When governments restructured their debts after the Napoleonic Wars and returned to the market to raise fresh funds they often did so in London, and later in Paris as well. These were the principal markets specializing in international finance in the 19th century. However, they were not the centers for sovereign lending in the 18th century. That honor goes to Amsterdam. Dutch investors funded the deficits of several European states and the early debts of the United States as well. However, the primacy of Amsterdam came to an end with the French Revolution and the Napoleonic Wars.
Amsterdam
The commercial center of the Netherlands was Amsterdam. While the city’s relative importance as a trading hub began to diminish in the late 17th century, it remained the leading capital market in Europe until the end of the 18th century. It was the site of numerous financial innovations, and the popularization of prior inventions, ranging from the joint stock company to financial derivatives like options and futures. The city was awash in wealth and the country was small enough that domestic investment opportunities were limited. So, surplus capital from Dutch investors was invested abroad.
Foreign Loans
Awash in surplus capital, Dutch investors snapped up foreign securities. These included those issued abroad and denominated in foreign currencies, most notably those of France or Britain, countries which generally sold their debt domestically alone. Dutch investors were invested heavily in Britain at first, until the Fourth Anglo-Dutch War in 1781, and other issuers thereafter.
The shift to French and other securities from British bonds was not driven so much by patriotism in a time of war – Dutch investors frequently invested in the bonds of enemy countries – but because of growing alternatives. Still, this was a risky era for investing in sovereign bonds as unilateral debt conversions or renegotiations were typically resorted to by governments and were considered normal fiscal policies.
In addition to bonds issued abroad, investors could purchase local bonds issued by foreign governments since Dutch bankers also underwrote local loan offerings for foreign clients denominated in Dutch florins. These included loans for Austria, Denmark, Poland, Sweden, Spain, Russia and the United States. Austria was one of the first, raising florin loans in Holland since 1695. The last of these, Poland and the United States, were introduced to the Dutch markets later in the 18th century. In all, both powerful states and small principalities turned to Amsterdam.
Danish Loans
Denmark raised its first Dutch loan in 1757. Wars tended to prompt much borrowing. However, while Denmark was not involved in the Seven Years’ War in these mid-century years, the country still issued loans in Holland to fund the accumulation of silver reserves to back banknotes issued by its central bank, the Copenhagen Kurantbank. Denmark issued more loans in the 1770s and 1780s, typically secured by toll revenues on the Øresund strait between Denmark and Sweden. By 1771, the yield on these bonds was 4.0% and rates stood at this level in 1783 as well. Generally speaking, countries could borrow in Holland at fairly attractive rates.
Denmark’s principal bankers in Holland were Jacob Dull & Zoonen. They placed five of the country’s seven Dutch loans between 1774 and 1788. After much of this borrowing, by 1784, Denmark had outstanding debts of 21 million rixdollars or 41 million Dutch florins. Of this, about 27 million florins (66%) was owed to investors abroad and about two-thirds of the country’s foreign debts in the 1780s were owed in the Netherlands.
The French Revolution and the Napoleonic Wars would change the role of the Netherlands in European finance. During the Napoleonic Wars, Denmark abandoned its neutrality in favor of an alliance with France. While Amsterdam was under French control, this did not prevent Denmark from losing access to its favored capital market. Denmark’s state revenues available to service debt fell and redemption of loans had to be suspended. Further, Holland’s bankers needed Emperor Napoleon’s consent to raise a loan, even for allied countries, and this was not straightforward to secure.
France
While larger countries tended to borrow less from abroad, France did rely on Holland to some extent. The first French loan in Holland was issued in 1720. Like Denmark, they could also borrow cheaply; yields on French bonds were 4.0% in 1771 and 3.9% in 1783. However, these were the rates on conventional loans; France also borrowed money in the form of life annuities which paid an investor a fixed amount for life. Some French borrowings also came with premiums paid upon redemption, keeping the recurring interest cost lower than the total return paid to the investor over the entire life of a bond.
Initially, most Dutch investors bought French securities that were issued in France through agents there. Nonetheless, perhaps sensing the demand from investors in Holland and in need of more money, in 1786, the French government hired bankers in Amsterdam to manage payments on its bonds held by Dutch investors.
French finances were generally in poor condition in the 18th century. While common across Europe, revisions to the terms of debts were more arbitrarily decisioned in the case of French loans than those of other states. However, it was not so straightforward then to recognize these fiscal problems as it is today. There was limited information on which to base an analysis of a government’s creditworthiness. State budgets were not often published and the news reporting that existed was not thorough enough to determine creditworthiness. Generally, as long as payments came, bondholders were happy.
Over the course of the 18th century, France issued more life annuities at higher returns to investors. A 1771 annuity sold by France in Holland paid 8% for a lifetime annuity on one life or 7% if on two lives. Peculiarly for life annuities, some French issues of this period offered the same rates regardless of the age of the annuitant. Further, investments in these 1771 annuities could be paid for with depreciated French bonds worth considerably less than face value so an investor could actually purchase the annuity at rates closer to 12%.
Of course, these are life annuities which terminate at death and so these rates are not at all comparable to the interest rate on a bond repaid at maturity if the bond was not a perpetual one. This may explain why the 1771 annuity did not sell well; nonetheless, later offerings after 1779 did find a lot of demand in Holland. Mimicking similar securitization structures already found in Geneva, Dutch investment trusts, such as one created by Couderc & Brants in 1787, invested in pools of these annuities.
Dutch interest in French securities grew in the 1780s. Some were simply attracted by the yield of their annuities but there was also a belief these yields were not to last and would fall in the years after the American War of Independence and the fiscal reforms of Jacques Necker, France’s finance minister. There may have been considerable fear of missing out. France also benefited from a stable monetary system and therefore a stable exchange rate against the Dutch florin. Investors were also in search of a large new favored borrower as relations with Britain worsened. The value of French securities held by Dutch investors grew from 25 million florins to well over 100 million florins. However, investors were ignorant of just how desperate France’s fiscal position was as the country was bankrupt by 1788.
America
In 1778, the United States, its independence not even yet secured, raised a loan in Amsterdam. This was not particularly successful but in 1781, France raised a five-million-franc loan on behalf of the United States while its credit was still viewed favorably in Holland. The following year, the United States raised a loan on its own credit and, while take up was slow, it did eventually receive meaningful funds from investors. The hesitation was understandable; the United States was a new issuer with fiscal problems. The country hired the Amsterdam bankers W. & J. Willink and N. & J. van Staphorst. Given the difficulty in selling American bonds, the banks were paid generous commissions for their work.
The yield on these bonds was 5.1% by 1783. This may not seem that high but it was one of the highest yielding sovereign bonds available on the market. However, it was still a lower cost of borrowing than that of Spain, a fiscal basket case of the time. Despite early fiscal troubles, the United States’ borrowing costs in Holland fell, converging with established issuers by around 1790. By now, the Americans had a more respectable fiscal system and greater familiarity among Dutch investors. Again, this reputation was not necessarily warranted; even in 1792, interest payments on the public debt comprised 87% of U.S. government tax revenues
Still, as wars ravaged Europe, the credit of the United States was one of the few that was improving. In the early 1790s, the country could borrow in Holland at rates as low as any government and it did just that. Between 1790 and 1794, the United States raised 23.5 million florins in Dutch loans. In the subsequent decade, loans raised in Holland would help the United States pay for its purchase of Louisiana from a still financial strained France.
Decline
By 1790, the foreign assets of Dutch investors amounted to between 500 and 650 million florins of which 150 to 220 million florins were comprised of foreign loans issued in Amsterdam and the rest foreign securities issued abroad but held by Dutch investors. Virtually all governments could borrow cheaply in Holland during this golden age. Even Spanish yields fell from over 5% to under 4% in the 1780s and very early 1790s. Unfortunately, the French Revolution and Napoleonic Wars shattered this system.
Parts of the Netherlands were occupied by France from 1793 on and Amsterdam from 1795 on. The wars destroyed Amsterdam’s indispensable role in finance. Unable to raise new loans, governments defaulted on their debts. Foreign governments at war with France could no longer access Dutch investors and even those allied with France, like Denmark, could not raise the sums they had easily secured in the past. Governments turned elsewhere for loans, especially to London. When governments settled their defaults and returned to the market in the 1810s, they largely bypassed Amsterdam for London which became the market of choice for foreign states in the 19th century.
Lesson
The Netherlands, and Amsterdam specifically, transitioned in the 17th century from a trading center to a financial center. The country’s investors deployed their excess savings abroad and in the local bonds of foreign governments. Virtually all European countries borrowed money and many did so at least to some extent in the Netherlands. This might have seemed like a source of great strength. However, this was a perilous age to be lending to governments.
Many states defaulted on their obligations in one way or another and unilateral debt restructurings were considered normal fiscal expedients. On top of this, most European countries were absolute monarchies with opaque budgets. When things went wrong, Dutch investors were doubly affected by the insolvency of France, first as exposed investors and then as captives under French administration when Holland was invaded and occupied by France during the French Revolutionary Wars.
More from the Tontine Coffee-House
Read about 18th century securitizations of French annuities and a Dutch invention, the first mutual fund. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Kindleberger, Charles P. A Financial History of Western Europe. George Allen & Unwin, 1987.
2. Riley, James C. International Government Finance and the Amsterdam Capital Market, 1740-1815. Cambridge University Press, 2009.
3. Tomz, Michael. Reputation and International Cooperation: Sovereign Debt across Three Centuries. Princeton University Press, 2012.
