Quest for riches and the colonization of the “New World”

June 15, 2021

“Behold rich lands! May you know how to govern them well!” Hernández Puertocarrero to Cortés in 1519

How did the discovery of large deposits of gold and silver in the “New World” affect the world economy? This paper argues that the long-run consequences were not the same everywhere. In Western Europe, the colonizers par excellence – Spain and Portugal – suffered negative consequences in the long run. The Spanish government enjoyed increased revenues, but it squandered those revenues on ultimately unsuccessful European wars. Precious metals enriched a merchant class in both Spain and Portugal, but both economies suffered from the Dutch disease. In addition, both countries suffered from the political resource curse, as pervasive rent-seeking distorted state institutions. By contrast, England and the Netherlands benefited from the influx of silver coins, which lowered transaction costs and increased fiscal capacity.

In Latin America, silver was the backbone of the colonial enterprise. The colonizers created a complex infrastructure to maximize the proceeds from mineral extraction. Without precious metals, the extent and depth of the Spanish empire would have paled compared to what actually occurred. The wealth from the metal-rich areas supported the imperial fringes and less affluent regions. Local elites, not the Spanish Crown, benefited most from mining and the subsequent growth. In Brazil, the absence of precious metals in the first two centuries gave rise to a plantation economy, which was overshadowed by the discovery of gold in the early 1690s.

American precious metals travelled far, transforming economies and policies in Asia and Africa. American silver lubricated the wheels of trade in Asia. Europeans were able to enjoy silk, tea, and porcelain from China and Japan thanks to silver from Latin America. Mining prosperity in America also fueled the demand for African slaves, contributing to the largest involuntary migration in history.

Click here to go to the paper by Leticia Arroyo Abad and Nuno Palma.