Spanish gold. History repeats
No relief in sight
Spanish Gold

Spain suffered inflation from the decline of the value of gold and silver.


Spain imported large amounts of gold and silver from South and Central America around 1500. In the beginning this importation of gold and silver stimulated its economy but soon it created inflation when the import of gold was not matched by a greater amount of production of goods in Spain and the production of goods in Spain became more expensive leading to more imports and lower exports. Sounds familiar? That then caused the outflow of money to other countries to pay for the greater importation of goods. It does not matter what form of money is exported, plain paper money, paper securities not backed by gold or silver or gold and silver itself. The effect on the economy is identical, the economy will decline no matter whether the paper money is gold and silver backed or not, if the export of money is not balanced by a matching value of exported goods or commodities.


The importation of New World gold into Spain coincided with a corrosive inflation that has come to be known as the "price revolution." Although prices had dropped steadily during the 1400s, after 1500 they began to rise dramatically--300 percent by 1600, according to economist Earl Hamilton, who wrote a well-known book on the phenomenon. The reasons for this are complex, but it seems clear that at least in part it was a matter of a sharply increasing the amount of money (in the form of silver and gold) chasing a relatively fixed output of goods and services, thus bidding up the price of goods and services. Among other things the higher prices meant Spanish goods became uncompetitive on European markets. Even the Spanish themselves began buying foreign products, resulting in a lot of cash leaving the country. In addition, inflation stifled local investment, with the grandees spending their dough on conspicuous consumables instead.


For the latter part of the 1500s and on into the 1600s Spain was a debtor nation, spending more abroad than it took in. The result was a net outflow of gold and silver. Attempts were made to restrict the export of precious metals, but without much success. In the end it all simply dribbled away. The problem was that the conquest of the New World left Spain with a lot more money, but not that much more wealth, if you follow me. They didn't realize that until too late, and suffered centuries of poverty as a consequence.


Exporting money in whatever form, commodity backed paper or gold and silver in solid form, has the same inflationary effect that exporting printed non-commodity backed paper money has. It leads to the same decline in living standard without balancing the exportation of money with an equal value exportation of manufactured goods and commodities.


History repeats itself with the current exportation of money and money instruments from America without backing it up with an equal value exportation of manufactured goods or commodities. Is anyone learning from history? Obviously not.


The value of gold and silver is subject to very violent fluctuations in their value and for that reason they are not a good standard to base the value of a currency on. For example the price of gold has fluctuated violently from $594 in 1980 down to $271 in 2001 and up to $1400 in 2011 and silver has similar fluctuations between $5 and $30 from 2001 to 2011. So gold and silver are not very good stable commodities to back a paper currency with unless the government will fix the price of gold and silver and make it payable on demand in coin or bullion against the paper currency.