Financial history of the Dutch Republic
Encyclopedia
Dutch Republic
The Dutch Republic — officially known as the Republic of the Seven United Netherlands , the Republic of the United Netherlands, or the Republic of the Seven United Provinces — was a republic in Europe existing from 1581 to 1795, preceding the Batavian Republic and ultimately...
. The rapid economic development of the country after the Dutch Revolt
Dutch Revolt
The Dutch Revolt or the Revolt of the Netherlands This article adopts 1568 as the starting date of the war, as this was the year of the first battles between armies. However, since there is a long period of Protestant vs...
in the years 1585 - 1620, described in Economic History of the Netherlands (1500 - 1815)
Economic History of the Netherlands (1500 - 1815)
The economic history of the Netherlands is the history of an economy that some consider to be the first "modern" economy, continuously existing to this day...
, accompanied by an equally rapid accumulation of a large fund of savings, created the need to invest those savings profitably. The Dutch financial sector, both in its public and private components, came to provide a wide range of modern investment products beside the possibility of (re-)investment in trade and industry, and in infrastructure projects. Such products were the public bonds, floated by the Dutch governments on a national, provincial, and municipal level; acceptance credit and commission trade; marine and other insurance products; and shares of publicly-traded companies like the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
(VOC), and their derivatives. Institutions like the Amsterdam stock exchange
Amsterdam Stock Exchange
The Amsterdam Stock Exchange is the former name for the stock exchange based in Amsterdam. It merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext, and is now known as Euronext Amsterdam.-History:...
, the Bank of Amsterdam, and the merchant bankers helped to mediate this investment. In the course of time the invested capital stock generated its own income stream that (because of the high propensity to save of the Dutch capitalists) caused the capital stock to assume enormous proportions. As by the end of the 17th century structural problems in the Dutch economy precluded profitable investment of this capital in domestic Dutch sectors, the stream of investments was redirected more and more to investment abroad, both in sovereign debt and foreign stocks, bonds and infrastructure. The Netherlands came to dominate the international capital market up to the crises of the end of the 18th century that caused the demise of the Dutch Republic.
Introduction
To fully understand the peculiarities of the history of the system of public finance, and that of the closely related system of private (international) finance and banking of the Dutch Republic, one has to view it in the context of the general history of the NetherlandsHistory of the Netherlands
The history of the Netherlands is the history of a maritime people thriving on a watery lowland river delta at the edge of northwestern Europe. When the Romans and written history arrived in 57 BC, the country was sparsely populated by various tribal groups at the periphery of the empire...
and of its institutions, and of the general Economic History of the Netherlands (1500 - 1815)
Economic History of the Netherlands (1500 - 1815)
The economic history of the Netherlands is the history of an economy that some consider to be the first "modern" economy, continuously existing to this day...
. In contrast to that general history this is a sectoral history, concerning the fiscal and financial sector.
It is important to realize that those general histories differ in an important way from those of centralized Western European monarchies, like Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
, Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
and Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
in the early modern era. The Netherlands were highly decentralized from their origins in the Habsburg Netherlands
Habsburg Netherlands
The Habsburg Netherlands was a geo-political entity covering the whole of the Low Countries from 1482 to 1556/1581 and solely the Southern Netherlands from 1581 to 1794...
in the late 15th century, and (other than the monarchies just mentioned) successfully resisted attempts to bring them together under the centralized authority of a modern state. Indeed, the Dutch Revolt
Dutch Revolt
The Dutch Revolt or the Revolt of the Netherlands This article adopts 1568 as the starting date of the war, as this was the year of the first battles between armies. However, since there is a long period of Protestant vs...
that gave rise to the Republic of the United Netherlands, effectively resulted from resistance against attempts by the representatives of king Philip II of Spain
Philip II of Spain
Philip II was King of Spain, Portugal, Naples, Sicily, and, while married to Mary I, King of England and Ireland. He was lord of the Seventeen Provinces from 1556 until 1581, holding various titles for the individual territories such as duke or count....
, the Habsburg ruler of the country, to institute such a centralized state and a centralized system of public finance. Where in other instances the modern fiscal system resulted from, and was made subservient to, the interests of a centralizing monarchical state, in the Dutch instance the emerging fiscal system was the basis of, and was mobilized in the interests of the defense of, a stubbornly decentralised political entity.
Ironically, the Habsburg rulers themselves pushed through the fiscal reforms that gave the rebellious provinces the wherewithal to resist the power of the sovereign. Emperor Charles V
Charles V, Holy Roman Emperor
Charles V was ruler of the Holy Roman Empire from 1519 and, as Charles I, of the Spanish Empire from 1516 until his voluntary retirement and abdication in favor of his younger brother Ferdinand I and his son Philip II in 1556.As...
needed to increase the borrowing capacity of his government to finance his many military adventures. To that end it was necessary to put in place a number of fiscal reforms that would ensure that the public debt could be adequately serviced (thereby increasing the creditworthiness of his government). In 1542 the president of the Habsburg Council of State, Lodewijk van Schoor, proposed the levy of a number of taxes throughout the Habsburg Netherlands: a Tenth Penny (10 percent tax) on the income from real property and private loans, and excise taxes on beer, wine, and woollen cloth. These permanent taxes, collected by the individual provinces, would enable the provinces to pay enlarged subsidies to the central government, and (by issuing bonds secured by the revenue of these taxes) finance extraordinary levies (beden in old Dutch
Dutch language
Dutch is a West Germanic language and the native language of the majority of the population of the Netherlands, Belgium, and Suriname, the three member states of the Dutch Language Union. Most speakers live in the European Union, where it is a first language for about 23 million and a second...
) in time of war. Other than expected, these reforms strengthened the position of the provinces, especially Holland, because as a condition of agreeing to the reform the States of Holland
States of Holland
The States of Holland and West Frisia were the representation of the two Estates to the court of the Count of Holland...
demanded and got total control of the disbursement of the taxes.
Holland was now able to establish credit of its own, as the province was able to retire bond loans previously placed under compulsion as enforced loans. By this it demonstrated to potential creditors it was worthy of trust. This brought a market for voluntary credit into being that previously did not exist. This enabled Holland, and other provinces, to float bonds at a reasonable interest rate in a large pool of voluntary investors.
The central government did not enjoy this good credit. On the contrary, its financing needs increased tremendously after the accession of Philip II, and this led to the crisis that caused the Revolt. The new Regent Fernando Álvarez de Toledo, 3rd Duke of Alba
Fernando Álvarez de Toledo, 3rd Duke of Alba
Don Fernando Álvarez de Toledo y Pimentel, 3rd Duke of Alba was a Spanish general and governor of the Spanish Netherlands , nicknamed "the Iron Duke" in the Low Countries because of his harsh and cruel rule there and his role in the execution of his political opponents and the massacre of several...
tried to institute new taxes to finance the cost of suppression of public disturbances after the Iconoclastic Fury
Iconoclasm
Iconoclasm is the deliberate destruction of religious icons and other symbols or monuments, usually with religious or political motives. It is a frequent component of major political or religious changes...
of 1566 without going through proper constitutional channels. This brought about a general revolt in the Netherlands, particularly in the northern provinces. Those were able to withstand the onslaught of the royalist forces militarily, because of the fiscal basis they had built in previous years.
Of course, they now withheld the subsidies to the central government their taxes were supposed to finance. That central government was therefore forced to finance the war by transfers from other Habsburg lands, especially Spain itself. This led to an enormous increase in the size of the Spanish public debt, which that country was ultimately unable to sustain, and hence to the need to accept Dutch independence in 1648.
As explained in the general article on the economic history of the Netherlands, the political revolt soon engendered an economic revolution also, partly related to political events (like the rise of the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
and its West-Indies
Dutch West India Company
Dutch West India Company was a chartered company of Dutch merchants. Among its founding fathers was Willem Usselincx...
colleague), in other respects unrelated (like the revolutions in shipping, fisheries, and industry, that seem to be more due to technological innovations). This economic revolution was partly the cause of, and partly helped along further, by a number of fiscal and financial innovations that helped the Dutch economy make the transition to "modernity" in the early 17th century.
Public Finance
The "constitution" of the new Republic, the Union-of-UtrechtUnion of Utrecht
The Union of Utrecht was a treaty signed on 23 January 1579 in Utrecht, the Netherlands, unifying the northern provinces of the Netherlands, until then under the control of Habsburg Spain....
treaty of 1579, tried to lay the basis of a revolutionary new fiscal system. It put in place a rudimentary confederal budget system that charged the Raad van State (Council of State) with drafting an annual Staat van Oorlog (war budget). This budget
Government budget
A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected...
was presented in a "General Petition" to the States-General for (unanimous) approval.
The treaty next required that the tax revenues for the financing of this budget would be levied "...equally in all united provinces, and at the same rate.". Furthermore, it prohibited internal tariffs and other taxes discriminating against residents of other provinces. Alas, these two latter provisions were never implemented. Instead, the provinces continued the practice under the Habsburg rulers that the provinces paid a fixed quotum (the repartitie) of the budget. Holland's contribution was the norm from which the contributions of other provinces were derived. After some changes the quota
Quota share
A quota share is a specified number or percentage of the allotment as a whole , that is prescribed to each individual entity ....
were fixed in 1616 as follows (to remain unchanged till 1792): Friesland
Friesland
Friesland is a province in the north of the Netherlands and part of the ancient region of Frisia.Until the end of 1996, the province bore Friesland as its official name. In 1997 this Dutch name lost its official status to the Frisian Fryslân...
one-fifth of Holland's share; Zeeland
Zeeland
Zeeland , also called Zealand in English, is the westernmost province of the Netherlands. The province, located in the south-west of the country, consists of a number of islands and a strip bordering Belgium. Its capital is Middelburg. With a population of about 380,000, its area is about...
(after some diligent bargaining) 16 percent; Utrecht
Utrecht (province)
Utrecht is the smallest province of the Netherlands in terms of area, and is located in the centre of the country. It is bordered by the Eemmeer in the north, Gelderland in the east, the river Rhine in the south, South Holland in the west, and North Holland in the northwest...
and Groningen
Groningen (province)
Groningen [] is the northeasternmost province of the Netherlands. In the east it borders the German state of Niedersachsen , in the south Drenthe, in the west Friesland and in the north the Wadden Sea...
one-tenth each; Gelderland
Gelderland
Gelderland is the largest province of the Netherlands, located in the central eastern part of the country. The capital city is Arnhem. The two other major cities, Nijmegen and Apeldoorn have more inhabitants. Other major regional centers in Gelderland are Ede, Doetinchem, Zutphen, Tiel, Wijchen,...
9.6 percent; Overijssel
Overijssel
Overijssel is a province of the Netherlands in the central eastern part of the country. The region has a NUTS classification of NL21. The province's name means "Lands across river IJssel". The capital city of Overijssel is Zwolle and the largest city is Enschede...
6.1 percent; and Drenthe
Drenthe
Drenthe is a province of the Netherlands, located in the north-east of the country. The capital city is Assen. It is bordered by Overijssel to the south, Friesland to the west, Groningen to the north, and Germany to the east.-History:Drenthe, unlike many other parts of the Netherlands, has been a...
(though not represented in the States-General) 1 percent.
The States-General had only two direct sources of income: it taxed the Generality Lands
Generality Lands
The Generality Lands, Lands of the Generality or Common Lands were about one fifth of the territories of the United Provinces of the Netherlands, that were directly governed by the States-General...
directly, and the five Admiralties set up under its authority, financed their activities nominally from the Convooien en Licenten levied on trade. Otherwise, the provinces determined themselves how they would collect the revenues to finance their repartitie. Within the provinces there were other quota systems to determine the contributions of the cities and of the countryside. In Holland, the city of Amsterdam was by far the largest contributor (though this was different from Habsburg times, when Delft made the relatively largest contribution), which explained the influence that city wielded, even at the national level.
This system remained in place throughout the life of the Republic. Simon van Slingelandt
Simon van Slingelandt
Simon van Slingelandt, lord of the manor of Patijnenburg was Grand Pensionary of Holland from July 17, 1727 to December 1, 1736....
made an attempt in 1716 to reform it by giving more power to the center. He convened the Groote Vergadering (a kind of constitutional convention) in that year, prompted by the fact that the Generality faced a liquidity crisis
Liquidity crisis
In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
in 1715, when most provinces fell into arrears on their contributions. However, this august body rejected all reform proposals, opting instead for "muddling through." Ten years later Van Slingelandt was made Grand Pensionary
Grand Pensionary
The Grand Pensionary was the most important Dutch official during the time of the United Provinces. In theory he was only a civil servant of the Estates of the dominant province among the Seven United Provinces: the county of Holland...
of Holland, but on condition that he not press for constitutional reforms. Except for a reshuffling of the provincial quota in 1792, a real reform of the system had to wait till after the demise of the Republic. The public debt was consolidated on a national level in 1798, and the system of taxation only unified in 1806.
Taxation
As Holland was the most important province, usually paying 58 percent of the total budget, it is probably useful to concentrate the discussion on this province (also because other provinces modeled themselves on the Holland system). It based its fiscal structure on the system inherited from the Habsburg era, mentioned above, but extended it in important respects.
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
taxes, as they were levied at a fixed rate, not ad valorem
Ad valorem tax
An ad valorem tax is a tax based on the value of real estate or personal property. It is more common than a specific duty, a tax based on the quantity of an item, such as cents per kilogram, regardless of price....
(the revenue stamp
Revenue stamp
A revenue stamp, tax stamp or fiscal stamp is a adhesive label used to collect taxes or fees on documents, tobacco, alcoholic drinks, drugs and medicines, playing cards, hunting licenses, firearm registration, and many other things...
s introduced later in the 17th century basically fall in the same category as they tax transactions in commerce). In the 1630s this type of tax accounted for two-thirds of Holland's revenue. It then amounted to about ten guilders per capita (while per capita income for most people may have been much lower than the average of about 150 guilders a year). These taxes were levied on the seller of the good, who presumably passed them on to the consumer. They were collected by tax farmers
Tax farming
Farming is a technique of financial management, namely the process of commuting , by its assignment by legal contract to a third party, a future uncertain revenue stream into fixed and certain periodic rents, in consideration for which commutation a discount in value received is suffered...
, who bought their farms at auction, at least until the Pachtersoproer
Pachtersoproer
The pachtersoproer was a Dutch rebellion in the 18th century. The origin of the uprising was to be found in the economic malaise of the 1740s. It was the system of the rural tax-collection that brought serious complaints, combined with deep dissatisfaction at the way in which the regents and the...
in 1748 put a stop to this practice. In Holland the real abuses of the system, though perceived to be great, may not have been as serious as the French abuses of the tax farms in that country. This was, because the tax farmers were numerous, low-status, and politically subordinate to the city Regenten
Regenten
In the 16th, 17th and 18th centuries, the regenten were the rulers of the Dutch Republic, the leaders of the Dutch cities or the heads of organisations . Though not formally a hereditary "class", they were de facto "patricians", comparable to that ancient Roman class...
, for which they formed a convenient barrier against popular discontent. Because of this weak position the Dutch tax farmers may have been less able than their French colleagues to exploit their privileges.
Though the excises were a heavy burden on the common man, at least in the first quarter of the 17th century, somewhat surprisingly this regressive taxation burden may have abated somewhat in later years. There were several factors for this. Many excises incorporated mitigating provisions, like exemptions and sliding scales, that reweighed their impact in the direction of higher-income people (like graduation of the beer tax according to quality; conversion of the grain and salt taxes to per-capita taxes on assumed consumption; a progressive tariff for the tax on household servants, and on weddings and burials, that may be seen as wealth taxes, as most people were exempt). Finally, the relative importance of these excises in total revenue declined in later years. It accounted for 83 percent of total revenue in 1650, but only 66 percent in 1790.
The types of tax that were next in importance were the real and personal property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
es like the verponding, a kind of rates
Rates (tax)
Rates are a type of property tax system in the United Kingdom, and in places with systems deriving from the British one, the proceeds of which are used to fund local government...
. This amounted to 8.5 percent (the Twelfth Penny) of the rental value of all real property. This tax, first introduced in 1584, was based on assessments of land described in registers that were not updated. To remedy the problems resulting therefrom a new survey in 1632 resulted in new registers, and at this time the tax was fixed at 20 percent of land rents and 8.5 percent of house rental values, all levied on the landlords. Whether they passed these on was determined by economic conditions, of course.
Unfortunately, 1632 proved from hindsight to be a top year for property prices. As rents plunged after the middle of the century, the real burden of the verponding therefore increased sharply. Also, in the war years after 1672 extraordinary levies, up to three times a year, were often imposed, amounting to 100 percent of the normal verponding. Pressure for new assessments was therefore high, but in 1732, after a century, the registers were only revised for house rents. The loss of revenue was otherwise deemd to be unacceptable. Farmers had to wait for the lifting of the agricultural depression after 1740 for relief through higher incomes.
Finally, direct tax
Direct tax
The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.-General meaning:In the general sense, a direct tax is one paid directly to the government by the persons on whom it is imposed...
es on income and wealth were the third major pillar of the tax system in Holland. Due to the difficulty of assessing incomes, at first the emphasis was put here on taxes on capital, like the inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
, and a number of forced loans that amounted to taxes. Income taxes were attempted in 1622, and again in 1715, but they proved impracticable. In 1742 Holland tried to impose the personeel quotisatie (whose registers offer a useful source to the social historian), which remained in force for eleven years, before it was abandoned. This was a progressive income tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
, levied on incomes over 600 guilders (the highest quintile) at a rate, ranging from 1.0 to 2.5 percent.
Wealth tax
Wealth tax
A wealth tax is generally conceived of as a levy based on the aggregate value of all household holdings actually accumulated as purchasing power stock , including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and...
es proved to be more feasible. The Hundredth and the Thoudsandth Penny were regularly levied on real and personal property (as distinguished from the income from property, like the verponding) from 1625. In the difficult years after 1672, when war required high repartities, extraordinary wealth taxes were imposed very frequently, amounting to a total levy of (theoretically) 14 percent of all real property, seigneurial rights
Heerlijkheid
A heerlijkheid was the basic administrative and judicial unit in rural areas in Dutch-speaking lands before 1800. It originated in the feudal subdivision of government authority in the Middle Ages. The closest English equivalents of the word are "seigniory" and "manor"...
, tithes, bonds, and personal objects of value. In 1674 Holland put this ad hoc taxation on a regular footing by founding a new register (the personele kohier). From then on the 100th and 200th penny could regularly be collected.
Finally, a curious predecessor of a tax like the dividend tax
Dividend tax
A dividend tax is an income tax on dividend payments to the stockholders of a company.-Collection:In many jurisdictions, the government requires the company to withhold at least the standard tax, paying this to the national revenue authorities and paying out only the balance to the...
was the levying after 1722 of the 100th and 200th penny on the income from provincial bonds, which then replaced the general wealth tax just mentioned. This withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
proved to be very convenient, but had the unintended consequence that the effective yield of Holland bonds (other bonds were not taxed) was commensurately lowered. Holland therefore had to pay a higher rate on its bonds, which more or less defeated the purpose.
All these taxes imposed a considerable burden on the Dutch tax payer, compared to his contemporaries in neighboring countries. There were no exemptions for churchmen or aristocrats. The Republic had sufficient authority to have these burdens accepted by its citizens, but this was a function of the "bottom-up" implementation of the taxes. Municipal and provincial tax authorities possessed more legitimacy than central authorities, and this legitimacy was reinforced by the fact that the broad tax base enabled local authorities to tailor taxes to local circumstances. The taxation system thereby underpinned the federal structure of the Dutch state.
Other than for other provinces, a reasonably accurate picture can be sketched of developments in revenue and tax burden in the province of Holland. In the two decades of the Revolt after 1568, Holland's revenues exploded in a tenfold increase compared to pre-Revolt years, proving that Dutchmen were not opposed to paying taxes per se (despite the fact that they had started a revolution about Alva's taxes). The revenue kept growing after 1588, rising threefold in the period till 1630. However, the real per-capita tax burden remained constant in the years up to 1670. This reflected the tremendous economic growth in the Golden Age, on the one hand, and a rapid expansion of the tax base, commensurate with this growth, on the other hand.
As in the economy in general, there was a sharp break after 1672. Whereas the economy stagnated, expenditures in connection with the wars, and hence taxes too, rose. Taxes doubled by the 1690s, but nominal wages (as distinguished from real wages, which rose due to the general decline in price levels) remained constant. At the same time the tax base almost certainly shrank as a consequence of the economic decline. This resulted in a doubling of the per-capita tax burden. This development levelled off after the Peace of Utrecht in 1713, when the Republic entered a period of peace and neutrality (though there was a spike when it was dragged into the War of the Austrian Succession
War of the Austrian Succession
The War of the Austrian Succession – including King George's War in North America, the Anglo-Spanish War of Jenkins' Ear, and two of the three Silesian wars – involved most of the powers of Europe over the question of Maria Theresa's succession to the realms of the House of Habsburg.The...
). However, it did not result in a reduction of the per-capita tax burden up to the final crisis of the Republic and its economy after 1780. Then that tax burden again sharply increased. Presumably, the other provinces globally followed these developments, though at a distance, because of their different economic circumstances.
Other than for Holland (for which more data are known) revenue figures for the Republic as a whole are available for 1716, when it amounted to 32.5 million guilders, and again for 1792 (when the repartitie-system was revised for the first time), when it came to 40.5 million (inflated) guilders. After 1795 the Batavian Republic
Batavian Republic
The Batavian Republic was the successor of the Republic of the United Netherlands. It was proclaimed on January 19, 1795, and ended on June 5, 1806, with the accession of Louis Bonaparte to the throne of the Kingdom of Holland....
collected regular revenue statistics. These figures allow the following observations: in 1790 the per-capita tax burden at the national level in the Republic was comparable to that in Great Britain, and twice that in France (which had just started a revolution about that tax burden). This reflected a rapid rise in tax burdens in both France and Great Britain during the 18th century in which both countries made up a large difference with the Republic (but also in income levels, of course). Extrapolating backward, the Dutch level of taxation in 1720 probably was double that of Britain. Dutch innovations like excises and stamp taxes were followed with a lag of a century in the larger countries.
The stagnation of the growth in the Dutch per-capita tax burden during the 18th century (while the Republic's rivals made up their arrears) may reflect both a lack of political will on the part of the authorities to exact higher burdens, and economic limits to taxation. The latter hypothesis is indirectly supported by the fact that after 1672 the tax system became far less regressive than before. Apparently, the common man was spared a further increase of his tax burden. Henceforth, "the rich" were burdened more severely by efforts at direct taxation, than during the Golden Age. However, this applied more to people rich in land and (provincial) bonds, than to people investing in commerce and foreign bonds. Source of income was therefore very important. This also contributed to the peculiar developments around the public debt in the 18th century.
Public Debt
Usually, taxation and borrowing are seen as alternative means of financing public expenditures, at least if they are available with equal ease. Borrowing is sometimes inevitable when a spike in expenditures would necessitate an unsupportable spike in taxation otherwise. This was the usual justification for taking on public debt in the days of the Habsburg Netherlands, when the province of Holland built up an enviable public credit. Alas, in the first years of the Revolt this credit evaporated and Holland (let alone the Republic) was forced to increase taxation very strongly (as we have seen), partly by resorting to forced loans (which at least offered the solace of paying interest and holding out the hope of ultimate redemption). Voluntary loans were only to be had from people related to government (like the Prince of Orange) and from the Office of Ecclesiastical Property, the institution that managed the expropriated real property of the Roman Catholic Church. That office was charged with continuing the charitable works of the Church foundations, which it could conveniently do by selling its choice properties and investing the proceeds in interest-bearing public bonds.At first the scarcity of funds available for public borrowing was no doubt due to pessimism about the prospects of the new state. However, soon a new reason of a more propitious nature was the explosive economic boom in trade of the 1590s and early 17th century, that required financing from private capital and offered far better returns than the measly 8.33 percent (12th penny) the state could pay. This competing demand for funds can be illustrated by the fact that most people voluntarily investing in public debt up to the Twelve Years' Truce
Twelve Years' Truce
The Twelve Years' Truce was the name given to the cessation of hostilities between the Habsburg rulers of Spain and the Southern Netherlands and the Dutch Republic as agreed in Antwerp on 9 April 1609. It was a watershed in the Eighty Years' War, marking the point from which the independence of the...
(1609) were widows and orphans. Also
the phenomenon of the emergence of a secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
for forced loans, offered by some municipalities in Holland, which enabled merchants to free up their forced loans, and reinvest those in private ventures, points in this direction.
With the Truce more normal times arrived. The borrowing requirement went to zero with the arrival of the temporary peace and this probably helped the transition to voluntary lending. After the Truce ended in 1621 expenditures for war again rose steeply, but this time the Republic, and in particular Holland, had no trouble borrowing on average 4 million guilders annually, which helped keep down the rise in taxation that might otherwise have been necessary. By 1640 confidence in Holland's public debt (and the supply of funds available for borrowing) had risen so much, that a refinancing of the outstanding debt with a much lower interest rate of 5 percent was possible (followed in 1665 by a conversion to 4 percent).
- Promissory notePromissory noteA promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
s (called Obligatiën), a form of short-term debt, in the form of bearer bondBearer bondA bearer bond is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership. Whoever physically...
s, that were readily negotiable; - Redeemable bondsRedemption valueRedemption value is the price at which the issuing company may choose to repurchase a security before its maturity date.A bond is purchased at a discount if its redemption value exceeds its purchase price. It is purchased at a premium if its purchase price exceeds its redemption value....
(called losrenten) that paid an annual interest to the holder, whose name appeared in a public-debt ledger (not as convenient as bearer bonds, but the bonds were still readily negotiable) until the loan was paid off; - Life annuitiesLife annuityA life annuity is a financial contract in the form of an insurance product according to which a seller — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer in exchange for the immediate payment of a lump sum or a series...
(called lijfrenten) that paid interest during the life of the buyer, or nominee, whereas the principal is extinguished at his or her death (this type of debt was therefore self-amortizing).
Other than in other countries, where the markets for public debt were often mediated by bankers, in Holland the state dealt directly with prospective bondholders. The tax receivers doubled as registrars of the public debt. The receivers were also free to tailor bond offerings to local circumstances. They often issued many bonds of small coupon that were attractive to unsophisticated small savers, like craftsmen, and often women. This made for a kind of "popular capitalism," at least during the Golden Age of the 17th century, that often amazed foreign observers.
Lijfrenten paid a higher rate of interest than losrenten, which made them rather popular, the more so, because Holland at first did not make the interest dependent on the age of the nominee. It took no less an intellect than that of Grand Pensionary Johan de Witt
Johan de Witt
Johan de Witt, heer van Zuid- en Noord-Linschoten, Snelrewaard, Hekendorp and IJsselveere was a key figure in Dutch politics in the mid 17th century, when its flourishing sea trade in a period of globalization made the United Provinces a leading European power during the Dutch Golden Age...
to figure out that this omission made lijfrenten too expensive. This contribution to actuarial science
Actuarial science
Actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries. Actuaries are professionals who are qualified in this field through education and experience...
also helped bring down the Dutch debt service appreciably.
In practice, however, by the middle of the 17th century the Dutch Republic enjoyed such good credit, that it was able to dispense with lijfrenten and finance its borrowing requirements with long-term redeemable bonds at rates that were equal to, or lower than, the lowest interest returns available in the private sector. In fact, redemption could often be postponed indefinitely, making such loans "interest-only." This enabled the Republic in practice to spend according to its needs without practical limit, greatly exceeding its short-term ability to tax. This greatly enhanced its politico-military power, as it was able to field mercenary armies equal in size to the armies of countries with much larger populations, like France and England.
The positive side of a well-managed public debt, like the Dutch one, is that it expands the purchasing power of the state in a timely fashion, without putting undue burdens on the tax payer. However, there are prices to pay. One of those prices is an appreciable redistributive effect, when via the debt service money is channelled from a large proportion of the population (the tax payers) to a much smaller number of bondholders. In the beginning (thanks also to the forced character of the lending) this effect was limited by the broad distribution of debt-holders across the population. In the course of the 17th century, however, bondholding became more concentrated. One of the reasons for this was that new bonds were often financed by reinvesting retained interest by existing bondholders. This effect increased commensurately with the increase of the debt and the debt service. It was reinforced by the fact that bondholders were thrifty people (a tendency possibly explainable by the Ricardian equivalence
Ricardian equivalence
The Ricardian equivalence proposition is an economic theory holding that consumers internalize the government's budget constraint: as a result, the timing of any tax change does not affect their change in spending...
-theorem, though people at the time were of course unaware of this theoretical underpinning).
In the course of the final third of the 17th century, and especially of the 18th century, this concentration of the public debt in the hands of a few gave rise to the emergence of a rentier class
Rentier capitalism
Rentier capitalism is a term used in Marxism and sociology which refers to a type of capitalism where a large amount of profit-income generated takes the form of property income, received as interest, intellectual property rights, rents, dividends, fees, or capital gains.The beneficiaries of this...
that amassed an important proportion of total wealth in the Republic, thanks to this redistributive effect, and despite the often confiscatory levies on wealth of the 18th century described above. This development went hand in hand with the development of the public debt itself after 1672. During the second half of the Golden Age (especially the years 1650-1665) the borrowing requirements of commerce and the public sector fell short of the amount of savings supplied by the private sector. This may explain the boom in real estate of those years, that sometimes acquired a "bubble" character. However, after the beginning of the Franco-Dutch War
Franco-Dutch War
The Franco-Dutch War, often called simply the Dutch War was a war fought by France, Sweden, the Bishopric of Münster, the Archbishopric of Cologne and England against the United Netherlands, which were later joined by the Austrian Habsburg lands, Brandenburg and Spain to form a quadruple alliance...
of 1672 these savings were rechanneled to the public sector (explaining the collapse of the housing bubble at the same time). Nevertheless, the holders of this rapidly increasing public debt were still awash in cash, which explains the low interest rates in the years up to 1689. This availability of funds also helped finance the great expansion of the VOC (and of its debt) in these years.
With the great conflicts that started with the Glorious Revolution
Glorious Revolution
The Glorious Revolution, also called the Revolution of 1688, is the overthrow of King James II of England by a union of English Parliamentarians with the Dutch stadtholder William III of Orange-Nassau...
of 1688 (financed with a bank loan that a consortium of Amsterdam bankers threw together in three days) these markets tightened appreciably, however. Holland was now forced to reintroduce the unprofitable lijfrenten, and to resort to gimmicks like lottery bonds
Lottery Bond
Lottery Bonds are a type of government bond in which some randomly selected bonds within the issue are redeemed at a higher value than the face value of the bond.They are government bonds and only issued by a government...
to entice lenders to buy its bonds. As the supply of funds from redemptions and retained earnings now fell short of government demand, these new loans must have been partially financed by disinvestment
Disinvestment
Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change...
s in the commercial, industrial and agricultural sectors of the economy (admittedly depressed in these years). By 1713 Holland's debt had reached a total of 310 million guilders, and that of the Generality of the Republic of 68 million (illustrating the relative preponderance of Holland in the Republic's finances). The debt service of this debt amounted to 14 million guilders. This exceeded the ordinary tax revenues of Holland. Most of this debt was now concentrated in the hands of only a relatively few families, that not so coincidentally also had privileged access to political office.
This conjuncture of factors (decision making in the hands of a political group that also owned the public debt, a debt that surmounted the ability of the economy to service it) explains in large part the "withdrawal" of the Republic as a Great Power after 1713. Once the reform proposals of Van Slingelandt, that might have provided a viable alternative by enhancing the financial capacity of the Dutch state, had been rejected by this conservative political class, there was simply no alternative to austerity in public finance, and dismantling the military power of the Republic (paying off the mercenaries and laying up the fleet). Due to adverse economic circumstances in the first decades of the 18th century even these austerity measures offered little solace in practice.
The only effect was that at least the public debt did not grow during these years, but even this trend was reversed after the forced entry into the War of the Austrian Succession caused another spike in military outlays (unfortunately with little positive effect, in view of the disastrous outcome of this war for the Republic), and therefore a spike in the growth of the debt.
The levelling-off of the growth of the debt in the years before 1740, and again after 1750, caused a curious dilemma for the Dutch rentiers: they kept accumulating capital from bond redemptions and retained bond earnings, due to an undiminished high average propensity to save
Average Propensity to Save
The average propensity to save , also known as the savings ratio, is an economics term that refers to the proportion of income which is saved, usually expressed for household savings as a percentage of total household disposable income. The ratio differs considerably over time and between countries...
(though their wealth allowed them to wallow in luxury at the same time). However, there were few attractive investment opportunities for this new capital in the domestic Dutch economy: as explained in the article on the economic history of the Netherlands, structural problems militated against expansion of the private sector, and the public debt hardly expanded (even decreased after 1750). This development gave undeniable discomfort to Dutch investors. It presented them with two unenviable alternatives: hoarding
Hoarding
Hoarding or caching is a general term for a behavior that leads people or animals to accumulate food or other items in anticipation of future need or scarcity.-Animal behavior:...
(which apparently happened on an appreciable scale, leading to a large increase in the amount of money in circulation, while the velocity of circulation dropped), or investing abroad.
The rentiers therefore switched on a major scale to foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
, especially in infrastructure in Great Britain (where the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
of that country was about to begin, preceded by an agricultural revolution that needed financing), and also in public debt in that country. The Republic in this way for the first time in history became an international capital market, especially geared to foreign sovereign debt in the second half of the 18th century. By 1780 the net value of Dutch foreign government lending exceeded 350 million guilders, about two-thirds of which British government debt. This brought annual foreign earnings of 16 million guilders. After 1780, other than one might expect in view of the crises following that year, this trend sharply increased. This can only be explained by wholesale disinvestment in the Dutch economy, and reinvestment in especially foreign sovereign debt. Foreign investment probably doubled to 20 million guilders annually. The result was that Dutch residents held foreign debt instruments exceeding an estimated value of a billion guilders in 1795 (though other estimates are more conservative, the lower ones are still in the 650 million range).
Merchant banks and the international capital market
The remarkable growth of Dutch involvement with the international capital market, especially in the second half of the 18th century, was mediated by what we now would call merchant bankMerchant bank
A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to....
s. In Holland these grew out of merchant houses that shifted their capital first from financing their own trade and inventories to acceptance credit
Acceptance credit
An acceptance credit is a type of letter of credit that is paid by a time draft authorizing payment on or after a specific date, if the terms of the letter of credit have been complied with. There are two types of acceptance credit, confirmed and unconfirmed...
, and later branched out specifically into underwriting
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
and public offerings
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
of foreign government bonds (denominated in Dutch guilders) in the Dutch capital markets. In this respect the domestic and foreign bond markets differed appreciably, as the Dutch government dealt directly with Dutch investors (as we have seen above).
Gustavus Adolphus of Sweden
Gustav II Adolf has been widely known in English by his Latinized name Gustavus Adolphus Magnus and variously in historical writings also as Gustavus, or Gustavus the Great, or Gustav Adolph the Great,...
around 1620 directly by the States General. When the king could not fulfill his obligations, the Amsterdam merchant Louis de Geer
Louis De Geer (1587-1652)
Louis De Geer was a Walloon/Dutch merchant and industrialist. He is considered the father of Swedish industry for introducing Walloon blast furnaces in Sweden...
agreed to assume the payments in exchange for Swedish commercial concessions (iron and copper mines) to his firm. Similar arrangements between Dutch merchants and foreign governments occurred throughout the 17th century.
The transition to more modern forms of international lending came after the Glorious Revolution of 1688. The new Dutch regime in England imported Dutch innovations in public finance to England, the most important of which was the funded public debt, in which certain revenues (of the also newly introduced excises after the Dutch model) were dedicated to the amortization and service of the public debt, while the responsibility for the English debt shifted from the monarch personally, to Parliament. The management of this debt was entrusted to the innovatory Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
in 1694.This in one fell swoop put the English public debt on the same footing of creditworthiness in the eyes of Dutch investors, as the Dutch one. In the following decades wealthy Dutch investors invested directly in British government bonds, and also in British joint-stock companies like that Bank of England, and the Honourable East India Company. This was facilitated as after 1723 such stock, and certain government bonds, were traded jointly on the London and Amsterdam Stock Exchanges.
But this applied to a safely controlled ally like England. Other foreign governments were still deemed "too risky" and their loans required the guarantee, and often subsidy, of the States General, as before (which helped to tie allies to the Dutch cause in the wars against France). After 1713 there was no longer a motivation for the Dutch government to extend such guarantees. Foreign governments therefore had to enter the market on their own. This is where the merchant banks came in, around the middle of the 18th century, with their emmissiebedrijf or public-offering business. At first, this business was limited to British and Austrian loans. The banks would float guilder-denominated bonds on behalf of those (and later other) governments, and create a market for those bonds. This was done by specialist brokers (called entrepreneurs) who rounded up clients and steered them to the offerings. The banks were able to charge a hefty fee for this service.
The rapid growth of foreign investment after 1780 (as seen above) coincided with a redirection of the investment to governments other than the British. Many Dutch investors liquidated their British portfolios after the Fourth Anglo-Dutch War (which immediately resulted in a rise in British interest rates) and reinvested in French, Spanish, Polish (an especially bad choice in view of the coming Partitions of Poland
Partitions of Poland
The Partitions of Poland or Partitions of the Polish–Lithuanian Commonwealth took place in the second half of the 18th century and ended the existence of the Polish–Lithuanian Commonwealth, resulting in the elimination of sovereign Poland for 123 years...
), and even American government loans. The appetite for such placements abated a little after the first defaults of foreign governments (like the French in 1793), but even under the Batavian Republic (which itself absorbed the bulk of available funds after 1795) investment in foreign funds did not fall-off completely. This may have been because Dutch investors did not always realize the riskiness of this type of investment. They were often badly served by the merchant banks, who had a vested interest in protecting their sovereign clients to the detriment of the bondholders. This is also indicated by the very slight agio
Agio
Agio is a term used in commerce for exchange rate, discountor premium.-Exchange rate:The variations from fixed par values or rates of exchange in the currencies of different countries. For example, in most countries that used the gold standard, the standard coin was kept up to a uniform point of...
of the interest rate of these risky loans over that for domestic bonds.
This apparent credulity on the part of the Dutch bondholders resulted in serious losses in the final years of the independent state, and during the annexation to France. The Dutch state for the first time in centuries defaulted
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
after that annexation (a default that the new Kingdom of the Netherlands
Kingdom of the Netherlands
The Kingdom of the Netherlands is a sovereign state and constitutional monarchy with territory in Western Europe and in the Caribbean. The four parts of the Kingdom—Aruba, Curaçao, the Netherlands, and Sint Maarten—are referred to as "countries", and participate on a basis of equality...
continued after the Netherlands became independent again in 1813). This tiercé (a dividing of the debt into two parts repudiated debt
Anticipatory repudiation
Anticipatory repudiation, also called an anticipatory breach, is a term in the law of contracts that describes a declaration by the promising party to a contract, that he or she does not intend to live up to his or her obligations under the contract....
and one part recognized debt) followed the earlier repudiation of the French debt that had also devastated Dutch bondholders that had switched into French debt shortly before. The losses in the period 1793 to 1840 may have totalled between one-third and one half of Dutch wealth .
The Wisselbanken
International payments have always posed a problem in international trade. Though exchange rateExchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
risks were less in the era in which the intrinsic value
Intrinsic value (numismatics)
In commodity money, intrinsic value can be partially or entirely due to the desirable features of the object as a medium of exchange and a store of value. Examples of such features include divisibility; easily and securely storable and transportable; scarcity; and hard to counterfeit...
of money was usually equal to the face value
Face value
The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...
(at least absent debasement
Debasement
Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins...
of the coin, of course), there was the problem of the risk and inconvenience of transporting money or specie
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
. An early innovation was therefore the bill of exchange
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
(called wisselbrief in Dutch, or wissel for short), which obviated the need to transport coins in payment. After the development of this financial instrument by Italian and later Iberian merchants and bankers, Antwerp added a number of legal innovations in the mid-16th century that enhanced its value as such an instrument appreciably. These were assignment
Assignment (law)
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
, endorsement
Endorsement
Endorsement may refer to:*Testimonial in advertising, written or spoken statement endorsing a product*Political endorsement*a form added to an insurance policy, modifying the terms...
, and discount
Discount
Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date...
ing of bills of exchange. The Antwerpse Costuymen (commercial laws of Antwerp), which were adapted in Amsterdam from 1597, allowed unlimited chains of endorsement. This may have been convenient, but it increased the risk of default with each additional endsorsement in the chain. For that reason the Amsterdam city government prohibited this practice.
Amsterdamsche Wisselbank
The Bank of Amsterdam was an early bank, vouched for by the city of Amsterdam, established in 1609, the precursor to, if not the first true central bank.-Bank money:...
, also called the Bank of Amsterdam. This bank (with offices in the City Hall) took deposits of foreign and domestic coin (and after 1683 specie), effected transfers between such deposit accounts (the giro
Giro
A Giro or giro transfer is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee...
function), and accepted (i.e. paid) bills of exchange (the more important of which - over 600 guilders in value - could now be endorsed - to the bank - only once). The latter provision effectively forced Amsterdam merchants (and many foreign merchants) to open accounts with this bank. Though Amsterdam established the first such bank in Holland, other cities, like Delft
Delft
Delft is a city and municipality in the province of South Holland , the Netherlands. It is located between Rotterdam and The Hague....
, Middelburg
Middelburg
Middelburg is a municipality and a city in the south-western Netherlands and the capital of the province of Zeeland. It is situated in the Midden-Zeeland region. It has a population of about 48,000.- History of Middelburg :...
, and Rotterdam
Rotterdam
Rotterdam is the second-largest city in the Netherlands and one of the largest ports in the world. Starting as a dam on the Rotte river, Rotterdam has grown into a major international commercial centre...
, followed in due course. The Amsterdam establishment was, however, the most important and the best known.
The giro function had the additional advantage (beside the obvious convenience) that the value of the underlying deposit was guaranteed. This was important in an era in which Metallism
Metallism
Metallism is a type of monetary system in which silver, gold or other metals are used as money.Usually, that word refers to a system where that kind of money is a legal tender.-Metallism versus fiat monetary systems:...
still reigned supreme. As a matter of fact, depositors were prepared to pay a small "fee" in the form of an agio for this "bank money" or bankgeld (which was an early example of fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
) over normal circulating coin, called courantgeld. Though the wisselbank was not a mint
Mint (coin)
A mint is an industrial facility which manufactures coins for currency.The history of mints correlates closely with the history of coins. One difference is that the history of the mint is usually closely tied to the political situation of an era...
, it provided coins deposited with it for melting and recoining at Dutch mints in the form of a high-quality currency, called "trade money" (or negotiepenningen in Dutch). These coins were used in trade with areas where the Dutch and other West Europeans had a structural trade deficit
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
, like the Far East, Russia and the Levant
Levant
The Levant or ) is the geographic region and culture zone of the "eastern Mediterranean littoral between Anatolia and Egypt" . The Levant includes most of modern Lebanon, Syria, Jordan, Israel, the Palestinian territories, and sometimes parts of Turkey and Iraq, and corresponds roughly to the...
, because they were highly valued there for their quality as commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
.
These trade coins were distinguished from the circulating currency (Dutch: standpenningen) that after the reform of the currency of 1622, that allowed the minting of coins with a lower-than-face-value metal content, had the character of fiat money. This development recognized the reality that most money in circulation had a fiduciary character. Toward the end of the 17th century the Republic became (thanks to its general balance-of-trade surplus, and the policy of the Wisselbank) a reservoir of coin and bullion
Precious metal
A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...
, which was regularly (re-)minted as trade coin, thereby "upgrading" inferior circulating money.
Unlike the later Bank of England, the Bank of Amsterdam did not act as a lender of last resort
Lender of last resort
A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
. That function was, however, performed by other institutions in the course of the history of the Republic, be it on a rather ad hoc basis: during financial crises in the second half of the 18th century lenders of last resort were briefly brought into being, but liquidated soon after the crisis had abated. The function of bank of issue
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
was often performed by small private operations, called kassiers (literally: "cashiers") that accepted courantgeld for deposit, and issued promissory notes for domestic payments. These notes functioned as an early type of paper money. The same went after 1683 for the Bank of Amsterdam when its receipts for foreign coin and bullion were accepted as fiduciary money.
Those kassiers engaged also in fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
, as did the other wisselbanken outside Amsterdam, though this "risky" practice was officially frowned upon. During the crisis of 1672 the Middelburg wisselbank, that had actively lent deposited funds to local businessmen, faced a bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
which forced it to suspend payments for a while. The Amsterdam wisselbank, at least at first, officially did not engage in this practice. In reality it did lend money to the city government of Amsterdam and to the East-India Company, both solid credit risks at the time, though this was technically in violation of the bank's charter. The loophole was that both debtors used a kind of anticipatory note, so that the loans were viewed as advances of money. This usually did not present a problem, except when during the Fourth Anglo-Dutch War the anticipated income did not materialize, causing a liquidity crisis for both the bank and its debtors.
Another important business for Dutch bankers was foreign exchange trading. The bills of exchange originated in many countries and specified settlement in many different foreign currencies. Theoretically the exchange rates of these currencies were fixed by their intrinsic values, but (just as in modern times) trade fluctuations could cause the market exchange rate to diverge from this intrinsic rate. This risk was minimized, however, at Amsterdam, because the freedom there to export and import monetary metals tended to stabilize the exchange rates. Besides, Dutch merchants traded all over the known world and generated bills of exchange all over. This helped to generate regular exchange-rate quotations (an important information function) with many foreign locations. For these reasons Amsterdam attracted a business in bills of exchange that went far beyond the needs of its own already appreciable business. Merchants from many Mediterranean countries (where exchange rates with northern currencies were seldom quoted) bought bills on Amsterdam, where other bills on the intended final destinations could be acquired. Even London merchants long relied on the Amsterdam money market, especially for the English trade on Russia, at least till 1763.
In sum, most "modern" banking practices were already present in the Republic, and often exported abroad (like the fractional banking practices of the predecessor of the Swedish Riksbanken, the Stockholms Banco
Stockholms Banco
Stockholms Banco in Sweden was the first European bank to print banknotes. The bank was founded in 1657 by Johan Palmstruch and began printing banknotes in 1661...
, founded by Dutch financier Johan Palmstruch
Johan Palmstruch
Johan Palmstruch was a Dutch merchant credited with the introduction of paper money to Europe. He became a commissioner in the National Board of Trade after his arrival in Sweden in 1647 and began submitting proposals for banking institutions to King Charles X Gustav in the 1650s...
; and later the Bank of England). They were, however, often not institutionalized on a "national" level, due to the stubbornly confederal nature of the Republic. For this reason the Netherlands only in 1814 got a formal central bank.
Commercial credit and insurance
As explained in the general article on the economic history of the Netherlands under the Republic, the Dutch entrepôtAmsterdam Entrepôt
The Amsterdam Entrepôt is the short-hand term that English-language economic historiographers use to refer to the trade system that helped the Dutch Republic achieve primacy in world trade during the 17th century.-The entrepôt system:...
function was very important. One of the reasons Amsterdam was able to win this function after the Fall of Antwerp was the commercial credit offered to suppliers and buyers, usually as part of the discount on the bill of exchange. By prolonging and rolling-over such short-term credits, suppliers and customers could easily be tied to the entrepôt. The low interest rates usually prevailing in the Republic made the maintenance of large inventories feasible, thereby enhancing Amsterdam's reputation as the world's Emporium
Marketplace
A marketplace is the space, actual, virtual or metaphorical, in which a market operates. The term is also used in a trademark law context to denote the actual consumer environment, ie. the 'real world' in which products and services are provided and consumed.-Marketplaces and street markets:A...
.
Though this commercial credit was originally tied to the trading operation of merchant firms, the sheer scope of the entrepôt created the opportunity for the trading in bills apart from this direct business, thereby serving third parties, even those not doing direct business with the Netherlands. Two kinds of financial trading, divorced from commercial trading, began to emerge by the beginning of the 18th century: trading on commission, and accepting house
Accepting house
An accepting house is a primarily British institution which specializes in the acceptance and guarantee of bills of exchange thereby facilitating the lending of money. They now have taken on other functions as the use of bills has declined, returning to their original wider function of merchant...
s. The first consisted of trading of agents (called commissionairs) on behalf of other merchants for a commission. Their role was therefore intermediation between buyers and sellers, leaving the conclusion of the business to those parties themselves.
The second consisted in guaranteeing payment on bills of exchange from third parties. If the third party issuing the bill would default, the accepting house would pay the bill itself. This guarantee of course was provided for a fee. This service need not have any connection with Dutch traders, or even with the Dutch entrepôt. It served international trade in general. Though this divorce between credit provision and trade has been interpreted as undermining Dutch trade itself in the age of relative decline of Dutch commerce, it probably was just a defensive move in a time of increasing foreign competition, protecting a share for Dutch commerce, and providing another outlet for commercial capital that would otherwise have been idle. The size of this business was estimated to be about 200 million guilders around 1773.
Much lending and borrowing of course occurred outside the formal economy. Unfortunately, it is difficult to document the size of this informal business. However, the archived registers of the notaries
Civil law notary
Civil-law notaries, or Latin notaries, are lawyers of noncontentious private civil law who draft, take, and record legal instruments for private parties, provide legal advice and give attendance in person, and are vested as public officers with the authentication power of the State...
form an important source of information on this business, as those notaries acted as intermediaries bringing lenders and borrowers together (not least in the mortgage-loan business). Also, probate
Probate
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. A probate court decides the validity of a testator's will...
inventories, describing the estate of deceased persons, show the intricate web of credit transactions that occurred on a daily basis in the Republic, even between its humblest citizens.
Self insurance
Self insurance is a risk management method in which a calculated amount of money is set aside to compensate for the potential future loss.If self insurance is approached as a serious risk management technique, money is set aside using actuarial and insurance information and the law of large numbers...
. The East-India Company armed its vessels, and maintained extensive military establishments abroad, thereby internalizing protection costs. Arming merchantmen was quite usual in those days. However, the type of cargo vessel most often used by the Dutch, the Fluyt
Fluyt
A fluyt, fluit, or flute is a Dutch type of sailing vessel originally designed as a dedicated cargo vessel. Originating from the Netherlands in the 16th century, the vessel was designed to facilitate transoceanic delivery with the maximum of space and crew efficiency...
ship, went usually without guns, or was but lightly armed. This made ship and crew vulnerable to capture by Dunkirk privateers
Dunkirkers
During the Dutch Revolt the Dunkirkers or Dunkirk Privateers, were commerce raiders in the service of the Spanish Monarchy. They were also part of the Dunkirk fleet, which consequently was a part of the Spanish Monarchy's Flemish fleet ...
and Barbary pirates. In the latter case captured crews were often sold as slaves. To finance the ransom
Ransom
Ransom is the practice of holding a prisoner or item to extort money or property to secure their release, or it can refer to the sum of money involved.In an early German law, a similar concept was called bad influence...
ing of these slaves so-called slavenkassen (slave treasuries) were set up with the support of the government, some of which still exist as charitable foundations, like the one in Zierikzee
Zierikzee
Zierikzee is a small city, located on the former island of Schouwen in the Dutch province of Zeeland. It is a part of the municipality of Schouwen-Duiveland, and lies about 26 km southwest of Hellevoetsluis....
http://www.slavenkas.nl/.
Other examples of self-insurance were the partnerships of ship owners, known as partenrederijen (which is probably best translated as "managed partnership", although these were precursors of joint stock companies
Joint stock company
A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...
). These spread the financial risks over a large number of investors, the participanten. This type of business organization was not limited to ship owning, of course. Investment in windmills and trekschuit
Trekschuit
Trekschuit, literal translation 'tugboat', is an old style of horse-drawn boat specific to the Netherlands where it was used for centuries as a means of passenger traffic between cities along trekvaarten, or tow-canals.-History:...
en often took this form also.
But insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
was also formalized as a contractual business, first offered by merchants as part of their normal trade, later by specialized insurers. This type of business started with marine insurance
Marine insurance
Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination....
. In 1598 (three years before a similar institution was established in England) the city of Amsterdam instituted a Kamer van Assurantie en Avarij (Chamber of Marine Insurance) which was charged with regulating this business. This drew on the example of Antwerp where this business had been going on for a long time before that. From 1612 on the Assuradeuren (insurance broker
Insurance broker
An insurance broker finds sources for contracts of insurance on behalf of their customers. The three largest insurance brokers in the world, by revenue, are Aon, Marsh & McLennan, and Willis Group Holdings.-Purpose of insurance brokers:...
s) had their own corner in the Amsterdam stock exchange, where they offered policies on hulls and cargoes to many different destinations. From 1626 the prijscourant (offering stock and bond prices) of the Dutch stock exchanges offered quotations for ten destinations. A century later that number had grown to 21. A large number of private firms insured domestic and foreign shipping alike, making Amsterdam Europe's principal center for marine insurance until the third quarter of the 18th century. One of these companies, founded during the 1720 Dutch financial Bubble (related to the English
The South Sea Company
The South Sea Company was a British joint-stock company that traded in South America during the 18th century. Founded in 1711, the company was granted a monopoly to trade in Spain's South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the...
and French
Mississippi Company
The "Mississippi Company" became the "Company of the West" and expanded as the "Company of the Indies" .-The Banque Royale:...
bubbles of the same year) as the Maatschappij van Assurantie, Discontering en Beleening der Stad Rotterdam has been continuously doing business as an insurance firm, Stad Rotterdam Verzekeringen
Stad Rotterdam Verzekeringen
Stad Rotterdam Verzekeringen was the name of a Dutch insurance company, founded in 1720. Until the merger with Fortis it was the oldest European mainland insurance company, at that time only Lloyd's of London was older. The full name of the original company was "Maatschappij ter discontering ende...
, to this day.
These marine insurers at the end of the 18th century branched out to fire insurance. However, that type of insurance had already been pioneered at the end of the 17th century by a remarkable mutual insurance
Mutual insurance
A mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Under this idea, what would have been profits are...
company of owners of paper-making windmills, called the Papiermakerscontract, though other types of industrial windmills were also admitted. The first known such policy dates from 1694. In 1733 no less than 72 windmills were insured with an insured value of 224,200 guilders. The company remained in business till 1903.
Another form of insurance that was popular from time to time was life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
. However, private insurance companies could usually not compete with government life annuities when the government was active in this market. We therefore see this activity only in the period between 1670 and 1690, when Holland suspended the issuance of lijfrenten, and again after 1710, when the province again withdrew from this market. After 1780 the French government started to dominate this market with its life annuities. The private life-insurance contracts often took the form of group investment pools that paid pensions to nominees. A peculiar feature was often a tontine
Tontine
A tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their...
format that offered windfall profits to surviving nominees. In the 18th century these pools were marketed and controlled by brokers, which gave them a professional character.
The Stock Market
Bringing together the savers that accumulated the growing stock of capital in the Republic and the people that needed that capital, like the Dutch and other governments, merchants, industrialists, developers etc. constitutes the formation of a marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
in the abstract economic sense. This does not require a physical meeting place in principle, but in early modern times markets commonly did come together at certain places. This was necessary, because the main function of a market is the exchange of information (about prices offered and accepted) and in the absence of means of telecommunication people had to meet in the flesh to be able to do that. In other words, abstract markets in the economic sense still had to be linked to physical markets. This applied as well to markets for commodities, as to financial markets. Again, there is no reason why financial markets and commodity markets should share the same physical space, but again, due to the close linkage of trade and finance, they in practice invariably did. We therefore see financial markets emerging in the places where commodities were also traded: the commodity exchanges.
Commodity exchanges probably started in 13th-century Bruges
Bruges
Bruges is the capital and largest city of the province of West Flanders in the Flemish Region of Belgium. It is located in the northwest of the country....
, but they quickly spread to other cities in the Netherlands, like Antwerp and Amsterdam. Because of the importance of the trade with the Baltic area, during the 15th and 16th centuries, the Amsterdam exchange became concentrated on the trade in grain (including grain futures and forwards
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
and options
Option (law)
In law, an option is the right to convey a piece of property. The person granting the option is called the optionor and the person who has the benefit of the option is called the optionee .Options characteristically exist in one of two forms:* Call options, which give the beneficiary the right to...
) and shipping. In the years before the Revolt this commodity exchange was subordinate to the Antwerp exchange. But when the Antwerp entrepôt came to Amsterdam the commodity exchange took on the extended functions of the Antwerp exchange also, as those were closely linked.
What changed the Amsterdam commodity exchange to the first modern stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
was the evolvement of the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
(VOC) into a publicly traded company
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
. It is important to make a few distinctions here to avoid a number of common misunderstandings. The VOC has been called the first joint-stock company, but this is only true in a loose sense, because its organization only resembled an English joint-stock company, but was not exactly the same. Like other Dutch merchant ventures, the VOC started out in 1602 as a partenrederij, a type of business organization that had by then already a long history in the Netherlands. As in the joint-stock company the investors in a rederij owned shares
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
in the physical stock of the venture. They bore a part of the risk of the venture in exchange for a claim on the profits from the venture.
A number of things were new about the VOC, compared to earlier Dutch companies: its charter
Charter
A charter is the grant of authority or rights, stating that the granter formally recognizes the prerogative of the recipient to exercise the rights specified...
gave it a monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
in the trade on the East Indies
East Indies
East Indies is a term used by Europeans from the 16th century onwards to identify what is now known as Indian subcontinent or South Asia, Southeastern Asia, and the islands of Oceania, including the Malay Archipelago and the Philippines...
, and other than in earlier partenrederijen
the liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
of the managing partners was limited to their share in the company, just like that of the silent partners. But the innovation that made the VOC really relevant for the history of the emergence of stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
s came about serendipitously, not as part of its charter, but because of a decision by the managing partners in the early years of the company to disallow the withdrawal of paid-in capital by partners. As this had been a right of shareholders in other such partnerships it necessitated a feasible alternative for the direct liquidation of the interest of shareholders in the company. The solution was to enable shareholders that wished to get out to sell their share on the Amsterdam Stock Exchange
Amsterdam Stock Exchange
The Amsterdam Stock Exchange is the former name for the stock exchange based in Amsterdam. It merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext, and is now known as Euronext Amsterdam.-History:...
that had just got a new building, but otherwise was just the continuation of the commodity exchange that existed beforehand.
It is important to recognize that shares were still registered by name in the VOC's register, and that transfer of shares was effected by an entry in that register, witnessed by the company's directors. Such transfers were allowed at infrequent opportunities (usually when a dividend was paid). The "shares" that are presented as "the world's first shares" therefore were in reality what we now would call either stock certificate
Stock certificate
In corporate law, a stock certificate is a legal document that certifies ownership of a specific number of stock shares in a corporation...
s or else stock options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
(depending on the concrete circumstances). This secondary market in VOC stock proved quite successful. The paid-in capital of the company, and hence the number of shares, remained the same during the life of the company (about 6.5 million guilders), and when the company proved to be very successful the demand for its shares drove up their price till they reached 1200 percent in the 1720s. Remarkably, the VOC did not raise new capital by issuing new shares, but it relied on borrowing and retained profits for the financing of its expansion. This is remarkable, because previous ventures on the contrary did not borrow, but used additional subscriptions if they needed extra capital
The real innovation therefore was that next to physical commodities henceforth financial rights in the ownership of a company were traded on the Amsterdam exchange. The stock market had come into being. Soon other innovations in financial trading were to follow. A disgruntled investor, Isaac Le Maire
Isaac Le Maire
Isaac le Maire was a merchant for the Vereenigde Oostindische Compagnie and later for the Austraalse Compagnie. He is best known for his constant strife with the VOC, which ultimately led to the discovery of Cape Horn.Isaac le Maire was born in 1558 or 1559 in Tournai...
(father of Jacob Le Maire
Jacob Le Maire
Jacob Le Maire was a Dutch mariner who circumnavigated the earth in 1615-16. The strait between Tierra del Fuego and Isla de los Estados was named the Le Maire Strait in his honor, though not without controversy...
), in 1609 initiated financial futures trading, when he tried to engineer a bear market
Market trends
A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
in VOC shares by short selling them. This is the first known conspiracy to drive down share prices (as distinguished from manipulating, and speculating in, commodity prices). The Dutch authorities prohibited short selling the next year, but the frequent renewal of this prohibition indicates that it was usually honored in the breach.
By the middle of the 17th century many "modern" derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
apparently already were quite common, as witnessed by the publication in 1688 of Confusion de Confusiones, a standard work on stock-trading and other financial-market practices, used on the Amsterdam stock exchange, by the Jewish Amsterdam banker Joseph Penso de la Vega. In it he describes the whole gamut, running from options (puts and calls), futures contracts, margin buying
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
,
to bull and bear conspiracies, even some form of stock-index trading
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
.
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Tulip mania
Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...
. This mostly unfolded in coffee houses throughout the country as a pastime for common people. The stock exchange and its brokers were hardly involved, though the techniques used were quite common on the stock exchange.
Similarly, the Dutch speculative bubble of 1720 (that coincided with John Law
John Law (economist)
John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...
's activities in France and the South Sea bubble in England, but had its own peculiarities), for a large part existed outside the formal confines of the stock exchange. Still, this pan-European speculative mania illustrates the way in which by that time the European capital markets were already interconnected. The London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
did not yet exist as a separate building, but its precursor operated in the Change Alley
Exchange Alley, London
Exchange Alley or Change Alley is a narrow alleyway connecting shops and coffeehouses in an old neighbourhood of the City of London in England, bounded by Lombard Street, Cornhill and Birchin Lane. It served as a convenient shortcut from the Royal Exchange to the Post Office...
, where licensed stock traders did their business in coffee houses. Since the Glorious Revolution the Dutch and English stock exchanges operated in tandem, certain stocks and bonds being quoted on both exchanges. English shares of the Bank of England and the British East India Company were continuously traded in both London and Amsterdam. They communicated via the packet-boat
Packet trade
Packet trade generally refers to any regularly scheduled cargo, passenger and mail trade conducted by ship. The ships are called "packet boats" as their original function was to carry mail.-United States:...
connection between Harwich
Harwich
Harwich is a town in Essex, England and one of the Haven ports, located on the coast with the North Sea to the east. It is in the Tendring district. Nearby places include Felixstowe to the northeast, Ipswich to the northwest, Colchester to the southwest and Clacton-on-Sea to the south...
and Hellevoetsluis
Hellevoetsluis
Hellevoetsluis is a small city and municipality on Voorne-Putten Island in the western Netherlands, in the province of South Holland...
that sailed twice a week. Information on stock and bond prices in both markets was regularly published in Dutch price courants (that originated in Amsterdam in 1583, and were published biweekly from 1613 on ).
Analysis of the information from these lists shows that the London quotations were apparently spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
s, whereas the Amsterdam quotations were forward prices, reflecting the fact that Amsterdam traded futures on English stocks. Of course, this need not signify stock speculation, but when the British and French speculative bubbles of 1720 erupted, the Dutch capital market soon got involved also, because Dutch investors were able to participate. The main Dutch bubble came afterward, however. When the bubble burst in France, short-term capital fled to the Netherlands, because this market was seen as a "safe haven." This influx of liquidity helped spark a domestic Dutch speculative bubble in dodgy public companies that burst in due course. Without the dire consequences of the British and French crashes, however, because the Dutch market was more mature. It occasioned a lot of satirical comment, however, as shown in the illustration from a contemporary tract on the follies of speculation, Het Groote Tafereel der Dwaasheid (Great Mirror of Folly).
The great import of this episode is that it shows that by this time the capital market had become truly international, not only for long-term bonds, but now also for short-term capital. Financial crises easily propagated because of this. Examples are the crisis of 1763, after the end of the Seven Years' War
Seven Years' War
The Seven Years' War was a global military war between 1756 and 1763, involving most of the great powers of the time and affecting Europe, North America, Central America, the West African coast, India, and the Philippines...
in which the Netherlands had remained neutral, occasioned a collapse of commodity prices, and debasements of the currency in Eastern Europe disrupted the bullion trade. Some Amsterdam accepting houses became overextended and failed as a consequence. This caused a brief credit crunch
Credit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
. Ten years later the bursting of a speculative bubble in British-East-India-Company stock, and a simultaneous default of Surinam planters, forced Dutch merchant bankers to liquidate their positions. As a result, acceptance credit evaporated temporarily, causing another credit crunch which brought down a number of venerable banking houses. This time a short-lived Fonds tot maintien van publiek crediet (a kind of bank of last resort) was erected by the city of Amsterdam, but dissolved again after the crisis abated. This experiment was repeated a few times during the crises of the end of the century, but equally without lasting results. The need for them was probably less than abroad, because the Dutch citizens were still extremely liquid, and possessed large cash hoards that obviated the need for a lender of last resort. Besides, the by then extremely conservative Dutch financial community feared that a paper currency beside the metal currency would undermine confidence in the Amsterdam capital market.
Collapse of the system
Though the 18th century has often been depicted as an age of decline of the Dutch economy, the picture is more nuanced. It is true that the "real" economy of trade and industry (and initially agriculture also, though there was a resurgence later in the century) went into at least relative decline, compared to neighboring countries. But it has to be admitted that those neighboring countries had to make up a big lag, which they actually only accomplished toward the end of the 18th century, when British per-capita GNP finally overtook the Dutch per-capita GNP. Meanwhile, within the Dutch economy there was a decided shift toward the "service" sector (as the British economy would experience a century or so later), especially the financial sector. Nowadays we would consider that a sign of the "maturity" of the Dutch economy at the time.At the time (and by later historians with an ax to grind) this shift was often evaluated negatively. Making money from money, instead of from toil in trade or industry was seen as a lazy-bones' pursuit. The "periwig-era" has become a byword for fecklessness in Dutch historiography. The 18th-century investors are seen as shunning risk by their overreliance on "safe" investments in sovereign debt (though those proved extremely risky from hindsight), while on the other hand they are excoriated for their predilection for speculative pursuits. But do those criticisms hold up under closer scrutiny?
First of all it has to be admitted that many modern economies would kill for a financial sector like the Dutch one of the 18th century, and for a government of such fiscal probity. In many respects the Dutch were unwittingly just ahead of their time. Their "speculative pursuits" are now seen as a necessary and integral part of commodity and financial markets, which perform a useful function in cushioning external shocks. It is as well that the Dutch performed that function for the wider European economy.
It is true, however, that the way the 18th-century financial sector worked had its drawbacks in practice. A very important one was the detrimental effect the large Dutch public debt after 1713 had on the distribution of income. Through its sheer size and the attendant size of the necessary debt service, which absorbed most of the tax revenue, it also cramped the discretionary spending possibilities of the government, forcing a long period of austerity on it, with its attendant "Keynesian" negative effect on the "real" economy. The structurally-depressed economy this caused made investment in trade and industry unattractive, which reinforced the vicious circle leading to more foreign direct investment.
In itself such foreign investment is not seen as a bad thing nowadays. At least it engenders a foreign-income stream that helps the balance of payments of a country (though it also helped keep the Dutch guilder "hard" in a time when exports were already hindered by high real-wage costs). Unfortunately, the signals the market for foreign investments sent to Dutch investors were misleading: the very high risk of most foreign sovereign debt was insufficiently clear. This allowed foreign governments to exploit Dutch investors, first by paying interest rates that were far too low in hindsight (there was only a slight agio for foreign bonds), and finally by defaulting on the principal in the era of the Napoleonic Wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
. As John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
has remarked: after the default of foreign borrowers the lending country has nothing, while after a domestic default the country has at least the physical stock that was bought with the loan. The Dutch were to experience this vividly after 1810.
In any case, the periwigged investors had in certain respects no choice when they shifted to acceptance credit and commission trade, for instance. This can be seen as a rational "second best" strategy when British, French and Spanish protectionism closed markets to the Dutch, and they lacked the military means to force retraction of protectionist measures (as they had often been able to do in the 17th century). Also, apart from protectionism, the old comparative advantage in trade simply disappeared when foreign competitors imitated the technological innovations that had given the Dutch a competitive advantage in shipping and industry, and it turned into a disadvantage when the Dutch real-wage level remained stubbornly high after the break in the upward secular trend in price levels after 1670.
From this perspective (and from hindsight by comparison with other "maturing" economies) the growth of the financial sector, absolutely and relative to other sectors of the Dutch economy, may not only be seen neutrally, but even as a good thing. The sector might have been the basis for further growth during the 19th century, maybe even supported a new industrial revolution after the British model. Ironically, however, crises in the financial sector brought about the downfall of first the political structures of the old Republic, and finally the near-demise of the Dutch economy (most of all the financial sector) in the first decade of the 19th century.
Fourth Anglo-Dutch War
The Fourth Anglo–Dutch War was a conflict between the Kingdom of Great Britain and the Dutch Republic. The war, tangentially related to the American Revolutionary War, broke out over British and Dutch disagreements on the legality and conduct of Dutch trade with Britain's enemies in that...
, which from the English point of view was caused by Dutch greed in supporting the American Revolution
American Revolution
The American Revolution was the political upheaval during the last half of the 18th century in which thirteen colonies in North America joined together to break free from the British Empire, combining to become the United States of America...
with arms and funds (the British pretext for declaring war was a draft-treaty of commerce between the city of Amsterdam and the American revolutionaries)
brought about a liquidity crisis for the VOC, which almost brought down the Bank of Amsterdam also, as this bank had been making "anticipatory" loans which the company could not pay back. Both were saved by the government, especially the States of Holland, which provided emergency credit, but financial confidence was severely damaged. Investor confidence was also damaged by the political troubles of the Patriot Revolt
Patriots (faction)
The Patriots were a political faction in the Dutch Republic in the second half of the 18th century. They were led by Joan van der Capellen tot den Pol, gaining power from November 1782....
after the war. That revolt was sparked by popular demand for thoroughgoing political reforms and reforms in public finance, to cure the ills exposed by the dismal conduct of the war by the regime of Stadtholder
Stadtholder
A Stadtholder A Stadtholder A Stadtholder (Dutch: stadhouder [], "steward" or "lieutenant", literally place holder, holding someones place, possibly a calque of German Statthalter, French lieutenant, or Middle Latin locum tenens...
William V
William V, Prince of Orange
William V , Prince of Orange-Nassau was the last Stadtholder of the Dutch Republic, and between 1795 and 1806 he led the Government of the Dutch Republic in Exile in London. He was succeeded by his son William I...
. When his regime was restored by Prussian force of arms, and the would-be reformers were driven into exile in 1787, many investors lost hope of economic improvement, and they started liquidating their assets in the "real" economy for a flight in foreign bonds and annuities (especially French ones, as the French monarchy happened to have a large borrowing requirement at this time).
When soon afterward the French Revolution
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...
of 1789 spread by military means, and put the exiled Patriots in power in a new Batavian Republic
Batavian Republic
The Batavian Republic was the successor of the Republic of the United Netherlands. It was proclaimed on January 19, 1795, and ended on June 5, 1806, with the accession of Louis Bonaparte to the throne of the Kingdom of Holland....
, for a while the reform of the state, and the reinvigoration of the economy, seemed to be assured. Unfortunately, the reformers proved to be unable to overcome the conservative, federalist, sentiments of the voters in their new democracy, and it took autocratic measures, first French-inspired, later by direct French rule, to reform the state. Unfortunately, the influence of the French on the economy was less benign. The French "liberators" started with exacting a war indemnity of 100 million guilders (equal to one-third of the estimated Dutch national income at the time of 307 million guilders). They did more damage, however, by first defaulting on the French public debt, and later (when the Netherlands were annexed to the French empire after 1810) on the Dutch public debt. This was the first such default for the Dutch ever. Bonds that had paid a dependable income since 1515 suddenly lost their value. This loss devastated the financial sector as up to half of the national wealth (and the source for future investments) evaporated with the stroke of a pen. Napoleon
Napoleon I of France
Napoleon Bonaparte was a French military and political leader during the latter stages of the French Revolution.As Napoleon I, he was Emperor of the French from 1804 to 1815...
concluded the process of destruction of the Dutch economy by enforcing the Continental System
Continental System
The Continental System or Continental Blockade was the foreign policy of Napoleon I of France in his struggle against the United Kingdom of Great Britain and Ireland during the Napoleonic Wars. It was a large-scale embargo against British trade, which began on November 21, 1806...
effectively, snuffing out Dutch contraband trade with the British, while at the same time keeping French markets closed to Dutch exports even when the Netherlands were part of the French empire.
Consequently, Amsterdam lost its position in the international capital market forever to London. The merchant bankers left en masse. Though for a while cities in the maritime Dutch provinces lost urban population, while grass grew in their streets, and their ports were empty, and even though the Netherlands' economy experienced deindustrialization and pauperization, with a concomittant re-agriculturalization, it did not revert to premodern days. It even managed to hang on for another fifty years, resistant to attempts at industrialization in the British mode, even though those attempts did take hold in the former Southern Netherlands, with which it shared a state until 1830. Only in the mid-19th century, after the final liquidation of the repudiated public debt (and the attendant restoration of public credit) did the Dutch economy start a new epoch of modern economic growth.