of all the major movements which mark the transition of Europe, none was more pregnant with change than the expansion of Europe overseas. Undoubtedly the most important consequence of the movement was its marked impetus to economic growth. Overseas areas constituted a vast new market for all kings of things from the motherlands, as is always in case in colonial undertakings, and the overseas areas gave the Old World supplies of goods that were to create entirely new industries. Secondly, the expansion of Europe led to the importation of so much gold and silver into Europe that the prices of goods, based as they were on these metals, rose enormously. This price rise had a stimulating effect on business enterprise, but caused considerable social tension, particularly between lords of the land and those peasants who had long-term contracts with their overlords and whose obligations were fixed in money.
Thirdly, the overseas movement tended to effect a shift in the center of commerce and subsequently of economic activity generally from the Mediterranean area to the Atlantic seaboard—a shift that has been glorified with the rubric “Commercial Revolution”. Fourthly, colonialism led to fundamental changes in business organization, for large-scale overseas enterprises required greater sums than could be provided by former institutions. In fact, European expansion is largely responsible for the coming into being of the stock company.
Fifthly, from increased trade and an increased division of labour stemmed an even greater use of money as a medium of exchange, and this increase led to important developments in banking practices. Lastly, the overseas movement contributed to changes in political, social, and to some extent, economic ideologies which were to become integral parts of Western culture.
European Price Revolution 1450-1650
The story of the economic impact of expansion of the Old World usually is begun with a consideration of bullion imports and the rise in prices, for these developments had effects which were pertinent to many economic, social and political changes. Indeed, they had a bearing upon the increased use of money, on banking, on debtor-creditor relationships, on savings and investments, on economic growth, on the relations between serfs or wage workers and masters, and upon the costs of government and the raising of taxes.
One finds from available date that Europe’s holdings of gold and silver more than tripled from 1500 to 1650. Furthermore, if a study of the area distribution of this treasure is made, it will be seen that despite Spain’s efforts to keep the gold and silver within its boundaries, precious metals went to all parts of Western Europe in payment for the difference between Spanish merchandise imports and its exports, that is, for the settlement of Spain’s deficits in foreign trade.
As bullion came to be exchanged for goods, it lost value in terms of actual merchandise; that is, prices went up. This was because (1) supplies of gold and silver increased much more rapidly than the stock of goods, (2) the rate of circulation of money was accelerated with the boom in commercial transactions, and (3) individuals, fearing shortage of goods or higher prices, used their free balances for immediate instead of future purchases.
As American bullion entered the market, its effects on prices were felt first in Spain and then in other countries almost in direct proportion to the extent of their participation in the new trade along the Atlantic seacoast. Prices, as expressed in gold and silver, stopped rising first in Spain as a reaction to the decline in the influx of bullion, to the fall in trade, and to the resulting deceleration in the rate of circulation of money, and then declined in other parts of the world. Furthermore, historical studies show that prices of staples produced locally for local consumption increased less rapidly than prices of goods produced for distant markets.
War could also influence some prices by creating a sudden demand, cutting off supplies, or closing markets. In the second place, price movements were caused by alterations in the precious-metal content or the official value of coins. Prices did not move in proportion, but in the last years of this “great debasement” they were more than double those prevailing a decade earlier. Currency manipulation was not merely a royal need; some of it was an attempt to prevent the value of silver coins from declining in terms of gold coins when silver, flowing into Europe in greater volume than did gold, fell in relative purchasing value. In the third place, some commodities rose in price for reasons of their own. Finally, there was the long upward movement caused by the influx of treasure. As precious metal grew more abundant it became less precious, and more of it had to be given in exchange for a unit of goods. Central Europe had learned this fact after 1450, as its silver output increased and business generally recovered. Then Spain quickly felt the effect of her great importations, and soon the rest of Europe was in the throes of a “price revolution”.
Price increases were at times so large and so rapid that they roused widespread discontent, especially among those whose income from rent, wages, or interest stood or still less slowly than did the price curve. It was noted that the purchasing power of an ounce of silver had not changed at all. The whole reason for higher prices lay in the lowered silver content of coins. This debasement must be supplanted by recognition of the vital connection between mounting prices and the influx of precious metals.
Spain fixed legal maximum prices, France pegged prices and wages, but in neither country were the effects satisfactory. In England the uprush of prices around 1550 led to more price fixing, more severe restrictions on middlemen, more careful definition of forestalling, regrating, and engrossing, and even to the exclusion of traders from some branches of commerce. A more realistic policy was that of providing for adjustments to the changing price level.
The entire phenomena of the price rise affected the lives of contemporaries very deeply. Bodin was the first to express, as early as in 1568, the fundamental principles of the quantity theory of money; that is, if the quantity of money in circulation is increased without a comparable increase in the supply of goods, prices tend to react upward. It remained for later studies to point out that an increase in the rate of circulation of money had the same effect on prices as an increase in the volume of money.
Contemporaries also recognized that the price rise favoured debtors and penalized creditors. It was clear to all that debtors had to produce less than formerly to meet their money obligations, for they got more money per unit for what they produced. Contrariwise, it was obvious that creditors were paid off in money which bought only a fraction of the goods which it had previously commanded.
This situation led many lords to seek a revision of their arrangements with their peasants. This was difficult if the peasant stood on his legal rights, but all too often the peasant lacked adequate legal advice or political power for a real defense. Thus lords were frequently able to change the terms of peasant payments and even in some cases to substitute a short-term lease of from five to fifteen years for the inheritable contract.
In England, special circumstances created a particularly tense situation ad a whole series of special social and economic problems. Here the price of wool went up with such amazing rapidity that the prospect of profits, together with a shortage of labour and low real wages, induced many large landowners to go into sheep raising. However, to conduct the new type of agricultural undertaking successfully, it was necessary to have large pastures enclosed by fences and hedges, and to get the large pastures it was necessary to get rid of the peasants and their rights to work small plots. This the land-hungry lords did by depriving their people of traditional privileges, like the right to turn out their livestock in the common fields, or by raising fees or leases to prohibitive levels.
These enclosure movements went so far that government circles in London feared for the food supply of both the city and the entire nation and enacted legislation, like that limiting the size of flocks and prohibiting the conversion of arable to pasture, to stop it. Lastly, enclosures contributed to outbreaks and revolts, often in connection with religious and social movements.
High prices stimulated the landlords of northeast Germany and Poland to push ahead with grain production and to depress the farmers on their estates into the condition of servile workers on large domain holdings. In France, many landlords, still rentiers, could do little to increase the income they drew from their tenants.
While some classes or groups suffered from the rising price curve, others benefitted. The independent craftsmen or small master might be able to pass on his higher costs. The farmer would not affected in so far as was self-sufficing; he would gain from higher prices if he produced for market, but he might lose some of that gain if is rent was adjustable. The merchant profited by the greater volume of goods now entering the market, by the demand of commodities for America and the Orient, by the increased opportunities for speculation, as well as by the rising prices.
The expansion of the supply of precious metal had other effects on European economic life, on commercial expansion, and on adolescent capitalism. More currency was available for cash transactions, for building up bank deposits, or for accumulating personal funds which could be hoarded or invested. The wealth that the Spanish kings drew from El Dorado stimulated them to ambitious policies which were as costly as they were disastrous. The desire to obtain, conserve and increase the supply of precious metals coloured economic discussions and influenced commercial policies at many points during the seventeenth and eighteenth centuries.
In addition to the tensions thus caused in agriculture by the rise in prices, there were also troubles in industry between employers and employees. Workers in the domestic system agitated for higher rates for their spinning and weaving, and labourers in large central shops demanded higher wages.
That aspect of the rise of prices at a more rapid rate than wages, which, however, contemporaries did not understand, was what has come to be known as “profit inflation”. This was that with prices rising and wages lagging behind, profits tended to be larger; that is, they were “inflated”, especially in those enterprises where wages constituted a high percentage of the total costs of production. Such a situation, at least in theory, increases the incentives of business entrepreneurs to augment their investments in capital equipment so that they can make more profit. In this way, “profit inflation” is supposed to favour economic growth. Economic expansion depends, however, on so many factors of which the desire to increase profits is only one that “profit inflation” does not operate automatically in accordance with theory. Its effect on industry was slight, partly because of a limitation of natural resources, a general unwillingness to save for investment, and an attitude, especially on part of the nobility, that participation in industrial activity was degrading.
“Profit inflation” undoubtedly had its greatest and clearest impact in England. In agriculture, production on large farms, even of wool that required little labour, was increased to take advantage of the opportunity to make large profits. In commerce, new investments were made in all kinds of enterprises. And in industry, investments were placed in a whole list of trades. Many of these would not have been made if the likelihood of profits had not been good. So great were the changes that more and more they are now regarded as having constituted an early English industrial revolution.