Paraguay declared its independence from Spain (August 14, 1811). The Viceroyalty of Peru and the Audiencia of Charcas had nominal authority over Paraguay, while Madrid largely neglected the colony. Madrid preferred to avoid the intricacies and the expense of governing and defending a remote colony that had shown early promise but ultimately proved to have dubious value. The governors of Paraguay had no royal troops at their disposal and were instead dependent on a militia composed of colonists. Paraguayans took advantage of this situation and claimed that the 1537 cédula gave them the right to choose and depose their governors. The colony, and in particular the Asunción municipal council (cabildo), earned the reputation of being in continual revolt against the crown.
Tensions between royal authorities and settlers came to a head in 1720 over the status of the Jesuits, whose efforts to organize the Indians had denied the settlers easy access to Indian labor. A full-scale rebellion, known as the Comunero Revolt, broke out when the viceroy in Lima reinstated a pro-Jesuit governor whom the settlers had deposed. Because of their success, the Paraguayan Jesuits gained many enemies, and the reducciones fell prey to changing times. During the 1720s and 1730s, Paraguayan settlers rebelled against Jesuit privileges in the Revolt of the Comuneros and the government that protected them. Although this revolt failed, it was one of the earliest and most serious risings against Spanish authority in the New World and caused the crown to question its continued support for the Jesuits. The revolt was in many ways a rehearsal for the radical events that began with independence in 1811. The most prosperous families of Asunción, whose yerba maté and tobacco plantations competed directly with the Jesuits, initially led this revolt but as the movement attracted support from poor farmers in the interior, the rich abandoned it and soon asked the royal authorities to restore order. In response, subsistence farmers began to seize the estates of the upper class and drive them out of the countryside. A radical army nearly captured Asunción and was repulsed, ironically, only with the help of Indian troops from the Jesuit reducciones.
The revolt was symptomatic of the region's decline. Since the refounding of Buenos Aires in 1580, the steady deterioration in the importance of Asunción contributed to growing political instability within the province. In 1617, the Río de la Plata Province was divided into two smaller provinces: Paraguay, with Asunción as its capital, and Río de la Plata, with headquarters in Buenos Aires. With this action, Asunción lost control of the Río de la Plata estuary and became dependent on Buenos Aires for maritime shipping. In 1776, the crown created the Viceroyalty of Río de la Plata; Paraguay, which had been subordinate to Lima, now became an outpost of Buenos Aires. Located at the periphery of the empire, Paraguay served as a buffer state. The Portuguese blocked Paraguayan territorial expansion in the north, Indians blocked it - until their expulsion - in the south, and the Jesuits blocked it in the east. Paraguayans were forced into the colonial militia to serve extended tours of duty away from their homes, contributing to a severe labor shortage.
As a result of its distance from the rest of the empire, Paraguay had little control over important decisions that affected its economy. Spain appropriated much of Paraguay's wealth through burdensome taxes and regulations. Yerba maté, for instance, was priced practically out of the regional market. At the same time, Spain was using most of its wealth from the New World to import manufactured goods from the more industrialized countries of Europe, notably Britain. Spanish merchants borrowed from British merchants to finance their purchases; merchants in Buenos Aires borrowed from Spain; those in Asunción borrowed from the porteños, or residents of Buenos Aires, and Paraguayan peones (landless peasants in debt to landlords) bought goods on credit. The result was dire poverty in Paraguay and an increasingly impoverished empire.
The French Revolution, the rise of Napoleon Bonaparte, and the subsequent war in Europe weakened Spain's ability to maintain contact with and defend and control its colonies. When British troops attempted to seize Buenos Aires in 1806, the attack was repulsed by the city's residents, not by Spain. Napoleon's invasion of Spain in 1808, the capture of the Spanish king, Ferdinand VII, and Napoleon's attempt to put his brother, Joseph Bonaparte, on the Spanish throne, severed the major remaining links between metropolis and satellite. Joseph had no constituency in Spanish America. Without a king, the entire colonial system lost its legitimacy, and the colonists revolted. Buoyed by their recent victory over British troops, the Buenos Aires cabildo deposed the Spanish viceroy on May 25, 1810, vowing to rule in the name of Ferdinand VII.
The porteño action had unforeseen consequences for the histories of Argentina and Paraguay. News of the events in Buenos Aires stunned the citizens of Asunción, who had largely supported the royalist position. Discontent with the Spanish monarchy was dismissed because of a bigger rivalry with the city of Buenos Aires.
The porteños bungled their effort to extend control over Paraguay by choosing José Espínola y Peña as their spokesman in Asunción. Espínola was "perhaps the most hated Paraguayan of his era", in the words of historian John Hoyt Williams. Espínola's reception in Asunción was less than cordial, partly because he was closely linked to rapacious policies of the ex-governor, Lázaro de Rivera, who had arbitrarily shot hundreds of his citizens until he was forced from office in 1805. Barely escaping a term of exile in Paraguay's far north, Espínola fled back to Buenos Aires and lied about the extent of porteño support in Paraguay, causing the Buenos Aires cabildo to make an equally disastrous move. In a bid to settle the issue by force, the cabildo sent 1,100 troops under General Manuel Belgrano to subdue Asunción. Paraguayan troops soundly thrashed the porteños at Paraguarí and Tacuarí. Officers from both armies, however, fraternized openly during the campaign. From these contacts the Paraguayans came to realize that Spanish dominance in South America was coming to an end, and that they, and not the Spaniards, held the real power.
The Paraguayan royalists' ill-conceived actions inflamed nationalist sentiment. Believing that the Paraguayan officers who had beaten the porteños posed a direct threat to his rule, Governor Bernardo de Velasco dispersed and disarmed the forces under his command and sent most of the soldiers home without paying them for their eight months of service. Velasco previously had lost face when he fled the battlefield at Paraguarí, thinking Belgrano would win. Discontent spread, and the last straw was the request by the Asunción cabildo for Portuguese military support against Belgrano's forces, who were encamped just over the border in present-day Argentina. Far from bolstering the cabildo's position, this move instantly ignited an uprising and the overthrow of Spanish authority in Paraguay on May 14 and 15, 1811.