Title: THE ROLE OF HIGH INFLATION IN THE DECLINE OF SIXTEENTH CENTURY POLAND-LITHUANIA'S ECONOMY
Abstract: The purpose of this paper is to explore the economic problems faced by Poland-Lithuania in the sixteenth Century. It is a historical perspective, examining how high inflation, trade, expanding serfdom, and a weakened currency combined to have a stagflationary effect on the country. This work aims to provide insight into the nature of feudalistic economies and how modern economic phenomena affected them. It seeks to change the modern view of Poland-Lithuania as a helpless and under-developed periphery nation compared to Western European countries. This paper will show that Poland-Lithuania had an advanced trade regime with Western Europe. That same system fueled high inflation, expanded serfdom, and quashed industrial development, creating similar conditions to modern stagflation. Hence, there are important lessons from this period that can be applied to modern agricultural or commodity producing economies in managing their economic growth and trade arrangements. At the beginning of the sixteenth Century, Europe underwent massive political and economic changes. After conquering Constantinople and much of the Balkans, the Ottoman Empire under Suleiman I was in the ascendant. The Habsburgs' personal empire was beginning to form into a potent continental power. Spain and Portugal had begun carving up their claims of the New World. As Christendom entered the Renaissance, economic revitalization took place, bringing life to a continent ravaged by the plagues, revolts, and wars of the Dark Ages. The sixteenth Century also witnessed the ? a steep rise in prices across the continent. Poland and Lithuania during this time of change seemed to be a nation of great strength. In the sixteenth Century these two countries formed the largest contiguous kingdom in Europe. Through Gdansk and other Baltic ports, Poland-Lithuania became the largest exporter of cereal grains to all of Western Europe. The country exploited its vast territory to become a major source of agricultural goods and raw materials. Being such a trading power, one would expect Poland-Lithuania to have become a successful economic power, exerting influence across all of Europe. Despite these appearances, Poland-Lithuania was hobbled by monetary and inflationary crises which substantially weakened the country, reduced its economic potential, and undermined its stability. The Price Revolution, which began at the end of the fifteenth century, sparked a period This content downloaded from 157.55.39.104 on Sun, 19 Jun 2016 06:45:45 UTC All use subject to http://about.jstor.org/terms 62 The Polish Review of prolonged high inflation in Poland-Lithuania.1 Rising prices reduced the value of each zfoty and diminished its buying power. Gains made by Poland-Lithuania's remarkably well-organized trade regime were offset by these economic failings. The meager profits extracted from trade were tunneled back into agriculture, substantially expanding the number of serfs during the sixteenth Century. Foreign trade undercut indigenous industrial entrepreneurs in Poland-Lithuania, hampering growth and directing investment into agricultural production. While prices rose, internal growth was nonexistent, there was no economic diversification, and a general economic downturn occurred. These symptoms are analogous to the modern economic problem of stagflation? Polish-Lithuanian society was aware of these crises but was unable to mitigate their effects sufficiently. Despite the efforts of the Crown, especially King Zygmunt I, Poland-Lithuania would continue to suffer from economic deficiencies that halted its growth and kept the country from diversifying. Structural weaknesses, both political and economic, kept the Polish Lithuanian state from adequately addressing the problems caused by the Price Revolution and stagflation. The make-up of Poland-Lithuania's market substantially contributed to the inflation crises experienced in the sixteenth century.3 The withering grip of high inflation whittled away the value of the Commonwealth's goods; it also drove capital and production to certain sectors of the economy. Agriculture and serfdom received much of this investment, with negative long-term consequences. Inflation was spurred by an abundance of what Copernicus called bad money; coinage that was sufficiently undervalued, encouraging spending, raising prices, and discouraging reinvestment of profits into the arts or industry. While this problem was well-recognized by the Commonwealth, the country's basic monetary policies were undermined by their reliance on the export of raw materials, which left a flood of foreign currency within Poland-Lithuania. 1 Schwartz, Anna J. Secular Price Change in Historical Perspectives. Journal of Money, Credit, and Banking. Vol. 5, No. 1, Part 2. Feb. 1973 2 Stagflation: when an economy experiences no growth in overall output, or a recession, while having high inflation and high unemployment. This is a quandary, because under normal circumstances, rising prices are usually attributed to expanding production; rising unemployment is usually deflationary, as there is less income for consumers to spend, prices fall. Under stagflation, prices and unemployment escalate while growth declines. This phenomenon is attributed to having a weak currency. 3Poland-Lithuania had an open exchange between buyers and sellers, what is traditionally called a market. This is not to be confused with Market economy, which indicates that sellers (more often called suppliers) have easy and usually equal ability to sell their goods. In Poland-Lithuania the nobility and, to a lesser extent, burghers had an undeniable advantage over other members of society. That being said, Poland-Lithuania had possibly the closest example of a market economy in Europe at the time. This content downloaded from 157.55.39.104 on Sun, 19 Jun 2016 06:45:45 UTC All use subject to http://about.jstor.org/terms The Role of High Inflation..._63 The freedom and societal advantages held by the nobility created the system for exporting grain but also contributed to continued high inflation. Despite having a well-organized trade regime, economic power was split among various groups. Monetary policy was the domain of the nobility whose land had mints, or the coin-pressers themselves.4 This decentralization kept the Polish-Lithuanian Crown from sufficiently fixing these structural problems, providing great damage to the country. The depiction of Poland-Lithuania as a weak victim stems mostly from the country's inability to overcome this crisis, beginning a process of decline which ultimately leads to partition. The traditional view of this crisis is through the lens of Wallerstein, depicting Poland-Lithuania as a helpless part of the periphery, being taken advantage of by the more powerful West European nations. Previous examinations of Poland-Lithuania's economic position likened it to that of its peasantry: a serf, working for greater powers, Western Europeans. This ignores the great potential that an expansion experienced in the sixteenth Century had and how it could have enriched all levels of society. The inflationary crisis in Poland-Lithuania has to be re-examined from a neoliberal viewpoint, one that emphasizes a free society, land ownership, and trade as necessary to development and growth. Poland Lithuania's problem was not backwardness as much of the past scholarly work has characterized it, but that of a combination of factors, most importantly its unique political structure, allowed for the development of an advanced system of wheat production. These same factors kept the country from correcting the effects of one sector of the economy expanding. As grain exports and production expanded, Poland-Lithuania experienced immiserising growth, with other sectors declining in net and real value even as the whole economy grew. Combined with an already weak currency, Poland-Lithuania's growth became stagflationary, reducing the value of currency and raising all prices. This article will examine how Poland Lithuania grew so quickly and then became ensnared in such an economic malaise. It will explain how ? by way of Copernicus and others ? the Polish King Zygmunt I had a solution to staglflation but was unable to
Publication Year: 2016
Publication Date: 2016-01-01
Language: en
Type: article
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Cited By Count: 2
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