American Gold and the Great Inflation of 1550: when too much gold hurts
How the arrival of huge quantities of gold and silver from the New World created the first modern European hyperinflation
Between 1500 and 1650, the arrival of 17,000 tons of silver from the Americas caused 300-400% inflation in Europe. Jean Bodin first theorized the relationship between money and prices.
Potosi and the Spanish galleons
The Potosi mines in Bolivia (discovered in 1545) were the richest in the world. Every year, hundreds of tons of silver were extracted, processed, and shipped to Spain on escorted galleons. Between 1500 and 1650, the European continent received over 17,000 tons of American silver.
The quantity theory of money — 1568 version
The French philosopher Jean Bodin in 1568 was the first to theoretically understand what was happening: more circulating money means higher prices, not more real wealth. He described the Great Inflation as a direct consequence of the influx of precious metals.
It was the first formulation of the quantity theory of money — the same that underlies modern monetary policy.
Spain weakened, didn't enrich
Paradoxically, Spain — which directly received American gold — was harmed by it. Domestic prices rose, making Spanish exports uncompetitive. Inflation eroded real wages. Spain declared bankruptcy four times between 1557 and 1607.
- More money doesn't mean more wealth: the quantity theory teaches that real value depends on production, not the quantity of money.
- The "resource curse" is real: easy access to natural wealth often discourages industrial development.
- Inflation is always and everywhere a monetary phenomenon: Bodin understood this 400 years before Friedman.