Munro J. (2006) A non-mercantilist approach to the balance of payment problem

Munro, John H. (2006) “South German silver, European textiles, and Venetian trade with the Levant and Ottoman Empire, c. 1370 to c. 1720: a non-Mercantilist approach to the balance of payment problem”, in Relazione economiche tra Europea e mondo islamico, seccoli XII – XVII, ed. Simonetta Cavaciocchi, Florence: Le Monnier, 905-960.


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For mercantilists, gold and silver are not just mediums of exchange but the most tangible form of wealth (store of value) and a country’s veritable life-blood. In their view, the economic contraction of the later 14th and 15th centuries were caused by the outflow of precious metal to the East (p.905). But according to J. H. Munro, there was no such thing as a ‘bullion famine’, at worst some “periodic scarcity of coined money” in 1320-1340, 1370-1420, and 1440-1470 (p.906).

Some explaining to do

First, even though some metal did move East, the losses were relatively minor compared to the demographic decline (Black Death); so even if the total mass of money may have decreased the availability of cash per caput did not.

Three factors explain better the relative scarcities of coined money felt in the 14th and 15th centuries:

  1. The reduction of the income velocity of money combined with increased hoarding due in particular to the increasing stain of warfare across Europe after the 1290s which increased transportation and transaction costs in international trade.
  2. Impediments to the flow of bullion in international trade (lack of financial innovation, which kept interest rates high).
  3. The development of proto-mercantilist bullionist policies designed to attract precious metal into the ruler’s mints and which, in turn, exacerbated international conflicts (p.907).

Mature miners

These problems might have been solved by a massive production of silver, but during the first half of the 15th century, Central European mines experienced diminishing returns, while the Balkan mines fell into the hands of the Ottoman (p.908).

The crisis was made worse by the fact that real prices did not adjust automatically (which would have led to a mere simultaneous decrease of all the nominal prices). The “long-term stickiness of nominal money wages, interest rates and rents” ensured crippling consequences to the monetary scarcity as some prices dropped but other did not (p.909).

From the 1440s to the 1460s, deflation was acute; this provided the necessary incentive (rise of the value of money) to motivate technological change (drainage pumps and Saigerhütten smelting) and generate the South German silver mining boom (p.910). The result was a vast increase – possibly a quintupling – of Europe’s supply of silver (which led to the 16th-century Price Revolution but that’s another story; p.911).

The invisible hand

Europe’s economic renaissance after 1450 was tightly related with the expansion of the Swabian fustian fabrics (p.914). This industry depended upon the import of Levantine cotton paid with South German silver (p.915). The new route from Venice to Antwerp associated with the fustian trade replaced the old Champagne Fairs that had disappeared during the 14th century. Once more a land route guaranteed speed, safety and regularity, which allowed the continent to collect the “gains from trade” (i.e. higher income velocity, economies of scale in transaction and transportation [see p.929-32]).

Far from impeding growth, bullion export had “promoted a rapid economic expansion [acting as] a macro-economic multiplier-accelerator mechanism” (p.918). The rise of the Fuggers, of the English woollens, and of the Portuguese spice trade and the quick urbanization of the continent are all related to this economic miracle (p.919).

Sailing East: a mercantilist’s nightmare

By the late 1490s, the aggregate value of the Venetian imports from the Levant may have approached 730,000 ducats (high estimate), of which around 63% were paid cash. The equivalent of 1,617 kg of gold or 17,191 kg of silver left Europe every year (roughly double the amount of precious metal minted every year in England and the Netherlands combined; p.923). This represents also 67% of the minimum yearly output of the South German/Central European mines. (p.924).

In the late 1520s, Venice replaced Florence on the Ottoman cloth market (p.939). Unlike what had been the case in the 15th-century trade the Venetians did not export mostly bullion to the Levant but a mix of specie and fabrics (p.940). Their system was further perfected by the English Levant Company after 1600. The English merchants managed to replace the Italians in the Ottoman Empire and to secure a more positive balance of payment (only 20 to 35% of the purchases paid cash; p.945) thanks to the high demand for their expensive broadcloth  (p.949).

The East India Company and the Vereinige Oost-Indisch Compagnie (VOC) replaced the Portuguese in the Indian Ocean in the early 17th century (p.950). This trade run a far greater deficit than the one with the Levant (bullion accounted for nearly 80% of the value shipped to the East). Almost 3.5 metric tons of silver were exported to Asia from 1600 to the mid-1700s. But such shipment posed no serious problem to the European economy (thanks to the American mines; p.951).


Unlike what the bullionists had predicted, from the 14th to the 18th century, the outflow of such a large portion of the European treasure to the East did not suck the life out of the continent’s economy. On the contrary, it “promoted the European and indeed global economy, through the enormous expansion in trade that such precious metal generated.” Over the centuries, numerous European industries owned their existence to bullion export.

“The fact that so much of these precious-metal exports took place during the inflationary Price Revolution era and the fact that the bimetallic ratio had risen (in England) from 10.33:1 in 1464 to 14.49:1 in 1660 together prove that western Europe, despite such exports, had long enjoyed a surplus of silver.”

2 Responses to Munro J. (2006) A non-mercantilist approach to the balance of payment problem

  1. Pierre van den Boogaerde says:

    Thanks for this interesting article. Indeed, most European powers were supplementing domestic coinage by coinage minted in colonial possessions to even out balance of payments needs. For example, the same portuguese coins were minted in Brazil, Mozambique and other places. Also they were using other countries’ coins when they had shortages, so there was a system of automatic stabilizers (gold standard of the time in a sense). I found some of these different coins on wrecks in Madagascar (see

  2. Pierre van den Boogaerde says:

    Thank you

    Pierre van den Boogaerde

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