monumental mass of gold and silver sailed across the
Atlantic from the New World to Spain during the 1500s.*
According to one authority, the total European stock of gold and
silver at the end of the century was nearly five times its size in
1492.1 The volume was so enormous that the armed convoys that
transported the treasure to Europe averaged about sixty ships; on
occasion, the convoys included as many as one hundred ships. Each
of these vessels carried over two hundred tons of cargo in the
1500s and around four hundred tons on larger ships in the 1600s.2
In 1564 alone, 154 ships arrived at Seville to debark their cargo
of treasure.' At the end of the sixteenth century, the precious
metals accounted for the bulk of the value of everything shipped
from America to Spain.
As we trace the impact of all that gold on the European economy in the course of the sixteenth century, we shall see that the story has an ironic twist at the end. Gold had to face silver as a rival for most of history, but a serious rival to both precious metals was blossoming by the end of the sixteenth century-forms of paper money as debt instruments issued by private parties instead of by governments. All the excitement about gold in the 1500s was in essence a celebration of the past. While no one was paying much attention, the future was beginning to emerge.
The Spanish government was extraordinarily effective and efficient in accomplishing the complex task of moving the treasure across perilous and hostile seas. The gold and silver were loaded on ships at Vera Cruz in Mexico, Trujillo in Honduras, Nombre de Dios on the Atlantic side of Panama, and Cartagena in Colombia. The area of the Caribbean enclosed by these ports came to be known as the Spanish Main, a name that has lingered on in romances ever since. From there, the ships traveled to Cuban waters to join together in convoys, or floras, for the long voyage to their home port of Seville. Two to eight armed galleons accompanied the flotas as protection against the pirates and buccaneers who roamed the seas waiting to pounce on treasure-filled vessels.* The flotas also provided at least a hope of rescue, of cargo if not men, when heavy storms threatened to sink one or another of the galleons.
When vessels were forced by storms or fear of attack to put in at any port other than Seville, passengers were forbidden to land or to make any offer to trade in treasure. Once the cargo reached Seville, everything was transported under the tightest security to the House of Trade, where it was weighed and placed in special chests in a treasure chamber; both chests and chamber were provided with triple locks, with each of the three keys carried by three different officials of the House. The metal was smelted and refined right there. Some of it was then minted, but significant amounts of bullion were delivered to the creditors of the Crown, most of whom resided in other lands.
It staggers the imagination to consider the skill required to gather together, organize, control, and maintain contact with that many sailing ships on a voyage of over three thousand miles of open ocean, with no handy means of communication such as the wireless systems or radar used on the convoys sent out four hundred years later from America to Britain in World War II.` By comparison, piloting one thousand camels across the wastes of the Sahara must have been a cinch. There was another big difference between the convoys of the 1500s and the convoys of the early 1940s. In World War II, the ships carried black goldoil-plus food and armaments to defeat the Nazis; in the 1500s, the freight amounted to nothing more useful than shiny metal ingots. People knew what to do with the precious cargoes carried through the submarine-infested seas of the North Atlantic, but the Spaniards had a far more open-ended set of options for the precious metals. More often than not, they made the wrong choices.
Although losses to the Spanish flotas from pirates were a lot smaller than losses from storms at sea-or from German submarines in World War II-the danger of attack was a constant worry. There was a rumor around Spain that Charles V cried with joy every time word came in of the safe arrival of a flota.4 Charles V, the reader should be reminded, was King Charles I of Spain through his mother, the daughter of Ferdinand and Isabella; he was also Charles V, emperor of the Holy Roman Empire (Charlemagne having been Charles I in that role). Generally known as Charles Quint at the time, he is most often referred to today as Charles V, the nomenclature that I follow here. He plays an active role in the later pages of this chapter.
As the historian Kenneth Andrews describes the times, piracy was elevated to a preferred branch of policy by Britain, France, and Holland, each of which was seeking a piece of the action in America that the Spaniards and Portuguese had claimed exclusively for themselves. Spain was also at war at one point or another with each of these countries during the sixteenth century. There were thirteen organized English expeditions to the Caribbean, and doubtless many free-lance junkets, just during 1570 to 1577.5 Nevertheless, despite all the romance about the pirates and their occasional dramatic successes, the records of the House of Trade contain many accounts of failed attacks and safe arrivals' Whole fleets were intercepted and defeated only three times, twice by the English and once by the legendary Dutch admiral Piet Heyn in 1628.' More often, stragglers ran into difficulty. In March 1569, for example, 22 Spanish and Portuguese ships were brought into Plymouth, where the English happily relieved them of their precious cargoes.8
The most serious and sustained threat to Spanish shipping came from Sir Francis Drake, who made a specialty of plundering gold from the Catholics of Iberia. His efforts made his crew rich, quite aside from the fortune he kept for himself and the even bigger sum that he turned over to the English Crown. His hatred of the Spaniards was reciprocated: they referred to him as "the master-thief of the unknown world."'
Drake kept at the task, off and on, for nearly 25 years. He even landed in Panama in 1572, aiming to capture the Atlantic-side port of Nombre de Dios and thereby interdict the north-south route of Spanish gold. A wound in his leg forced him to abandon that project, but he and his men succeeded in seizing a pack train loaded with gold en route to Nombre de Dios from Panama City on the Pacific, with £20,000 worth of coins to show for their efforts.
Drake's famous voyage on the Golden Hind during 1577-1579 snared more than ten tons of gold, silver, and jewels from Spanish ships, first on the Atlantic side, and later, after sailing through the Straits of Magellan, on the Pacific side.10 Drake then sailed up the coast of California before crossing the Pacific. He landed at Point Reyes on the shores of Marin County on San Francisco Bay and claimed the territory in the name of Queen Elizabeth of England. In 1586, the Venetian ambassador to Madrid reported that Drake had landed on Santo Domingo, Puerto Rico, and Cuba and had "returned to England with 38 ships laden with much booty."" In 1595, the queen sent Drake back to Panama to capture Nombre de Dios and Panama City and hold them for ransom. This time he succeeded in taking Nombre de Dios, but he in turn was conquered by a fatal case of dysentery, along with many of his shipmates, and was buried at sea.
One might think that Spain in the middle of the sixteenth century should have been the richest nation in Europe by a wide margin. It was not. The impact of this immense and sudden addition to monetary wealth was felt throughout the rest of Europe and even out to the Far East, but in Spain no lasting payoff remained from the spectacular exploits of the Conquerors and the fountains of blood that flowed from white men and Indians. The gold came in one end and went out the other like a dose of salts.
How was it that the Spaniards were able to mismanage one of the greatest windfalls of all time? Why did so much of the fruits of history's first gold rush end up in the hands of others? Part of the answer to these questions was local, indigenous to the character of sixteenth-century Spain. Part, and perhaps a larger part, was the result of the dynamic and restless environment of the era, in which the rigid structure of Spanish society was ill-fitted to participate.
During the sixteenth century, five-sixths of outgoing cargoes from Spain, primarily to the colonies, consisted of goods grown or manufactured in other countries." Late in the century, the Cortes, or Parliament, declared, "The more of [gold] that comes in, the less the Kingdom has. ... Though our kingdoms should be the richest in the world ... they are the poorest, for they are only a bridge for [the gold and silver] to go to the Kingdoms of our enemies." Another Spanish observer, Pedro de Valencia, wrote in 1608, "So much silver and money ... always has been fatal poison to republics and cities. They believe money will keep them and it is not true: plowed fields, pastures, and fisheries are what give sustenance." Still another complained, "Agriculture laid down the plough, clothed herself in silk, and softened her work-calloused hands. Trade put on a noble air ... went out to parade up and down the streets."14 Instead of transforming the gold and silver into new productive wealth, the Spaniards paid the precious metals out to other countries and spent so much that debts to foreigners soared. As early as the 1550s, there was a popular saying that "Spain is the foreigners' Indies," because so much good Spanish money was being paid over to foreigners for "puerilities"-baubles like bangles, cheap glassware, and playing cards.15
Spain had also committed a costly economic blunder in the Columbus-year of 1492, even though the decision had brought joy and pride at the time it was made. The Jews and the Muslims were both expelled in 1492. Some Jews remained by converting to Christianity, but the vibrant intellectual community that had contributed so much to Spain for hundreds of years rapidly disintegrated. Most Christian Spaniards at that time were peasants or soldiers, illiterate and without any knowledge of the simplest kind of arithmetic. The nobility were either idle or romantic warriors.
The Jews and the Muslims, in contrast, were highly educated, leaders in mathematical and scientific developments, and immune from the Christian strictures against usury. They were the skilled governmental administrators and men of business. The Muslims in particular had a long heritage of trading, importing, and exporting. With their departure, Spain lost almost all of the native merchant class that was essential in a time of dynamic economic development throughout Europe. Instead, Cadiz and Seville, the primary economic centers of sixteenthcentury Spain, were filled with foreigners-Genoese merchants and bankers, German moneylenders, Dutch manufacturers, and purveyors of every kind of goods, services, and finance from all over Europe, even Bretons and people from as far away as the North Sea area."' Almost all of the massive borrowing by Spain in the sixteenth century was financed by foreigners.
The departure of the Jews and the Muslims was a loss in another sense. Because of its geographical location, Spain is not on the route that traders and travelers would take in going from one place to another. The line of countries from France eastward, and the projection of Italy and Greece down into the Mediterranean, were on the east-west crossroads of travel and trade through Europe. There was no need to cross Spain, unless you were coming from Africa, and even then Spain was not the only possibility. As a result, Spain tended to be more provincial and ingrown than the countries to the north and east; only Seville, Barcelona, and Bilbao had any significant connections with the rest of Europe. The cosmopolitan flavor came from the Jews and the Muslims, who had many contacts in other lands dating back for centuries. Their departure cut that link to the outside world, leaving Spain dependent on foreigners whose allegiance was elsewhere.
One authoritative study has summarized Spain's situation as a dreadful paradox:
Gold and silver merely acquired their international status in Spain, without being in any way connected with the Spanish economy.... There was an abundance of metals without any productive development, a rise in prices without any monetary alterations. In short, sixteenth century Spain was characterized by a separation between money and merchandise."
The greatest waste inspired by Spain's gold was not in the baubles or in the loss of commercial and financial sophistication. It was in the dreams of glory of the Spanish monarchs. Gold has always been associated with power. Once the kings of Spain realized how much new wealth the discoveries of gold in the American colonies would bring them, they convinced themselves that their wealth was great enough to bend the world to their will, especially in the fiery matter of Catholicism versus Protestantism. In the middle of the century, half of all business conducted in Spain was for the account of the king.18
Charles V, who ascended the throne in 1516 at the death of his grandfather, Ferdinand, was determined to make Spain the dominant power in Europe. But Spanish power was not sufficient for Charles. He also wanted to follow in his other grandfather's footsteps and become emperor of the Holy Roman Empire. That job did not pass by inheritance; you could become emperor only through election by a group of Germans appointed by the pope and called electors. Francis I of France had identical ambitions. An intense bidding war to buy the votes broke out, in a no-holds bribery contest, with Francis backed by Genoese bankers and Charles by the Fuggers, the great Augsburg banking family. Charles won, but at a cost of 850,000 florins, which pushed him in debt to his ears. He proceeded to engage in 27 years of warfare with Francis I, with intermittent truces that were invariably violated and at one point that almost led to a personal duel between the two monarchs. Charles also claimed the Netherlands as part of his empire, and left his son, Philip II, to deal with the fruitless eighty-year struggle to tame the Dutch and the Belgians, during which most of the fighters on the Spanish side were mercenaries who would fight only for payment in "good money"that is, gold or silver. Philip, in turn, was so bold as to try to topple Queen Elizabeth of England in 1588 with his ill-fated venture known as the Spanish Armada, to say nothing of his sporadic campaigns against the Turks, who had launched an aggressive move into the Balkans and eastern Mediterranean.
These adventures had to be financed. The 37 million ducats of external debt accumulated by Charles V during the forty years he was king of Spain exceeded by two million ducats the total value of the precious metals assigned to the crown that reached Seville from America in those years.'" In 1572, the cost of the war in the Netherlands was running at an annual rate of 14.4 million florins, but the Spanish were able to come up with only 7.2 million florins in all of 1572 and 1573. By July 1576, King Philip owed the troops 17.5 million florins. Stretched beyond his means, Philip ordered payments to his creditors stopped, confiscated two shipments of silver that he owed them, and forced the creditors to convert most of his debts into long-term loans-nearly wiping out the Fugger banking house in the process. Philip's bankruptcy led his army of mercenaries to break apart in mutiny and desertion. It was said that at one point the captain general did not have enough money for lunch .211 Philip thereby introduced the Western world to the relatively rare but shattering phenomenon of default by a sovereign or, in today's parlance, by a sovereign state. Spain would go on to repeated financial crises in 1596, 1607, 1627, and 1647.21
Meanwhile, a lot was going on throughout Europe, not just in Spain. In spite of the continuous depredations of warfare and religious turmoil, these unpleasant developments played themselves against the background of the High Renaissance, when artistic and scientific achievements reached extraordinary levels. Leonardo, Tintoretto, Raphael, Palladio, Cellini, Michelangelo, Titian, Diirer, Cervantes, and El Greco were all active during the 1500s. The great cathedral of Saint Peter's rose up on the banks of the Tiber, well splashed with gold in its interior. Copernicus and Galileo were exploring the solar system, while businessmen for the first time took the giant step of using double-entry bookkeeping.22 This was also a period when Latin was being replaced by vernacular languages, which facilitated communication among the great mass of individuals, including some very rich ones, who had neither been to universities nor joined the clergy.
The single most important event of the century occurred in 1517 when Martin Luther posted his 95 theses on the door of the church in Wittenberg. The Reformation tore through Europe like a hot poker, transforming beliefs and revolutionizing artistic styles while ripping across political and dynastic relationships. The Reformation was in some instances the cause of wars, but war was in any case an almost constant way of life in the 1500s.
England was at war for a total of fourteen years. In 1545, at war with Francis I and simultaneously threatened by an invasion from Scotland, Henry VIII had 120,000 men under arms-and drawing pay from his treasury. Henry was forced to borrow money at interest rates as high as 16 percent and even seized all the lead in the kingdom to be sold for export. In a vast privatization plan that bears some resemblance to those carried out in many countries during the 1990s, Henry sold off valuable properties that he had grabbed from the monasteries and the churches when he veered into Protestantism after his divorce in 1533.23 As a final step, Henry resorted to debasement of his currency.
No matter how painful and expensive the wars were, the English spent much less time at war than the Spanish and the French, and the difference probably explains the relatively rapid economic development in England during the reign of the Tudors. The Spaniards fought with France for nearly thirty years. The major struggle was over who would dominate Italy, but that contest was in addition to Spain's ill-fated Armada against England and their brutal campaign to subdue the Netherlands. Religious wars were also fought within nations, many continuing at an unrelenting pace well into the seventeenth century. The result was repeated repudiation of debts by both the Spanish and the French.
The Europeans did not fight only among themselves. Just beyond the eastern Mediterranean, the Turks launched a sequence of campaigns against Europe that would continue with only brief interruptions for over one hundred years. In 1529, the Turks were at the gates of Vienna for the first time. They ravaged Italy and Sicily in the 1530s. They were at war with Venice from 1537 to 1540 and again from 1545 to 1564, but suffered a major naval defeat at Lepanto in Greek waters in 1571.
Most of the military activity within Europe resulted from the ambitions of the great dynasts of the age-Charles V in Spain and Francis I in France. Henry VIII (1509-1547), who was eager to establish and maintain the legitimacy of his own dynasty in England, acted as a kibitzer and occasional participant in the struggles between Charles and Francis, continuously playing one against the other. Henry's choices were limited in the early years, as Charles was the nephew of his first wife, Catherine of Aragon, but Henry also played at making alliances with Francis.
France was not among the lucky countries to discover gold in the New World, but France did gain gold from trade and from picking off Spanish galleons on the way to Seville from America. Francis I (1494-1547) was a great believer in the tradition that gold was essential for public relations, for ostentatious display, and for messages of power. His tastes were by no means unusual for an age in which Flemish and Burgundian embroidery was lavished with gold thread, when gold was becoming increasingly visible in church adornment, when nobles' ranks were distinguished by the weight of the gold chains they wore around their necks (Henry VIII had a "masseye gold cheyne" of 98 ounces), and when knights went into battle wearing doublets strewn with gold and gems.21
Francis was an enthusiastic patron of the arts, and when he arranged for Benvenuto Cellini to be released from a Roman prison to come work at the French court, he declared to Cellini, "I will choke you with gold! 1125 Cellini proceeded to produce a salt cellar so sumptuously decorated with gold and jewels that Francis cried out with astonishment when he saw it.26 Francis was a connoisseur of more than the arts: he was also famous for his many amours, and observed that "A court without women is a year without spring and a spring without roses. 9121 In 1515, Francis followed in Charlemagne's footsteps in fighting the Lombards: he conquered northern Italy and was feasted by the pope.
Francis now considered himself the most powerful monarch in Europe. Nevertheless, in order to cover himself against Charles V's increasing threats to capture Italy for the Holy Roman Empire, Francis decided to make an alliance with Henry VIII. It is worth mentioning that Charles succeeded in his goal of throwing the French out of Italy. The battle of Pavia in 1525 was a total defeat for Francis, who ended up Charles's prisoner, marking the second occasion on which a king of France became a prisoner of war. Charles was no model of chivalry, as Edward III had been when he captured jean II: Francis languished for a year in a dank cell in Madrid, where he passed the time writing songs and poems. Charles proceeded to take complete control of Italy and allowed his troops to sack Rome with a violence that was barbarous even for those times. The control of Italy included the control of the papacy, which is why Pope Clement VII found himself unable to authorize Henry's divorce from Queen Catherine of Aragon, Charles's aunt. Henry had every reason to be shocked at the pope's rejection: the pope had earlier named him "Defender of the Faith," in return for Henry's zeal in condemning Martin Luther as a mortal enemy of all good Christians.
Henry and Francis encountered each other face-to-face in 1520 at Guynes, in the neighborhood of Calais, at a summit meeting that accomplished even less than most summit meetings. Francis was unaware that Charles V had traveled to London for a secret meeting with Henry just prior to Henry's departure for France, which is one reason that the meeting at Guynes ended up as more pomp than circumstance, with the lavish overlay of ceremony and display obscuring empty confrontations on matters of substance.
Henry crossed the Channel aboard the Henri Grace-de-Dieu, the Royal Navy's largest ship, accompanied by enough smaller vessels to transport a retinue of 4500 for himself and twelve hundred for Queen Catherine, to say nothing of three thousand horses and a wide variety of associated equipment. Upon his arrival at Calais, Henry's chancellor, Cardinal Wolsey, rode on a mule with golden stirrups to the French camp to proclaim the arrival of the English.
The encounter between the two posturing monarchs has come to be known as the Meeting on the Field of Cloth of Gold. The title is apt. The ground was not literally covered with cloth of gold, but the participants lavished gold all over their costumes, and the 2800 tents that Francis supplied for the occasion were covered with so much cloth of gold shimmering in the sunshine that the observer sensed himself immersed in gold.28
Five days after Henry's arrival, at the precise moment announced by a gun firing a salute, the two kings and their elaborate entourages began to move toward each other to meet at the appointed spot at Guynes. The French archers rode with weapons sheathed in gold, followed by the marshals of France all shining in cloth of gold. Then came two hundred nobles clad in uniforms of gold and crimson. Francis himself wore a cassock of cloth of gold, while his horse was decked out with gold filigree.
The English were not to be outdone in gaudy golden display. Wolsey was accompanied in the procession by fifty giant men carrying gold maces with knobs as big as a man's head .29 Shakespeare, in his play about Henry VIII, described the sequence of events this way:
The reference to India was to the Indies, which at that time still referred to all of the New World. Shakespeare's hyperbole that every man "Show'd like a mine" suggests that the English were so covered with gold that they looked like a gold mine."' Gold was so much in every- one's consciousness that one of Henry's aides commented that the beard Henry grew for the occasion "looks like gold."31
The entire setting was marked by fluttering flags and faux palaces, and included two fountains that spouted red wine the whole time (they say that 1520 was a pretty good year). Henry even prompted a spontaneous wrestling match with Francis, a twisting tussle in which Henry ended up on the grass, purple with rage. Elaborate jousts on horseback and archery contests alternated with meals of "cygnets [swans], venison, pike, heron, pies of pears, custard and fruit ... kid, sturgeon, peacock, quails, pheasant, egrets."32 No wonder the chef was called Merryman.
Withal, Henry and Francis were at war with each other only three years later. Had all the gold flaunted at their summit blinded them from reality? Now they had to use their gold for grimmer purposes.
While all this was going on, and to some extent because all this was going on, profound economic changes were at work in Europe and, in a secondhand kind of way, in Asia as well. The behavior of prices and the demand for money in Europe changed so dramatically in the course of the 1500s that economists refer to this period as the Price Revolution of the Sixteenth Century. The Price Revolution, the ceaseless warfare, the rapid growth in international trade, and expanding economic relations with trading partners thousands of miles away in the Far East galvanized methods of doing business and transformed the character of financial transactions. Regardless of the difficulties that monarchs may have had with their finances in the sixteenth century, affairs in the private sector reached a far more sophisticated level than at any time in the past.
The Price Revolution defined the tone of the entire century. A pattern of rising prices was first visible in Italy and Germany from about 1470, the low point for the decline in prices that had set in following the Black Death in 1349. Then, like another kind of plague, inflation infected Europe in a series of steps. It took hold in England and France during the 1480s, extended to Iberia in the next decade, and appeared in eastern Europe in the early 1500s. Although prices did not rise in every single year, for agricultural prices in particular are characteristically volatile because of weather variations, the low point reached in each decline tended to be higher than the previous low, while each high point tended to set a record on the upside.33
Anyone who has lived through an inflationary period can testify that inflation is always unsettling because it clouds the future with uncertainty, but the shock of sustained inflation to the inhabitants of Europe in the sixteenth century was shattering. They had no prior experience with it, no good economic theory to explain it, and no established rules of behavior or policy with which to manage it. There had always been brief episodes of inflation in response to crop failures, but the Price Revolution of the Sixteenth Century persisted for more than one hundred years before it tapered off at long last. No other inflation in history has been so stubborn.
The price increases were most rapid in raw materials, especially food. In England, wood, livestock, and grain rose fivefold to sevenfold from 1480 to 1650; manufactured goods merely tripled.34 A 700 percent increase over 170 years compounds at only 1.2 percent a year, but, with wages rising less than half as fast as the prices of necessities, it was the tenacity and the duration of the inflationary pressures that shook people. The purchasing power of money and of labor incomes deteriorated at what appeared at the time to be an alarming rate.
What caused this deterioration? A weighty literature has accumulated to record the debates on this matter. The bottom line of the controversy is that no one cause can be held responsible for the long duration of the Price Revolution. The economic historian Glyn Davies describes it as "strange and profound. "31 Contemporary observers in the sixteenth century engaged in plenty of dispute. Just a few of the causes mentioned in the literature of the time include the decline of agriculture, ruinous taxation, depopulation, market manipulation, high labor costs, vagrancy, luxury, and the machinations of businessmen like the Genoese.36'
Some modern authorities argue that the combination of rapid increases in population and a much slower rate of growth in food supplies was responsible for igniting the inflationary fires. The European population numbers had begun to recover from the Black Death and the Hundred Years' War some time early in the fifteenth century. The largest advance was from 45 million in 1400 to sixty million in 1450, but the population increased by another nine million to ten million people during each fifty-year period up to 1600. By that time, the population had doubled from the level of 1400. In 1550, the number of people in Europe finally exceeded the 73 million mark set way back in 1300, a short while before the catastrophes of the Black Death.37
Food supplies, which had been ample up to the early part of the fifteenth century, could no longer keep up with the increase in the number of mouths to feed. Agricultural output would probably have lagged population growth in any case, but two other factors contributed to the shortage of food. The first was the shift, particularly in England, from arable to pastoral farming, as the profitability of sheep farming overtook the profitability of growing food; the second was the continuing drift of labor into the cities. In 1538, a German writer commented that "There are so many people everywhere, no one can move."38 Perhaps he had paid a recent visit to Florence, where by 1561 the average size of households was 7.8 31 people, which was double what it had been 120 years earlier.
Inflation has always appeared during wartime, when spending leaps ahead and production of peacetime goods and services tends to fall. Tacitus wrote that "Pecunia nervus belli " (Money is the sinew of war),"' and there was not a single year of complete peace on the European continent during the one hundred years from 1551 to 1651. The fiscal problems of financing these wars were intensified by the character of the sixteenth-century tax systems, which put almost all the burden on the lower classes. As it was the lower classes who fell furthest behind in the inflationary process, government revenues lagged even as inflationcum-warfare was constantly driving government expenditures higher. Jumbo fiscal deficits and exploding government indebtedness were the inevitable consequences. Two resulting financial innovations were Spain's asientos and France's Grand Parti, both of which were forms of borrowing in the capital markets-the modern convention-which supplemented the traditional method of privately negotiated debts that piled up on the accounts of the bankers in Italy, Germany, and Holland.
There was another method of royal finance that was by now an old trick: increasing the supply of money through devaluation of the currency. In 1523, the Spanish Cortez urged Charles V to reduce the gold content of Spanish coins in order to curtail the distressing outflow of their highly valued coins to other countries. That way, they could mint a larger number of coins with the same amount of gold. Charles waited until 1537 to take the step; the magnitude of his needs is apparent from his decision to make this move even after Cortez and Pizarro had provided him with what looked at the time like a bottomless pit of gold bullion. Other rulers followed suit. Henry VIII's policy from 1542 to 1547 was so blatant that his move became known, with the uppercase letters, as The Great Debasement. Henry's debasement was a direct result of the war with France in the 1540s, when, as described by one historian, he "worked the Mint for all it was worth."41
Monarchies were not the only urgent spenders in this environment. Inflation generates its own self-sustaining urgency. As goods become more valuable to people than money, inflation encourages hoarding by consumers and especially by businessmen and farmers. More elaborately, hoarding takes the form of speculation, in which people buy in advance of their needs or try to corner the market, either to beat anticipated price increases or to resell the goods at a higher price later on. All of this intensifies the upward pressure on prices and then encourages even more hoarding and speculation.
But what about the impact of American treasure on the Price Revolution? Adam Smith had no doubt about that: "The discovery of the abundant mines of America seems to have been the sole cause.... there has never been any dispute about the fact or the cause of it."42 At first glance, it appears obvious that the flood of new money coined from the treasure of the New World must have been the driving force that supported inflation for so long. Population may have outstripped the supply of food, but babies do not normally come into the world with silver spoons in their mouths. If overpopulation were an automatic cause of inflation, countries like India and Bangladesh would have led the world in inflation while countries with slower-growing populations would have steady or declining prices. The facts fail to fit that hypothesis by a wide margin. In some instances, population growth in excess of food supplies may be a necessary cause of inflation, but it is hardly sufficient. Where does the increased population get the wherewithal to pay the higher prices?
The question suggests an answer: money supplies must increase. That reasoning supported Adam Smith's didactic conclusion that the abundant mines of America were responsible for the price inflation. Smith's view stemmed from a remarkable piece of economic research in 1568 by a French observer named jean Bodin, who went all the way back into ancient history to demonstrate how rising amounts of gold and silver were associated with higher prices. He pointed out that the prodigious inflow of precious metals from America had landed in Spain and that prices in Spain were higher than in France and Italy: "Spain is rich, haughty, indolent.... It is ... the abundance of gold and silver that causes, in part, the dearness of things."43
Bodin is the spiritual father of monetarism, an important branch of economic theory spelled out most authoritatively by Nobel Laureate Milton Friedman, who has asserted that inflation is always and everywhere a monetary phenomenon. When prices in general are rising, the buyer has to spend more money for the same basket of goods and services. That is, inflation cannot continue unless it is financed in some fashion. If buyers cannot find the extra money they need to maintain the same level of purchasing, they will have to cut back and buy fewer things, thereby limiting the ability of sellers to keep raising prices. Monetarists therefore contend that the Price Revolution of the Sixteenth Century would never have endured for such a long period of time had it not been nourished by the increased money supply produced from the New World's gold and silver bullion.
Yet fitting the facts to that monetarist theory is not as easy as Bodin made it appear. Not all the treasure remained in Europe as money. Hoarding, as always, kept some of it out of circulation. Gorgeous ornamentation in the churches took a share. And, as we shall see in the next chapter, a significant amount was shipped off to Asia, never to return.
Furthermore, although prices started rising around 1470 and were climbing throughout Europe by 1500, American gold did not arrive in Spain in any significant quantity until 1520; the Peruvian discoveries took place after 1530, and the big silver discoveries did not begin to bear fruit until about twenty years after that. The relationship continues to be confusing after 1600. The imports of gold and silver to Seville appear to have peaked about 1590, to have remained at a high level for another thirty years or so, and then to have fallen off precipitously from around 1620 to the end of the century. Yet prices kept on climbing, at rates that seemed to bear no relation to the arrivals of fresh supplies of the precious metals. In England, for example, prices doubled between 1600 and 1650.4
However, the Seville data are questionable, because an increasing supply was unloaded downstream at Cadiz or in Lisbon, and illegal diversions from official routes were also growing. Gold is too easy to smuggle for official statistics to be trustworthy. Analysis of informal kinds of information concludes that the flow of precious metals to Spain actually increased after 1600.45 The huge Brazilian gold mines began shipping to Portugal after 1700, but by that time the Price Revolution had played itself out. Even so eminent an authority on monetarism as Anna Schwartz, one of Friedman's principal colleagues, has described the experience of the Price Revolution as a "contradiction of the basic hypothesis" of monetarism. 46
Other economists take issue with monetarism's focus on just one economic variable. They prefer to turn the argument upside down. The Price Revolution of the Sixteenth Century, viewed from this vantage point, was not the result of an increased supply of money in the form of the precious metals; rather, the rising price level magnified the demand for money, arousing the Spaniards to redouble their efforts to bring in gold and silver from America. Seen from this perspective, expanding money supplies are not the cause of inflation but the result of it.
Whichever and whatever was the cause of the Price Revolution, the inflow of treasure must have contributed to its persistence. A dramatic example of this phenomenon appeared in the course of the long struggle between Francis I and Charles V.
After Charles captured Francis at Pavia and imprisoned him in Madrid, he forced Francis to sign a ruinous treaty that was to be secured by Francis's two oldest sons, seven and eight years old, as hostages. Goodbye to the French claim to Lombardy! The children remained prisoners for four years, until they were ransomed by Francis's promise to pay two million gold crowns to liberate them. Payment began with 1.2 million crowns sent in a boat that crossed the river at the French-Spanish border at the precise moment as the boat carrying the princes headed in the other direction. The exchange was delayed (as mentioned in Chapter 6) until four months had been spent counting the coins.47
This enormous transfer of gold put a painful squeeze on the French nobility, clergy, and taxpayers while stimulating a wave of spending in the Spanish economy. As a result, prices in Spain were soon higher than prices in France. The resulting disparity in prices produced such a surge in French exports to Spain-everything from wheat, wine, and brandy to hammocks, candles, and canvas-that the transfusion of gold and silver was soon running in reverse as monies returned to the French side of the border. 8
The most curious aspect of this whole sequence of events was what happened to the value of gold itself, and silver along with it. The precious metals were no more immune than anything else to the inexorable influences of the law of supply and demand. The European supply of gold in the sixteenth century expanded rapidly, as the deluge of gold imports from America joined with the flow of gold from new mines and improved mining technology in eastern Europe and especially in Hungary.
Consequently, although the price of gold rose along with everything else in the course of the Price Revolution, the gold price changes were much more subdued. For example, the price of gold in England, reported in shillings, climbed from forty to sixty shillings an ounce between 1492 and 1547, a rise of 50 percent, then was stable for the next fifty years, and then had a further modest increase to 74 shillings by 1611." That was a total advance of 85 percent-way below the increases in wages, clothing, or food. Although the English had no gold resources of their own in the Americas or anywhere else to draw upon, there is reason to believe that the supply of gold in England increased at a rapid pace nevertheless, thanks to huge gains of treasure through piracy and war.5°
Adam Smith provides ingenious insights into this phenomenon. The quantity of any commodity, he asserts, regulates itself in every country according to the demand of those who are willing to pay enough to bring it to market. No commodity regulates itself "more easily or more exactly" by this rule than gold or silver, because their high value and small bulk make it so easy to transport them from the places where they are cheap to the places where they are expensive. This physical relationship explains why gold prices are so much more stable than the prices of commodities "that are hindered by their bulk from shifting their situation." Therefore, "When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary laws of Spain and Portugal are not able to keep their gold and silver at home. The continual importations from Peru and Brazil ... sink the price of those metals there below those in neighboring countries."51 Therewith, Smith provides an additional insight into the inability of the Spaniards to hold on to their precious gold.
The Price Revolution and the discovery of the copious gold resources of America were abrupt shifts from the past, but additional significant economic innovations were at work during the sixteenth century. Indeed, the trade fair, a traditional institution, now began to play a more important role in the economic scene, initiating a mutation in the role of gold that has continued to the present day. The expansion of this institution is notable for its civilized character, which made a dramatic contrast to the warfare, religious controversy, pillage, and plunder that persisted throughout these centuries.
Beginning in the Middle Ages, the trade fair developed into an essential institution for doing business-displaying wares, buying them, and selling them in a world where most towns were tiny places, without a bank on every street corner and without a supermarket just a fiveminute automobile drive from the house. It was also a world without telephones, Federal Express, the Internet, or news services that could quote or advertise the prices of goods, financial instruments, and foreign exchange. Without central gathering places, merchants could not supply themselves or were limited to only one or perhaps two local sources; large customers could not locate the merchandise-and, more often, the bankers-they needed; the multiplicity of monies and of credit instruments could not be settled to pay the obligations that accumulated in the course of thousands of transactions. In today's world, the annual Frankfurt book fair, the colorful expos in Las Vegas for the high-tech industry, and the longstanding Leipzig fair for industrial machinery are pale shadows of this vital and essential institution of earlier times. Furthermore, most of these modem fairs meet annually, whereas the fairs that concern us here met at least twice a year; Lyons, one of the major locations, held its fair four times a year.
Unlike local situations, where merchants exchanged wares with their neighbors, transactions at trade fairs would permit a merchant to buy without necessarily having something to sell, or vice versa. One-sided purchases often require financing, because the buyer is not making an offsetting sale. The format of the fairs thus became increasingly elaborate, and during the sixteenth century, financing the purchases at the fairs became as important as merchandise itself. In many instances, the transactions were financial without regard to any movements of goods." Although fairs took place in many centers in Europe, both geographical and political factors determined the locations of the key towns where the major players met and where kings provided special protection and facilities for foreigners; at Lyons, the great preponderance of foreigners were from Florence, Milan, Lucca, and Genoa.53 At the great fairs, the merchants and financiers were dominant, with representatives of municipal or royal institutions playing a subordinate role. The popularity of the fairs rose and fell as trade patterns and political hegemonies varied over time-the Champagne area, Antwerp in the fifteenth century, then Geneva, from which a French king lured the fair to Lyons, and then to the eastern French town of Besancon and finally Piacenza. In Piacenza, the fairs were known as Bisenzone, an Italianization of Besancon.
Many booths at the fairs were occupied by the money changers; in the fair of Medina del Campo in Spain, trading in promissory notes drawn in different nations' currencies, called bills of exchange, was the only activity. The money changers must have had a busy time indeed. One authority lists 48 different kinds of gold coins circulating in Europe in the sixteenth century, including eleven from Italian cities, nine from the Netherlands, six from England, and smaller numbers from Spain, France, Portugal, and Hungary."
Merchants struggling to deal with this multiplicity of monies were the targets of many popular jokes. In Chaucer's "Shipman's Tale," the merchant is so involved with his counting board that he leaves word not to be disturbed, no matter what. A young monk takes advantage of this situation to make advances on the merchant's lusty wife, who bangs on her husband's door crying,
Nevertheless, the money changers were much less involved with developments in coinage than with the increasing substitution of papermoney instruments for the inconvenience and complications of payment in coin. The principal vehicle for these kinds of payment was the bill of exchange, an instrument developed by the Italians in the thirteenth century, perhaps earlier. This was a remarkable financial innovation that lent itself to a wide variety of uses and formats.se
Here is a simple example of how a bill of exchange worked.* Two transactions take place: Franco in Italy buys wool from Berthold in Flanders, while David in Flanders buys wine from Carlo in Italy. Franco, however, does not pay Berthold directly, and David does not pay Carlo directly. Instead, Carlo "draws" a bill of exchange on David, a sheet of paper declaring that David owes him such-and-such an amount of Italian money for the wine. Carlo sells this bill to Franco, which means that Franco's purchase of the bill has satisfied Carlo. In order to pay Berthold for the wool, Franco now sends that bill to Berthold, who turns around and sells it to David, which means that David's purchase of the bill has satisfied Berthold. Thus, both shippers, Berthold and Carlo, have been paid, but by the other fellow's customer rather than by their own: Franco has paid Carlo instead of Berthold, while David has paid Berthold instead of Carlo. The wine, the wool, and the bill that Carlo has drawn on David move across the borders, but no money goes from Italy to Flanders or vice versa.
This is an oversimplified explanation, but it indicates the essence of the process. In reality, there is no reason to believe that each transaction will precisely equal the other, or even that Franco and Carlo or Berthold and David will readily find each other. In order to settle up these differences, a lively market built up in the trading of bills of exchange. In 1585, for example, bills drawn on merchants and bankers in Amsterdam were trading in Antwerp, Cologne, Danzig, Hamburg, Lisbon, Lubeck, Rouen, and Seville.51
In these markets, dealers rather than principals would buy the bills and then would settle up the balances among themselves; dealers often acted as bankers by advancing payments to suppliers of merchandise and collecting later from the buyers of the merchandise. By settling differences rather than gross amounts and by making the business one in which a large number of dealers participated, these bill markets significantly reduced the need for coins to settle bilateral differences. On one occasion, a million livres tournois changed hands without a single penny being disbursed .5" That entire process, however, could not have functioned as well without the institution of the trade fairs, where the dealers and money changers could meet with one another, buying and selling bills back and forth, and working out their payments in foreign exchange as Italians settled with Flemish dealers, the Flemish settled with the English, and so on.
Remarkable changes developed from these arrangements. Merchants no longer had to travel to settle up their accounts, and when they did travel they went to centers with trading posts where transactions could be settled most efficiently. Consequently, the centralized operations of the fairs attracted an increasing volume of financial transactions. Merchant firms became more diversified as a result and in time turned into the great family firms that grew up in this age, such as the Fuggers in the Holy Roman Empire, the Medici of Florence, and later the Rothschilds and Baring Brothers.
The whole concept of money was being transformed. The traditional public money of the prince in the form of coins stamped or engraved as official government issue now shared the money circulation with private money in the form of credit instruments that served as means of payment in transactions involving both merchants and bankers. When an individual in the modern world engages in the dominant form of doing business by writing a check instead of paying with paper currency, that is private money at work. That arrangement first developed during the fifteenth and sixteenth centuries with the growing use of the bill of exchange and the trade fairs where transactions were cleared and settled and where foreign exchange trading became a major activity.-59
The private money had to be expressed in some kind of denomination, just as people keep money in bank deposits or write checks today denominated in dollars or sterling or euros. Nobody issues a check denominated in a given number of specified gold coins or weight of gold bullion, any more than someone in the sixteenth century who drew a bill of exchange would denominate it in a number of coins or weight of bullion. Money in the private world had to be expressed in terms of a unit of account, such as dollars or euros, which was a convenient numeraire for defining the size of the transaction and the local money used by the parties to settle up. A unit of account is an abstract concept-you cannot see the dollars that a check transfers, nor can you feel them, bite into them, or weigh them. The only concern of the owner of private money is that the prince so regulate the supply of public money that the integrity of the unit of account is stable instead of withering away in the fires of inflation.
If we extrapolate these developments through the centuries, they define much of the subsequent history of gold as money in Europe and the United States. Over time, gold coins circulated less frequently and gold bullion served only to settle up very large transactions or to cover the unfavorable balance of trade between Europe and the Far East. This does not mean that gold became less of a fixation or less valuable-we have only to think of the drama of the gold rushes of the nineteenth century to understand that-but the nature of its role in the system did begin to change.
Furthermore, India and the nations of the Pacific looked on gold in a fashion quite different from how it was perceived by people in the West. The view from China, Japan, and India is interesting in its own right, but, as we shall see in the next chapter, the attitudes of those nations raise profound questions about the nature of money and the role of wealth.