The prosperity of Lisbon was threatened when the Ottoman Empire invaded and conquered the Arab territories of North Africa, Egypt and the Middle East in the 15th century. The Turks were initially hostile to the interests of Lisbon and its allies in Venice and Genoa; consequently the trade in spices, gold, ivory and other goods suffered heavily. The merchants of Lisbon, many of them descendants of Jews or Muslims with links to North Africa, reacted by seeking to negotiate directly with the sources of these goods, without using Muslim mediators. The Portuguese Jews’ connections with the Jews of the Maghreb, and the conquest of Ceuta, allowed the Lisbon merchants to spy on the Arab merchants. They learned that the gold, slaves and ivory brought to Morocco in the great caravans travelled through the Sahara desert from the Sudan (which at that time included all the savannas south of the desert, the current Sahel). and that spices like black pepper were transported to Egyptian ports on the Red Sea from India. The new strategy of the merchants of Lisbon – Christian and Jewish Portuguese, Italian and Portuguese-Italian – was to send ships to the sources of these valuable products.

Prince Henry, based in the city of Tomar, was the major proponent of this initiative,. As headquarters of the Order of Christ (formerly the Knights Templar), and with a large community of Jewish merchants, the city was also very connected to Lisbon by its trade in grains and nuts (one of Lisbon’s main exports). The ready access to large amounts of capital and knowledge of the Orient that the Templars and the Jews had were key to achieving the objectives of the Lisbon merchants. Although Prince Henry was the driving force of this project, it was not actually of his own design, but rather had been conceived by the merchants of Lisbon. Those who supported the monarchy financially by the payment of taxes and customs tariffs, making it virtually independent of the resources of the territorial nobles, bent it to their own mercantilist purposes. Prince Henry was, however, the organiser of the state’s policy of dirigisme (state-directed investment): the substantial risk involved and the capital needed to finance the opening of new trade routes required the cooperation of all merchants throughout the realm (just as today many large capital projects are undertaken with international cooperation). Henry organised and supervised preparations by the Portuguese merchant fleet to reach the sources of gold, ivory and slaves, efforts that the merchants themselves had managed inefficiently. Using funds made available by the Order of Christ, mariners’ schools were founded to centralise the resources and practical knowledge of the merchants of Lisbon. Several expeditions were launched under contract to some of the most influential of the bourgeoisie in Lisbon, and the Gulf of Guinea was finally reached around 1460, the year Prince Henry died.

After Henry’s death, by which time the sea route was already open, the expansion of the African trade led to the rise of a private sector in the Portuguese economy. In 1469, Afonso V granted the Lisbon merchant Fernão Gomes the monopoly of this trade, in exchange for exploring 100 leagues southward on the West African coastline each year for five years, and payment of an annual rent of 200,000 reais. With his profits from the African trade, Gomes assisted Afonso in the conquests of Asilah, Alcácer Ceguer, and Tangier in Morocco, where he was knighted

Meanwhile, there were new attempts by the remaining feudal nobles of northern Portugal to retake control of the kingdom, frustrated as they were by the growing prosperity of Lisbon’s merchants in contrast to their own loss of income. Their purpose was to seek further conquest in North Africa, which offered the prospect of more and relatively easy victories. Such a campaign would be favorable to the interests of the feudal nobles, who stood to gain lands and tenants in Morocco by waging war, but was anathema to the merchant nobles and Jews in Lisbon who would be paying the extra taxes needed to finance such expeditions. The merchants favored investing the resources of the kingdom and its military forces in the discovery of new African and Asian markets, not in augmenting the power of the hostile and pro-Castilian Portuguese nobility. The ongoing disputes that John II engaged in against these nobles, with the backing of the merchants, demonstrate the underlying reality of the conflict between Lisbon and the former County of Portugal, birthplace of the nation: its resolution would set the future course of the country. Following the exposure of several conspiracies and various other incidents of their treachery, the northern nobles again sought the aid of their Castilian counterparts, but Lisbon and its merchants eventually prevailed: the ringleaders of one plot were executed, including the Duke of Braganza in 1483 and the Duke of Viseu in 1484. A great confiscation of estates followed and enriched the Crown, which now became the sole political power of the realm, aside from the Catholic Church. John II famously restored the policies of active Atlantic exploration, reviving the work of his great-uncle, Henry the Navigator. The Portuguese explorations were his main priority in government, pushing ever further south on the west coast of Africa with the purpose of discovering the maritime route to India and breaking into the spice trade. The colonial ventures in north Africa were abandoned to pursue trade in the new lands discovered further south.

As the islands of Madeira and the Azores were colonised, the Crown encouraged production of commercial products for export to Lisbon, primarily cane sugar and wine, which soon appeared in the markets of the capital. In the recently discovered land of Guinea, cheap products like metal pots and cloth distributed from Lisbon-controlled depots were exchanged for gold, ivory and slaves. The natives of the region relocated their economic activities closer to the coast for this European trade, but their settlements were left unmolested because such campaigns of conquest were deemed too costly. Sham weddings between officials of the trading posts and the daughters of local chieftains were made to facilitate commerce, albeit with an aim for profit, not colonisation. The result was a new impetus to trade in Lisbon: wheat was shipped from Ceuta, as well as musk, indigo, other clothing dyes, and cotton from Morocco. Significant amounts of gold were obtained from Guinea and the Gold Coast; other sources of this precious metal were sorely lacking in Europe of the late 15th century. Berber slaves from the Canaries and later, black Africans, were trafficked in the often brutal slave trade.

The best markets and most valuable products were to be found, however, in India and the East. The war between the Ottoman Empire and Venice resulted in greatly increased prices for black pepper, other spices, and silks brought by the Venetians to Italy from the Ottoman-controlled Egypt, which received Arabian boats sailing from India at its ports on the Red Sea (and thence to Lisbon and the rest of Europe). To circumvent the “Turkish problem”, a voyage of discovery to be captained by Vasco da Gama was organised, again on the initiative of the Lisbon merchants, but this time with royal funding; his boats arrived in India in 1498.

Before the end of the 16th century, the Portuguese merchant fleets had reached China (where they founded the commercial colony of Macau), as well as the island archipelagos of present-day Indonesia and Japan. They established the ports of call of the Eastern trade route and made commercial agreements with the chiefs and kings in Angola and Mozambique. A large colonial empire was consolidated by Afonso de Albuquerque, his armed forces securing those ports on the Indian Ocean in locations convenient for ships outbound from Lisbon against competition from the Turks and Arabs. Local territories were generally not seized, excepting the ports that carried on a profitable trade with the natives. Meanwhile, on the other side of the world, Pedro Álvares Cabral had arrived at Brazil in 1500.

As the Portuguese merchant fleets established the ports of call of the Eastern trade route and made commercial agreements with their rulers, Lisbon gained access to the sources of products it exclusively sold to the rest of Europe for many years: in addition to African products including pepper, cinnamon, ginger, nutmeg, herbs, and cotton fabrics, as well as diamonds from Malabar in India transported on the Carreira da Índia (“India Run”), it sold Moluccan spices, Ming porcelain and silk from China, slaves from Mozambique, brazilwood and Brazilian sugar. Lisbon also traded in fish (mainly salted cod from the Grand Banks), dried fruit, and wine. Other Portuguese cities, like Porto and Lagos, contributed to foreign trade only marginally, the country’s commerce being practically limited to the exports and imports of Lisbon. The city still controlled much of the commerce of Antwerp through its depot there, which exported fine fabrics to the rest of Europe. The German and Italian merchants, seeing their trade routes, by land in the case of the first, and by the Mediterranean sea in the second, mostly abandoned, founded large trading houses in Lisbon for re-exporting goods to Europe and the Middle East.

As Lisbon became the prime market for luxury goods to satisfy the tastes of the elite classes all across Europe: Venice and Genoa were ruined. The Lisbons controlled for several decades all trade from Japan to Ceuta. In the 16th century Lisbon was one of the richest cities in the world, and the city gained a mythic stature. England and the Netherlands were obliged to imitate the Portuguese mercantile model to halt the loss of foreign exchange. Meanwhile, merchants migrated from all over Europe to establish their businesses in Lisbon, and even some Indian, Chinese, and Japanese traders found their way to the city. Large numbers of African and a few Brazilian Indian slaves were imported at this time as well. During the reign of King Manuel I, festivals were celebrated on the streets of Lisbon with parades of lions, elephants, camels and other animals not seen in Europe since the time of the Roman circus. In 1515, Afonso de Albuquerque presented an Indian rhinoceros to King Manuel, who had it let loose in a ring with an elephant to test the reputed mutual animosity of the two species. The rhinoceros was then forwarded as a gift to Pope Leo X. In Europe the prestige of Lisbon and its land discoveries had grown so great that when Thomas More wrote his book Utopia, about the political system of an ideal and imaginary island nation, he tried to further its plausibility by saying that the Portuguese had discovered it.

To organise private trade and manage the collection of taxes, the great Portuguese trading houses of the capital were founded in the late 15th-century: the Casa da Mina ( House of Mina), the Casa dos Escravos (House of Slaves), the Casa da Guiné (House of Guinea), the Casa da Flandres (House of Flanders), and the famous Casa da Índia (House of India). Their huge revenues were used to finance construction of the Jerónimos Monastery and the Torre de Belém (Belém Tower), prominent examples of the Manueline architectural style (evocative of the overseas discoveries and trade), the Forte de São Lourenço do Bugio with its garrison and heavy artillery on an island in the Tagus, the Terreiro do Paço (Palace Square), the new and imposing Paço da Ribeira or Ribeira Palace (destroyed in the earthquake of 1755), and the “Arsenal do Exercito” (Military Arsenal), all raised next to the Mar da Palha; and even the Hospital Real de Todos-os-Santos (Royal Hospital of All Saints). Numerous palaces and mansions were built by the merchants with their profits. As the city expanded and reached nearly 200,000 inhabitants, the Bairro Alto urbanisation (known initially as Vila Nova de Andrade) was developed by the wealthy Galicians Bartolomeu de Andrade and his wife, and quickly became the richest neighbourhood in town.

The 16th century in Lisbon was the cultural golden age for Portuguese science and arts and letters: among the scientists who called the city home were the humanist Damião de Góis (friend of Erasmus and Martin Luther), the mathematician Pedro Nunes, the physician and botanist Garcia da Orta and Duarte Pacheco Pereira; and the writers Luís de Camões, Bernardim Ribeiro, Gil Vicente and others. Isaac Abravanel, one of the greatest Hebrew philosophers, was appointed the King’s Treasurer. All social classes benefited from the city’s prosperity, although the urban nobility serving in royal administration and the bourgeoisie benefited the most, but even the common people enjoyed luxuries unattainable to their English, French or German contemporaries. Heavy manual labour was done by African slaves and by Galicians. The first African slaves were sold in Praça do Pelourinho (Pelourinho Square); they were separated from their families, worked all day without pay, and were subject to brutal treatment. The Galicians, although uprooted from their homes, certainly found their lot improved, considering their miserable condition in rural Spain, and their language being very similar to Portuguese facilitated their integration into Portuguese society..

The Jewish population, as always, included some of the poor, as well as scholars, merchants, and financiers who were among the most educated and wealthy citizens in the city. A commentary on the Pentateuch, written in Hebrew by Moses ben Nahman, and published by Eliezer Toledano in 1489, was the first book printed in Lisbon. In 1496, the Spaniards expelled the Jews from Spanish territory, motivated by a fundamentalist spirit that demanded an exclusively Christian kingdom. Many of the Jews fled to Lisbon, and may have temporarily doubled its population. Although acknowledging the central importance of the Jews to the city’s prosperity, Manuel I decreed in 1497 that all Jews must convert to Christianity, only those who refused being forced to leave, but not before the expropriation of their property. His desire to wed Princess Isabel of Castile, daughter of the Catholic Monarchs, who required that he first expel all the Jews of Portugal, is generally given as his reason for the forced conversions. For many years these New Christians had practiced Judaism in secret or openly despite the riots and the violence perpetrated against them (many Jewish children were torn from their parents and given to Christian families who treated them as slaves). For now, they were tolerated till the start of the Inquisition in Portugal decades later. Without the disadvantage of being considered Jewish, they were able to rise in the social hierarchy, even to the higher ranks of the court. Again the elite descendants of the ancient families of the old aristocracy of Asturias and Galicia created barriers to the social ascent of Jews, who were often better-educated and more proficient than their antagonists.The anti-semitic movement among the Old Christians infected the common people, and in 1506, spurred by the perceived blasphemy of some injudicious remarks uttered by a converso over the occurrence of a supposed miraculous event at the Church of São Domingos, and then further inflamed by the invective of three Dominican friars, culminated in a massacre of New Christians, in which between 3,000 and 4,000 people were killed. The king was at Evora when these events occurred, but angered when he received the news, he ordered an investigation which resulted in two of the instigating friars being excommunicated and burned alive, and the Dominicans were expelled from their convent.

As a result of the dissension aroused by this catastrophe, King Manuel was persuaded by the territorial nobles to introduce the Inquisition (which did not become formally active until 1536) during the reign of his son and successor, King John III, and legal restrictions were imposed on all descendants of New Christians (similar to those the Old Christians had imposed  Besides the Inquisition, other social problems arose; in 1569 the great Plague of Lisbon killed 50,000 people.

The inquisition put to death many of the New Christians, and expropriated the property and wealth of many others. The riches of even some Old Christian merchants were expropriated after false anonymous complaints were made that the inquisitors accepted as valid, since the property of the condemned reverted to themselves. On the other hand, few merchants would not have had some New Christian ancestry, as marriages between the children of Christian and Jewish partners in the major firms were commonplace. The Inquisition thus became an instrument of social control in the hands of the Old Christians against almost all the Lisbon merchants, and finally restored their long lost supremacy.

In this climate of intolerance and persecution, the expansion of the economy enabled by the genius of the traders was undone by the large landowners (whose collectible rents were much less than the receipts of the merchants), and the prosperity of Lisbon was destroyed. The former climate of liberalism conducive to trade disappeared and was replaced by Catholic fanaticism and a rigid conservatism. The noble elites persecuted those who were alleged to be not of “pure blood” and truly Old Christian. Many of the merchants fled to England or the Netherlands, bringing their naval and cartographic knowledge with them as they settled in those places. Lisbon was taken by the feudal mentality of the great nobles, and the Portuguese merchants, with no security or social support and unable to obtain credit during the persecutions of the Inquisition, could not compete with the English and Dutch merchants (many of them of Portuguese origin) who subsequently took over the markets of India, the East Indies and China.

The young king Sebastian I was burning with zeal to go to Morocco and stop the advances of the Turkish-supported armies, an enterprise which held the promise of more land and revenues in North Africa for the nobles (they perhaps believing this would allow them to maintain their economic supremacy over the merchants), but the mercantile bourgeoisie also supported the effort as it would benefit Portuguese commerce in North Africa. Sebastian used much of Portugal’s imperial wealth to equip a large fleet and gather an army. He and the flower of the Portuguese nobility were killed in the military disaster of the Battle of Alcácer Quibir in 1578, his death triggering a succession crisis, where the main claimants to the throne were Philip II of Spain and António, Prior of Crato. The remaining Portuguese nobles and the high clergy were gathered once again to the arms of their like-minded counterparts, the Castilians, and supported Philip, a maternal grandson of Manuel I of Portugal. Philip sent an army of 40,000 men under the command of the Duke of Alba to invade Portugal. They defeated António’s troops at the Battle of Alcântara and Philip was crowned Philip I of Portugal in 1581. Thus he at least partly fulfilled the ambition of his father, the Habsburg King Carlos I of Spain (also Charles V of the Holy Roman Empire), who was famously quoted by Friar Nicolau de Oliveira: “Se eu fora Rei de Lisboa eu o fora em pouco tempo de todo o mundo” (“If I were King of Lisbon, I would soon rule over all the world.”) The union of Portugal with Spain lasted sixty years (1580–1640).