Inflation and Imperial Spain

The field of macroeconomics today, in contrast with microeconomics generally, is far from a consensus. Ever since the stagflation of the 70’s, the Keynesian stranglehold on mainstream economic thought has begun to loosen its’ grip, give or take a few chokes here and there. As a result, the emergence of opposing schools of thought has been steadily on the rise, with a corresponding growth in confusion and uncertainty amongst academics as well as laymen.

No other field of economics has seen as much divergence in thought as the monetary field. On the one hand more generally lie the Keynesians, and Monetarists, while on the other hand, you see Neo-Keynesians, Post-Keynesians, and Austrians, among many other different groups. Keynesians and Monetarists accept the general principles of modeling the economy but tend to differ on the elasticity of IS and LM curves. Both believe, however, that money is neutral, at least in the long run. Post-Keynesians, in contrast to Keynesians, believe that money is non-neutral, and changes in the supply of money affect the economy, output, etc.

Standing even more apart from all these schools are the Austrians, who believe that the modeling presumptions of modern economics are inherently flawed and that changes in the money supply are non-neutral. The Austrian tradition can be traced back many years ago, to the sixteenth century and the School of Salamanca. The School of Salamanca during this time was one of the most prestigious universities in Spain and Western Europe. Its philosophical foundation was centered around the Natural Law tradition, which the scholars from Salamanca had maintained since the time of St. Thomas Aquinas.

During this time, Spain was colonizing the New World, and with it, the vast gold and silver reserves that sprinkled the colonies. In almost direct correspondence with the almost constant shipments of precious metals, however, came an almost constantly rising price level. The plague of inflation had descended upon the Spanish Empire. While previous scholars from many different points in history had (correctly) attributed rises in price levels with the debasement of national currencies, the Spanish Crown would not employ such a tactic until the end of the sixteenth century. There was a need for a new explanation in order to understand the phenomena of Spanish price levels.

Due to the lack of data we possess from this time period, it is difficult to point to empirical correlations between precious metal imports and price level rises in Spain during the sixteenth century through modern methods. However, we can observe an interesting phenomenon that helps weaken the claims of monetary neutrality in the economy. Despite the numerous shipments of precious metals arriving in Spain, most of the poor and middle classes suffered from a shortage of bullion and species. Price levels would rise across the peninsula, but the common people’s purchasing power would most often diminish.

Mainstream monetary theory tends to teach the neutrality of money, which justifies the phenomena of inflation. This teaching claims that inflation does not harm the members of society because the rising of the price level leads to rises in other factors of production, with wages being one of those factors. Therefore, as inflation increases, all of the different factors of the economy increase as well in tandem, and people are not left worse off. While many will argue whether or not this holds true in the short run as well as the long run, the fact of the matter remains that the distribution of inflation across the different factors of production is not equal in real time.

Thanks to an economic phenomenon commonly known as price “stickiness”, there is a lag between the changes in the information and factors of the economy and the subsequent change in prices. It is this lag that proves to be detrimental to the different members of society. For it is but a privileged few who gain first access to the increase in monetary supply, and are able to enjoy a higher purchasing power before prices and other factors of production have the time to adjust. By the time the increase of the money supply is absorbed by the economy, the damage has been done, and those who were last to receive the adjustments in wages are at best left with equivalent purchasing power, and at worst, with diminished purchasing power along with a decrease in savings.

This understanding of inflation and the effects it has on the different members of society would come to be discovered and described, to varying degrees by members of the School of Salamanca. Their careful observations of the money markets, interest rates, and exchange practices of merchants helped lay the foundation for Classical, and later, Austrian economics. The Scholars of Salamanca were committed to a Natural Law framework, with universal morality (and principles) that everyone was subject to. This framework would, later on, serve to guide many economists and share many similarities with the works of Mises and his development of Praxeology. And while it is hard to quantifiably measure the impact that these Spanish academics had on the field of economics, it is very important to shed light on their works, struggles, and achievements, for those who do not know history are doomed to repeat it.

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