The Riches of Potosí and the Price Revolution of the Sixteenth Century
Bryan Taylor, Chief Economist, Global Financial Data
The Riches of Potosí are remembered even today. One of the greatest silver mines in the history of the world was discovered in Bolivia in the 1540s. Over the next two centuries, Potosí enriched Spain, provided silver for galleons that sailed to China, and during many years produced more silver than the rest of the world put together. It also contributed to one of the worst inflations in pre-modern history.
If you look at Figure 1, you have a chart of the price of commodities over the past 800 years. There was little change in the price of commodities between 1200 and the early 1500s, then a rise in prices between 1525 and 1640, little change in prices until around 1750, price stability in the 1800s and then a dramatic rise in prices since 1900. The increase in prices in the late 1700s was caused by the American War of Independence and the French Revolutionary/Napoleonic Wars, and the increase in prices since 1900 was caused by the inflation from wars and money creation by Central Banks, a process which is still continuing.
Figure 1. GFD Commodity Composite Index, 1200 to 2023
But where did the inflation in the 1500s come from? The price of commodities had remained stable for over three centuries, and then prices steadily rose for over 100 years before settling down between 1650 and 1750. Between 1548 and 1648, prices rose at the rate of 1.48% per annum. This may seem like an inconsiderable amount in the twenty-first century, but between 1218 and 1548, prices rose at the rate of 0.03% per annum. In essence there was no change in average commodity prices for over 300 years, but between 1548 and 1648 prices increased four-fold. What caused this increase in commodity prices? Was it excess demand? Was it a steady increase in the money supply? And why did it stop?
The Price Revolution
The Great Famine of 1315 to 1317 and the Bubonic Plague of 1346 to 1353 had a devastating effect on the population of Europe. The plague is estimated to have killed between 75 and 200 million people, or between 30 and 60 percent of the European population. During the 1400s and 1500s, the population slowly recovered, and increased demand for food. Urbanization increased in the 1500s and this placed pressure on the price of commodities. Evidence from Earl Hamilton showed that the prices of agricultural goods increased faster than the prices of non-agricultural goods during the 1500s making it likely that population growth was a contributing factor to the Price Revolution. But were increases in population the sole cause?
The Price Revolution was a sustained increase in prices that lasted over a century, and it seems unlikely that population growth alone could have produced this inflation. After all, as Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” During the 1400s gold and silver were scarce in Europe, and prices were stable. Europeans began searching for gold and silver and discovered new mines in central Europe. European output of silver doubled between 1470 and 1520, and when the mine at Joachimsthal was found in 1516, silver output increased even more.
One of the causes of European exploration of Asia and the discovery of America was a search for gold and silver. The Portuguese went around the continent of Africa to reach Asia, and Christopher Columbus thought he could cross the Atlantic Ocean and reach China. A terrestrial globe, created by Martin Behaim in 1492 still exists, and shows an ocean lying between Europe and China with nothing in between. So people thought they could cross the ocean to China, but they didn’t know how long it would take. Columbus discovered the globe was incorrect when he discovered America. Europeans took what gold they could from the Aztecs when they conquered them in 1521, but the greatest discoveries came from the silver mines in Zacatecas, Guanajuato and Taxco in Mexico, and the Potosí mine in Bolivia.
Europe succeeded in finding new gold and silver, and silver production increased dramatically. Silver production increased, rising from 7 million ounces per annum between 1493 and 1600 to 13 million ounces in the 1600s, 18 million ounces in the 1700s, and 51 million ounces in the 1800s. 60% of global sliver production came from South America (Bolivia and Peru) in the 1500s and 62% in the 1600s. After 1700, however, North America produced the largest share of silver, producing 57% in the 1700s and 62% in the 1800s. Mexico was the primary producer in the world between 1700 and 1850. Then the Comstock Lode was discovered, and production was split equally between the United States and Mexico. South America’s portion fell to 33% in the 1700s and 20% in the 1800s.
The Riches of Potosí
Silver was discovered in Potosí in 1545. It is one of the highest cities in the world at 4,090 meters (13,420 feet). At its height in the 1500s, the city included 200,000 people, making it one of the largest cities on the earth. The patio process, which used mercury amalgamation to extract silver from low grade ores was introduced in the late 1500s, and as can be seen in Figure 2, this dramatically increased production. Silver production gradually declined, but at its height, the majority of silver produced each year came from Potosí. Some of the silver went to Spain, but large shipments of silver also went to Acapulco where it joined the Spanish galleons headed for China to pay for goods that were exported to Europe.
Figure 2. Silver production at Potosi, 1549 to 1735
The silver from Peru and Mexico flowed to Spain which used it to pay for the goods they imported from the rest of Europe. Figure 3 illustrates consumer prices in France, Germany, the United Kingdom, and the Netherlands between 1500 and 1700. Inflation was similar in these countries between 1500 and 1600. Some monarchs added to the inflation by debasing the currency. King Henry VIII treated the English currency even worse than he treated his wives. He paid for his lavish style of living and foreign wars by reducing the silver in the currency from 92.5% in 1544 to 25% in 1551. King Henry VIII left it to his successor to restore the currency to its unadulterated form.
Figure 3. Consumer Prices in Germany, France, United Kingdom, and Netherlands, 1500 to 1700
The worst inflation in the 1600s occurred in Germany during the Kipper- und Wipperzeit between 1618 and 1622 at the beginning of the Thirty Years’ War. Local rulers debased coins to pay for the war. Prices increased at an annual rate of 31% in Germany, tripling in four years. In some cities, prices increased ten-fold. By comparison, France suffered almost no inflation between 1600 and 1700. This is illustrated in Figure 3. The Thirty Years’ War continued until 1648, but by the 1620s, the Price Revolution was drawing to an end. Prices stabilized and remained stable for the next 100 years.
Conclusion
The Price Revolution brought about one of the worst inflations of pre-modern times. Although expanding population and demand may have contributed to the higher prices, the main cause was the great influx of silver from Peru and Mexico that flooded Europe during the late 1500s and early 1600s. This problem was exacerbated when King Henry VIII debased the English currency, and German states lowered the quality of coins at the beginning of the Thirty Years’ War in 1618. As the supply of silver slowed, so did price increases. There would not be another global increase in prices until the French-English wars in the late 1700s and early 1800s drove prices further upward. Of course, if you compare the inflation of the 1500s with the inflation of the 2000s, it seems minor by comparison, but to someone living in the 1500s, it was a horror which they would never forget.
