Any influx of new money, if poorly managed, can prove as ruinous as it seemed alluring. Misdirected riches can be frittered away and, by enabling years or decades of dissipation, growing indebtedness, or both, can leave its former holders in far worse position than where they began. Spain was able to capture large amounts of gold and silver in the Americas in the 16th century. Not only did this cause inflation in prices at home but much of the wealth was used to finance wars instead of internal improvements. When the gold and silver flow from the New World dwindled, it left the country with little but debt to show for its discoveries.

American Gold

           One of the economic results of the Spanish colonization of the Americas was the discovery of large amounts of gold and silver. Significant Spanish imports of American gold and silver began in the 1550s. This was a windfall for Spain; less than a third of gold exports from the Americas was in payment for imports from Spain, most were remittances or other capital inflows. Though the extracted gold was largely privately owned, the state collected customs duties on imported gold. Income related to American bullion made up 25% of the Spanish king Philip II’s revenue near the end of the 16th century.


           In the 1500s, money was largely comprised of gold and silver coins. So, the importation of large volumes of these metals essentially increased the money supply of European countries. Increases in the money supply, all else equal, usually causes prices to rise and prices did indeed rise in Spain and the rest of Europe in the 16th century. By 1560, they had already doubled, much of this prior to the introduction of meaningful amounts of Spanish gold into Europe. Per annum, the inflation was nothing extraordinary by modern standards, never averaging much more or less than 1.5% across several countries.

           Since the inflation of the 16th and 17th centuries began before American gold and silver began appearing in Europe in meaningful quantity, there must have been other factors driving the inflation. Elsewhere in Europe, population growth was blamed, as agricultural production struggled to keep up, raising prices. But in Spain, which also saw inflation, the population was falling amidst dropping birthrates and emigration.

           Others attribute the inflation to increasing urbanization, which could increase the velocity with which money changes hands, increasing its ready availability without necessarily increasing physical supply. There was also increased silver production in Central Europe which likely contributed to the inflation, and perhaps initiated it.

Spanish 4 Real Coin c. 1538-41

           After the 1550s though, American gold and silver imports begin to look like a factor in driving prices higher. Of course, this metal was under Spanish control but the inflation spread to the rest of Europe from Spain. It even seems that inflation outside Spain might have been larger than that within the country.

           Still, this could be attributed to Spanish American gold and silver nonetheless. Price rises elsewhere were to some extent driven by bullion that made its way from Spain; periods of military conflict saw increased flows of gold from Spain to elsewhere in Europe. Also, the increase in Spanish prices required that other countries increase their stock of money to meet the growing demand for money occasioned by rising prices for Spanish commodities and manufactured goods.

           Contemporary commentators attributed the inflation to American gold and silver. Some of them from outside Spain lamented that they shared in the inflation without the same spoils from America that Spain had secured. Adding further evidence that Spanish gold imports from the Americas was driving the inflation is the fact that Spanish prices generally led changes in broader European prices in this period.


           The colonization of the Americas, rich in gold and silver, should have been a windfall for Spain but this turned out a mixed blessing instead as the wealth exported from America was poorly managed and came with its own costs. First, maintaining the empire was expensive. It required building a new bureaucracy. Also, Spain now had to protect these distant colonies and the seas separating them from Spain.

           Piracy and the interference of rivals threatened the Spanish position. Defending the empire was expensive and it did not help that the Spanish participated in many European wars in the 16th century. Finding its own domestic manpower insufficient, Spain resorted to hiring expensive foreign mercenaries to meet its needs. So, these wars meant that state expenditures frequently exceeded revenues.

           The Spanish crown also abstained from profiting from any debasement of gold and silver coins, meaning that the Spanish actually had one of the more stable monetary systems of the era. However, the state also collected no income from minting coins, called seigniorage. With one less source of income and large expenses, the state turned to borrowing.

           Large amounts of money were borrowed on the premise that future imports of gold and silver could repay any loans. Little of this borrowed money went to productive investments. As just one example, the country’s roads remained underdeveloped. Instead, the palace at El Escorial was built, at a cost supposedly equal to one year’s revenues of the kingdom of Castille, and a building frenzy saw new churches and monasteries put up across Spain.

Spanish Decline

           Perhaps the borrowing would have turned out fine had the premise on which the money was raised endured. However, by the late 16th century, the volumes of bullion imported from the New World began to disappoint. It turns out that expectations of gold and silver output were too high. Over time, what precious metal did arrive was applied towards payments on the debt and otherwise produced little but inflation for the Spanish economy.

           As the fiscal situation worsened, the government began minting new mostly-copper coins, this time earning seigniorage income and frequently debasing the coins. One Spanish state bankruptcy came in 1557 and it saw a restructuring of high-interest short-term debt.

           Not all was well with the private economy either. At the start of the 16th century, Spain had a well-developed silk and woolen goods industry. The inflation seems to have also damaged this so that these industries were less significant by the 17th century. Rising prices without improvements in quality made imports more competitive.

           Without sufficient precious metal imports and their related revenues, taxation of commoners in Spain increased. It didn’t help matters that nobles were exempt from taxes and Spain had a relatively large idle nobility. Meanwhile, a tax of 10% on all commercial transactions burdened merchants. Forced loans and seizures of property featured in the reign of Philip II, this in what should have been the wealthiest country in Europe. Together with the inflation, taxes on the poor made the cost of living in Spain very high relative to incomes, and led to more poverty. In the 16th century, real wages were at their highest at the century’s start, before hardly any of the benefits of the American discoveries could even be realized.

           Whether because of taxes, insufficient wages, or some other reason, writers of the period describe a problem of idleness. Many commoners preferred to beg than work. The concerned wondered how this could happen; they contrasted the wealth brought from America with the poor condition of Spaniards. In terms of the living standards of ordinary people, it seems as though Spain would have been better off without its conquests of the New World and without the gold and silver it found there.


           The extraction of American gold and silver would seem an unexpected cause of economic pain for the country that controlled that trade. It was also an unnecessary pain. The economic decay of Spain in the late 16th and early 17th centuries was unique even though the problem of inflation was not endemic to that country. It was also a mild rise in prices, hardly troublesome in modern times. The problem was not so much the influx of money but the manner in which it was used or misused. The riches could have been prudently invested but instead it was spent on wars and covering mounting payments on the debt, meaning ordinary Spaniards saw only the downside of these riches without their benefits.

More from the Tontine Coffee-House

        Read about the steady inflation caused by periodic debasements of ancient Roman coinage. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.     Chen, Yao, et al. “Reconstruction of the Spanish Money Supply, 1492–1810.” Explorations in Economic History, vol. 81, 2021.

2.     Fisher, Douglas. “The Price Revolution: A Monetary Interpretation.” The Journal of Economic History, vol. 49, no. 4, 1989, pp. 883–902.

3.     Miller, Ryan. “Spain’s Lesson in Hubris: Tracing Spain’s Financial Collapse to the Beginning of Its New World Empire.” The Classic Journal, University of Georgia, 7 May 2020.

4.     Moses, Bernard. “The Economic Condition of Spain in the Sixteenth Century.” Journal of Political Economy, vol. 1, no. 4, Sept. 1893, pp. 513–534.

5.     Munro, John H. “Money, Prices, Wages, and ‘Profit Inflation’ in Spain, the Southern Netherlands, and England during the Price Revolution Era: Ca. 1520 – Ca. 1650.” História e Economia: Revista Interdisciplinar, vol. 4, no. 1, 2008, pp. 13–71. 

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