The Empire of Gold

And the inflationary rot that destroyed it

Few eras in history fascinate me more than the Spanish conquest of the New World. Yes - I know. The European arrival was an unmitigated, apocalyptic disaster for the indigenous civilizations already living there. I’m fully aware of that.

But from the standpoint of history, it's an absolutely riveting tale. Especially the Spanish conquest, which unfolded with unprecedented speed and decisiveness. I’ve always been captivated by the stories of Hernán Cortés walking into Aztec temples, beholding walls of skulls, and believing he had entered a literal den of devil worshippers.

The sheer clash of cultures - the staggering contrast between the Aztec world and their Catholic conquerors - has always struck me as profoundly stark and deeply compelling. It’s history that reads like a myth.

But there’s a profound, timeless tale behind this story that really deserves its own analysis. In the speed and incredible success of the Spanish conquest, they sowed the seeds of their own demise.

You see - when the English and French came to the New World, they were genuinely seeking gold. And North America simply didn’t have that much.

But South and Central America had it in plentiful amounts. In fact, the story goes that when Cortes captured Montezuma, they demanded a room full of gold to release him, which the Aztecs provided.

In fact, the amount of gold in the New World dwarfed what was then available in the Old one. Spanish gold galleons became a thing - an endless, irresistible flow of wealth, gold, and possession from the New to the Old.

And for a time, it greatly enriched the Spanish Empire. In fact, at its peak, the Spanish Empire was one of the largest Empires in history.

But what if I told you that the tremendous flow of gold ultimately had a deleterious effect on Spain and savagely weakened its economy and currency? Because that’s exactly what happened.

The Reworking of the Global Monetary System

The amount of precious metals in the Old World pre-Columbus was relatively fixed. It came almost entirely from Africa (via trans-Saharan trade) or was recycled from older imperial hoards. In other words, Europe had a small and largely static quantity of gold and silver circulating among its kingdoms.

Mining techniques were rudimentary, and Europe’s reserves were effectively shared with the Middle East, China, and Africa - one vast but constrained trading network. Precious metals were scarce. And that scarcity lent the monetary system stability.

For centuries, Europe’s economy operated within this tight metallic ecosystem. Coins were minted, hoarded, melted, and re-minted - circulating slowly through kingdoms and city-states. Trade was often done via barter or credit, and large transactions relied on trusted coinage like the Venetian ducat or Florentine florin. But overall, the economy was starved of liquidity. Expansion was slow. Capital accumulation took time. And inflation was largely nonexistent.

Then came the New World.

What the Spanish discovered in the Americas wasn’t just land or labor - it was an economic supernova. The mines of Potosí in present-day Bolivia, Zacatecas in Mexico, and the looted treasuries of the Aztecs and Incas unleashed an unprecedented flood of gold and silver into Europe. Within decades, Spain was importing more bullion than the entire Old World had previously seen in centuries. The result? The most dramatic reworking of the global monetary system since the fall of Rome. Prices across Europe soared, purchasing power eroded, and the old rules of money - scarcity, restraint, balance - were thrown out the window.

Here’s a handy chart recreated by yours truly from Wikipedia that illustrates the sheer scale of loot from the Old to the New.

For discussion’s sake, I was a bit perplexed by the USD flows. From a modern sensibility, the $160 million in loot coming into Europe seems relatively minor. In today’s terms, that’s less than the net worth of most Silicon Valley residents. So, how could this relatively modest number have caused a monetary revolution?

The answer lies in context. Some estimates place global GDP in the 1600s at around $360 billion. But that’s misleading. The world wasn’t interconnected like it is today. Most of this bullion didn’t circulate globally - it entered Europe. So, we need to narrow our scope.

If Europe made up roughly 25–30% of global output, its GDP was likely in the range of $90–110 billion. More importantly, Europe’s monetary system was hard metal-based. There was no central bank. No fiat currency. And total coinage + bullion in circulation may have been just a few billion dollars at most - possibly even less than $1 billion in some regions.

That means the influx of New World treasure - sometimes exceeding $100 million per year - was proportionally massive. In effect, it expanded the money supply by an estimated 10% or more per year, for decades on end.

The results were visible. From 1500 to 1650, prices in Spain and Western Europe rose five to sixfold. The annualized inflation rate may not sound alarming - around 1% per year - but it was an earthquake in an era where price stability had been the norm for centuries. The old world ran on the logic of scarcity. Suddenly, it was awash in silver (and gold).

The (Slow) Destruction of the Spanish Empire

As always, history provides us with some incredibly illustrative (and alarming) examples of how this “sudden influx of new currency” can seriously harm an Empire.

The Spanish Empire - which was tremendously wealthy and powerful at its peak- highlights this.

Societal Effects: Rising inflation, coupled with relatively stagnant fixed incomes, means that regular people's earnings steadily eroded against rising prices. This is, in my opinion, not dissimilar to what’s happened in the United States since we decoupled from the Gold Standard. Somebody linked this page to me on a previous post - it’s well worth the gander (WTF Happened in 1971). Yikes.

Agricultural Decline: An interesting and pernicious effect of the influx of capital, was that resources and labor started to shift to more “lucrative ventures” tied to the empire’s growing wealth. The net effect, though, was a decline in agricultural production.

Again - the parallels to America are worrisome. We, too, have seen a huge, commensurate increase in force going into “lucrative” ventures like technology and finance. In fact, I’m going to write an article at some point here about what happens when societies (like the British Empire) peak and the share of the economy dedicated to “managing money” starts to rise commensurately. Objectively - it may be one of the less efficient and powerful uses of capital.

One could make the argument that directing the flow of capital results in investment in useful industries and new innovations. I would probably make that argument. But it’s also debatable if it makes sense for our best and brightest to all go into investment banking.

Economic Hollowing Out: One of the most devastating results of Spain’s bullion windfall was how it discouraged internal production. Why would you need to build a domestic manufacturing base when you can buy whatever you need with silver? So Spain imported most of its consumption - from Italian textiles to French luxury goods to Baltic naval supplies.

Meanwhile, a rentier class emerged - nobles and officials living off royal stipends or passive land while productive sectors like manufacturing (and agricultural income - as mentioned previously) declined. The result was a classic case of The Dutch Disease - way before the term truly emerged - where too much easy money flows in and insufficient real economic growth undergirds it.

So, instead of building a sustainable economy, Spain outsourced its needs and funded its empire on borrowed time and silver.

Sounds a bit like our current predicament.

Imperial Overreach: So this may be the most fascinating result. Because of the huge influx of gold and silver, the Spanish Empire could (for a time) finance significant imperial overreach. Think about it. Because there was such a massive flow of bullion into Spain, the government could borrow quite effectively (for a time). In fact, the Crown could actually borrow against future bullion shipments arriving.

It, too, is reflective (unfortunately) of the dynamics of the United States at present. We are the world’s reserve currency, which drives huge demand for our bonds and the dollar. Research the Petrodollar - a lot of the USD strength derives from the fact that, at present, oil must be transacted in USD. And this has led directly to what I’d say is some level of overreach on our own part.

Unlike us (so far), the Spanish Crown repeatedly defaulted on its debt obligations, with obvious, long-term, deleterious effects on its finances.

Investor Takeaways

If there's a modern lesson here, it's this: easy money breeds dependency. Whether it’s a flood of silver from Potosí or trillions in artificially cheap capital post-2008, productive discipline tends to wither when money becomes abundant. For investors, this means being skeptical of boom cycles and remembering that long-term wealth is rarely built through windfalls. It’s built through structure, reinvestment, and restraint.

Why Land & Property Stand the Test of Time

Amid all this, one group managed to stay ahead: those who owned land. In a world of rising prices and eroding currencies, landowners - especially those able to adjust rents - retained their purchasing power and status. This isn’t just a footnote. It’s a recurring pattern throughout history: when money fails, real assets endure.

And that’s the lesson for modern investors. We may not live in imperial Spain, but we do live in an age of monetary experimentation, massive government borrowing, and increasingly unstable paper promises. Owning productive, inflation-resistant assets - like real estate, farmland, infrastructure, or stakes in strong companies - is still one of the most durable ways to protect and compound wealth. It was true in 1600. It’s true now.