Monetary Versus Velocity Interpretations of the “Price Revolution”: A Comment

Abstract

In recent article in this JOURNAL, Douglas Fisher defended monetary interpretation of revolution of sixteenth century.' He produced evidence that seemed to run counter to population- and velocity-based explanation I have propounded elsewhere.2 However, when closely scrutinized, Fisher's evidence does not support monetarist argument. Instead, it provides unanticipated evidence in favor of population- and velocity-based account. Fisher rehearsed usual debate about monetary versus population- and velocity-based arguments. He pointed out that price in Spain caused by bullion inflows could have raised prices and increased money demand elsewhere through balance-of-payment effects that did not depend on American bullion spreading through Europe. He also pointed out that population-based accounts sometimes err by emphasizing relative price shifts between agricultural and other prices rather than focusing on changes in overall price level. Finally, Fisher expressed skepticism regarding whether, given expansion of economic activity due to urbanization and population growth, velocity could have been sufficient to of sustaining long price rise. However, Fisher omitted several germane points from his discussion. First, he made no mention of research done by M. Morineau, J. Riley, and J. McCusker on period following price revolution.3 Morineau demonstrated that bullion exports to Europe were considerably greater in latter half of seventeenth century than in latter half of sixteenth century; however, in later period European prices stagnated or fell. Moreover, Riley and McCusker found that relationship between French mint output and French prices-which Fisher claimed to have demonstrated to exist during price revolution-failed to hold after 1650. Riley noted that in France after 1650, increases in money stock . . . do not explain price level movements; and Riley and McCusker emphasized that the money stock grew most rapidly when prices were stable, and least rapidly when prices were rising.' These findings suggest that relationship between money stock and prices in earlier period should be viewed with skepticism and care, as possibly spurious rather than causal. Second, Fisher dismissed Peter Lindert's evidence of large velocity shifts during price revolution5 and flatly claimed that a rise in velocity will not by itself do job if there is, simultaneously, general economic growth (p. 891). Yet this assertion omits mention of my demonstration-using network theory-that urbanization and occupational specialization accompanying population can cause velocity of circulation to increase as square of population, even though quantity of goods traded only linearly.6 In this model, population prices not simply by augmenting demand but by producing greater density of exchange