Holland's Loan Issuing Policy During the Dutch
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Government-Market Interaction: Holland’s Loan Issuing Policy during the Dutch War Research MA thesis History: Cities, States & Citizenship, Utrecht University Student: Ralf Bovers Supervisor: dr. Oscar Gelderblom Second reader: dr. Joost Jonker © Ralf Bovers, August 2009 1 Table of Contents Abbreviations 3 Introduction 4 Historiography 6 Methodology 8 Chapter 1 11 States General 13 Stadholderate 14 Council of State 15 Generality Finances 15 Holland‟s social, economic and political structure 18 Holland‟s fiscal structure and administration 20 Chapter 2 25 Holland‟s public debt under Charles V and Philip II 25 Holland‟s credit from the start of the Revolt to the mid 1580s 28 The restoration of credit, 1585-1609 31 The rise of the obligatie as a long-term security 37 Holland‟s Public Debt from the Twelve Years‟ Truce to 39 the Peace of Westphalia Holland‟s debt between 1652 and 1670 41 Chapter 3 45 Political and economic context at the eve of the Dutch War 45 Financing the war 49 Propositions Johan de Witt 50 Loan issues 1671 and 1672 53 War financing without a free capital market: wealth taxes, 64 forced loans and the East Indian Company Government and capital market in a time of no credit 71 Loans of 1675 and 1676 73 Other loans 75 Conclusion 78 Appendix 1 81 Appendix 2 83 Bibliography 86 2 Abbreviations RSH Resolutions by the States of Holland RGR Resolutions by Gecommitteerde Raden 3 Introduction In 1672 France and its allies invaded the Dutch Republic by land, while the English attacked by sea. This Year of Disaster (Rampjaar) and the ensuing Dutch War (1672-78) formed one of the most dangerous periods in the existence of the Dutch Republic (1579-1795). To fight off its big European neighbors the Dutch needed to raise great amounts of troops, build more fortifications and expand its navy with new ships. In addition, they had to acquire weapons, ammunitions and other resources necessary to defend the Republic. In order to pay for these resources millions of guilders were required. The seven provinces making up the Republic consequently decided to increase their taxes and to borrow on the capital market. With regard to the latter, the Dutch Republic had the reputation of having excellent credit and paying the lowest interest rates in Europe. This held in particular for Holland, the richest of the seven provinces. From the late sixteenth century onwards, this province was able to issue large sums of long-term debt at progressively lower interest rates.1 This capacity is considered as one of the essential features that supported the Republic‟s independence for more than two centuries. Although scholars have assigned this important role to Holland‟s borrowing capacity, we still lack a detailed analysis of this province‟s debt policy. What were the conditions of the loans issued? And what was the rationale behind the choice for these particular conditions?2 This essay will answer these questions by investigating the debt issuing policy of Holland during the Dutch War. By examining this policy we thus confront one of the important means which enabled the Dutch to successfully defend their territory. This close relation between war and debt emerged all over Europe between the sixteenth and eighteenth centuries, for the Dutch War was only one of many wars that were the bloody manifestations of an ongoing power struggle which dominated these centuries.3 These wars were fought on a progressively larger scale with more advanced weaponry and consequently higher costs. As a means to raise these increasing sums, European rulers set up tax systems that covered an increasing size of territories and populations. As a consequence, the administrative role of the state at national or provincial levels grew at the cost of local ones. This process of state formation took place all over Europe but expressed itself in different forms. While for instance in England, France, Spain and Sweden political and fiscal powers became increasingly 1 Between 1515 and 1565 Holland‟s provincial estates had also issued loans. But then the Dutch Revolt damaged provincial credit for thirty years. We will examine this in-depth in chapter 2. 2 A first step in this direction has been taken by O. Gelderblom and J. Jonker, “The Conditional Miracle: Institutional Change, Fiscal Policy, Bond Markets and Interest Rates in Holland, 1514-1713” (working paper 2009). 3 M. „t Hart, The Making of a Bourgeois State: War, Politics and Finance during the Dutch Revolt (Manchester 1993) 2, 158. 4 centralized at a national level, the Dutch Republic‟s political structure remained highly decentralized with fiscal centralization only at the provincial level.4 Apart from these differences with regard to the extent of centralization, the organizational and administrative effectiveness of tax systems also varied. In France central authorities never had a complete overview of tax revenues, but in Holland taxation was efficiently coordinated by the provincial Finance Office.5 Because taxes formed the main source for interest and redemption payments, public borrowing was intimately connected to the setting up of tax systems. Initially, some rulers pledged princely domains or ecclesiastical property as collateral for their debts. But in many European states this role was taken over by tax revenues during the sixteenth and seventeenth centuries.6 Because in war time tax revenues always fell short of expenses, a state‟s capacity to borrow was crucial for paying its troops. It could even affect the outcome of wars. Peter Dickson for instance argued that in England institutional changes led to a “financial revolution” at the end of the seventeenth century, which enabled the English state to borrow enormous amounts of capital and subsequently win the Anglo-French power struggle of the eighteenth century.7 Although scholars have assigned this crucial importance to the role of public debt, they have focused almost exclusively on this fiscal and institutional side to explain its creation and development. What lacks in their analyses is the interaction between the state and the capital market. Building up an effective tax system to pay for interest was one thing, but inducing investors to buy state securities at as low interest rates as possible was another. By constantly feeling out each other both government and investors must have influenced the cost of debt.8 This essay will investigate the influence of this interaction on Holland‟s debt issuing policy during the Dutch War. Initially this will include consideration of the parameters in which this interaction took place: institutional developments, previous debt history, and the political and economic situation. Subsequently, the conditions of each issue of debt and the subsequent reaction of the capital market will be investigated to analyze what motivated people to invest or not, and the abilities of the government to influence these incentives (and vice versa). Holland and the Dutch War are especially interesting for such an analysis as at this time Holland had excellent credit, the lowest interest rates of Europe and an advanced capital market. However, after the French invasion in 1672 credit was severely damaged. The interaction between state and market can therefore be investigated in circumstances of good and bad credit. 4 M. ‟t Hart, “The Emergence and Consolidation of the „Tax State‟. The Seventeenth Century” in: R. Bonney, Economic Systems and State Finance (Oxford 1995) 281-293, at 282-283; C. Tilly, Coercion, Capital and European States, AD 990-1992 (Cambridge MA 1992) 74-75. 5 R. Bonney, “France, 1494-1815” in: R. Bonney, The Rise of the Fiscal State in Europe, c. 1200-1815 (Oxford, 1999) 123-176, at 136; J.F. Bosher, French Finances 1770-1795: From Business to Bureaucracy (London 1970) 6; W. Fritschy, “The Efficiency of Taxation in Holland” in: O. Gelderblom (ed.), The Political Economy of the Dutch Republic (Farnham 2009) 55-84. 6 ‟t Hart, Bourgeois State, 158-159. 7 Dickson, The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756 (London 1967) 8-9. 8 Gelderblom and Jonker, “Conditional Miracle”, 3. 5 Historiography By virtue of its importance for the Republic‟s fight for independence the topic of Holland‟s public debt has received much scholarly attention. Before we will discuss this essay‟s approach in more detail, we will therefore briefly consider this historiography to take account of other dimensions and approaches with regard to Holland‟s public debt. The standard work on the topic is Het Tekort by Eduard Dormans. This book is a general survey about the development of Holland‟s debt during the existence of the Dutch Republic. The core of the work concentrates on the amount of debt over time in connection to tax revenues and the political situation. The author shows that despite an enormous rise of tax revenues, taxes could not keep pace with the huge increases in public borrowing. As a result an increasingly larger part of taxes was spent on interest payments. According to Dormans, this necessitated Holland to cut down military expenses to such a dangerous level that France could easily conquer the Republic in 1795.9 Other authors have concentrated on the origins of Holland‟s public debt and the causes for its success in the 17th and 18th centuries. With “success” we mean the ability to issue great amounts of debt at progressively lower interest rates. According to James Tracy, these origins can be found during the rule of the Habsburg emperor Charles V as Count of Holland. That means that the origins of Holland‟s public debt had already been established before the Dutch struggle for independence began in 1568. Tracy maintains that institutional changes in the first half of the 16th century eventually resulted in the establishment of provincial credit.