Spain’s preoccupation with gold and silver mining led to shortsighted outcomes resulting in European inflation and several national bankruptcies.
The Spaniards arrived in Potosi in 1545, ready to exploit silver deposits at Cerro Rico, referred to as “the richest mountain ever discovered anywhere on earth” by anthropologist Jack Weatherford. Establishing the largest city in the Americas at that time with a population of over 160,000 by the mid seventeenth century, the Spaniards extracted silver until the end of the eighteenth century. The silver from Potosi would change European economies and, according to Fernand Braudel, fuel “a strong and sustained inflation.”
Silver and Gold in Early European Exploration
At the point of early European exploration, beginning with the Portuguese efforts along the western coast of Africa, precious metals in Europe were scarce. Some gold entered Europe through the North African trade routes, flowing through Timbuktu. In Germany, silver mines operated but made no significant contribution to the overall demand for precious metal. According to John Hale, “Europe was genuinely desperate for metal to make into coin…without ample supplies of coin, there could be no real expansion of commercial and financial transactions.”
Once Europeans, notably explorers sailing for Spain like Columbus, reached the Americas, the influx of gold and silver would expand dramatically. Columbus established a gold quota for the Caribbean Arawaks; Cortes told Montezuma that he had a sickness of the heart that could only be cured by gold. By the mid sixteenth century, Spain discovered Cerro Rico which would produce 85 percent of all silver mined in the central Andes mountains.
Mark Abbott, who co-authored a study of pre Inca Potosi that was published in the September 26, 2003 Science journal, demonstrated that geological evidence suggests extensive silver mining in the region even before Incan times. The intriguing aspect of the study is that there is no firm accounting for all of the silver removed between A.D. 1000 to 1200.
Exploiting the silver at Potosi required a large labor force. Spain used both Africans, brought across the Atlantic as slaves, as well as indigenous Indian populations. Each miner was assessed a daily quota of one and a quarter tons of ore. The silver was separated from the ore and shipped in bars and coins to the coast with a final destination of Seville, Spain.
American Silver Bankrupts Spain
The silver glut dramatically altered the financial and commercial institutions in Europe. Spain used the windfall to pay for incessant wars as well as to fill orders for goods. Braudel writes that within the first fifty years of Spain’s looting the New World, Europe saw the introduction of 3.3 billion worth of silver, much of it passing through Spanish hands to other countries, such as the purchase of cannons from England. At the time the Armada sailed to England in 1588, English ships were still delivering cannon to Spain.
Although silver from Potosi and the Mexican silver mines led to a “true money economy” and “accumulation of wealth,” according to Weatherford, Spain and Portugal would become the ultimate losers. As economic historian David Landes writes, “Gold and silver mines are wasted assets.” Landes argues that Potosi, and other gold and silver mines, represented a seemingly limitless supply of precious metal, leaving no incentives for Spain to develop those industries that would produce long term prosperity such as in England. This led to several declarations of bankruptcy by Spain.
The historical and economic lessons highlight the irony that despite redirecting gold and silver to Europe, representing billions of dollars, Europe’s biggest “winner” wasn’t Spain but rather England, which found no precious metals but developed multifaceted manufacturing and agricultural colonies.