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The Price Revolution: A Monetary Interpretation
Published online by Cambridge University Press: 03 March 2009
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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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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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
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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
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