Peru’s Silver Age

Can Peru’s economic problems be traced back to the 1980’s — or do we need to go back much further?

June 8, 2001

Can Peru's economic problems be traced back to the 1980's — or do we need to go back much further?

Peru: the very name suggested inexhaustible riches. When, at the beginning of the 16th century, the conquistadors had arrived from Spain, they found ton upon ton of gold and silver in the Incan king’s treasury. Just as important for them, vast quantities of the precious metals could be extracted from the mines in Peru’s mountains. On that basis, Peru and Mexico were the two most important centers of power at the beginning of the Spanish Empire.

Almost three centuries later, the two viceroyalties in Mexico and Peru still had much in common. The King of Spain ruled them both. They shared the same language, the same structure of government, the same currency, the same tax system — and, of course, the same religion.

But there were also great differences. Economically, Peru was sinking rapidly. Culturally, it was very far from being Mexico’s equal. It had recently gone through a major Indian uprising — and, perhaps most important of all, it was truly very far away from Spain.

Still, in the 16th century, Peru’s coastal city of Callao was the greatest port in South America. But by 1800, the viceroyalty of Buenos Aires had taken over and dealt the trade — and thus the prosperity — of Peru a mortal blow.

In theory, Spanish colonies could trade directly only with the mother country. Thus, a merchant could not legally send goods from Peru to Buenos Aires — which was a separate and distinct Spanish colony — then have them carted across to Lima. In fact, there was a great deal of smuggling, much to Peru's detriment.

The distance from Spain had another major consequence. Because Peru was invariably the last to get the news from Madrid (it normally took at least five months to arrive), its viceroys were far more autonomous than those of Mexico. While that sounds good at first, it also meant that a great deal depended on the talents and thoroughness of a single man.

There was another major difference as well. Unlike Peru, Mexico thought of itself as a country. Its borders were permanent. And within those borders, it had developed a national identity.

In contrast, Peru was a mere geographical entity — and a changing one at that. Until 1776, for instance, it had included Upper Peru, which is today’s Bolivia. But when the viceroyalty of Rio de la Plata was created, it included not only this vast area, but also all of today’s Argentina. This represented a double loss, for with the new territory carved out of the “old” Peru went its highly productive silver mines.

The shift in borders encouraged smuggling. English manufactured goods made their way into Peru and depressed domestic production even more. That left the pursuit of foodstuffs as a commercial product, but Peruvian agriculture was notoriously inefficient. In part, this was because it lacked capital, and in part because the Indians, who were forced to work on the farms, were slow and unproductive. By 1800, to the viceroy’s shock, Peru had become unable to feed itself.

Still, there was the silver. One major mine, that of Cerro de Pasco, remained. And it had to pay for virtually everything. In the period from 1785 to 1789, silver made up 88% of Peru's exports, some 22 million pesos. Unfortunately, this reliance on bullion was dangerous: production could fluctuate considerably. In 1792, silver exports reached 8 million pesos. In 1793, they sank to 1.5 million, rising the following year to 4 million.

In the end, it was just not enough. Every year, the balance of trade registered a three million peso deficit. That led to the ironic situation that in a country where silver was mined, there was a permanent shortage of coins. Equally bad was the fact that there was no capital accumulation, since Peru was paying for its consumption with silver. And that, in turn, meant less — and less effective — production.

This already bad situation was worsened by the lack of decent roads. Getting from one place to another in Peru was a major endeavor. Roads were virtually nonexistent, except for one from Callao to Lima, which ran some eight miles and was highly unsafe at night. Even though Mexican inns were admittedly bad, they still existed, as did passable highways. Peru, however, was still far more primitive.

In the end, what really hurt Peru was that it was not free of the colonial yoke in the time around 1800. Rather, fidelity to Spain was such that it was steadfastly adhered to whatever form the Spanish government might take. And Peru considered itself essentially a distant province of Spain.