With the discovery of the great silver lodes at Potosí in Perú Alto (Upper Peru--present-day Bolivia) in 1545 and mercury at Huancavelica in 1563, Peru became what historian Frederick B. Pike describes as "Spain's great treasure house in South America." As a result, the axis of the colonial economy began to move away from the direct expropriation of Incan wealth and production to sustain the initial Spanish population through the encomienda system to the extraction of mineral wealth. The population at Potosí in the high Andes reached its apogee in 1650 at about 160,000, making it one of the largest cities in the Western world at the time. In its first ten years, according to Alexander von Humboldt, Potosí produced some 127 million pesos, which fueled for a time the Habsburg war machine and Spanish hegemonic political pretensions in Europe. Silver from Potosí also dynamized and helped to develop an internal economy of production and exchange that encompassed not only the northern highlands, but also the Argentine pampa, the Central Valley of Chile, and coastal Peru and Ecuador. The main "growth pole" of this vast "economic space," as historian Carlos Assadourian Sempat calls it, was the Lima-Potosí axis, which served as centers of urban concentration, market demand, strategic commodity flows (silver exports and European imports), and inflated prices.

If Potosí silver production was the mainspring of this economic system, Lima was its hub. "The city of the Kings" (Los Reyes) had been founded by Pizarro as the capital of the new viceroyalty in 1535 in order to reorient trade, commerce, and power away from the Andes toward imperial Spain and Europe. As the outlet for silver bullion on the Pacific, Lima and its nearby port, Callao, also received and redistributed the manufactured goods from the metropolis for the growing settlements along the growth pole. The two-way flow of imports and exports through Lima concentrated both wealth and administration, public and private, in the city. As a result, Lima became the headquarters for estate owners and operators, merchants connecting their Andean trading operations with sources of supply in Spain, and all types of service providers, from artisans to lawyers, who needed access to the system in a central place. Not far behind came the governmental and church organizations established to administer the vast viceroyalty. Finally, once population, commerce, and administration interacted, major cultural institutions such as a university, a printing press, and theater followed suit.

The great architect of this colonial system was Francisco Toledo y Figueroa, who arrived in Lima in 1569, when its population was 2,500, and served as viceroy until 1581 (see table 3, Appendix). Toledo, one of Madrid's ablest administrators and diplomats, worked to expand the state, increase silver production, and generally reorganize the economy by instituting a series of major reforms during his tenure.

Native communities (ayllus) were concentrated into poorly located colonial settlements called ( reducciones-- see Glossary) to facilitate administration and the conversion of the native Americans to Christianity. The Incaic mita system was shifted from performing public works or military service to supplying compulsory labor for the mines and other key sectors of the economy and state. Finally, various fiscal schemes, such as the tribute tax to be paid in coin and the forced purchase of Spanish merchandise, were levied on the indigenous population in order to force or otherwise induce it into the new monetary economy as "free wage" workers. In these, as in many other instances, the Spaniards used whatever elements of the Andean political, social, and economic superstructure that served their purposes and unhesitatingly modified or discarded those that did not.

As a result of these and other changes, the Spaniards and their creole successors came to monopolize control over the land, seizing many of the best lands abandoned by the massive native depopulation. Gradually, the land tenure system became polarized. One sector consisted of the large haciendas, worked by native peasant serfs in a variety of labor arrangements and governed by their new overlords according to hybrid Andean forms of Iberian paternalism. The other sector was made up of remnants of the essentially subsistence-based indigenous communities that persisted and endured. This left Peru with a legacy of one of the most unequal landholding arrangements in all of Latin America and a formidable obstacle to later development and modernization.

Data as of September 1992