& Tornado Alley
In the sixteenth century gold and silver poured into Spain from Mexico, Peru and the rest of the Spanish Empire. Prices rose. The observation of a probable connection between the inflow of treasure and the rise in prices was one of the first formulations of an economic theory, in this case The Crude Quantity Theory of Money. The statistics available allow one to test the idea that the price level is related to the amount of money in circulation. Only part of the data is available so there cannot be a definitive test of this theory. There are statistics on the import of treasure into Spain but not for the export of gold and silver. Also the extent of hoarding and the diversion of gold and silver into jewelery and decoration is unknown. The amount of money other than gold and silver is not known either. Nevertheless the statistics that are available allow a crude test of the crude quantity theory of money.
When these data are plotted the result, shown below, indicate a relationship between the price level and the amount of money in circulation which is here approximated by the cumulative imports of treasure. In the early seventeenth century the price level did not rise even though treasure was still imported. Here the lack of statistics on the export of gold and silver is crucial. If gold and silver were flowing out as fast as they were coming in then there would have been no increase in the money in circulation. It was well known that much of the gold that flowed into Spain flowed out to France and England to pay for manufactured goods. Also the Chinese Empire refused to allow any European products to sold in China and so the European purchases of Chinese goods had to be paid for in silver. Thus there was a steady outflow of gold and silver from Spain although this was illegal according to the laws of the kingdom.
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