💰The greatest financial fraud in history

Today’s newsletter is about the biggest financial fraud you’ve never heard of: the Great Potosí Mint Fraud of 1649.

Let’s go back in history to the 1500s.

At the time, the Spanish Empire controlled much of South America. (see a map of the Spanish Empire in 1600 below)

In 1545, the Spaniards discovered one of the world’s richest silver mines underneath the Cerro Rico mountain in modern-day Bolivia.

Over the next 200 years, 80% of the world’s silver would come from the mine.

The Spaniards founded the town of Potosí near the mountain to organize the processing & transportation of the silver. (see an illustration from 1553 below)

In 1561, the Spanish king even sent an ornamented shield to Potosí that read:

A few decades later, they set up a silver coin mint in the city to turn the newly mined silver into Spanish coins.

By 1600, the city had:

• a population of 160,000+, making it one of the most populous cities in the world

• 22 dams in rivers around the mountain powering 140 mills, each of which ground silver ore before molding it into bars that would then become coins

The mining process was extraordinarily dangerous for the African slaves and native Peruvian people who were forced to labor in the mines, with locals calling Cerro Rico:

However, the silver mine proved very lucrative for the Spanish colonists.

The coins minted there, known as Potosís, became the first global currency.

They were used by traders from China, India, the Middle East, and anywhere Spanish merchant ships went. (see the flow of global trade at the time, with Potosí highlighted)

By providing a consistent currency that could be used by traders around the world, the spread of silver Potosí coins helped to secure Spain’s place as a world superpower.

Anthropology professor Jack Weatherford wrote that Potosí was:

Things began to change in the early 1600s, when rumors circulated that the Potosí coins were fraudulent.

In the 1640s, Spanish investigators determined that the coins, which were supposed to be 97% silver, were only 75% silver.

Someone had been stealing silver from the mint and intentionally minting coins that were diluted with copper.

The Spanish king sent a former inquisitor to Potosí, who found a major conspiracy by administrators in Potosí to debase the coins and enrich themselves.

Historian Kris Lane found that the Spaniards who perpetrated the fraud got away with it for so long by blaming slaves for stealing silver from the mint.

He said this was part of a coverup comparable to “Enron or Bernie Madoff.”

Many of those involved in the fraud were executed, and the mine continued to produce coins under new leadership.

But the reputational damage was done.

After the fraud was uncovered, the Potosís went from being the world’s most-trusted currency to one of the least-trusted.

In a 1650 decree, Spanish councilors in the city of Castile declared that the debased coins had killed:

By 1652, the coins were being rejected across Europe.

According to Lane, after news of the fraud spread worldwide, “merchants from Boston to Beijing were rejecting Potosí coins.”

Global trade slowed down, as creditors refused to accept the debased coins as payment.

Even Spanish soldiers refused to take payment in Potosís.

Although the Mint Fraud ultimately contributed to a broader decline of the Spanish Empire in the 1600s, the global spread of silver coins from Potosí helped to create a truly global economy for the first time.

Dr Ignacio Gonzalez Casasnovas, an expert on the history of Potosí, said that the city's silver mines:

The universal acceptance of the Potosí coins before the fraud was uncovered helped to integrate Asian economies into European colonial empires.

For the first time, Chinese & Indian merchants could trade with British & Spanish merchants in the same currency.

Nowadays, the U.S. dollar plays a similar role as a global reserve currency.

Even though we now live in a world of fiat currency, it’s worth thinking about the trust that goes into making everyone on Earth accept the same currency as money.

And here’s what Potosí looks like today:

ART OF THE DAY

Potosi Silver Mine by Theodor De Bry. 1590.