When did we learn that money does not equal wealth?

I’ve been reading about the history of Spain, particularly the horrible economic time they had of all the gold they got from the Americas. They dumped the metal onto the economy, with the predictable (to us) result that gold’s value dropped and gold specie became monstrously inflationary. But was it predictable to the Spanish at the time? You’d think if it were, the royalty might have limited the importation of gold into the continent and focused on wealth-building back home. Instead, Spanish industry was woefully neglected to the point that Spain, an agrarian country, had to import food. (There may have been cultural factors. See my links below.)

So what’s the breaks? Did the Spanish honestly not know as much basic economics and money supply theory as I do? The CSA had similarly ruinous currency policies, to the point where the country was basically insolvent. Were Spain and the Confederacy simply saddled with incompetent morons too enthralled with money to think about actual wealth? Or did one or both of them exist at a time before we knew the difference?

Cecil’s take
Treasure and Prices in Spain 1505-1650, demonstrating the inflation that took place.
Spain: Our Neighbor to the Past, which touches on some possible cultural issues. (“Iglesia, mar o casa real” is the phrase to search for.)

This is my vote. Economic theory is primarily a development of the 20th and 19th centuries, along with the rest of science. People, even royalty, were just plain ignorant prior to that.

In fact, a lot of economic theory has only developed in the past 60 years. Ben Bernanke, the chairman of the Federal Reserve, has admitted that the Fed caused the Great Depression because of a lack of understanding of how the market operates. Milton Friedman only provided that understanding decades later.

(http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm)

What do you mean when did “WE” realize money =/= wealth? There is an abundance of people who right at this moment do not get it.

Considering that The Wealth of Nations was not published until the 1770s, it would seem evident that the Spanish crown would be operating from a pre-capitalist conception of money and wealth. Also, consider that Spain found itself immediately involved in near-constant military conflict, an activity that is a net expenditure of wealth, and soldiers wanted to be paid in pieces of silver, not in stock options. The Confederacy came along a couple of generations after Adam Smith, but the economy of the South was not heavy on industry/finance and again, had to face a huge military expenditure right off the bat. And both cultures would seem (I’d be willing to be corrected on that) to be the kind to have little regard for the “wisdom” of bankers and moneychangers.

You can’t compare the CSA to a nation-state. It was never a true nation. The states insisted on a weak national government because of the states rights bias that was their overriding principle, after slavery. Throughout the war the states balked at any sensible revenue policy. Heck, they balked at sensible war policies, insisting on local control over federal control. The CSA needs to be compared more to the US at the time of the Articles of Confederation. It was designed to fail because it was not designed to be a nation.

There were few people in a profession of economics until the 20th century. The American Economic Association wasn’t even founded until 1885. The stock market as we know it today barely existed at the time of the Civil War, since there were so few corporations. The means to create wealth instead of money were limited at all levels.

The basic economic structure until the growth of the industrial revolution really took hold was mercantilism.

The US was a forthrightly protectionistic country through the end of the 19th century, and this protectionism is what allowed our native industries to compete against the better established industries in Europe, especially Britain. Some people conclude that third world countries today will never see any growth through free trade and should be allowed to protect their developing industries just as worked for us. I’m a free trader but I wouldn’t want to bet against this being true. Interestingly, the CSA constitution explicitly rejected protectionism, which made sense since they had no industry, i.e. finished product, but wanted to sell raw materials:

So as others agree, the answer to the OP is that modern economic theory is a recent development that nobody in the world understood a couple of centuries ago. I’m not sure how many people in the CSA government understood it, and even if they did the social and cultural character of the states prevented its application.

And JRDelirious is absolutely correct. One of the biggest mistakes people on this board bring into economic discussions is the lack of understanding that money is not the same as wealth.

The CSA wasn’t insolvent because of its ruinous currency policy. It pursued a ruinous currency policy because it was insolvent.

The CSA had no choice but to fight a long and expensive war if it wanted to achieve independence. There was zero chance it could finance such a war out of tax revenue (nor could the Union), and since upstart countries with uncertain chances of success are lousy credit risks, it couldn’t borrow the money either. (It sold a few bonds to its own citizens, who invested out of patriotic motives despite the risk, but found few investors overseas.)

They had no choice but to pay their soldiers and suppliers in ever-depreciating scrip, which those soldiers and suppliers had to accept, again, out of patriotic motives. There was no other way. If the CSA had won the war, over a period of decades, they might have been able to redeem the scrip in specie, as the USA did 20 years after the Revolution.

All of this was well understood at the time. The CSA Cabinet members weren’t economically illiterate.

Adam Smith’s the Wealth of Nations is the answer.

Note that PJ O’Rourke has a great little book on Adam Smith,just out.

True enough, although a case can be made that they were ideologically disinclined to adopt a modern view of economics. For example, when merchants responded to the debasement of Confederate currency by the logical step of raising their prices, they were roundly denounced as money-grubbing parasites who were extorting the poor.

Both the North and the South had ideological and philosophical objections to dealing with anything but species, physical gold transfers.

The real difference is that the North had a modern industrial economy and the South had a backward farming economy. The North could tax this base more heavily and also had a complete infrastructure in place to collect the money. Money in the north came primarily from loans (war bonds) followed by excise and income taxes and tariffs. What could the South do? It got a much smaller proportion of a smaller total amount from bonds and taxes and was forced to print money for the rest. The result was ruin. They understood this much; the government knew that a long war would ruin them. But the greater understanding of modern economies was lacking.

The Tax History Museum Civil War page has too much good stuff on it to summarize. Please read it.

Tax policy is not glamorous or even especially interesting, comparing with dashing generals and flying bullets. But it puts the lie to the nonsense that the South could have won the war under any circumstances other than an abject surrender by the North, which was as likely as asking Queen Victoria to take over the country as part of Britain. The South didn’t have the money to wage war, didn’t have the industry, didn’t have the material, didn’t have the troops, didn’t have the infrastructure, didn’t have the resources, didn’t have the food, didn’t have the soldiers. Its sole advantage was that it was fighting a defensive war and could prolong it until the North figured out how to fight a war over half a continent in enemy territory. By 1863 Grant had learned this and the war was over.

But any competent general who had survived the first two years could have figured out the solution. The North held overwhelming strength because it had the overwhelming economy. It was stronger at the end of the war than at the beginning while the South was utterly ruined. All the economic theory in the world couldn’t have changed this but it might have eased the misery some along the way.

I think people figured out that money does not equal wealth a long time before money even existed. I do not know the details of how Spain acted, but Spain isn’t some dude. Especially not some dude concerned with wellbeing of the economy.

If your question is when did individuals start acting in a way as to prevent inflation, the answer is never, because anybody today who finds a huge source of gold is very likely to flood the gold markets. I am sure the concept of inflation is an ancient as money, but I think the idea that “The _____” doing something that causes problems for “The _____” refers to the same people dates back to the 1960’s :wink:

Did anybody predict it in Spain? I’m sure they have. Did anybody write it down? Don’t know. Was it preventable? Most likely not because I doubt any single individual had enough economic control over anything. Evenf or a monarch, how do you propose to keep gold out of the market? Ban travel to the new world? Ban gold? Have the treasury hoard it?

Gold and silver are really commodities that people used as ‘money’.

An increase in the supply of a commodity generally lowers its price (Ok there are exceptions).

‘Money’ is funny stuff, it is really a token rather than something physical.
An increase in the supply can lubricate trade, or economic activity in general, a shortage can lead to problems.

Things can take on ‘moneyness’, for example cigarettes. I remember hearing a story about an English couple in Eastern Europe who bought a tin of caviar, a box of chocolates and a bottle of wine - they were very expensive. When they opened them, they were all off. On telling a local about their disgusting binge, they were told ‘Those things are for trading, not for eating’.

There are a few other ways in which ‘money’ can decline in value :-
Debasement the government calls up silver coins and re-issues them with a smaller proportion of silver.
Clipping people clip the edges of (typically) gold coins
Sweating people put gold coins in a leather bag and beat sh/t out of it, flakes of gold are knocked off the coins

My understanding is that initially Spain prospered from the influx of gold and silver, the decrease in farming was because it was cheaper to import food. Possibly Spain’s tendency to conduct expensive wars did not help matters.

Regarding Spain: even if someone had sat down with one the Phillips and patiently explained the phenonemon of inflation to him, the reply would probably have been something like this: “So we have no economy other than conquistadores and looting? What’s wrong with that? Let someone else be grubby farmers and craftsmen”. As long as the Hapsburg dynasty ruled half of Europe and had a near-monopoly on the New World, the rulers of Spain saw no problem with specializing as conquerors. For most of human history, the dynamic of government was “conquer, acquire loot, fund a bigger army, conquer more”. Along with modern ideas of a market economy ala’ Adam Smith there had to slowly develop the idea that maybe government should nurture and encourage (or at least not actively plunder) the civilian economy.