I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Tuesday Book Club, I share an idea from a book.
In 1545, a silver rush began following Francisco Pizarro’s discovery of massive silver deposits in the massive Cerro Rico (“Rich Mountain”) in Peru. During the late 16th century, this mountain produced an estimated 60% of all the silver mined worldwide, funding the Spanish Empire and its expansion. It turned the citiy of Potosí, Peru into one of the largest and wealthiest cities on earth.
An ocean away, this mining boom drove an economic boom in Europe, which had been facing a shortage of silver, one of the main materials used as money, writes financial historian Niall Ferguson in The Ascent of Money:
At Potosí, and the other places in the New World where they found plentiful silver (notably Zacatecas in Mexico), the Spanish conquistadors therefore appeared to have broken a centuries-old constraint [on the supply of silver]. The initial beneficiary was, of course, the Castilian monarchy that had sponsored the conquests…. But the way the money was spent ensured that Spain’s newfound wealth provided the entire continent with a monetary stimulus. The Spanish ‘piece of eight’, which was based on the German thaler (hence, later, the ‘dollar’), became the world’s first truly global currency, financing not only the protracted wars Spain fought in Europe, but also the rapidly expanding trade of Europe with Asia.
But this dramatic expansion of the money supply was not without its drawbacks:
And yet all the silver of the New World could not bring the rebellious Dutch Republic to heel; could not secure England for the Spanish crown; could not save Spain from an inexorable economic and imperial decline. Like King Midas the Spanish monarchs of the sixteenth century, Charles V and Philip II, found that an abundance of precious metal could be as much a curse as a blessing. The reason? They dug up so much silver to pay for their wars of conquest that the metal itself dramatically declined in value – that is to say, in its purchasing power with respect to other goods.
In short, the Spanish empire in the faced inflation caused by a form of money printing, just like the United States is facing now. This was known as the Price Revolution, or the Spanish Price Revolution. Over 150 years, prices rose about 1.2% a year compounded, which doesn’t sound like much to us. But it was high in the 16th and 17th centuries relative to history.