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How did American gold and silver affect the Spanish economy and prices in Europe?

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Map showing the transatlantic and global routes of major early voyages of discovery and exploration by Spain, Portugal, England, and France during the 15th and 16th centuries. The map traces the journeys of explorers such as Columbus, Cabot, Magellan, da Gama, and others, with labeled paths crossing the Atlantic and encircling Africa and South America, as well as lines of demarcation dividing Spanish and Portuguese exploration zones. — European exploration Map depicting the European exploration of the New World in the 15th and 16th centuries, including the voyages made by Christopher Columbus, John Cabot, Alonso de Ojeda and Amerigo Vespucci, Pedro Álvares Cabral, Ferdinand Magellan and Juan Sebastián del Cano, Giovanni da Verrazzano, Jacques Cartier, Sir Francis Drake, and others. The lines of demarcation represent an early division between the territory of Spain (to the west) and Portugal (to the east).

The influx of American gold and silver significantly impacted the Spanish economy and European prices during the 16th century. While prices for agricultural goods had begun to rise in Europe prior to the arrival of large quantities of American bullion, the massive influx of silver from mines in Mexico and Peru greatly aggravated inflation in Spain.1

In Spain, costs multiplied by three to five times during the 16th century, a phenomenon known as the price revolution. Despite this wealth, very little treasure was invested in domestic economic production. Instead, it was used for court display, to pay for foreign imports, and to finance the crown's costly wars and debts to German, Italian, and Netherlandish creditors. Because Spanish industry declined—partly due to high taxes and the high cost of goods—the bullion flowed out of the kingdom to pay for foreign merchandise, subsequently driving price increases across the rest of Europe. This period led scholars at the University of Salamanca to formulate an early quantity theory of money, recognizing that money loses value when it becomes abundant.21