The Dutch Republic had the most developed financial system in Europe in the 17th and 18th centuries, a system which deployed huge surpluses earned in trade. However, there were limited investment opportunities in Holland so this system also helped develop Dutch colonies as investors in Holland invested their surpluses abroad. In Suriname, Dutch savings were invested in plantations through securities called negotiaties issued by mortgage funds. The funds were structured to overcome the great distances between the lenders and borrowers involved but they did not prevent over-lending or soften the tumble when the bubble burst.
Suriname
On the northern coast of South America, Suriname was colonized by the British who established the first plantations there in 1650. With the Dutch, Britain swapped the territory here for New Amsterdam in North America. After 1750, coffee replaced sugar as the main export crop produced in Suriname. Some 60,000 slaves worked over 400 plantations just in Suriname. Other Dutch possessions in the West Indies, cultivating similar crops, included bordering Guyana and some Caribbean islands. It was capital intensive to develop a plantation since everything, including slave labor, was imported from abroad.
Negotiaties
A system developed in the mid-18th century to finance the cultivation of Suriname. Starting around this time, debt repayments by the government were freeing up investor capital for other projects. The debt burden of the most important province in the Dutch Republic, Holland, fell from 360 million florins to 320 million in the thirty years starting in 1750. This may seem like a small portion of the public debt but the repaid sum was large relative to available alternative investment opportunities.
Much of this capital found its way to Suriname. However, to do so, some barriers to investing money so far away had to be overcome. Investors in Holland reinvested their money into securities called negotiaties. These were essentially securities issued by a fund-like entity. A fund structure allowed investors in the Netherlands to pool resources and employ professional managers. The structure could go some way towards overcoming the tremendous distance between lenders and borrowers in overseas lending. At this time, a voyage from Europe to the American colonies could easily take three months.
A negotiatie fund would be managed by a merchant-banker, typically based in a city like Amsterdam, Middelburg, or Rotterdam, who would issue the securities under a ‘plan of negotiatie’. The fund managed by a director would intermediate capital invested by Dutch investors into colonial mortgages. In Suriname, and to a lesser extent in Guyana, the negotiatie fund would employ agents, known as agendarissen, to find and screen prospective borrowers and appraisers, or priseurs, to value properties.
Coffee plantations received 85% of plantation loans in Suriname. The loans were secured by mortgages on the property and were made at up to five-eighths or three-quarters of their value. A typical loan was structured with a twenty-year term but only interest had to be paid in the first ten years, giving time for the plantations to be developed. It took five or six years for newly planted trees to yield coffee beans. Principal repayment, in increments of one-tenth over ten years, would begin after the tenth year of the loan.
The merchants who arranged these funds aspired not so much to be investment managers as to simply gain one more product, an irresistible one, which to offer planters – credit. Planers who accepted a loan committed to selling their produce, and often purchase their supplies, through the negotiatie fund’s director who would receive a commission, typically 2%, for marketing their produce. A fund manager might also collect 1% to 2.5% for arranging a mortgage with the planter.
The funds promised their investors a return of 5-6%. This was higher than the interest rates than could be earned on safer investment opportunities back in Holland. A government bond yielded just 2.5%. The negotiaties were divided into units, usually 1,000 florins each, and syndicated to investors.
The first Suriname plantation negotiaties were issued in the 1750s by the merchant Willem Gideon Deutz. His fund grew from an initial capital of one million florins to 3.7 million florins. However, this experiment was not successful. Planters often needed more loans over and above the mortgages, which Deutz made personally. They then struggled to make interest payments let alone repay their loans’ principal. Still, this early stumble would not mark the end of the plantation mortgage.
Over-lending
Rather than fade away, there was a boom in the issuance of negotiaties and the making of mortgages in the colonies from 1765 to 1775. Some 198 funds were established for financing plantations in the Dutch West Indies. Somewhere between 30 million and 41 million florins was raised to finance plantations in Suriname alone. The Suriname-based agents of the fund managers struggled to make enough loans. This was not due to any shortage of incentive; in fact, part of their pay depended on the volume of mortgages extended.
With credit easy to come by, entrepreneurs jumped into the business. Anyone could secure financing and try their luck as a planter in the colonies. Some had no relevant experience at all and some did not even leave for the Caribbean. Rather, they were absentee owners in Holland, delegating management to an administrator who usually lived in the Surinamese capital Paramaribo and visited the properties only when necessary, in turn leaving day-to-day management to staff who received just a fixed salary but no incentive compensation.
At first, things progressed well. Coffee prices were rising and production surged. This meant that the valuations of plantations increased sharply. Land prices doubled in the 1770s in Suriname and more than doubled in parts of nearby Guyana. Indebtedness grew as well. The size of a typical mortgage grew from approximately 35,000 florins between 1750 and 1765 to 65,000 florins for mortgages originated between 1766 and 1768. The average loan then grew to 107,000 florins between 1769 and 1770.
Overall, estimates of Dutch money invested in plantation negotiaties in the Dutch West Indies range from 63 million florins to 80 million florins, approximately half of this in Suriname. This was a sum equal to at least one-third of Holland’s GDP. There was tremendous danger lurking and not only because of the amounts being lent. On top of that, much of this lending was done on appraised values that were not at all related to a plantation’s productivity or their ability to service the debt. Some loans were also poorly documented, with money lent before a mortgage over the property was even formally created.
The value of one representative estate, Bleyenhoop along the River Cottica, more than doubled between 1765 and 1773, from approximately 135,000 florins to 303,000 florins. This was disproportionate to the increase in the cultivated acreage or the number of slaves working the plantation. Appraisers were often colonial landowners themselves, or were politicians, and so had an incentive to inflate valuations for their neighbors’ properties. Bleyenhoop’s debts more than doubled from 75,000 florins to 195,000 florins over the same years.
This was unique to the Dutch colonial system. There was no comparable credit system in Britain’s Caribbean colonies. There, a planter had to build his business by reinvesting retained earnings over time whereas a planter in the Dutch Caribbean had access to the credit needed to throw himself into the business much more quickly.
For the planter, the system was very generous. Second mortgages became common. If a planter exhausted his existing lender’s willingness to lend more money, his loan could be transferred to another fund more willing to extend more credit. To secure business, some fund directors personally made loans ineligible for inclusion in their negotiatie funds. Between second mortgages and other loans, some planters incurred debts of 100% of the value of their plantation. Much of this money was not spent on improvements to the estate but went towards maintaining the planter’s lifestyle. When payments were missed, something which often happened right from the start of the boom, fund managers paid investors their interest out of their own funds, keeping investors happy but masking the problem.
Crisis
The boom turned to a crash in Suriname in the 1770s. This coincided with drought, poor harvests, and attacks by escaped slaves on plantations. In the past, credit had continued to flow when some of these developments occurred but the combined effect would be different this time. The market for coffee peaked around 1769 and the origination of new mortgages fell sharply. By 1771, credit was becoming quite a bit harder to come by and the business of the planter depended on credit.
Those quick to sell their plantations cashed out at high prices. One plantation called Venetia Nova was sold in 1770 at a price just 3% below its appraised value of 1768. Thereafter coffee prices and plantation values began to fall further. La Confiance, another plantation financed by the same lender as Venetia Nova, sold in 1773 at a price 22% below its 1768 valuation.
Compounding the crisis, there was a financial panic in London and Amsterdam in 1772-73 making investors even more risk averse. So, between 1773 and 1775, plantations lost still more of their value. There were also a rising number of bankrupt estates making defaults and losses on loans likely. Plantations that could not even make reliable payment on their loans when times were good now faced a dismal situation. The Bleyenhoop estate mentioned earlier generated an income in 1778 of just 2,700 florins as compared to interest on its associated debts of 17,000 florins.
It was not just limited access to new loans or declining coffee prices that wrecked planters. Coffee plantations could not maintain their production levels as their debt overhang limited their potential to invest. Enslaved workers bore the brunt of a financial deflation originating across the ocean. One administrator, Jean Rocheteau, had to request clothes for his half-naked slaves from their owner, in part to avoid fines from the colonial government, but he received no money. The value of estates and their slaves fell by a stunning two-thirds. The funds and in turn the holders of the mortgage negotiaties were underwater on their investments.
Outcomes
Among the outcomes of the bubble’s deflation, interest paid on negotiaties had to be reduced from a norm of 5-6% to 3% or 1.5% and sometimes nothing at all. Principal repayment was also substantially delayed if any meaningful payment was seen at all. One of the biggest negotiatie funds, managed by Abraham ter Borch & Sons, suspended payment as early into the slide as 1772. The export value of Suriname plantations was insufficient, after the costs of production, to repay the massive debts incurred and no one was willing to make new loans. The massive volume of loans made in the peak years around 1770 had reduced to a trickle by the late 1770s.
Another negotiatie fund managed by the van Marselis brothers had raised 3.9 million florins of investor capital and deployed this in loans to thirty-one plantations. The cumulative value of twenty-five of these in 1770 was 5.5 million florins. Within twenty years these estates were judged to be worth no more than 1.8 million florins while their total indebtedness had grown to over six million florins. The returns on the fund fell from 5% to 3% around 1780 but it kept making payments. This actually made the van Marselis fund among the best performers. The typical outcome was worse.
Among loans originated before 1776, only one-third of their balance was repaid by the end of the century. This was far less than should have been repaid given that loans were arranged to be twenty years in term. Many mortgages were simply rolled over, making amortization rare. Around the same time, two-thirds of the plantations in Suriname were in bankruptcy. Many negotiatie funds were restructured into share companies in what amounted to a debt-to-equity conversion. This meant investors had to accept the loss of a regular income stream.
The coffee business stagnated and went into decline. Despite all the lending during the boom years, Suriname produced hardly any more coffee in 1790 than it had in 1770 and by 1810 output was clearly falling. Nonetheless, since the problem facing planters was mostly a simple excess of debt, plantations with less debt survived and often maintained some access to credit, even during the bleak years.
Lesson
The plantation mortgage funds did attempt to combine the excess savings of Dutch investors in Holland with professional management and agents to make investing in a distant land safer. However, there were no safeguards against over-lending and the adverse incentives of many involved. As noted by Bram Hoonhout in “The crisis of the subprime plantation mortgages in the Dutch West Indies, 1750-1775.” (cited below), this combination of novel investment structures and problematic incentives, and the nature of the plantation mortgage product, bear a resemblance to much more recent real estate bubbles. The fact they have so much in common signals such developments will surely reoccur in the future and not without due embarrassment.
More from the Tontine Coffee-House
Read how excess savings in early 20th century Shanghai were invested in rubber plantations in Malaysia as well as a 19th century bubble in Indian indigo. 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. De Jong, Abe, et al. “Plantation mortgage-backed securities: Evidence from Surinam in the eighteenth century.” The Journal of Economic History, vol. 83, no. 3, 2023, pp. 874–911.
2. Hoonhout, Bram. Borderless Empire: Dutch Guiana in the Atlantic World, 1750-1800. The University of Georgia Press, 2020.
3. Hoonhout, Bram. “The crisis of the subprime plantation mortgages in the Dutch West Indies, 1750-1775.” Leidschrift, vol. 28, no. 2, Sept. 2013.
4. Van Stipriaan, Alex. “Debunking debts image and reality of a colonial crisis: Suriname at the end of the 18th century.” Itinerario, vol. 19, no. 1, Mar. 1995, pp. 69–84.
