Treasure, competitiveness, and institutions: What caused the reversal of fortune of early modern Spain?

March 24, 2021 | Blog
Home > Treasure, competitiveness, and institutions: What caused the reversal of fortune of early modern Spain?

This project was awarded a £3,500 Carnevali Research Grant from the Economic History Society.

By Roberto Bonfatti (University of Padua, and University of Nottingham), Adam Brzezinski (University of Oxford), Eva Fernandez-Garcia (University Carlos III, Madrid) & Nuno Palma (University of Manchester & Institute of Social Sciences at the University of Lisbon)

18th century hand-coloured engraved map of the Iberian peninsula. Available at Wikimedia Commons.

[S]ince the discovery of the mines in America, industry has increased in all the nations of Europe, except in the possessors of those mines; and this may justly be ascribed, amongst other reasons, to the increase of gold and silver (Hume 1987, originally published in 1742)


Spain was one of the richest countries in Europe in the late Middle Ages, but in the early modern period (c. 1500-1800) Spain entered a period of secular decline (Álvarez-Nogal and Prados de la Escosura 2013, Prados de la Escosura et al. 2020). Different explanations for this decline have been advanced by scholars (e.g. Acemoglu et al 2005; Grafe 2012).

We aim to test empirically the Dutch disease and institutional resource curse hypotheses offered by Hamilton (1934), and Drelichman (2005a, b). Starting in the sixteenth century, Spain imported vast quantities  of precious metals for about three centuries (Palma 2019). These imports facilitated Spanish military dominance for decades but likely had long-term consequences that were detrimental to the mother economy because of the resource curse which operated in two ways.  First, the ‘Dutch disease’: the import of precious metals led to an appreciation of the real exchange rate, increasing the relative prices of non-tradable goods.  This made imports cheaper and exports more expensive for other countries, ultimately rendering traditional Spanish export industries (such as woollen products) less competitive. Second, the political resource curse exaggerated expectations of future inflows of precious metals and resulted in the Crown acquiring more public debt. The quality of institutions worsened and checks to executive power weakened (Henriques and Palma 2019). A substantial rent-seeking sector emerged which harmed Spain’s state and productive industries (Stein and Stein 2000; Drelichman 2005a, b, c; Drelichman and Voth 2008).


A new dataset to understand Spain’s secular decline

The theoretical mechanisms of the Dutch disease and political resource curse hypotheses are well understood, but their empirical investigation remains a challenge in the context of early modern Spain because of the limited availability of micro-level data. We propose to overcome this issue by collecting city-level data on tradable and non-tradable goods for three Spanish regions (Andalusia, New Castile, and Aragon). We focus on the period between the fifteenth and seventeenth centuries which encompasses Spain’s rise, stagnation, and eventual decline.

This data will also allow us to investigate whether the development of prices across Spain’s regions accords with the mechanisms of the resource curse.  We expect the negative impact to be strongest in regions most exposed to the import of precious metals – especially Andalusia.  The current literature is unable to investigate this hypothesis in detail because of a lack of sufficient data (Drelichman 2005a, p.363).

Our new dataset permits the construction of counterfactuals to evaluate the Dutch disease and the political resource curse.  By comparing the development of  regions most affected by imports of precious metals with those less affected, we will be able to project the regional development that would have occurred without these imports. We will also consider the related matter of how the economic and political resource curses interacted.

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Acemoglu, D., Johnson, S., & Robinson, J. (2005). The rise of Europe: Atlantic trade, institutional change, and economic growth. American Economic Review, 95(3), 546-579.

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Hamilton, E. J. (1934). American treasure and the price revolution in Spain, 1501-1650 (Vol. 1125). Cambridge, MA: Harvard University Press.

Henriques, A. and N. Palma (2019). Comparative European Institutions and the Little Divergence, 1385-1800. CGEH working paper series

Hume (1987). Essays, Moral, Political, and Literary. Indianapolis, IN: Liberty Fund, Inc. Liberty Fund. Originally published in 1742.

Palma, N. (2019). American precious metals and their consequences for early modern Europe. In: Handbook of the History of Money and Currency, edited by Stefano Battilossi, Youssef Cassis and Kazuhiko Yago. Springer

Prados de la Escosura, L., C. Álvarez-Nogal, and C. Santiago-Caballero (2020). Growth Recurring in Preindustrial Spain: Half A Millennium Perspective. CEPR Discussion Paper 14479

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