Summary & Analysis
During the Spanish colonial period, the economy was based on exploitation, both of land and of Indian labor. The first Spanish settlers organized the encomienda system by which Spaniards were given title to American land and ownership of the villages on that land. In return for promises to convert the Indians to Christianity, the Spanish were allowed to use the land and labor any way they saw fit. This system quickly turned into something very close to outright slavery: Indians were paid exceedingly low wages—if anything at all—to peform backbreaking labor on plantations and in mines. The Spanish believed that their God-given duty was to convert the Indians, and that the European notion of eternal salvation was a reward great enough to justify any possible mistreatment in this life. The result was a race for control of people more than of land, and not too surprisingly, abuses were so widespread as to become the norm.
By 1550, the Spanish were involved in a heated debate about the rights of natives in the New World, and the New Laws were promulgated ordering the Indians to be treated with more dignity and outlawing outright exploitation. However, as the American proverb goes, "if death came from Spain, we would all live a long life"; in other words, orders from Madrid took a great deal of time to reach the New World, and were heavily diluted in the process. The encomienda system was officially abolished in 1717, but it continued in outlying regions until Mexico achieved independence in the 1820s.
The other aspect of the Spanish colonial economy was the exploitation of land. Gold had always been a draw for conquistadors and later Spanish settlers; the gold and jewels stolen from the Aztecs were triumphantly displayed throughout Spain to drum up interest and support for the colonization venture. When Columbus was sent off to see what he could find by sailing west, Queen Isabella of Castile, who funded the journey, gave Columbus ownership of all the land he discovered—as long as the Crown collected 20% of the revenue. Called the quinto—which conveniently means "one-fifth"—this was the basis for all subsequent ownership grants from Castile.
At first, gold was the primary mineral mined in the New World, and in various parts of the continent conquered Indians were given quotas of gold that they had to bring to the Spaniards as rent. Failure to adhere to these strictures often meant terrible punishment at the hands of the Spanish. But in 1545, the Spanish demand for gold deliveries slowed after a remote mountaintop in Bolivia, at a place called Potosí, began to yield silver.
Lots and lots of silver. More silver, over the next hundred years, than had existed in all of Europe up to that time. Suddenly, the New World became a cash cow for Spain, which used its 20% of the proceeds to wage nearly endless wars in Europe. Unsurprisingly, the conditions for the Indian (and eventually African slave) labor in the mines was horrific. The arrival each autumn of the convoy carrying that year's silver from Vera Cruz, Mexico to Seville, Spain was celebrated with fireworks, public holidays, and lots of good wine for the bankers who gained much of the wealth.
By the eighteenth century, however, silver receipts were falling, meaning that the economy of Spanish America suffered as well. But by then, a trans-Atlantic trade in sugar, slaves and commodities made up for the shortfall.
At first, everything the Spanish needed in the New World was shipped from Spain. Food, nails, weapons, paper—everything. Before 1600, the encomenderos and other Spaniards paid for all these trade goods with gold and silver, and occasionally some foodstuffs like chocolate, corn, and potatoes. After 1600, things began to change. A critical mass of Spaniards meant that the major population centers of Mexico City (Mexico), Lima (Peru), and Vera Cruz (Mexico) began to produce some of these items for themselves. But the Crown wasn't thrilled with this; not unlike the English a century later, Spain wanted to keep its colonies as colonies. Among other measures to keep the colonies subservient to Spanish control, the making of paper was prohibited in the New World. This proved problematic, since the Spanish government depended on paper, and more paper and more paper. The eventual shortage got so serious that by the early nineteenth century,legal documents were crossed out and reused repeatedly.
And in an age where no one went anywhere without sailing ships, the Spanish made sure that there was no colonial production of goods such as canvas for sails, hemp for rope, and tar for sealing ships. Nonetheless, as always happens with these things, the Spanish economy suffered as a trade imbalance grew with the New World. In other words, since Mexico and Peru began producing clothing and other goods for themselves, there was little demand for Spanish products and Spanish merchants couldn't finance the purchase of all that silver.
The Slave Economy
One solution to this problem was slavery. So many Indians died in the early years of Spanish rule in the New World that there were few people left to actually work. The Spanish had no intention of doing it themselves, so they began to import African slaves as early as 1502. The first Africans, who came from long-established Portuguese slaving ports on the West African coast near the River Gambia, were put to work on sugar plantations in the Caribbean. West African slaves continued working the sugar plantations on Hispaniola (now Haiti and the Dominican Republic) and other islands until the mid-nineteenth century.
This solved the trade imbalance by giving the Spanish merchants something to sell in return for the gold, silver, and sugar produced in the New World. The losers here, as usual, were the Indians and the African slaves; life on a sugar plantation in the tropics was, to borrow the words of Thomas Hobbes, "nasty, brutish and short." Still, for hundreds of years, the slave economy and the "triangle trade"—slaves shipped to the Caribbean and sold for sugar and rum, which was shipped back to Europe and sold for guns, nails, colored cloth and other trade goods, which were then sent to Africa and sold for slaves—dominated American trade, both in Spanish America and farther north in British America.