There aren’t very many financial instruments, especially bonds, that distributed income to investors for over a century. The relatively few that exist are usually perpetual bonds, those without any maturity date at all. Today, they are a relatively small category of bonds available to investors. However, there was a time when perpetual bonds were the norm. One of these bonds, issued by a Dutch water authority in the era of Rembrandt, has been paying interest for well over three centuries.
Of course, perpetual bonds are not at all unique to the Netherlands, but the purpose of this bond was. It was issued in 1648 by a Dutch public authority managing part of the country’s dykes and other infrastructure needed to protect the country, much of it below sea level, from floods. Today, in a small way thanks to this bond, the Netherlands is still dry and the bond, perhaps the world’s oldest infrastructure bond still paying interest, has traded into the hands of Yale University.
Dutch Water Boards
But first, a bit about the kind of institution that issued this bond. Water Boards, or waterschappen in Dutch, are local public sector organizations that are charged with maintaining waterways and water barriers in the Netherlands. An important responsibility in a country where about a third of the land is below sea level, and an expensive one. In the Middle Ages, many of the dykes and simple water control systems were build and maintained by the adjacent population. However, as time went on, the structures became more complex and their beneficiaries included people who lived farther from the barriers and had not been among those who maintained them.
To spread the growing cost of maintaining the water barriers and getting more of their beneficiaries to pay up, Water Boards were established. They were able to raise their own taxes and enforce them. The Water Boards also borrowed money to provide financing for any required improvements. As obligations used to finance specific infrastructure projects, they were among the world’s first infrastructure bonds, today a burgeoning asset class.
The 1648 bond now owned by Yale was issued by the Hoogheemraadschap Lekdijk Bovendams (try saying that five times). Lekdijk Bovendams was a Water Board governed by local landowners and other citizens that managed barriers and waterways on a 20-mile stretch of a branch of the Rhine called the Lek. This was just one of these local organizations; in 1850, there were over 3000 such Water Boards. The smaller entities were consolidated over time and today, Stichtse Rijnlanden is the successor of the organization that issued the 1648 bond.
As public sector authorities with taxation powers, the Water Boards had some of the credit characteristics of sovereign governments. However, unlike sovereign governments which have gotten into dire financial straits by borrowing to fund wars and social spending, the Water Boards have a single specific function, and fighting wars isn’t it. As such, the Water Boards had some pretty solid credit fundamentals, revealing some reasons why the Lekdijk Bovendams bond survived and continues to pay its interest today.
The 1648 bond was denominated in Carolus Guilders, a coin minted in the Netherlands starting in the early 16th century, during the reign of Holy Roman Emperor Charles V, whom the coin is named after. The Carolus Guilder, and later its decedents, served as the currency of the Netherlands until its adoption of the euro in 2002.
When it was issued, the bond had an interest rate of 5%. This was reduced centuries ago to 2.5% and since the guilder is long gone, interest is now paid on the principal’s equivalent sum in euros. The conversion between the old guilders and the new euros was fixed at 2.20371 guilders per euro; thus, the euro principal on the bond is just over €450. At an interest rate of 2.5%, that means annual interest payments on the bond of €11.35.
However, Yale paid a lot more than fair market value for the bond, at least when considering only its financial value. In 2003, Yale purchased the bond for €24,000 for a current yield on their investment of under .05%; this is excluding its historical value of course.
The terms of the bond required that the bond be presented to the Water Board in order for its bearer to collect the interest. The bond was thus a bearer bond, as opposed to a registered bond; interest was paid to whoever physically held the bond instead of having an official record of its owner being kept. As a result, the bond has been presented and interest collected only a few times in the last few decades with any preceding uncollected sums paid then as well.
Yale dispatched corporate finance professor Geert Rouwenhorst to collect interest on the bond in 2015. He brought with him a much newer addendum document accompanying the bond as proof of ownership; Yale’s Beinecke Library, the document’s home, prevented the actual 370-year-old bond from being checked out of its collection. Prior to that, the university last collected interest in 2003, soon after it first purchased the bond. The last interest collection from before the university’s purchase was made in 1976 to a previous owner, and only intermittently before then. In a caveat to our earlier yield calculation, Yale did get to collect all the interest accrued on the bond since its last interest collection in 1976, when the university presented it for payment in 2003; collecting over €300.
The bond and the addendum to it can be seen above. In smaller text at the bottom of the original bond, written on goatskin, interest payments were recorded. This centuries-long list continues on the back of the original document and since 1944 on the separate addendum. Shown above is how it looked just before the university collected an additional 12 years of interest in 2015.
But what specifically did this bond finance? As the role of its issuer implied, it was used to pay for improvements to waterways and barriers. Specifically, this bond financed the construction of a cribbinge, piers along a river’s bend that help prevent erosion, on that 20-mile stretch of the Lek.
In a way, the Lekdijk Bovendams bond was one of the world’s first infrastructure bonds. Using the term rather loosely to mean any bond issued to back a specific infrastructure project, infrastructure bonds have existed for centuries, even outside the Netherlands. Today, these bonds are very often backed by the revenue generated by the project being financed. However, while the Dutch bond explained above was backed by taxes collected by the Water Board, the capacity of local landowners and citizens to pay the tax was at least in some way influenced by the success of the project.
Later on, infrastructure bonds backed by the revenues generated by the projects being financed were issued regularly in Britain in the late 18th and 19th centuries. In Britain, turnpike trusts were created by Parliament and were composed of trustees charged with managing toll roads in England. These turnpike trusts borrowed money and their debts were paid for and secured by the tolls collected on the roads. The same approach was also used to finance canal construction; some of the earliest municipal bonds issued in the US were issued to build canals in New York, including the Erie Canal. These infrastructure projects were crucial to bringing about the Industrial Revolution in Britain and America, and the bonds that financed them are thus of great historical importance.
Given that the 1648 Water Board bond is among the first in a long line of bonds issued over the centuries to finance infrastructure, it becomes obvious how important bond issues like it were. Without them, cities and towns would not have thrived as they did and the development of nations would have been slowed. Thanks to them, capital was raised for transformative projects. It is all the more significant that the Lekdijk Bovendams bond continues to pay interest today; though it is of greater historical value to its owner than merely provided by its financial returns. Indeed, the bond is of particularly great educational value because of it. Hopefully it continues to stick around long after more space is needed to fit all those interest payment records.
1. Cummings, Mike. “Yale’s 367-Year-Old Water Bond Still Pays Interest.” YaleNews, Yale University, 22 Sept. 2015.
2. de Jong, David. “Yale to Be Paid Interest on Dutch Water Authority Bond From 1648.” Bloomberg.com, Bloomberg, 16 Sept. 2015.
3. Fahim, Mayraj. “Municipal Bonds Have Been Issued by US Local Government since 1812.” City Mayors, 20 Mar. 2012.
4. Scott, Tom, director. The Centuries-Old Debt That’s Still Paying Interest. The Centuries-Old Debt That’s Still Paying Interest, YouTube, 25 Sept. 2017.