The discovery of silver at Potosí in 1541 (see “The Birth of the Global Economy” in Chapter 16) had produced momentous wealth for Spain, allowing it to dominate Europe militarily. Yet Spain had inherent weaknesses that the vast wealth of empire had hidden. It was a combination of different kingdoms with their own traditions and loyalties. Spanish silver had created great wealth but also dependency. While Creoles undertook new industries in the colonies and European nations targeted Spanish colonial trade, industry and finance in Spain itself remained undeveloped.

The impact of these developments became apparent during the first half of the seventeenth century. Between 1610 and 1650 Spanish trade with the colonies in the New World fell 60 percent due to competition from colonial industries and from Dutch and English traders. At the same time, disease decimated the enslaved workers who toiled in South American silver mines. Moreover, the mines started to run dry, and the quantity of metal produced steadily declined after 1620.

In Madrid royal expenditures constantly exceeded income. To meet state debt, the Spanish crown repeatedly devalued the coinage and declared bankruptcy, which resulted in the collapse of national credit and steep inflation. Meanwhile, commerce and manufacturing shrank. To make matters worse, in 1609 the Crown expelled some three hundred thousand Moriscos, or former Muslims, significantly reducing the pool of skilled workers and merchants.

Spanish aristocrats, attempting to maintain an extravagant lifestyle they could no longer afford, increased the rents on their estates. High rents and heavy taxes drove the peasants from the land, leading to a decline in agricultural productivity. In cities wages and production stagnated.

Spain’s situation worsened with internal conflicts and fresh military defeats during the Thirty Years’ War and the remainder of the seventeenth century. In the 1640s Spain faced serious revolts in Catalonia, Sicily, and the Spanish Netherlands. The Treaty of Westphalia, which ended the Thirty Years’ War, compelled Spain to recognize the independence of the Dutch Republic, and another treaty in 1659 granted extensive territories to France. Finally, in 1688 the Spanish crown reluctantly recognized the independence of Portugal. With these losses, the era of Spanish dominance in Europe ended.