I THE MONEY-MARKET AMERICAN TREASURE AND THE PRICE-LEVEL

IF there was one economic lesson which the whole Spanish nation had learned by the middle of the sixteenth century, it was that the value of money is fickle and that gold and silver are not synonymous with wealth, a lesson made all the more bitter by the high hopes that had attended the discovery of the New World a few decades before. The dream of El Dorado had been followed by a harsh awakening.x

A rise in the Spanish price-level made itself felt at the very beginning of the sixteenth century. By 1550 prices had more than doubled. The economic literature of the period reflects the general discontent. The labouring classes were probably the chief sufferers from the fall in the purchasing-power of money, since they were already only too well acquainted with poverty and hunger, and there is no reason to suppose that wages kept step with prices. That gaunt army, the beggars, whose battalions never seem to leave the roads of Spain, grew alarmingly; and the middle and upper classes—the country gentleman, the retired officer, the Crown itself in so far as the royal revenues were fixed in terms of money—shared in greater or lesser degree the hardships of the poor.

The monetary theorists of an earlier age, especially in France, had correctly attributed similar rises in the cost of living to debasement of the currency. But this traditional explanation was not applicable to the Spain of Charles V, since it was not until the end of the sixteenth century that the Spanish monarchs resorted to debasement on an extensive scale. The high cost of living had therefore to be accounted for in some other way. It would have been remarkable if Spanish observers had not connected the fall in the purchasing-power of money with the increase in the circulation brought about by the imports of gold and silver from America. Between 1551 and 1555 the influx of American treasure reached its highest level since the beginning of the century, and it was at about this time that the Spanish economists began to attribute the prevailing high prices to a swollen circulation resulting from the import of the precious metals. How far were they right in this interpretation of events?

The monetary theory of the period is based on the assumption that money was more ‘abundant’ in Spain than elsewhere. But when we come to analyse this ‘abundance’ we encounter certain difficulties. The most reliable estimate of the quantity of gold and silver imported into Spain is based on the remittances registered at the House of Trade in Seville.¹ Naturally, no account could be taken in this estimate of the contraband and therefore unregistered remittances of bullion that entered Spain, but there is reason to think that they were considerable. And even if we knew the exact amount of bullion imported we still could not be certain as to what proportion of it was actually coined and put into circulation. Some part of the treasure, no doubt, was melted down for plate and ornaments. Immense sums, too, were sent to Flanders, Germany, and Italy, some through the fair of Medina but others directly, in payment of the loans advanced to Charles V by foreign bankers.¹ In the present state of our knowledge, therefore, no exact correlation between treasure imports and prices is possible.

To the ordinary citizen money seemed anything but ‘abundant’. On the contrary, there was an acute shortage of specie which provoked bitter complaints from merchants and economists alike.² The May fair of Medina del Campo had to be postponed on this account in 1543, 1553, and 1554. Thomas Gresham, who visited Spain in 1554 with the object of cashing bills of exchange to the value of 320,000 ducats drawn in Antwerp and payable at the Spanish fairs, was unable to bring away more than 200,000 ducats, and expresses astonishment at the shortage of specie in Spain.

Besides the influx of treasure, there were other causes of the rise in prices. Bad harvests, the decay of industry, and the increasing demands of the Indies, all doubtless helped to raise prices by creating a shortage of goods. But it is probable that these were secondary factors. The curve of treasure imports, though it cannot yet be traced with precision, broadly corresponds to that of prices. The rise in prices began in Seville, the home port of the treasure fleet, spreading thence to other parts of Spain and later to the rest of Europe. Finally, the fact that the exchanges turned against Spain, and, within Spain itself, against Seville, supports the picture of Spain as a country with a relatively large circulation and high price-level brought about by the import of gold and silver from the New World.

MERCHANTS, MONEY-CHANGERS, AND BANKERS

From about 1540 onwards there appeared a whole crop of handbooks, written mostly by learned friars, which paint a vivid picture of the business life of the times.¹ Their authors vie with one another in offering the merchant the perfect guide for the salvation of his soul, though one writer’s injunction to his readers that they were ‘not to twist a rule of iron into one of lead’ suggests that their teaching was often followed in the letter rather than the spirit. These little books reflect, in a simplified form comprehensible to the layman, the more elaborate body of doctrine that was in process of evolution at the universities.

The shrewdest and at the same time the most entertaining of this group of writers is the Dominican friar from Mexico, Tomás de Mercado, who journeyed to Spain and lived for some years in Seville and Salamanca. Little is known of his life, except that he wrote several learned commentaries on Aristotle besides the popular and widely read handbook on commercial morality that concerns us here. Mercado died in 1585 on board the ship that was taking him home to his native Mexico. His homilies are much enlivened by his pithy style, sardonic humour, and colourful way of describing the iniquities of merchants.

Mercado distinguishes three main classes of business men: merchants, money-changers, and bankers. The Seville merchant was an imposing figure, having in his hands ‘the greatest trade in Christendom, and even in Barbary’. To Flanders he sent wool, oil, and wines in exchange for cloth, carpets, and books, and to Florence cochineal and leather against gold brocade and silks. He imported linen from Flanders and Italy and had a hand in the lucrative slave-trade of Cape Verde. So great were the mixed cargoes he sent to all parts of the Indies in exchange for gold, silver, pearls, cochineal, and leather that ‘not Seville nor twenty Sevilles’ would suffice to insure them, and he had to call upon the resources of Lyons, Burgos, Lisbon, and Flanders for the purpose. The Seville merchant kept in close touch with his Italian counterpart and had his factors in every corner of the globe.

Close upon the merchant’s heels followed the moneychanger ‘travelling from fair to fair and from place to place with his table and boxes and books’.¹ In theory he was a public official whose business it was to deal in cambium minutum or the changing of gold coins into silver or other money in return for a small fee. A series of royal pragmatics issued in 1550, 1551, and 1552 prescribe the proper table of equivalences for cambium minutum¹ and provide that any money-changer who failed to give the legal rate should be fined for a first offence, flogged for a second, and banished for a third. The broker who arranged the deal was to suffer the same punishment. Money-changers were to keep proper books ‘and not leave blank sheets between the pages already used’, and only persons appointed by the cities, villas, and lugares might act as brokers.

Sharing the common fate of laws in Spain, these drastic measures were effective only on paper. In practice, many money-changers no longer stooped to deal in cambium minutum at all. ‘Go up to their tables if you dare’, writes one observer, ‘and ask them to give you small change for a real or a ducat. You will soon see how angry they get and with what a peevish, grave face they complain that you are affronting them, for they do not deal in such low trade.’² Nor did the more enterprising money-changers deal in genuine bills of exchange, though this was another important part of their official activities. They had, in fact, ceased to be money-changers at all in the traditional sense of the term and were simply fair-bankers. As soon as they got to the fair they made their way to a part of the Rua or high street that was marked off for their accommodation by means of heavy chains thrown across the road. There they proceeded to set up their tables and rake into their coffers all the loose cash the newly arrived merchants would deposit with them, paying their customers 6 maravedís for every 1,000 deposited.¹ The whole business of the fair was then conducted through the fair-bankers, and cash transactions were reduced to a minimum by the cancelling-out of book entries.² If a merchant wanted to be paid in cash for his goods before the official settling-day he was required to pay a commission to the fair-banker. The rate was in theory the same as the rate paid by the bankers to the merchants, namely, six to the thousand, but in practice it was much higher. In 1542 it is said to have reached 25 and 30 per thousand at the fairs of Rioseco and Medina del Campo.³ Mercado complains that ‘the money-changers sweep all the money into their own houses, and when a month later the merchants are short of cash they give them back their own money at an exorbitant rate’. In this and other ways the money-changers made big profits, and it is for them that the severest strictures of the theologians are reserved.

The banker proper was a much more dignified personage. ‘The Seville bankers’, writes Mercado, ‘are in substance the treasurers and depositaries of the merchants. When the fleet comes in, every merchant puts into the bank all the treasure that is brought to him from the Indies, the bankers having first given a pledge to the city authorities that they will render good account to the owners.’¹ The bankers served their depositors free of charge and used the money deposited with them to finance their own operations. Most of the gold and silver brought in by the fleet passed in this way through the hands of the bankers and served as a basis for the creation of credit. ‘In Spain’, concludes Mercado, ‘a banker bestrides a whole world and embraces more than the Ocean, though sometimes he does not hold tight enough and all comes crashing to the ground.’² We know the names of some at least of the Seville bankers who were operating in the second half of the sixteenth century: Alonso and Pedro de Espinosa, Juan Iñiguez in partnership with Octaviano de Negrón, Domingo de Lizarrazas, and Pedro de Morga.³

The customers of the Seville banks were important rather than numerous. Besides the merchants they included buyers of gold and silver at the auctions held at the House of Trade, dealers in precious stones, shippers, slave-traders, and holders of juros or bonds conveying the right to draw on the royal or municipal revenues. The banks themselves held juros in large quantities. Another class of customers was that of the farmers who borrowed from the bank and paid a certain quantity of wheat by way of interest, reserving the right to redeem the censo (as this type of bond was called) by repaying the sum borrowed. These censos and juros, which in some respects corresponded to our modern stocks and shares, circulated in great profusion, since the banks were always anxious to sell them for cash.

THE FAIRS AND THE FOREIGN EXCHANGES¹

To the Spanish fairs came ‘men of all nations, from Seville, Lisbon, Burgos, Barcelona, Flanders, and Florence’.² Many of them were rich and powerful—great noblemen, ecclesiastical dignitaries, and officers of the Crown. Needs felt in Milan, Antwerp, or the Indies were met at Medina, Villalón, and Rioseco, and every commodity was dealt in, from humble articles of daily use to supplies for the armies and navies of princes.

In the great melting-pot of the fairs the activities of merchants, money-changers, and bankers were fused into one. Gone was the old medieval principle of every Jack to his trade. Merchants were less than ever content to serve the community by supplying it with goods in return for a modest living, and were tending to engage more and more in purely financial business, thereby (in the eyes of theologians) impoverishing their fellow men and imperilling their own souls. As early as 1526 the Venetian ambassador had observed that although goods were abundant at the fair of Medina del Campo the most important business was done in exchange transactions. All the evidence points to an accentuation of this tendency during the succeeding decades. The fairs lost the last traces of their old local character and became great national, and indeed international, clearing centres, ‘the beginning and end of all payments ’.They were by this time ‘mainly places for settling accounts, not for true buying and selling’, though of such there was still ‘a good share’.¹

When we come to examine more closely the methods by which money was remitted from country to country and from fair to fair we shall readily understand the attraction of the exchanges for merchants and bankers alike, and we may perhaps feel some surprise that merchants ever dealt in goods at all when financial business was apparently so profitable.

As early as the twelfth century the merchants of all countries had begun to use the expedient of regulating their business relations by means of bills of exchange payable at the same fair. Suppose, for example, that a merchant in Genoa was owed a hundred livres by his London correspondent. The latter might promise to repay the money at the fair of Bar, for instance. He would then authorize a money-changer at Bar to pay the debt in his name to an agent nominated by his Genoese creditor. Since many places would be represented at Bar, it fell to the money-changers to adjust accounts between the different countries, and in this way the fairs gradually became clearing-houses for the whole of Western Europe. Another consequence of this practice of making bills payable at certain recognized fairs was that the periods when the fairs were held came to be treated as quarter-days. A Spanish merchant, for instance, would agree to pay a debt ‘at the May fair of Medina del Campo’ even if he did not go to the fair in person. Debts were set off against one another at the end of the fairs, and in this way the merchants of every country united to overcome the general shortage of ready cash. The practice of making a bill of exchange ‘payable at the next fair’ seems to have been retained in Spain after it had died out elsewhere. If we may believe Malynes, it was still in force there in 1622, whereas in other countries bills were by that time customarily payable after a certain specified period, generally two or three months.

In the sixteenth century, the Spanish and Flemish fairs were held in conjunction with one another and together formed one of the main arteries through which American treasure flowed from Seville across the Pyrenees. A good description of the methods of payment in force at the end of the reign of Charles V is given by the latter’s confessor and representative at the Council of Trent, the theologian Domingo de Soto.¹ After observing that ‘an author who seeks to reprehend the customs of the exchanges must note the practice of merchants with his own eyes’, Soto tells us that four fairs were held every year in Spain and the same number in Flanders. The first was the May fair of Medina del Campo, for which payment opened on the 15th of July and closed on the 10th of August. This fair corresponded to the September fair in Flanders, for which payment opened on the 10th of November and closed at the end of that month. The second fair was at Rioseco, for which payment opened on the 15th of September and closed on the 10th of October, corresponding to the Christmas fair in Flanders. The third was held at Medina del Campo, corresponding to the Easter fair in Flanders, and the fourth at Villalón, corresponding to the June fair in Flanders. As had been the practice since medieval times, accounts between merchants were settled by order of transfer in bank while the fairs were in progress. During the period allotted for payment, any balances outstanding were remitted by bill of exchange, which was customarily drawn on the fair that immediately followed.

It is the custom of the exchanges [continues Soto] for money to be repaid in Flanders three months after it has been received at Medina. The fair-banker who pays out money at the beginning of August for the May fair at Medina is repaid at the September fair in Flanders, where, as we have shown, payment is made in November. Similarly, the banker who pays out money at Rioseco at the beginning of October is repaid in Flanders in February for the Christmas fair. And so on with the other fairs. For it is said that this period is bound to elapse before the bill can conveniently reach its destination and the money be collected.

Having thus described the system of payment in force at the fairs, Soto goes on to explain how it gave rise to a rate of exchange for money remitted from fair to fair by means of bills. This rate, in the opinion of Soto, fluctuated according to the state of supply and demand.

Whenever [he says] on account of war or other causes, there is a shortage of money in Flanders, a merchant who wants to send money from Spain to Flanders must pay a price for doing so, whereas if he pays out money in Flanders for repayment at Medina he not only pays nothing but actually gains more than he loses when he pays the money in Spain and is repaid in Flanders.

According to Soto, money was so scarce in Flanders that small coins were there worth as much as coins of large denominations in Spain, just as a measure of wheat in a place where wheat is scarce is worth two measures in a place where it is plentiful. For this reason a merchant who paid 410 maravedís to another merchant or fair-banker in Spain was repaid only 360 maravedís in Flanders, thus suffering an apparent loss of 50 maravedís.

Similarly [adds Soto], if a merchant pays out 300 maravedís in Flanders he is repaid 375 in Spain, so that he gains more by sending money to Spain than he loses by sending it to Flanders. The same thing is happening now between Spain and Rome, because money is generally scarcer in Rome.

Like other apologists of exchange transactions, Soto is careful to minimize the importance of the time element in the deal, since interest paid simply for the use of money during a certain period of time was universally condemned as usurious. Nevertheless, it is clear that the cambium was partly a loan, partly a true exchange transaction. The price of a bill depended, as Soto observes, largely on the supply of money and bills of exchange and on the demand for them in the different markets. But it also included the banker’s charges and a certain proportion of interest concealed under one pretext or another.

If we may accept the widely divergent figures given in books published within a year or so of one another, the rates at which money could be sent by bill of exchange between Spain and other countries fluctuated violently.¹ Such fluctuations are to be expected in the relatively narrow and inflexible money-market of the period. The figures show that the exchanges turned consistently against Spain, and, within Spain itself, against Seville, the home port of the treasure fleet.² Soto has already given us the rate at which money could be sent from Medina to Antwerp and back again from Antwerp to Medina in 1553. In 1569 money could be sent from Medina to Lisbon at par or at 1 per cent, premium and from Lisbon to Medina at a premium of 5, 6, or 7 per cent., from Seville to Flanders at a discount of 5 or 6 per cent, and from Flanders to Seville at a premium of 8 or 9 per cent., from Seville to Rome at a discount of 8 or 10 per cent., and from Rome to Seville at a premium of as much as 15 or 20 per cent.¹

The double transaction (for example, Medina-Antwerp-Medina) constituted the classic operation of the ‘exchange and rechange’, which dated back to medieval times.² A profit was often made on both the exchange and the rechange, as, for example, in 1583, when the rate was 360 maravedís in Medina to 410 in Antwerp and 360 in Antwerp to 435 in Medina.³ Sometimes a profit was made on either the exchange or the rechange which more than compensated for any loss incurred on the other half of the deal. Rarely was the whole operation effected at a loss.

Simple exchange transactions performed by means of bills drawn in Spain and payable abroad, or drawn in a foreign town and payable at one of the Spanish fairs, were lawful, and it was generally agreed that the merchant who paid out money in one place and recouped himself in another was entitled to make a reasonable charge for his services. To charge a similar fee for bills transferring money from one Spanish fair to another was forbidden by a pragmatic of 1551, a measure which dislocated the whole business of the fairs and evoked a chorus of protests from the merchants.

The double transaction of the exchange and rechange was frowned upon by the Church. A purely financial operation, it was condemned as a device of the Devil to ensnare men in their own unbridled lust for gain. And it came perilously near to ‘dry exchange’, a term loosely applied to any unlawful form of exchange operation. Used in a narrower sense, the term ‘dry exchange’ referred to a fictitious operation devised to evade the usury laws, which we first meet in Florence in the later Middle Ages. Dry exchange in this narrower sense was redefined and condemned by a Papal Bull of 1566 and again by a Spanish pragmatic of 1598, and was stigmatized as a ‘manifest cankered usury’ by our own Thomas Wilson in 1572. It was, in fact, nothing but a loan camouflaged as an exchange deal. The borrower drew a bill of exchange in favour of the lender on some man of straw nominated by the latter, and this nominee protested the bill on its arrival. The borrower was then legally obliged to compensate the lender for the pretended loss sustained on both the exchange and the rechange. In legitimate exchange business it was usual for a merchant who drew a bill on some person in another city to give a guarantee against the bill’s being protested by binding himself in such case to refund the principal, interest, and costs of the double transaction. He might also deposit jewels or other valuables as a pledge.¹ No doubt the same practice was followed in dry exchange, but in this case the ‘pledge’ was intended to be forfeited. Merchants in all countries long continued to resort to this way of raising money by fictitious exchange transactions. Even in the late eighteenth century we find somewhat similar practices described by Jeremy Bentham¹ and Adam Smith² under the name of ‘drawing and re-drawing’.

The distinction between ‘real’ or lawful and ‘dry’ or unlawful exchange was thus a very fine one. We may well pity the simple priest who was called upon to direct his penitents on the conduct of their exchange business.

We are now in a position to survey the whole network of the fairs, and we can visualize the money flying back and forth between them by the shuttle-system of the exchange and rechange. A merchant who laid out part of his capital in exchange business could, according to one critic³ expect to make about 12 per cent, per annum on his money. Not such a very exorbitant return by modern standards, though it filled the writer in question with horror and dismay. Yet it was enough to tempt many merchants away from their usual pursuits and into that dim borderland of finance that the Church could neither approve nor altogether condemn. Fortunes were made overnight and bankruptcies were frequent. Speculators borrowed all they could in markets where money was plentiful and sent it post-haste to places where it was scarce. ‘Then, when the time of the fair comes, not a farthing being visible on earth, the rates soar up to the skies. And opening the exchanges they lend at 20% and 25% for Seville and Lisbon.’¹ The unhappy merchants ‘bounced from fair to fair like balls’.² In a desperate attempt to stave off their creditors they took to ‘straddling the fairs’. Instead of making their bills payable ‘at the next fair’, which was the usual and lawful practice, they borrowed for a period of several fairs ahead at a high rate of interest. As the high premium was clearly meant to compensate the lender for the exceptionally long period that would elapse before the bill fell due, this practice of straddling the fairs provoked fresh fulminations from both Church and Crown.³

Faced with this highly unsatisfactory state of affairs, the theologians went patiently to work. The new situation demanded a new commercial morality, and yet there must be no sacrifice of Christian principles. For many writers the core of the problem lay in the nature of money itself. Monetary theorists are born in all ages and they were not lacking in sixteenth-century Spain, which was indeed the happiest of playgrounds for theologians whose tastes lay in what would now be called economics.

Let us now take a brief glance at earlier monetary theory and see what sort of instrument our Spanish economists inherited from their predecessors, the philosophers and jurists of Greece and Rome and the schoolmen of the Middle Ages.

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¹ Earl J. Hamilton, American Treasure and the Price Revolution in Spain (Harvard Economic Studies), Cambridge, 1934, pp. 11-45.

¹ Ramon Carande, Carlos V y sus banqueros, vol. i, La vida económica en España en una fase de su hegemonia, Madrid, 1943, p. 155.

² Complaints of a ‘scarcity of money’ are common in the mercantilist literature of all countries. For a discussion as to what was meant by the phrase see E. Heckscher, Mercantilism, London, 1935 (English translation of Merkantilismen, Stockholm, 1931), vol. ii, pp. 221-4, and J. Viner, Studies in the Theory of International Trade, London, 1937, pp. 87-90.

¹ Cristobal de Villalón, Provechoso tratado de cambios y contrataciones de mercaderes y reprovación de usuras, Valladolid, 1542. Luis de Alcalá, Tratado de los préstamos que passan entre mercaderes y tractantes, Toledo, 1543. Luis Saravia de la Calle, Instructión de mercaderes muy provechosa, Medina del Campo, 1544. Tomás de Mercado, Tratos y contratos de mercaderes, Salamanca, 1569 (of which a revised edition entitled Summa de tratos y contratos was published at Seville in 1571 and an Italian translation at Brescia in 1590).

¹ Saravia de la Calle, op. cit, p. xciv (verso).

1 As follows:	Doblón	750 maravedís
	Ducado sencillo	375 „
	Castellano	485 „
	Corona	350 „

² Saravia de la Calle, op. cit, p. xciv (verso).

¹ Ibid., p. xcv (verso).

² Usher, Early History of Deposit Banking in Mediterranean Europe (Harvard Economic Studies), Cambridge, 1943, p. 128.

³ Saravia de la Calle, op. cit., pp. xcv (verso)-xcvi.

⁴ Op. cit., p. 87.

¹ Op. cit., p. 89 (verso).

² Ibid.

³ Carande, op. cit., pp. 196-204.

¹ The fairs and Bourse of Antwerp are described by R. Ehrenberg, Zeitalter der Fugger, Jena, 1896 (English translation under the title of Capital and Finance in the Age of the Renaissance, London, 1928). An account of the life of the Spanish merchants in Antwerp is given by J. A. Goris, Études sur les colonies marchandes méridionales à Anvers de 1488 à 1567, Louvain, 1925.

Much the best description of the Spanish fairs remains that of C. Espejo and J. Paz, Las antiguas ferias de Medina del Campo, Valladolid, 1912. A shorter account is given by Carande, op. cit., pp. 211-34.

For a clear description of the origin and development of the bill of exchange on the Continent as well as in England, and a useful bibliography of the subject, see Sir William Holdsworth, A History of English Law, 1925, vol. viii, pp. 126-70. Two contemporary English sources which are easily accessible are Thomas Wilson’s Discourse on Usury, 1572, reprinted with an important introduction by R. H. Tawney, 1925, and Gerard Malynes, Lex Mercatoria, 1622, the third part of which is devoted to the exchanges.

² Mercado, op. cit., p. 89.

¹ Mercado, op. cit., pp. 88-89.

¹De justitia et jure, Salamanca, 1553, p. 595.

¹ I know of no comprehensive modern study of the rates of exchange for money sent to and from Spain at this period. See, however, A. Sayous, ‘Les Changes de l’Espagne sur l’Amérique au XVI^e siécle’, in Revue d’économie politique, 1927, pp. 1417 et seq., and the same author’s ‘Observations d’écrivains du XVI^e siécle sur les changes’, in Revue économique internationale (Nov. 1928).

² ‘On Seville (except from the Indies) a profit is always made, and, on the other hand, from Seville to any place abroad money is sent at a loss. For Seville exceeds all other cities in money and riches.’ Mercado, op. cit., p. 88.

¹ Mercado, op. cit., p. 88.

² For an exceptionally lucid contemporary account of the exchange and rechange see Appendix i.

³ Francisco Garcia, Tratado utilisimo y muy general de todos los contractos quantos en los negocios humanos se suelen ofrecer, Valencia, 1583.

¹ A specimen document of this type is included by Diaz de Valdepeñas in his Summa de notas copiosas, Valladolid, 1553, a collection of model contracts for the guidance of public scriveners.

¹A Defence of Usury, 1787, pp. 73-77.

²Wealth of Nations, Bk. 2, ch. 2.

³ Cristobal de Villalón, op. cit., ch. 7. A little farther on he estimates an average annual return of only 5 per cent.

¹ Mercado, op. cit., p. 87.

² Ibid., p. 86.

³ See Appendix 2.