The 16th century has often been called the “Golden Century” of Spain.
Figure 6. In the 16th century, Spain has achieved the most territorial gain. The territories owned by Spain in the Americas were known as “New Spain”.
The influence of Spanish armies, Catholicism and wealth was felt all over Europe. This greatness rested largely on the precious metals from the New World.
Figure 7. Phillip II was King of Spain from 1556 to 1598. During his reign the Spanish Empire attained its greatest power and widest geographical extent, but also suffered setbacks in its relations with the Protestant nations in northern Europe.
In the 16th century, Spain experienced a rise in population.
“A population increase leads to a demand of foods and goods. If the Empire does not have enough of those… the trouble is brewing!”
Since Spain expelled some of its best farmers and businessmen due to religious reasons, it could not meet the new demands.
“The basic economic model: when supply is lower than demand, prices rise! I would increase interest rates to slow down the demand, but, unfortunately, Spain did not have the Federal Reserve Board back then.”
Since the cost of manufactured goods increased, Spanish products could not compete with cheaper goods made elsewhere.
“Although I keep preaching about free markets being good, that is, perhaps, one drawback to the open market system… one country’s goods are cheaper than others, so it gains a competitive edge, and forces the other country’s economy “out of business”.
This price revolution severely strained government budgets. The Spanish king has repudiated the state debt several times, thus undermining confidence in the government and leading the economy into shambles.
“Here is the paradox. The more of a thing is freely available to people, the less it costs. For example, stone costs less than gold. Why? Because stone is available anywhere, while gold is very limited.”
Because there was too much supply of gold and sliver from the New World, the precious metals became less valuable. The people could buy less with their gold and silver money. Food increased sharply, and the economy spiraled downward. The Dutch and the English gradually replaced the waning economies of Spain and Portugal, where the situation was pretty much the same.
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