Encyclopedia of Money: Spanish Inflation of the Seventeenth Century

The seventeenth century almost from beginning to end saw Spain debase its silver coinage with copper and mint vast quantities of copper coins, causing inflation and shortages, punctuated with fits of deflationary policies and solemn promises of currency reform. Ironically, Spain struggled for nearly a century with debasement and inflation after exploiting vast gold and silver discoveries during the sixteenth century. The percent of Spain’s domestic coinage made of copper rose to 92 percent, hardly believable in light of the influx of gold and silver from the New World in the sixteenth century.

At the beginning of the seventeenth century, Spain’s government budget was bloated after years of financing wars and the royal pomp necessary for a great world power. Spain’s revenues from gold and silver mines in the New World began trailing off, and the Spanish crown turned to minting copper coins to pay for heavy government expenditures. Spain’s dependence on foreign treasure had perhaps already sapped vitality from domestic industries, rendering inflationary policies tempting in an economy that could not generate sufficient tax revenue to finance its government.

During the first quarter of the seventeenth century, the government’s unbridled coinage of copper coins spawned a wave of inflation that drew public protest. The face value far exceeded the intrinsic value of copper coins and the crown was reaping the difference as a profit for minting the coins. By 1627 widespread inflation aggravated public anger over wheat and livestock shortages, pressuring the government to switch to a deflationary monetary policy. The nominal values of the copper coins were cut in half without compensating the holders of the devalued copper coins. The government began a practice of making solemn promises not to tamper with the currency—promises only meant to be broken.

In 1634 the government resumed a policy of inflationary finance. To save the expense of supplying copper to the mints, the government restamped the existing copper coins, raising the face value. Coins were called in several times and restamped, often doubling or tripling nominal values. Between 1627 and 1641 copper coins were inflated three times and deflated four times. In 1641 inflation reached a peak and silver was selling at a premium of 190 percent. In 1642 the government undertook a brutal deflationary devaluation, reducing the face value of copper coins by 70 to 80 percent.

In 1651 the government, again short of money for military outlays, called in copper coins of one denomination and restamped them, quadrupling their face values. In 1652 the government returned to a deflationary monetary policy and devalued copper coins. This time the government compensated holders of devalued copper coins with interest-bearing bonds.

Counterfeiting contributed significantly to the depreciation of copper currency. After 1660 counterfeiting was punishable with the death penalty, and burning at the stake awaited those participating in the importation of counterfeit coins.

Monetary disorder reached a climatic crisis in 1680 with silver selling at a premium of 275 percent. The government issued a decree devaluing copper currency by half, equivalent to one-fourth its 1664 value. Prices plummeted 45 percent in a few months, forcing a harsh readjustment. The government began reducing the supply of copper coins, and had ceased minting copper by 1693. Monetary stability returned to Spain and lasted throughout the first half of the eighteenth century.

Nearly a century of monetary disorder ravaged the Spanish economy. The woolen industry in Toledo and the cargo ships sailing between Spain and the Indies shrank by three-fourths and some industrialized areas lost half their populations. Monetary chaos stifled private initiative, contributing to Spain’s economic deterioration.