Spending a Windfall

We study the effect of the discovery of precious metals in America on international trade from 1500 to 1810. Around 1500, there was a simultaneous discovery of precious metals and new trading routes. We construct a counterfactual scenario of new routes but no precious metals. The discovery of precious metals was a windfall to Europe. It increased the stock of precious metals in the world more than tenfold. Compared with the case of no trade routes and no precious metals, Euro-Asian trade increases up to 20 times. We find that American precious metals were at least as important as the new trading routes as a cause of observed trade patterns.