III THE SCHOOL OF SALAMANCA THE MEN

IF in most parts of Europe the old scholastic tradition had nearly died away by the middle of the sixteenth century, in Spain it was not until this time that it bore its finest fruits. The work of the theologians and jurists who brought fame to the Spanish universities is thoroughly scholastic in form. The full panoply of Questions, Articles, Objections, Distinctions, Solutions, and Conclusions is unsparingly displayed. Every utterance is checked against Aristotle and St. Thomas, and every page encrusted with quotations from their works. Too rigid a strait-jacket, it might be supposed, to contain the great expanding world of the sixteenth century. Yet the writings of the Spanish theologians convey no sense of restraint. For all their stiff, unbending style, our writers were flexible of mind, attentive to new facts and doctrines, and respectful of the honestly held opinions of the ordinary man.

At Salamanca, Vitoria and his followers devoted a large share of their efforts to reshaping the old ius gentium in order to regulate the relationship that had recently arisen between the conquered peoples of America and the Spanish Crown.¹ But they also spared time for political, social, and economic theory, to which the discovery of the New World gave powerful impetus. They engaged, for example, in a lively philosophical debate on the advantages and disadvantages of private property, inspired by reports of the primitive American communities, especially the collectivist society of Peru, which were seized upon as survivals of a lost Golden Age when all things were held in common.¹ And the practical problems of business life were growing daily more pressing. The inflationary economy of the period offered unprecedented opportunities for enrichment, and the Church’s solemn warnings against undue love of gain passed all too often unheeded. Lip-service was paid to the prohibition of usury, but, since theologians themselves differed as to the definition of the term, laymen could scarcely be blamed if they lapsed into ‘error’. The most blatant forms of usury were universally practised, though generally under cover of some device invented to conceal the true nature of the transaction. In Spain, the great stronghold of religious authoritarianism, such a situation could not idly be tolerated. Some reconciliation of Thomist doctrine with the new economic order was urgently demanded. The Spanish theologians tackled this difficult task with zeal, and, what is perhaps more remarkable, with a fair measure of success. Here we shall not be primarily concerned with their moral teaching, or even with their economic theory as a whole, but only with one small fraction of their work, their analysis of money. Though they wrote as moralists, they were at pains to study the nature of money objectively, and they were not content merely to approve or condemn the monetary system as it functioned in their day, but tried to go deeper and explain it scientifically.¹

In October, 1534, four years after replying to the merchants of Antwerp, Vitoria began to deliver a course of lectures on the Secunda Secundae or moral system of St. Thomas. Vitoria was now at the height of his powers, and his eloquence, simplicity, and great personal charm made his lecture-room at Salamanca a meeting-place for all who were perplexed by the manifold legal and ethical problems that arose in the government of the far-flung Spanish Empire. To Vitoria had fallen the task of reconciling historical reality with Thomist doctrine, of modifying each in the light of the other, and of passing on the traditional ideas he had imbibed during his period of apprenticeship in Paris, remoulded to fit the circumstances of his time. In March and April of 1535 Vitoria was engaged in explaining St. Thomas’s doctrine of usury. His words were carefully noted down by one of his pupils, whose manuscript may still be read in the library at Salamanca.¹ Vitoria had evidently given a good deal of thought to the current problems of commercial morality since replying to the merchants of Antwerp four years before. Yet even this maturer work, though interesting for the first-hand picture it gives of the business world of Spain and Flanders, makes no great advance on medieval economic theory. Later writers associate Vitoria with some of the more advanced doctrines of the School of Salamanca, and it is possible that his best work in this field has not come down to us. However this may be, Vitoria’s interest in the problems of commercial ethics certainly seems to have stimulated those around him, for a number of his colleagues and pupils blossomed forth as capable economists during the next few years.

Among the first generation of the School, contemporary with Vitoria, two of the best writers on economic matters were the Dominicans, Domingo de Soto and Martin de Azpilcueta Navarro (often called simply Navarrus). Soto, who was born in 1495, was of humble origin. He studied first at Alcalá de Henares and later in Paris, coming under the influence of Vitoria, who was then teaching at the Sorbonne. In 1532 Soto was appointed to a chair of theology at Salamanca. The terrible famine that ravaged Spain in 1540 led him to write his well-known treatise on poor relief, in which he upheld the poor man’s right to liberty of person and of action, arguing against his colleague, Juan de Medina, who maintained that the problem of vagabondage could only be solved by the strict and centralized control of the movements of poor persons. In 1545 the Emperor appointed Soto, by now regarded as the most eminent of the Spanish theologians after Vitoria (who was in failing health), as his representative on the Council of Trent. In 1548 Soto became confessor to the Emperor, but two years later he caused general surprise by relinquishing this influential post and returning to the University of Salamanca, where he continued to teach until his death in 1560. Soto’s monetary theory is expounded in his treatise De justitia et jure, an extensive work on the philosophy of law which was published in 1553 and is said to have been based on a series of lectures given at Salamanca in 1540–1 and repeated in 1552–3.¹ In this important treatise, which was reprinted no less than twenty-seven times before 1600 and which continued to be read and quoted by jurists and moralists for some 200 years after its original publication, Soto begins by explaining the general nature and functions of Law. He then turns to the moral problems created by the contemporary expansion of commerce, a subject which (as he tells us) was so peculiarly interesting to him that it alone had led him to take up the burden of writing his great treatise. Long chapters are devoted to the problems of usury, the general position of commerce within the State, the fixing of the just price, the fluctuations of that price and their cause, the purchase of rent-charges, the formation of commercial companies and the propriety of investment in such companies by Christian men, and the character of shipping and life insurance. Each of these chapters would repay detailed study. Besides providing a mass of factual information, they conceal beneath their theological dress many general concepts that deserve a place in the history of economic doctrine.

DIEGO DE COVARRUBIAS Y LEIVA

From a portrait by El Greco in the
Greco Museum, Toledo

Another distinguished figure at Salamanca was Martín de Azpilcueta Navarro. A scholar famed for his saintly life and vast learning, he had taught canon law at Toulouse and Cahors before coming to Salamanca, and he was chosen by Charles V as rector of the newly established University of Coimbra. He spent the last years of his life in Rome. Azpilcueta’s monetary theory is developed in his Comentarios de usura, which were published in 1556 as an appendix to a manual of moral theology dedicated to his friend and protectress the Princess Juana, sister of Philip II. The manual and commentaries were translated into Latin and Italian, and they continued to be followed by Roman Catholic writers for many years.

Another leading member of the School of Salamanca was Diego de Covarrubias, a pupil of Azpilcueta. Born in 1512, he became Bishop of Ciudad Rodrigo and later President of the Council of Castile. He was one of the greatest experts of his day on Roman law and was called ‘the Spanish Bartolus’ by his contemporaries. For some reason he seems to have been particularly widely read in Italy. His work is often cited by Davanzati, and at least once by Galiani, writing as late as 1750.¹

The fame of these and other scholars who taught at Salamanca greatly enhanced the prestige which the University had acquired under Vitoria, and the doctrines evolved there soon spread to other parts of Spain. In the 1570s an interesting group of economists sprang up in Valencia, who based their ideas on those of the theologians of Salamanca. The best-known members of this little satellite school are Miguel Salón, Bartolomé de Albornoz, and one very gifted economist, Francisco García.

At the end of the sixteenth century the monetary theory taught at Salamanca received further development at the hands of two important theologians, the Dominican, Bañez, and the Jesuit, Luís de Molina. Domingo de Bañez, who held a chair of theology at Salamanca for some years, is remembered as the friend and confessor of St. Teresa. His chief contribution to theology was his doctrine of grace, in which he was strongly opposed by Molina, the upholder of free will, according to whom the grace of God could only become efficient by the consent of man. The ensuing polemic troubled the whole cultural and religious life of Spain during the last years of the sixteenth century. Though the Pope finally imposed silence on the contending parties, the writings of Bañez and Molina, passing into Belgium and France, were to prove one of the main sources of the Jansenist controversy. With these two writers the monetary theory of the School of Salamanca may be regarded as having travelled so far beyond the limits of its original home as no longer to be specifically ‘Salamancan’.

Enough has been said of our Spanish economists to show that we are not dealing with a group of obscure writers whose work was no sooner published than forgotten. On the contrary, our doctors of Salamanca were heard with respect by the whole world of learning. They lectured to successive generations of students of every nationality, and their books continued to be translated and reprinted for many years after they themselves had passed away.

THE DOCTRINES

While adhering closely to traditional doctrine, our Spanish writers gave a novel twist to the teaching of their medieval predecessors, and, discarding some of the older ideas and emphasizing others, wove a solid, coherent, and characteristic body of theory of their own.

The Aristotelian and scholastic ideas about the nature, origin, and functions of money were handed on unchanged except for a few elaborations of minor importance. Even today these traditional concepts of money as a medium of exchange and a measure and store of value, together with the customary ‘historical’ account of the inconveniences attendant upon a barter economy, are still reflected in our text-books. The School of Salamanca is simply a link in the long chain of writers who have helped to pass on these ideas. The School’s original contribution to monetary theory consists, in my opinion, in its formulation of a psychological theory of value applied to both goods and money, of the quantity theory, and of a theory of foreign exchange that closely resembles the modern purchasing-power parity theory.

Theory of Value. The markedly subjective theory of value adopted by our writers appears in an extreme form in the work of Saravia de la Calle (Text I). Saravia denies with considerable vehemence that cost-of-production can play any part at all in the determination of price. Viewing the poor man not as producer but as consumer, he clearly fears that the least relaxation of his doctrine will give merchants an excuse for raising prices on the pretext of recouping their expenses. Another extreme subjectivist was Diego de Covarrubias. ‘The value of an article’, he says, ‘does not depend on its essential nature but on the estimation of men, even if that estimation be foolish. Thus, in the Indies wheat is dearer than in Spain because men esteem it more highly, though the nature of the wheat is the same in both places.’ In assessing the just price, Covarrubias continues, we are not to consider how much the article originally cost, nor the labour its acquisition cost the vendor, but only its common market-value in the place where it is sold. Prices fall when buyers are few and goods and vendors many, and rise when the contrary conditions prevail.¹

Most members of the School, however, do not go quite so far. As a rule they concede, though sometimes rather grudgingly, that cost-of-production, including the remuneration of labour, may help to determine price. But they all agree that the most important determinant of the ‘natural’ or uncontrolled price of an article is the estimation in which that article is held, such estimation being in its turn determined primarily by the forces of supply and demand, utility, rarity, and so on. From the tone of our writers it is evident that the subjective theory of value enjoyed their moral approval while the labour theory smacked of brimstone as the favourite tenet of the contemporary ‘selfish business man’. This subjectivist tendency led to some interesting attempts to analyse the psychological springs of economic activity. For some authors, such as Francisco García, value in exchange expressed the subjective estimates of utility, a view which he develops in workmanlike style (Text V). Others regard scarcity as the chief determinant of price. Bartolomé de Albornoz, for example, develops this concept at length, and relates the story of King Tarquin and the Sibylline books to illustrate the principle that price, as the reflection of estimation, increases with rarity.¹ All these ideas lend a remarkably modern air to the discussions of our authors.

When they turned from theory to practice, most of the Spanish economists agreed that the price of necessary articles such as bread and meat ought to be fixed by the State, while that of luxury goods might well be left to find its ‘natural’ level in accordance with market conditions (Text II). The question then arose: on what principles should the tasa or controlled price of necessities be fixed? Many authors seem to think that the legal price of an article ought to correspond to its ‘natural’ price and be roughly equivalent to whatever sum the article might reasonably be expected to fetch in a free market. The difficulty of estimating the ‘natural’ price of an article whose price is, in fact, controlled does not seem to have struck them at all forcibly. At least one writer, however, though of a rather later date, realized that this position was unsatisfactory and concluded that the price of corn, the first necessity of life, ought to be measured by the amount of labour spent in an average working day (Text VIII). In support of this view he uses very much the same argument as did Adam Smith in 1776 when he advanced his more generalized form of labour theory: namely, that money and other objects are useless as measures of value, since their own value is subject to continual fluctuation.¹ Thus it would be untrue to say that the labour theory, which in the Middle Ages had run side by side with the subjective theory, disappeared entirely in the work of the School of Salamanca. But it was temporarily submerged and seems to have occupied a secondary place in the minds of most of the Spanish economists.

The emphasis laid on the subjective factors that go to determine the price of goods was extended also to the value of money. Our writers thus brought both goods and money within the scope of a single theory of value, and in doing so made a great advance on the work of their medieval predecessors. By about 1560 the old contrast between the ‘intrinsic’ and ‘extrinsic’ value of money, the former being derived from the metal content of the coin and the latter from its tale, had faded away and been replaced by a new antithesis—that of the metal content and tale on the one hand, called simply valor, and that of estimación or subjective value on the other. The definition of these terms, and the careful distinction that was made between them (Text IV, p. 98), paved the way for some very neat and lucid theorizing. The exchange-value of money, according to the School of Salamanca, depends largely on the estimation in which the money is held, and the estimation of money, like that of goods, fluctuates with variations in supply and demand, utility, the safety of the money in question, its presence or absence, and so on. Monetary theory was thus rendered a very flexible instrument which could be applied successfully to the most varied circumstances. We shall see presently how it was capable of bringing order even into the seemingly hopeless chaos of foreign exchange business. But before passing on to this subject I should like to say a little about our writers’ formulation of the quantity theory of money.

Quantity Theory. To account for the fall in the value of money, and to study the moral and legal problems it entailed, was perhaps the most pressing task that awaited our Spanish monetary theorists. In 1550 Diego de Covarrubias published a celebrated treatise¹ in which he traced the chequered history of the maravedí and showed how sharply its value had fallen even within living memory. The treatise bristles with statistics but is little concerned with theory and attributes the contemporary rise in prices chiefly to debasement. Nevertheless, the book was of great value in its day, since it provided the theorists for the first time with definite information on which to build.

The history of the quantity theory has frequently been studied and wide credence accorded to the claim made by Jean Bodin in 1568 that he was the first to connect the contemporary rise in prices with the increase in the quantity of money in circulation, an increase which he attributes to the influx of American gold and silver, among other causes.¹ Yet the basic principles of the quantity theory had certainly been glimpsed by medieval writers, while the effect of American treasure on the European price-level was first noted, as we might naturally expect, in Spain, the country where it was first felt. We have seen that both prices and the imports of bullion reached a new high-level in the sixth decade of the century. In 1556 Azpilcueta Navarro produced the first clear statement that the high cost of living was a result of the import of treasure (Text III, p. 95). He thus preceded Bodin by twelve years. In England it was not until 1581 that the same observation was made,² and it is interesting to see how American treasure in its passage across Europe called up the quantity theory in Spain, France, and England successively.

The purchasing-power parity theory of exchange. The most noteworthy achievement of our Spanish writers, and the most original, was their formulation of the basic principles of the purchasing-power parity theory of exchange,¹ a doctrine not usually associated with the sixteenth century. We have seen that when the doctors of Paris were consulted in 1530 as to the legitimacy of exchange transactions they seem to have grasped, though not perhaps very clearly, the fact that the rates of exchange fluctuated in accordance with the state of supply and demand (Appendix, p. 126). Vitoria, in the lectures he delivered in the spring of 1535, preferred to regard the ‘profit’ made on a bill of exchange as compensation for the labour and risk entailed in sending the money abroad, and as a reward paid by the party who wished to make the transfer in return for the benefit he received. Vitoria mentions, however, that ‘when the Emperor was in Germany and money was very scarce there, if the Duke of Alba paid a thousand ducats in Medina he would receive less in Germany, and rightly so’, a statement that takes supply and demand into account. Vitoria condemns as usurious any profit made in the transfer of money by bill of exchange over short distances, but considers that similar transfers effected between different countries fulfil a real need, since they ‘avoid the inconvenience of transporting specie, and also because the export of specie is forbidden by law’.

The decisive factor in the evolution of our theory was the turning of the exchanges against Spain, or, at least, the general realization that they were unfavourable. We have no good study of the actual course of the exchanges, and have to rely on the information dropped by our Spanish economists. This much is clear: when money was sent from foreign countries to Spain a considerably larger sum was usually repaid in Spain than had been delivered abroad, but when money was sent in the opposite direction, from Spain to places abroad, only a slightly larger sum, and sometimes even a smaller one, was repaid abroad than had been delivered in Spain. This discrepancy had nothing to do with the quality of the actual coins delivered and repaid. It existed even when the transaction was confined to one particular kind of money, such as the Spanish escudo, and therefore the question of weight, fineness, tale, &c. could not enter into the matter. Moreover, the same amount of labour and risk were involved in sending money from Spain to places abroad as in the other direction. Monetary theorists were called upon to explain this apparent anomaly. And here their subjective theory of value, already applied in the case of goods, came to their rescue. Since the agio could not be explained by objective factors, it must presumably be derived from a variation in the subjective value of money in the different countries. Estimation, declared our authors, was the real measure of the value of money as of goods, and estimation was determined by supply and demand, and by utility. Obviously, the relative abundance of money in Spain must be the thing that lowered its estimation and hence its exchange value.

This view was propounded a little timidly by Juan de Medina in 1550,¹ and in authoritative style by Domingo de Soto in 1553.² After examining in exhaustive detail the traditional objections to exchange transactions, and carefully refuting each of them in turn, Soto remarks that ‘the more plentiful money is in Medina the more unfavourable are the terms of exchange, and the higher the price that must be paid by whoever wishes to send money from Spain to Flanders, since the demand for money is smaller in Spain than in Flanders. And the scarcer money is in Medina the less he need pay there, because more people want money in Medina than are sending it to Flanders.’ Just as one measure of wheat delivered where the price of wheat is high may lawfully be exchanged for two measures where the price is low, so will it be with money. ‘It is lawful’, Soto concludes, ‘to exchange money in one place for money in another having regard to its scarcity in the one and abundance in the other, and to receive a smaller sum in a place where money is scarce in exchange for a larger where it is abundant.’ When the two sums are exchanged by reason of a divergence in place, not time, the transaction is not a loan but ‘the true exchange of two things present which are of equal value’. Some such doctrine had been current in the market-place long before it was echoed in the august precincts of the University of Salamanca. But the emphasis laid on it by Soto was new in a spokesman of the Church.

The next step in the evolution of the purchasing-power parity theory was taken by Azpilcueta Navarro in 1556. He had, he tells us, at one time rejected the view that abundance or scarcity of money was the factor that determined the course of the exchanges, but he had been led to alter his opinion by the ‘new arguments and considerations advanced’ (namely, by Soto). As Azpilcueta had spent a long life in the perusal of scholastic treatises, his designation of our theory as ‘new’ helps to confirm our version of its early history—more especially since Azpilcueta himself makes no claim to its discovery! Let us again turn to the passage that has already been presented as an important document in the history of the quantity theory (Text III). When we come to examine it more carefully we shall see that it was written to account for the behaviour of the international exchanges, not merely to explain fluctuations in the value of money within a single country. Azpilcueta introduces the factor of the price-level and replaces the concept of ‘estimation’ by that of purchasing-power. In doing so he brings Soto’s doctrine into line with modern theory, and anticipates not only Bodin but very much later economists.

Sanctioned by the authority of Soto and Azpilcueta, our theory was now ripe for diffusion. The work of vulgarization was begun by Azpilcueta himself, since his manual was written in Spanish instead of Latin and was meant for the guidance of simple priests as well as theologians. The theory was brought to the attention of laymen by our old friend Tomás de Mercado (Text IV, pp. 98–103), who dedicates his book to the merchants of Seville and explains that his teaching is based on the doctrine of the theologians of Salamanca. The merchants thus received back their own theory in a form that made it intellectually and morally acceptable.

A few years later quite a sharp controversy broke out in Valencia over the purchasing-power parity theory. Francisco García, who had read Saravia, Mercado, Soto, and Azpilcueta, closely follows Mercado in his theory of foreign exchange, and studies at great length the effect of any variation in supply and demand on the estimation of money. But Bartolomé de Albornoz, while agreeing that an increase in the circulating medium tends to raise prices, maintains that the relative purchasing-power of money in different countries cannot justly be taken into account in determining rates of exchange.¹ But Albornoz fought a losing battle. Domingo de Bañez, in a comprehensive discussion of the purchasing-power parity theory, concludes that in places where money is scarce, goods will be cheaper than in those where the whole mass of money is bigger, and therefore it is lawful to exchange a smaller sum in one country for a larger sum in another. Since the primary end for which money was ordained is the purchase of goods, it follows that wherever money is more highly esteemed for this purpose it may be exchanged for a larger sum than where it is less so. … We admit that one party may lawfully agree to repay a larger sum to another, corresponding to the amount required to buy the same parcel of goods that the latter might have bought if he had not delivered his money in exchange.¹

And Luís de Molina, the great opponent of Bañez in other controversies, fully endorses the latter’s theory of foreign exchange (Text VII). This early version of the purchasing-power parity theory was of considerable practical importance in its day. It removed the taint of usury that had formerly accompanied even the most genuine exchange transaction, and it also provided for the first time a satisfactory explanation of the movements of the exchanges.

It is evident, then, that in their analysis of the subjective factors that go to determine price, and in their formulation of the quantity theory of money and the purchasing-power parity theory of exchange, our Spanish writers made an original and useful contribution to monetary theory. Now, the type of doctrine they favoured is very much alive today. And, since the work of the School of Salamanca long continued to endure in other branches of law and theology, it seems at least possible that their monetary theory was also read and that it has played its part in the shaping of modern doctrine. We have already tried to show something of the debt owed by our writers to their medieval predecessors. It remains for us to see what influence, if any, they exerted on later generations.

---

¹ As early as 1730 the importance of the Spanish contribution to the science of natural law was recognized by Hermann Conring (Examen rerum publicarum potiorum totius orbis, ch. 1, in Opera, Brunswick, 1730) who stresses the influence exerted by Vitoria, Vasquez, and Covarrubias on Grotius. The best modern studies of the subject are E. Nys, Le Droit des gens et les anciens jurisconsultes espagnols, 1914, and J. B. Brown Scott, The Spanish Origin of International Law, 1932, and The Spanish Conception of International Law and of Sanctions, Washington, 1934.

¹Doctrinas de los tratadistas españoles de los siglos XVI y XVII sobre el comunismo, ed. Carmelo Viñas Mey, Madrid, 1945.

¹ The credit for the discovery of the School of Salamanca, so far as monetary theory is concerned, has been generally accorded by Spanish scholars to J. Larraz, who, in his Época del mercantilismo en Costilla, Madrid, 1943, pointed out the similarity of ideas that unites the various members of the School. But Larraz had predecessors. A. E. Sayous, in his ‘Observations d’écrivains du 16me siécle sur les changes’ (Revue économique internationale, November 1928), drew attention to the work of Tomás de Mercado, while the monetary theory of Azpilcueta Navarro has been excellently analysed by Alberto Ullastres Calvo (Anales de economía, Nos. 4–5, 1942).

¹ Reprinted with an introduction by R.P. Vicente Beltrán de Heredia, O.P. under the title of Comentarios de la Secunda Secundae in the Biblioteca de teólogos españoles.

¹ R.P. Venancio Carro, O.P., Domingo de Soto y su doctrina jurídica, Madrid, 1943.

¹Della Moneta, 1750, ch. 2.

¹Variarum ex pontificio, regio et caesareo jure resolutionum, libri 4, 1554, vol. ii, lib. 2, ch. 3.

¹Arte de los contractos, Valencia, 1573, p. 64.

¹ ‘Labour alone, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated.’ Adam Smith, Wealth of Nations, Bk. I, ch. v.

¹Veterum numismatum collatio, 1550.

¹ See p. 34 (note 5).

² By John Hales in his Compendious or brief examination of certain ordinary complaints, &c. (1581 edition).

¹ By the purchasing-power parity theory I shall mean in this essay the doctrine summarized in the following passage in the Bullion Report of 1810: ‘In the event of the prices of commodities being raised in one country by an augmentation of its circulating medium, while no similar augmentation in the circulating medium of the neighbouring countries has led to a similar rise in prices, the currencies of the two countries will no longer continue to bear the same relative value to each other as before. The exchange will be computed between these two countries to the disadvantage of the former.’ Quoted as an early example of the theory by G. Halm, Monetary Theory, Philadelphia, 1942, p. 222. For the history of the purchasing-power parity theory in the nineteenth century see J. W. Angell, Theory of International Prices, Cambridge, 1926, ch. III, sec. 4.

¹De restitutione et contractions tractatus, 1550.

²De justitia et fure, Lib. 7, Q. V, Art. 2.

¹ Op. cit., pp. 131–2.

¹De Justitia et Jure, 1594, Q. LXXVIII, De cambiis, Art. IV.