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Source: Economist
According to the Economist:

“Some modern economic historians dispute Smith’s argument that the discovery of the Americas, by Christopher Columbus in 1492, accelerated the process of globalisation. Kevin O’Rourke and Jeffrey Williamson argued in a 2002 paper that globalisation only really began in the nineteenth century when a sudden drop in transport costs allowed the prices of commodities in Europe and Asia to converge. Columbus’ discovery of America and Vasco Da Gama’s discovery of the route to Asia around the Cape of Good Hope had very little impact on commodity prices, they argue.

But there is one important market that Mssrs O’Rourke and Williamson ignore in their analysis: that for silver. As European currencies were generally based on the value of silver, any change in its value would have had big effects on the European price level. Smith himself argued this was one of the greatest economic changes that resulted from the discovery of the Americas:

The discovery of the abundant mines of America, reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before. As it cost less labour to bring those metals from the mine to the market, so, when they were brought thither, they could purchase or command less labour; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account.

The influx of about 150,000 tonnes of silver from Mexico and Bolivia by the Spanish and Portuguese Empires after 1500 reversed the downwards price trends of the medieval period. Instead, prices rose dramatically in Europe by a factor of six or seven times over the next 150 years as more silver chased the same amount of goods in Europe.

There you have it. Columbus ended price deflation by discovering lands rich in Silver.

Category: Inflation

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15 Responses to “How Columbus Caused Inflation”

  1. rd says:

    I strongly recommend the books 1491 and 1493 by Charles Mann. 1491 is about what current research indicates the Americas were like before the Europeans arrived and is eye-opening. 1493 is a fascinating exploration of the impact of the Columbian exchange on the world.

  2. Lyle says:

    Actually if you believe in the law of supply and demand it makes total sense. Suddenly the supply of silver was much greater than before (between Mexico’s and Peru’s silver). To not expect the relative value of silver to decline is to say that what you choose as money is special in that the law of supply and demand. I suspect if you looked at inflation and the 19th century in terms of the effects of the various gold rushes you would find the same effect when the supply of gold increased the value of gold relative to everything else declined.

    • Bam_Man says:

      Yes, there were periodic large discoveries during the 19th century (Comstock lode) that resulted in brief spurts of inflation, but the era was on balance one of stable-to-lower-prices due to the rapid growth of the economy. The deflation situation had become so bad by the 1890′s that there was a growing movement that favored bi-metallism (free coinage of silver to complement gold). That was the essence of W.Jennings Bryan’s famous “cross of gold” speech.

  3. Bam_Man says:

    Yes, that is one of the arguments that the MMT (Magic Money Tree) crowd use against the Gold Standard. The Gold Standard provides price stability only when the supply of Gold closely matches the rate of economic growth within the economy. New ore discoveries tend to produce inflation, while rapid economic growth without corresponding increase in ore supply causes deflation.

    • Always thought tying economic growth to the amount of yellow metal scraped out of the earth was sort of random and silly.

      • Bam_Man says:

        Well, no monetary system is perfect, and certainly not the one we have now, which is subject to all manner of corruption and abuse.

        i think in the current situation where we have mature, developed economies that are not growing at rates that are liable to exceed the marginal supply of Gold, a Gold Standard would work quite well – at least in terms of providing price stability.

      • rd says:

        I think the First Nations in the Americas thought the same thing which is why they didn’t use it as currency. They did use it for ornamentation since it could be shaped easily and looked really cool.

      • Angryman1 says:

        Another problem with the gold standard, for it to work, you really need a supra-national body to manage it. Nation States that wouldn’t abide by it, won’t. This was a big problem with its management structure.

        I think the big reason why market statists love the gold standard, it gives them global control over civilization. They can manage it privately why publicly imposing its whims with the abolishment of the Nation State.

  4. CSF says:

    The consensus in the history textbooks is that New World silver was not the initial cause of Spanish inflation. Prices began to rise in the mid 1500s (see chart above) as a result of a population boom and stagnant output, probably related to the expulsion of Jews and Moors after 1492. The silver from Potosi began to flow in earnest after 1585, and this caused the so-called price revolution to accelerate.

  5. MaciekKolodziejczyk says:

    BR: “Always thought tying economic growth to the amount of yellow metal scraped out of the earth was sort of random and silly.”

    Barry, I’m wondering what OTHER factors, besides economic growth can possibly cause the increase of the amount of yellow metal scraped out of the earth – especially if the yellow metal’s real price stays more or less constant over decades and centuries?

    Could possibly a maritime technology of crossing the Atlantic in three ships contribute to amount of yellow metal scraped out of the Earth? Could possibly discovering a technology of cyanidation help?
    How good were Romans at computer 3D modelling of underground mines? Diamond drills? Were there any 100 tons diesel haul trucks available to the pharaohs to build 1 mile wide open pit mines?

    I am pretty sure that the amount of gold extracted is directly proportional to the growth in sciences and technologies relevant to mining and ore processing. And that includes quite a wide range of fields.


    • But not the actual amount the world’s economies grow.

      The gold standard folks want to tie this rather irrelevant metric — that total annual scrapeage — as a limiter to economic growth

  6. CSF says:

    Gold coins may be silly, but the choice of material is not simply cultural, let alone random. If you want to put your personal stamp on a medium of exchange with long-term value, you want a solid that’s slightly malleable, physically durable, chemically stable (doesn’t oxidize), and can’t be counterfeited. Scan the periodic table and you end up in the precious metals. It must be scarce (ruling out silver for large denominations), but not ridiculously scarce (ruling out PGMs). Ergo gold. Today we have different priorities and more options – hence the use of government-issued serial numbers, encrypted 1s and 0s, etc.

  7. jnutley says:

    This book is a long dry read:

    But it points out that the Chinese pegged their taxes to silver during this period. Silver flowed from the mines to Europe but also to China; where Chinese concerns traded manufactured goods for much cheaper imported silver. Hapsburg economic fortunes became dependent on how much silver they could move to the rest of the world. Without the China demand, the Spanish New World would have gone bust much sooner. Economic historians describe it as a massive arbitrage. Then at about the time the whole Earth was sated with Potosi silver, demand for sugar and tobacco stepped up to keep the trans-Atlantic trade running.

  8. kaleberg says:

    Obviously the authors are not familiar with a lot of the scholarship on European inflation. There have been a series of roughly 200 year cycles of inflation and stability since at least 1200 with serious inflation in the 1300s, 1500s, 1700s and 1900s. There has been a lot of debate and research on this. Some theorists argue that it reveals a Malthusian cycle, others argue for political cycles of reform and reaction. For a good discussion aimed at the American audience, check out David Hackett Fischer’s The Great Wave.

    That chart integrates the price changes and does no smoothing. The integration makes it hard to see the inflation of the late middle ages after the high medieval stable period. The lack of smoothing inserts a lot of noise which makes it hard to see anything. Surely the folks at The Economist could have dropped by their local library and done a bit more research. This has all been well studied and the patterns well known on the other side of the English Channel.