Key ideas: Published in 1952. “Marjorie Grice-Hutchinson’s remarkable classic, The School of Salamanca, posed an extraordinary challenge when it first appeared in 1952. The book is not only a pioneering presentation of this lost school of monetary theory — fantastic thinkers of Old Spain that were more advanced than the English classicals centuries later — it is also beautifully written.” (from Intro)
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…
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.
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.
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 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.
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.
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.’
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…
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.
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”
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.
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
The double transaction (for example, Medina-Antwerp-Medina) constituted the classic operation of the ‘exchange and rechange’, which dated back to medieval times. 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. 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.
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.
Medieval ideas about the origin and functions of money are largely based on a few short passages in Aristotle’s Politics and Nicomachean Ethics. The former contains Aristotle’s famous account of the transition of society from a barter to a monetary economy, a development he assumes to have taken place at some remote period in the history of mankind.
Aristotle goes on to note the most obvious function of money, its use as a medium for the exchange of goods. Money was first invented, he explains, to overcome the difficulties of transport that are bound to arise in a barter economy. Iron, silver, or some similar material, was adopted as being valuable in itself and yet easy to convey, and in course of time this metal came to be publicly stamped to save the trouble of weighing.
If we are right in thinking that towards the end of the Middle Ages subjective factors came to be assigned an increasingly important role in the determination of value, then the extreme subjectivism of Saravia de la Calle (c. 1540), one of our earlier Spanish writers, may be regarded as the culmination of a gradual movement.
Now, one of the most interesting things about the work of our Salamancans is the methodical way in which they set about applying the above well-established principles to the determination of the value of money as well as goods, laying special stress on the influence of supply and demand
At Salamanca, Vitoria and his followers devoted a large share of their efforts to reshaping the old ius gentium in order to regulate the relationship that had recently arisen between the conquered peoples of America and the Spanish Crown.
And the practical problems of business life were growing daily more pressing. The inflationary economy of the period offered unprecedented opportunities for enrichment, and the Church’s solemn warnings against undue love of gain passed all too often unheeded.
Vitoria was now at the height of his powers, and his eloquence, simplicity, and great personal charm made his lecture-room at Salamanca a meeting-place for all who were perplexed by the manifold legal and ethical problems that arose in the government of the far-flung Spanish Empire.
In March and April of 1535 Vitoria was engaged in explaining St. Thomas’s doctrine of usury. His words were carefully noted down by one of his pupils, whose manuscript may still be read in the library at Salamanca.
The Aristotelian and scholastic ideas about the nature, origin, and functions of money were handed on unchanged except for a few elaborations of minor importance. Even today these traditional concepts of money as a medium of exchange and a measure and store of value, together with the customary ‘historical’ account of the inconveniences attendant upon a barter economy, are still reflected in our text-books.
Another extreme subjectivist was Diego de Covarrubias. The value of an “article’, he says, ‘does not depend on its essential nature but on the estimation of men, even if that estimation be foolish. Thus, in the Indies wheat is dearer than in Spain because men esteem it more highly, though the nature of the wheat is the same in both places.’ In assessing the just price, Covarrubias continues, we are not to consider how much the article originally cost, nor the labour its acquisition cost the vendor, but only its common market-value in the place where it is sold. Prices fall when buyers are few and goods and vendors many, and rise when the contrary conditions prevail.
To account for the fall in the value of money, and to study the moral and legal problems it entailed, was perhaps the most pressing task that awaited our Spanish monetary theorists.
In 1550 Diego de Covarrubias published a celebrated treatise1 in which he traced the chequered history of the maravedí and showed how sharply its value had fallen even within living memory. The treatise bristles with statistics but is little concerned with theory and attributes the contemporary rise in prices chiefly to debasement. Nevertheless, the book was of great value in its day, since it provided the theorists for the first time with definite information on which to build.
The history of the quantity theory has frequently been studied and wide credence accorded to the claim made by Jean Bodin in 1568 that he was the first to connect the contemporary rise in prices with the increase in the quantity of money in circulation, an increase which he attributes to the influx of American gold and silver, among other causes.
We have seen that both prices and the imports of bullion reached a new high-level in the sixth decade of the century. In 1556 Azpilcueta Navarro produced the first clear statement that the high cost of living was a result of the import of treasure (Text III, p. 95). He thus preceded Bodin by twelve years.
The most noteworthy achievement of our Spanish writers, and the most original, was their formulation of the basic principles of the purchasing-power parity theory of exchange, a doctrine not usually associated with the sixteenth century.
We have seen that when the doctors of Paris were consulted in 1530 as to the legitimacy of exchange transactions they seem to have grasped, though not perhaps very clearly, the fact that the rates of exchange fluctuated in accordance with the state of supply and demand (Appendix, p. 126). Vitoria, in the lectures he delivered in the spring of 1535, preferred to regard the ‘profit’ made on a bill of exchange as compensation for the labour and risk entailed in sending the money abroad, and as a reward paid by the party who wished to make the transfer in return for the benefit he received.
Vitoria mentions, however, that ‘when the Emperor was in Germany and money was very scarce there, if the Duke of Alba paid a thousand ducats in Medina he would receive less in Germany, and rightly so’, a statement that takes supply and demand into account. Vitoria condemns as usurious any profit made in the transfer of money by bill of exchange over short distances, but considers that similar transfers effected between different countries fulfil a real need, since they ‘avoid the inconvenience of transporting specie, and also because the export of specie is forbidden by law’.
The decisive factor in the evolution of our theory was the turning of the exchanges against Spain, or, at least, the general realization that they were unfavourable.
This much is clear: when money was sent from foreign countries to Spain a considerably larger sum was usually repaid in Spain than had been delivered abroad, but when money was sent in the opposite direction, from Spain to places abroad, only a slightly larger sum, and sometimes even a smaller one, was repaid abroad than had been delivered in Spain.
Monetary theorists were called upon to explain this apparent anomaly. And here their subjective theory of value, already applied in the case of goods, came to their rescue.
Since the agio could not be explained by objective factors, it must presumably be derived from a variation in the subjective value of money in the different countries. Estimation, declared our authors, was the real measure of the value of money as of goods, and estimation was determined by supply and demand, and by utility.
Soto remarks that ’the more plentiful money is in Medina the more unfavourable are the terms of exchange, and the higher the price that must be paid by whoever wishes to send money from Spain to Flanders, since the demand for money is smaller in Spain than in Flanders. And the scarcer money is in Medina the less he need pay there, because more people want money in Medina than are sending it to Flanders…
Azpilcueta introduces the factor of the price-level and replaces the concept of ‘estimation’ by that of purchasing-power. In doing so he brings Soto’s doctrine into line with modern theory, and anticipates not only Bodin but very much later economists.
It is evident, then, that in their analysis of the subjective factors that go to determine price, and in their formulation of the quantity theory of money and the purchasing-power parity theory of exchange, our Spanish writers made an original and useful contribution to monetary theory. Now, the type of doctrine they favoured is very much alive today. And, since the work of the School of Salamanca long continued to endure in other branches of law and theology, it seems at least possible that their monetary theory was also read and that it has played its part in the shaping of modern doctrine. We have already tried to show something of the debt owed by our writers to their medieval predecessors. It remains for us to see what influence, if any, they exerted on later generations.