The Vagaries of the Sea: Evidence on the Real Effects of Money from Maritime Disasters in the Spanish Empire

We estimate the effect of money supply changes on the real economy by exploiting a recurring natural experiment: maritime disasters in the Spanish Empire (1531-1810) that resulted in the loss of substantial amounts of silver money. We find that negative money supply shocks caused Spanish real output to decline. A transmission channel analysis highlights slow price adjustments and credit frictions as mechanisms through which money supply changes affected the real economy. Especially large output declines occurred in textile manufacturing against the backdrop of a credit crunch that impaired merchants' ability to supply their manufacturers with inputs.