Spanish Monarchy ́s Monetary Problems in the Seventeenth Century: Small Change and Foreign Credit

______________________________________________________________ It is well known that the Spanish Monarchy found out some problems in its monetary system. So far, almost all the studies have been concentrated in the billon problem and inflation. However, small and large silver coins had also problems to circulate together in Castile. Without small change, among other consequences, it was more difficult to carry out small transactions and without large denominations the credit borrowed by the king to foreign bankers was more expensive. These problems were endogenous to the Castilian monetary system based on precious metals. Those problems were aggravated with the inflation of copper currency and the new war scenario in Flanders during the seventeenth century. The Monarchy took decisions against the market in order to avoid those problems. These measures did not solve the problems, but they affected the fineness of the currency, the price of transactions and the relationship between the Council of Finance and its foreign bankers. Theory helps to explain why those problems were intrinsically related to the Castilian monetary system. New historical evidence shows that the outcomes of the Crown’s solutions to control the number of small coins and to eliminate any premium on large coins are in line with predictions of new developments in monetary theory. Finance was provided by Spanish Ministry of Education (Grant EX2001-10862383)