By the early seventeenth century, the seeds of Spanish disaster were sprouting. Between 1610 and 1650, Spanish trade with the colonies in the New World fell 60 percent due to competition from local industries in the colonies and from Dutch and English traders. At the same time, the native Indian and African slaves who toiled in the South American silver mines suffered frightful epidemics of disease. Ultimately, the mines that filled the empire’s treasury started to run dry, and the quantity of metal produced steadily declined after 1620.

In Madrid, however, royal expenditures constantly exceeded income. To meet mountainous state debt, the Crown repeatedly devalued the coinage and declared bankruptcy, which resulted in the collapse of national credit. Meanwhile, manufacturing and commerce shrank. In contrast to the other countries of western Europe, Spain had a tiny middle class. To make matters worse, the Crown expelled some three hundred thousand Moriscos, or former Muslims, in 1609, significantly reducing the pool of skilled workers and merchants. Those working in the textile industry were forced out of business by steep inflation that pushed their production costs to the point where they could not compete in colonial and international markets.4

Spanish aristocrats, attempting to maintain an extravagant lifestyle they could no longer afford, increased the rents on their estates. High rents and heavy taxes in turn drove the peasants from the land, leading to a decline in agricultural productivity. In cities, wages and production stagnated. Spain also ignored new scientific methods that might have improved agricultural and manufacturing techniques because they came from the heretical nations of Holland and England.

The Spanish crown had no solutions to these dire problems. Philip III (r. 1598–1621) handed the running of the government to the duke of Lerma, who used it to advance his personal and familial wealth. Philip IV (r. 1621–1665) left the management of his several kingdoms to Gaspar de Guzmán, Count-Duke of Olivares. Olivares was an able administrator who has often been compared to Richelieu. He succeeded in devising new sources of revenue but clung to the grandiose belief that the solution to Spain’s difficulties rested in a return to the imperial tradition of the sixteenth century. Unfortunately, the imperial tradition demanded the revival of war with the Dutch at the expiration of a twelve-year truce in 1622 and a long war with France over Mantua (1628–1659). Spain thus became embroiled in the Thirty Years’ War. These conflicts, on top of an empty treasury, brought disaster.

Spain’s situation worsened with internal conflicts and fresh military defeats through the remainder of the seventeenth century. In 1640, Spain faced serious revolts in Catalonia and Portugal. In 1643, the French inflicted a crushing defeat on a Spanish army at Rocroi in what is now Belgium. By the Treaty of the Pyrénées of 1659, which ended the French-Spanish conflict, Spain was compelled to surrender extensive territories to France. In 1688, the Spanish crown reluctantly recognized the independence of Portugal, almost a century after the two crowns were joined. The era of Spanish dominance in Europe had ended.