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The Impact of the Spanish Empire on Spain's Economy in the Sixteenth and Early Seventeenth Centuries

By far the most important product of the Spanish Empire in the New World was bullion, which was brought to Spain by annual fleets from San Juan de Ulloa and Nombre de Dios. The gold and silver mines had once been owned by the Crown, but most were leased to individuals and companies, the Crown taking a portion of the treasure as rents. Hence each shipment contained both private and royal shares. Allowing for periodic fluctuations, the output of treasure increased steadily between 1530 and 1570, accelerated between 1571 and 1580, and reached a peak between 1586 and 1600 and again in the early seventeenth century. Thereafter, decline set in, becoming increasingly rapid after 1625. This process is illustrated in Fig. 2.

At first the treasure shipments had beneficial effects on Spain; Seville became one of Europe's major ports, and shipbuilding in northern Spain received a considerable impetus from the growing demands for merchant vessels. It seemed that Spain should become the major economic power in the world, controlling, as she did, most of the known reserves of bullion. Yet the reverse happened. After a brief spell of prosperity and prestige the Empire and treasure shipments slowly but inexorably induced a state of economic crisis which actually overlapped the period of greatest wealth in terms of bullion, the 1580s and 1590s. Spain never recovered, and her decline as a major power accelerated during the course of the seventeenth century. It was a classic example of the gross misuse of resources and of the mistaken belief that bullion inevitably means wealth and prosperity. Why did this decline take place?

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Spain was one of the least suitable states of Europe to be flooded by vast quantities of bullion, since she had a simple and unsophisticated economy which could absorb and benefit from only relatively small amounts of treasure. Above all, she had a poor and undeveloped agricultural base which was the result partly of large infertile areas and partly of primitive agricultural methods. England, France and the Netherlands came to realize that agriculture was the basis of any sound and balanced economy, as did their colonists in America and Africa. Industries also needed to be developed and foreign markets progressively and permanently exploited. Spanish industrial output in the sixteenth century was small and required a major stimulus. At first the influx of bullion benefited selective industries which related to its exploitation and carriage (like shipbuilding). But ultimately it prevented or undermined the development of others, as it became easier to import articles from other countries, using bullion as a means of exchange. The result was that a primitive economy became a distorted, rather than a developed, economy.

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Figure 5. Treasure imports into Spain

The relationship between Spain and her colonies was also unnatural and damaging. The system of mercantilism, upon which it was supposedly based, was not in itself at fault: a connection of mutual benefit could have been established on the basis of the colonies providing a variety of raw materials and Spain catering for all the needs of the colonists. This balance was not, however, achieved. For one thing, Spain concentrated heavily on the exploitation of bullion (which always accounted for over 80 per cent of the exports from the New World and actually reached 95.6 per cent).1 Inadequate attempts were made to diversify the products of Central and South America. Seville could have become the entrepot in Europe for spices, cochineal, maize, cassava, beans, sugar and cocoa, and this might have contributed to the solution of Spain's growing balance of trade difficulties. But the opportunity was not taken and the initiative passed to the Netherlands in the seventeenth century, Amsterdam becoming one of the great redistribution centres for tropical goods. The other side of the relationship also failed to develop. Spain could not meet the demand of the colonists in the New World for food and manufactured goods; indeed, the deficiency became so serious that special cargoes had to be obtained from elsewhere in Europe, particularly from England, France and Flanders. In failing to use the needs of her colonies to stimulate home industries, therefore, Spain relinquished one of the main benefits of mercantilism, a mistake which was not repeated by England, France and the Netherlands when these acquired empires.

The blame for this misuse of resources must lie partly with the Spanish Crown. Yet there was worse to come. The most glaring example of the dissipation of Spain's new-found wealth was the unrestrained foreign policy of Charles V (Charles I of Spain between 1516 and 1556) and Philip II (1556–98). Charles V's involvement in the Habsburg-Valois struggles and the conflict with Lutheranism were incredibly expensive: in 1540 he told Ferdinand: ‘I cannot be sustained except by my kingdoms of Spain.’2 Philip II's wars against England, the Netherlands and the Turks created unbearable demands on the Spanish economy; between 1586 and 1588 he spent 10 m. ducats on the Armada and a great deal more over a longer period in trying to suppress the Dutch Revolt. The basic and disastrous mistakes made by both rulers were to overestimate the amount of bullion available to finance foreign policy and to assume that the increase in the quality of treasure would continue indefinitely. (Philip II was greatly misled by the dramatic but temporary increase in the output of treasure during the 1580s which was due not to the discovery of richer veins but to the use of mercury in the recovery process.) In actual fact the royal share of the treasure was fairly small. Between 1546 and 1550 Charles V received 2 m. ducats out of a total amount of 6.6 m., and in the critical years of 1586–90 Philip II received 9.6 m., out of 28.6 m. (far less than the amount needed to finance the Armada and campaigns in the Netherlands). The solution of both monarchs was simple. They both assumed the future would bring vast returns and raised enormous loans from foreign bankers on the security of the next treasure shipments. The royal share was therefore mortgaged many years in advance and the debts sometimes could not be paid; the Crown was four times bankrupt during the reign of Philip II: in 1557, 1560, 1575 and 1596.

By the end of the sixteenth century it had become clear that much of the treasure from the New World was going straight through Spain to other European countries. This occurred in three ways. First, the private shares of the treasure shipments were used increasingly to pay, usually illegally, for the import of foreign–manufactured goods and corn. Jean Bodin, the French writer, observed in 1568: ‘The Spaniards … being compelled to secure from us grain, linens, cloth, woad, paper, books, even carpentry and, in short, all manufactures, sail to the end of the world to fetch for us gold, silver and spices.’3 Second, the royal shares of the shipments were used to pay foreign bankers for loans to finance Spanish foreign policy. At first these benefited the old banking systems of the Fuggers and Welsers and then, as these were affected by the bankruptcies of Philip II, the networks of France, the Netherlands and England. A third outlet for Spanish bullion was the army in the Netherlands; the coinage paid to the troops attempting to subdue the Dutch Republic soon leaked out into Central and Western Europe. In all respects, therefore, Spain acted as a sieve, a deplorable situation which did not escape the notice of contemporaries. In 1617, for example, the Cortes of Castile complained that the silver from the New World ‘immediately goes to foreign kingdoms, leaving this one in extreme poverty’.4

Spain had, therefore, extracted, imported and re–exported vast quantities of bullion, which adversely affected her economy and left no tangible benefits. The sixteenth century had seen growing financial crisis and a deteriorating balance of trade. During the seventeenth century the situation worsened as the quantity of treasure manifestly began to give out. Shipments into Seville declined from 42 m. ducats (1591–5) to 29 m. (1611–15), 21 m. (1631–5) and 9 m. (1651–5). Three main reasons have been advanced for this. First, the mines became less productive as the veins became poorer. Second, more treasure was retained by the colonists themselves and was sometimes exported illegally. Third, treasure shipments were increasingly vulnerable to attacks by foreign privateers who managed, for example in 1628 and 1656, to reduce the quantity of bullion actually reaching Seville.5

The effects on the Spanish economy in the seventeenth century were devastating. For one thing, the decline in the quantity of bullion affected the price pattern. During the course of the sixteenth century there had been a general rise in prices, affecting Spain and the rest of Europe. A combination of population pressures and the widespread circulation of precious metals had helped push up the price index sixfold between 1500 and 1600, inflation following the routes across which the treasure was dispersed. The connection was not readily accepted by the Spanish monarchy, even though a theologian at Salamanca University explained, as early as 1566, that ‘money is worth more where it is scarce than where it is abundant’.6 Inflation was undoubtedly most pronounced in Spain, bringing both positive and negative effects to the economy. On the positive side, certain select industries were stimulated while, negatively, high costs reduced Spain's competitive strength in Europe. The vital point, however, is that the Spanish economy as a whole had adjusted itself to rising prices. Once the treasure shipments fell away in quantity, and prices throughout Europe stabilized, Spain experienced a prolonged cycle of depression. The more advanced and balanced economies of France, the Netherlands and England, by contrast, made a relatively successful adjustment to the new conditions.

The reduction of the inflow of treasure combined with the colossal debts incurred by Philip II to threaten the security of the currency itself. The coinage was debased on several occasions during the reigns of Philip III (1598–1621) and Philip IV (1621–65); by 1665, indeed, silver had given way almost entirely to the base metals. Also, the decline of the royal share of the bullion resulted in a desperate search for alternative sources of revenue; to a debased coinage, therefore, was added a huge fiscal burden. The increase in taxation, mainly through the millones, alcabala, centosand octrois, affected most severely the peasantry and manufacturing and com mercial sectors, rather than the unproductive and parasitic nobility. Nor was there much evidence of increased tax returns. The royal treasury became more and more deficient so that, after Charles II's death in 1700, it was barely able to meet the funeral expenses.7

The whole story shows a lack of leadership, awareness and economic planning by the central government and it is difficult to envisage so extreme a situation today. The role of government in the economic structure of the state has obviously changed enormously but even by the standards of the sixteenth and seventeenth centuries the general policies of the kings of Spain can only be regarded as incredibly haphazard, piecemeal and unconstructive.

More general changes in Europe emerged as a result of the colonization of America and the import of treasure—there was a fundamental shift in the balance of political and economic power. This appears to have developed in two phases.

In the first three-quarters of the sixteenth century the balance of power shifted from the Mediterranean and Central Europe firmly in favour of the Iberian Peninsula. As the Ottoman Empire established a stranglehold in the fifteenth century on the medieval overland trade routes to the Far East, Italian ports began to decline in importance as redistribution centres and the advantage lay with Spain and Portugal, who established new oceanic trade routes and empires. The treasure shipments for a while confirmed Spain's supremacy. Under Charles V and for the first half of Philip II's reign Spain was unquestionably Europe's major military power, even if she was unstable economically.

The end of the sixteenth century and the first half of the seventeenth saw a further tilt in the balance of power: this time away from the Iberian Peninsula and into north–west Europe, to the advantage of England, France and the Netherlands. This was due to the steady commercial development of these countries, the economic strangulation of Spain, and the disastrous involvement of Spain in the Thirty Years’ War. Spain had overreached herself militarily as well as economically; although in a position of bankruptcy, she continued to aspire to a major role in international relations. As a result she fell a prey to more stable and fundamentally prosperous powers like France.

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