The world of money and finance was transformed by the discovery of America, as that Continent unjustly came to be called, or the Indies, as the Castilians named it. A flood of gold and silver washed over Europe raising the level of prices, transmuting trade and banks, changing the finance of governments, and giving rise to a new constellation of power, by pitting kings and queens, bankers and merchants, pirates and privateers, against each other.

The name of “Las Indias” reveals what the initial incentive was for the intrepid sailors that first undertook the crossing of the Atlantic in three minimal boats of some 51 gross tons each. Columbus wanted to reach the Portuguese Indies in the Far East through the back door, so to speak, sailing west. His flagship was a carrack, the Santa María; the other two, the Pinta and the Niña, caravels. It was later that galleons were used for the traffic of the Indies with Europe. One gets an idea of what it meant to sail across the Atlantic in those times if one remembers that the Santa María was lost in a storm in the Caribbean, and the Niña attacked by Berber privateers on her return. The hope was to obtain the spices of tropical India for which there was such a craving in Europe. But this was certainly not all. Gold appeared obsessively in Columbus’s diary. We only know this journal because it was amply quoted by friar Bartolomé de las Casas, the great critic of the Spanish conquest. The friar made great play of the auri sacra fames of the Castilians to question their alleged care for saving the souls of the natives.

Some gold was found in the island of Hispaniola and the other Caribbean islands, and sent to Spain. Then came the gold taken by force from the Aztecs in Mexico and of Incas in Peru. An abundance of votive and religious figures in gold were melted and sent back to Spain (and to smugglers). Last century, the great historian of the traffic of precious metals in the Spanish kingdoms and captaincies, Earl J. Hamilton (1899-1989), gathered data on the proportions of weight of gold and silver officially sent to, and registered by, the authorities in Seville: from 1503 to 1530, more than 95 per cent was gold. But the treasure of gold objects accumulated by the natives was exhausted after thirty years and the Spaniards had to turn to silver and become mining entrepreneurs.

The gold and silver industry

I have mentioned Seville, where the overseeing body “La Casa de la Contratación” was established 1503. All the traffic with the Indies was monopolised by this beautiful city. In 1717 the monopoly passed to Cadiz. When visiting this gleaming white city, at the mouth of its magnificent bay, one can still see the slender towers on top of houses from where signals were exchanged by eager speculators with the arriving “Flota”. Foreign merchants could not travel to the Indies but dwelt in the monopolising city. The subjects of the King of Spain outside Castile, Andalusia, and Navarre were forbidden to travel to the Americas. Even the Castilians wishing to cross the pond were carefully vetted: for one, Cervantes applied to go to America and was rejected, perhaps because he had spent some time in prison as a tax official under suspicion. It was not until King Charles III freed trade within his possessions in 1778 that the dwellers in the Kingdom of Aragon could trade with the Indies.

The Crown did not own the mines in America, be they of gold or silver. They were claimed by their discoverers and were private property. The metal obtained, however, had to be taken to the office of a public assayer to have its fineness tested and a fifth retained by the Crown. The metal bars or cakes were engraved or punched to show all this. They could then be sent to Spain. If they were taken to the colonial mints, the amounts had to be duly registered.

Strokes of luck

A number of fortunate coincidences made the Spanish Crown rich and powerful, as the distinguished and ingenuous Italian historian, the late Carlo Cipolla, noted. The first was the circle of winds that made it possible to navigate the Atlantic taking the southern route by the Canaries to the Caribbean, and the Northern route by the Azores back to Seville. A similar wind system made it possible to send a yearly ship to the Philippines from Acapulco across the Pacific along the southern route laden with silver pieces of eight, and bring it back by the northern route with silk cloth and other Chinese specialities and ornaments.

The second piece of luck was the discovery by chance of hugely rich silver mines in Potosí in the middle of a desolate plateau high up in the Andes, crowned by the “Cerro de la Plata”, the Silver Mountain. If this was not enough, systematic prospecting was crowned by the discovery of the rich mines of Zacatecas and Guanajuato near Tenochtitlán or Mexico City.

The third piece of luck came in the 1560s: the discovery and application of a new method of separating the silver from its mineral. Cinabrium is an amalgam (not a compound) of silver and metallic sulphur. The traditional process to recover the silver was to toast the mineral in furnaces, with a great expense of scarce charcoal. An enterprising merchant of Seville called Bartolomé de Medina proposed the new method of the “Patio” to separate the silver. It consisted in crushing the red cinabrium rocks on a wide surface, adding salt water and mercury to the gravel: the mercury displaced the silver in the amalgam, was then evaporated and the silver could be easily recovered. At first the needed mercury came from Almadén in the centre of Spain. The metal had to be transported in leather pouches across the ocean and then by mule to Zacatecas or llama to Potosí. Then a fourth piece of luck! An inexhaustible reserve of mercury was discovered in Huancavélica in the Andes.

What all this meant for the Indian workers can easily be imagined. In Mexico the system used to engross them into the mines was based on the Castilians acting as trustees or ‘encomenderos‘ of the natives. In Peru they simply took over the Inca arrangement of the ‘Mita‘ or rotation of indentured labour. The Spanish Crown tried to control excessive exploitation with ponderous laws but, in the Spanish expression, “las leyes se acatan pero no se cumplen“, laws are respected but not complied with. The poisonous effluvia of mercury were neither respecters of race and must have shortened the lives of miners and sailors in Spain and America.

Good traded between Seville (later Cadiz) and the Indies

“There would be no hamburgers in the United States, nor tomato sauce for the spaghetti in Italy but for the great movement of species started by Christopher Columbus. The beheaders of his statues in Los Angeles should totally renounce Big Macs and pizzas if they were consistent!”

Until the beginning of the 17th century only a minimal part of the goods needed in the Americas was produced locally. Cipolla quotes a suggestive list of the varied merchandises ventured on those frail ships apart from mercury. In 1594, the merchant Gaspar Gonzalez had his ships laden, with “spoons, candelabra, stills to produce rum, razors, leather goods, rosaries, crystal bead collars, cloth, shirts, cambric, velvet, taffeta, handkerchiefs, copper lanterns, and many other things”. The return goods, apart from silver, could be scarlet cochineal, blue indigo, medicinal plants, precious woods, sugar, tobacco, and silk from the Philippines. This trade however was only the surface of what has been called “the great Columbian exchange.” Some of it was conscious: Columbus took sugar plants, cattle, sheep and pigs to Hispaniola. Cortés invaded New Spain (Mexico today) with the help of horses. Coffee, wheat, and other cereals (except maize) were transplanted to the Indies. Some of the transfers were technical, especially the wheel. Going the other way were potatoes, tomatoes, chocolate, chillies, peanuts, manioc (to Africa), and tobacco. One deadly and involuntary export from Spain was the diseases against which the natives were not immunised: Thomas Grennes reminds us of the tragedy of 90 percent of the population in today’s Mexico dying of new illnesses in the century after conquest.1 In sum, as Grennes adds, there would be no hamburgers in the United States, nor tomato sauce for the spaghetti in Italy but for the great movement of species of plants and animals started by Christopher Columbus. The beheaders of his statues in Los Angeles should totally renounce Big Macs and pizzas if they were consistent!

To fight off pirates and privateers it became obligatory to travel in well-armed convoys. The earliest is known to have been organised in 1535. In July 1561 a decree laid down that there were to be two convoys per year on the “Carrera de Indias”, the Road to the Indies. One would leave Seville in March or April destined for New Spain to collect the Mexican silver and other goods in Vera Cruz; the other in August before the hurricane season, to ship back the Peruvian silver, brought to Cartagena de lndias across the Isthmus and by ship from the port of Callao. It must have been a magnificent (and tempting) spectacle to see the long train of merchants vessels in full sail, headed by the Captain’s armed Galleon, the rear brought up by the Admiral’s Galleon, and two or three men-of-war to windward of the convoy. The successes of pirates have been exaggerated. In total only three convoys were captured in two and a half centuries, one completely in 1628 by the Dutch privateer Piet Hain and two others partially by the English. Not one was captured on the Pacific route from Callao to Panama. The true headache of the Spanish authorities was smuggling. Ramón Carande, the author of the classic Charles V and his Bankers gives the example of a galleon that sank between Cadiz and Gibraltar in 1555. The declared treasure on board was 150 thousand pesos or pieces of eight. The cargo was retrieved and it was discovered that the ship was carrying another 150 thousand undeclared pesos. The measures taken to stop smuggling were not very successful!

How much gold and silver

The statistic everyone uses is that of E. J. Hamilton for declared gold and silver imported into Castile. Smuggling under its different forms must have increased that amount sizeably. But let me give the figures collected by the heroically patient Hamilton in Table 1.

Table 1.

Table 1.



Of course, if we compare these totals with the present day’s gold and silver production they seem puny: some 2,500 tonnes are the yearly average gold production today; and 26,800 tonnes that of silver. But there had been a dearth of the precious metals in Europe before 1492, so that these small quantities were nothing short of revolutionary for trade and for prices.

The story of the rivalry between gold and silver has been one of slow retreat of silver due to its progressively greater abundance. From 1497 to 1536 the official rate of exchange in Castile was 10.11 to 1. Then it fell to 10.61 in 1567. The 19th century bi-metallic systems rated silver at 15.1. The market today has it at around 74 to 1.

Much of this silver was coined, in pieces worth eight reals, “reales de a ocho” as they came to be known. These pieces came to be so well accepted that they were found in Japan, China, and India. Cipolla carefully explains that in the Far East they were valued by weight and not by size, so that one often finds them cut in half or quarters to fit the exchange. However, in Europe they became so popular that they were accepted at face value, which led to some authorities in Italy, for example, forbidding the circulation of coins proceeding from some mints in the Americas, for being underweight or lacking in fineness.

To give an idea of what these precious metals could buy, let me calculate what building the Monastery and Palace of El Escorial must have cost. Some of my readers may have visited that imposing pile. The sharp air of the mountains behind Madrid has kept the stone in its primitive neatness. Rarely is a royal palace started and finished within the life of its kingly builder. It is in a way the portrait of Philip II—severe, majestic, and almost forbidding. According to Father José Sigüenza, present in or around the Monastery for the duration of the works, from their inception in 1562 to its completion 1598, the year of the king’s death, its total cost was 5,260,568 ducats, to which he added the expense of other “embellishments”, resulting in a final figure of 6,200,000 ducats2 spent over 36 years, the equivalent of nearly one billion dollars at today’s gold prices.3

The sorrows of inflation

Of course, the flow of gold and silver pushed up prices in Spain and to a lesser extent in the rest of Europe. Hamilton was a ‘quantitativist’, by which I mean that he applied the ‘quantity theory of money.’ The very title of his book shows it: American Treasure and the Price Revolution in Spain, 1501-1650. To show this he made a brave effort to calculate inflation for those years in Castile. The comparatively small quantities of gold and silver did have a clear effect on prices.

At the time, inflation was noticed but wrongly attributed to the demand for goods coming from the Indies, or even more superficially to speculation. Today, critics have argued that the rate of increase in prices did not faithfully follow the increase of the money supply. In a closed economy prices in terms of gold and silver would tend to reflect proportionately the influx of the two metals. But much of the smuggled amounts passed to the rest of Europe. A large part of the sums received by the Treasury were spent abroad in the different wars and foreign exertions of the Crown. Still, inflation there was, causing a veritable revolution in the economies of Europe.

According to Hamilton’s careful calculations, based on the accounts of hospitals and colleges, from 1501 to 1550 prices in Andalusia, the New and the Old Castile, and Valencia increased by 127.74 percent. The rise continued, so that by 1600 the increase from 1501 had been 252 percent. Now 252 percent over 99 years is, according to my calculations, a 5 percent annual rate of inflation. This must have looked enormous to the ordinary consumer in a half monetised country, though to us poor subjects of authorities intent on maximising the inflation tax under the pretext of fostering growth, it may not appear so great.

For more on these topics, see “Gold Is Money, in Spite of Mr. Keynes”, by Pedro Schwartz, Library of Economics and Liberty, May 6, 2013; and the EconTalk podcast episode Peter Leeson on Pirates and the Invisible Hook. See also Inflation, by Lawrence H. White, and Mercantilism, by Laura LaHaye in the Concise Encyclopedia of Economics.

A paradoxical consequence of the unwonted abundance of precious metals was that money became scarce. The Crown, the Church, and the great noble houses lived beyond their means. Honour and Reputation led to continuous was and expensive show. The higher reaches of society were in thrall to German, Italian, and converted Jewish bankers. But this was not all. It is a well-known phenomenon that there comes a point during a sustained inflation when money disappears. Silver left for other parts where its purchasing power was greater. Small change disappeared, as its metallic content became greater than its face value. The Cortes complained bitterly because there was no wherewithal to conduct trade. The King, in this case Philip III, relented and graciously debased the currency and struck more copper coins. Of course, the real aim was to obtain more seignorage for the Crown—seignorage meaning the difference between the metal content and the higher face value. The first large issue of pure copper coins took place under Phillip III, as I say, in 1606. Then came the second large issue of copper money or vellón (old Spanish for ‘ingot’ or ‘bullion’) by Phillip IV in 1624-28 in great need of funds at the beginning of the Thirty Years War: the premium on silver then reached 55 percent. The third copper inflation took place in 1640 to 44, forced by the need to put down the rebellion of Portugal and Catalonia in the 40s and the silver premium reached 200 per cent in the Old Castile in 1642. One must not forget that the price level in silver terms was itself inflationary—a double whammy.

The most important consequence for Castile of the discovery and exploitation of precious metals in the Indies is another one: Spain in the 16th and 17th centuries suffered the so-called ‘oil curse’, a combination of monopolistic mercantilism and distorted politics, as happens to traditional societies that suddenly discover oil or gas. A plethora of rich mines together with a great technical advance in the extraction of silver made the precious metals the main, almost single, exportable product of the Spanish economy. This meant three things: that silver displaced other possible exports; that silver lost value in international markets; and that price inflation hit the domestic economy hard. The illusion of riches made the European rulers of the kingdoms and captaincies of the Indies pursue unreachable political and religious goals of domination—to the cost of Castile, Sicily, Naples, and Southern Flanders. For two centuries everything Spain touched seemed to turn to gold and silver. This has left us with a magnificent heritage in art, architecture, music, literature, and a language shared by twenty-three republics and a kingdom. However, it is one of the great lessons of classical economics that financial services do increase production, but money itself is not wealth. One cannot eat gold and silver, as Midas to his sorrow found out at the dawn of civilisation.


The Venetian gold ducat was a money of account, equivalent to the value of 0.11223 troy ounces in 1570, an ounce being worth some $1,350 on the market today. The 6.2 million ducats are equivalent to 21.6 metric tonnes in weight.

The minimum yearly cost of 20 infantry regiments and 10,000 cavalry is reckoned at 5,528,640 ducats by historian Modesto Ulloa (1977), pg. 110. And the yearly cost of a large war galley with its full complement and armament is given by the historian Modesto Ulloa at 10 to 11,000 ducats.


*Pedro Schwartz is “Rafael del Pino” Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He currently serves as President of the Mont Pelerin Society.

A first and shorter version of this essay was presented to the Conference organised by the London Bullion Market Association in Barcelona in October of this year.

For more articles by Pedro Schwartz, see the Archive.