Tales of Soft Money — The Real Spanish Price Revolution


One chapter of Money Dethroned details Spanish copper money, and the way it was abused by the state in the 17th century. It is an interesting example of the tinkering of face values, leaving regular Spaniards financially ruined in the process without shrinking or debasing the actual physical coinage.

Habsburg Wars

A period where many nations experienced monetary inflation, while operating mostly on gold and silver, was the 16th century. Spain, having reached the New World in 1492 A.D., could finally reap significant rewards from this military investment in the West: large scale confiscation and production of precious metals. This new silver and gold found its way back to Europe through the ports of Seville, Cadiz and Lisbon, from where the flow continued towards neighboring nations. In a sensational wording, this event has been termed "The Price Revolution", or "The Spanish Price Revolution", to emphasize what has been portrayed as a drastic increase in the prices of goods in Europe. Upon closer scrutiny, it appears no such "revolution" in prices occurred; nominal prices in Europe rose with an average of less than 2% per year (Fisher, 1989, p. 895).

The real loss in purchasing power for most Spaniards instead came later, and was knowingly and purposefully imposed on the poorer segments of the populace, not by the market, but by Spanish authorities. The ultimate end-point of such actions resulted in a farcical situation where not even King Philip IV of Spain himself could conjure up enough respect for his Castilian copper coins for them to be acceptable for commerce elsewhere in his kingdom. Akira Motomura, in The Best and Worst of Currencies: Seigniorage and Currency Policy in Spain, 1597-1650, discusses related causes and effects.

One of the main reasons central authorities embarked on an armada of debasements was, as we can guess by now, war. In fact, the whole 16th century consisted of Spanish involvement in various conflicts since the empire's dominions stretched as far as the Low Countries, Burgundy, The Holy Roman Empire, Italy, Mexico and Peru. The Habsburg Charles V, who inherited all this and fought to secure it, had to divide the empire as he abdicated to his son, Philip II, who still remained in possession of much territory. Both Philip II and his successors Philip III and Philip IV were involved in wars with France, the Dutch, England, and the Ottoman Empire. Defaulting on debt obligations became a regular occurrence.

Debasements, being a tax not always easily noticeable - especially in times of war when trade and production were disrupted by enemy troops and ships - became a useful tool for these Habsburg monarchs. But since the empire's gold escudos and silver reals, both above a 90% purity, were much used in international commerce, there was a general unwillingness to tinker with them if not strictly necessary. Instead, focus turned to the billon coinage, consisting of an alloy of majority copper and minority silver, and measured in maravedís. The maravedí stemmed from the Almoravid rulers of Muslim Spain during the 12th century. While initially a gold dinar, the maravedí later evolved into a unit of account of Spanish coinage which lasted to the 19th century.

Starting at the very end of the 16th century, and continuing long into the 17th century, the slight silver content in billon coinagewas withdrawn, meaning it now consisted only of copper. At the same time, the Spanish state increased the maravedí face value of the new copper coins, meaning seigniorage rates at the Castilian mints quickly went from below 10%, to 70% (Motomura, 1994, p. 108). Seigniorage rates for silver and gold coins stayed between 1-3% - any higher number and silver- and gold bullion from the Americas would have found their way, legally or illegally, to cheaper foreign mints instead.

Regional 'Monopolies'

Philip IV tried to devalue the silver real which had stayed the same in size and content for centuries. The attempt seems to have been a trick related to its weight rather than silver content, as the number of reales per marc (which was a weight unit) increased. In other words, it appears Philip IV wanted to decrease the weight of the new reales, while still keeping their maravedí face value. He quickly reversed his decision however:

[He] recognized his error and reversed the devaluation the following March 12, announcing that "the little utility, and the anger of our subjects and vassals at doing business with this growth [in the nominal value of reales] have been recognized..." The monarch thus returned to its long-standing policy of silver currency stability. (Motomura, 1994, p. 114)

The King's naughty attempt was more an exception than a rule. The Spanish monetary discipline, when it came to gold and silver, was high according to historian Antonio Domínguez Ortiz:

[...] the Spanish Administration's preoccupation with maintaining intact its silver money's credit, even when urgent needs obliged it to continuously alter the billion money; ... [and] show[ed] that considered as a fiscal judgement, undoubtedly very painful, the Administration nevertheless wanted to maintain a solid monetary master for major commerce and foreign goods. (Motomura, 1994, p. 117)

With copper, or what Domínguez Ortiz still termed "billion" despite a total lack of silver, everything changed. Here is Domínguez Ortiz again:

[...] Philip IV understood fully the importance of a healthy currency for a country's economy; if, in spite of that, he consented to such large and lamentable changes in the billion [copper] currency, it was because in the oppression that constantly encircled him he found no other way to get large sums of money quickly... The deflationist effort of 1627, in which he took a direct and personal part, shows that he knew perfectly well the gravity of the evil and the urgency of the remedy. (Motomura, 1994, p. 122)

As has been mentioned already, discipline had indeed shown to be severely lacking when it came to tinkering with the copper coinage. As opposed to silver and gold, copper coins were mainly used in local trade, by local subjects who unlike international merchants could very well not easily resist without the risk of facing threats of state violence. Since the value-to-weight ratio of copper would cause the long transport of such coins to the many mountainous regions of Spain to be uneconomical, it meant that the Spanish mints, and thus the Spanish state, in practice had free reins on such money production. By not having to compete much with mints in neighboring countries, debasing and devaluing copper (first by reducing the silver content, then by changing the face value) became too attractive not to pursue. From having a silver content of 1.39%, that number decreased under Philip II to 0.35% to finance the building of another armada. Philip II's debasement was followed by another one under Philip III, to 0% silver, as part of an offensive against the Netherlands. In 1601 A.D., one marc of copper coins was worth 140 maravedí. With the stroke of a pen, Philip III set one marc of copper coins to 280 maravedí, meaning he doubled the face value of the new issues, which weighted the same as the old. For the same amount of copper production and import, in other words, the state had suddenly doubled its revenue on its minting of copper coins.

Even higher than the seigniorage related to the striking of new copper coins was the one related to the restamping of old ones - something the state sometimes ordered. Coins minted in 1599-1602 A.D. were ordered for restamping, and the seigniorage rate reached 91% (Motomura, 1994, p. 118). How can we explain this high seigniorage? By ordering the restamping of, for example, copper coins of a face value of one maravedí each, the state could gather four such coins from a peasant, restamp them into four new coins of a face value of four maravedís each, and subsequently give one of those back to the peasant while keeping the other three. The state could then spend its new copper coins on goods and services not yet adjusted for inflation.

Aside from causing trust in the (copper) monetary system to deteriorate, the Spanish state's policies caused other more unexpected results as well. As subjects received some compensation for the transportation of their old copper coins to the mints, many chose to travel far longer than necessary, which of course meant huge inefficiencies for the economy. A portion of Spain's population, in other words, was paid to walk the country's dusty roads, instead of concentrating on production (Motomura, 1994, p. 118). It is safe to say that, while the copper money devaluations were showering the Spanish state (and military) with short-term profits, the practice very likely had many bad predictable and unpredictable consequences. State contractors, receiving pay in devalued coinage, may very well have left for more honest trading partners. Soldiers, perhaps paid in debased copper coins, may very well have deserted their posts in search of better paid mercenary work. Spain's decline as an Empire was likely not related to the influx of American silver and gold, but from high taxes, continuous copper devaluations, and a bloated bureaucracy.

Finally, in a rather perverse cycle of irony, much of the copper used to defraud the Spanish population in order to finance a Habsburg troop buildup in Austria, was supplied by the Swedish royal monopoly on copper, meaning the Swedes then dying in the Thirty Years' War not long thereafter had supplied much of the means to such an end. We will end this chapter on debasements and tinkering on that note - an evil circle of states profiting and subjects dying. In 1641 A.D alone, in the middle of horrendous war, the mints in Castile minted almost 12 million ducats of petty coins, of which more than 11 million ducats was seigniorage (Motomura, 1994, p. 119).