Sixteenth-century woodcut of Potosí Hill, also called Rich Hill (Cerro Rico)

Spain immediately recognized the enormous economic potential of Upper Peru. The highlands were rich in minerals, and Potosí had the Western world's largest concentration of silver. The area was heavily populated and hence could supply workers for the silver mines. In addition, Upper Peru could provide food for the miners on the Altiplano.

Despite these conditions, silver production fluctuated dramatically during the colonial period. After an initial fifteen-year surge in production, output began to fall in 1560 as a result of a severe labor shortage caused by the Indian population's inability to resist European diseases. Around the same time, Potosí's rich surface deposits became depleted, which meant that even more labor would be required to extract silver. The labor shortage was addressed by Francisco de Toledo, the energetic viceroy (the king's personal representative) of Peru, during a visit to Upper Peru in the 1570s. Toledo used the preColumbian mita to extract forced labor for the mines at Potosí from some sixteen districts in the highlands, which were designated as supplying mita. Adult males could be required to spend every sixth year working in the mines. Henceforth, Potosí mining depended on the mita as well as on a labor system in which relatively free men worked alongside those who were coerced. Toledo also regulated the mining laws, established a mint at Potosí, and introduced the mercury amalgam process. Adoption of the amalgam process was particularly important, according to Herbert S. Klein, in that it eliminated Indian control over refining.

The second problem, the exhaustion of the high-content surface ores, required technological innovations. Hydraulic power took on increased importance because of the construction of large refining centers. By 1621 a system of artificial lakes with a storage capacity of several million tons provided a steady supply of water for refineries. With the labor and technological problems resolved, silver mining flourished. By the middle of the seventeenth century, silver mining at Potosí had become so important that the city had the largest population in the Western Hemisphere, approximately 160,000 inhabitants.

The end of the seventeenth-century boom, however, was followed by a major decline in the mining industry. The exhaustion of the first rich veins required deeper and more expensive shafts. The rapid decrease of the Indian population as a result of disease and exploitation by the mita also contributed to the reduction in silver output. After 1700 only small amounts of bullion from Upper Peru were shipped to Spain.

Kings from the Bourbon Dynasty in Spain tried to reform the colonial economy in the mid-eighteenth century by reviving mining. The Spanish crown provided the financial support necessary to develop deeper shafts, and in 1736 it agreed to lower the tax rate from 20 to 10 percent of the total output. The crown also helped create a minerals purchasing bank, the Banco de San Carlos, in 1751 and subsidized the price of mercury to local mines. The foundation of an academy of metallurgy in Potosí indicated the crown's concern with technical improvements in silver production. The attempts to revive the mining sector in Upper Peru were only partially successful, however, and could not halt the economic collapse of Potosí at the beginning of the nineteenth century. Nevertheless, mining remained critical to the economy of Upper Peru because food supplies sent from the valleys to mining centers on the Altiplano influenced agricultural production.

Farming at first took place on encomiendas (see Glossary). The crown granted a small number of conquistadors the right to the labor and produce of Indians living on the encomienda, and by the 1650s there were some eighty-two encomiendas in Upper Peru. Encomenderos tended to monopolize agricultural production, control the cheap Indian labor, and collect the tribute that the Indians had to pay to the crown. Because encomenderos were difficult to control and abused their laborers, however, the crown tried repeatedly to bring Indians under its direct jurisdiction and control.

In the second half of the sixteenth century, agricultural production shifted from encomiendas to large estates, on which Indians worked in exchange for the use of land. Cochabamba became a major producer of corn and wheat, and the valleys produced coca leaves in increasing amounts during colonial rule.

In addition to mining and agricultural production, Indian tribute (alcabala) became an increasingly important source of income for the crown despite Indian migration to avoid payment. An early effort to collect tribute from Indians by moving them into villages or indigenous communities (comunidades indígenas) was unsuccessful because of resistance from both encomenderos and Indians. But by the late eighteenth century, an increase in the Indian population, the extension of tribute payments to all Indian males (including those who owned land), and a relative decline in income from the mines combined to make alcabala the second largest source of income in Upper Peru. Tribute payments also increased because Spanish absolutism made no concessions to human misfortune, such as natural disasters. The Indian tribute was increased by 1 million pesos annually.

Data as of December 1989