Price revolution

Price revolution is a term used to describe a series of economic events from the second half of the 15th century to the first half of the 17th century. The price revolution refers most specifically to the high rate of inflation that occurred during this period across Western Europe. Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1–1.5% per year, a relatively low inflation rate for the 20th century standards, but rather high given the monetary policy in place in the 16th century.

Generally it is thought that this high inflation was caused by the large influx of gold and silver from the Spanish treasure fleet from the New World, especially the silver of Bolivia and Mexico which began to be mined in large quantities from 1545 onward.

Specie flowed through Spain increasing Spanish prices and then spread over Western Europe as a result of Spanish balance of payments deficit. This enlarged the monetary supply and price levels of many European countries. Combined with this influx of gold and silver, the growing population and urbanization perpetuated the price revolution. According to this theory, too many people with too much money chased too few goods.

The 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. Furthermore, depopulation – specifically in southern Spain – resulted in a high rate of inflation. 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. During 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 of the century. The annual inflation rate ranged from 1% to 1.5%. 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 led to a fall in the price of metals relative to rising prices for other commodities. This process is only remedied if the purchasing power of the metal is equal to its production costs.

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