Dutch Bankers and Early American Credit

The early diplomatic history of the United States, before the War of Independence even came to a close, revolved around securing recognition from other countries and raising money from their governments, bankers, or investors. Of course, London’s financial markets were off limits until the peace treaty of 1783 and France, while the provider of initial financial backing, had its own limited fiscal capacity which was generally weakening with time. So, the early United States turned to the Netherlands, whose bankers and investors warmly welcomed early American borrowings abroad.

American Credit

The standing of American credit was not good in the early-1780s. The country was plagued by the myriad of depreciated currencies issued by various states and a shortage of precious metal specie with which to repay foreign loans. Paper dollars were worth just 1/40th of their purported value in specie by 1780. There was no national bank able to facilitate loans for the government. The federal government also had nearly no ability to impose a tax. Instead, it relied on charging assessments to the states. Unfortunately, the latter usually underpaid, on average contributing only about 25% of amounts assessed in the 1780s.

In 1781, the United States defaulted on its domestic debts and then, in 1783, on its loans from France. The deep discounts to face value at which American domestic debts traded hands would impede efforts to raise new loans abroad.

Despite the challenges and the halt in debt payments, there was some credit extended to the new country in the early-1780s anyway. Foreign creditors knew that, if it became independent, the land handed over to the new U.S. government could facilitate the repayment of debts. European investors were also more interested in the Treaty of Paris, being negotiated between Britain and America, and signed in 1783. The treaty would auger well for American credit, foreign investors assumed, and in any case successfully distracted their attention from American domestic political and fiscal disfunction.

Early American Loans in the Netherlands

After France, American foreign borrowing turned to the Netherlands, which had been for well over a century one of the wealthiest countries in Europe. After 1740, Amsterdam became a more meaningful center in international lending as foreign governments placed more frequent loans with Dutch investors. Helping facilitate the introduction of American securities in the country, the Netherlands recognized the independence of the United States in 1782. As France began to encounter its own financial difficulties and there was no credit to be obtained in America, the Netherlands became the only financial market open to the U.S. government.

Treaty of Amity and Commerce between the U.S. and the Netherlands (1782)

Some, but far from all, Dutch bankers were intrigued by the possibility of making loans to the United States just as the War of Independence was coming to a close. The French had previously raised a ten million livre (about 5 million guilder) loan on America’s behalf in the Amsterdam market. However, this loan was raised on the basis of its French backing along with a guarantee provided by the States General of the Dutch Republic.

Following that loan though, several banks bid to issue the first purely American loan in Holland. That said, these were generally the lesser bankers of the country because the principal banks of the Netherlands were associated with the House of Orange, which produced Dutch stadtholders and English monarchs, and therefore were associated with England and English interests. These firms would not work with the United States. Instead, a group of bankers – Willink, Van Staphorst, De la Lande, and Fynje – were hired to place the first American loan.

The bankers Nicolaas and Jacob Van Staphorst took the lead role. The two were brothers particularly active in American loans, were encouraged by some American sympathies, and possessed the desire to become a leading Dutch banking house. Counting a new national government as a client would be helpful in that endeavor. The Van Staphorsts made a 300,000-guilder loan to Maryland in 1782 where interest would be paid each year in the form of one thousand hogsheads of that state’s tobacco crop.

Also in 1782, the first Dutch loan issuance for the federal government was arranged at a size of five million guilders, or $2 million, at 5% interest. It was placed with investors by a syndicate paid a 4.5% commission. That said, the money did not come rushing in; just $720,000 was secured in 1782. The rest of it was raised from investors in the subsequent four years. A further loan of two million guilders (or $800,000) was raised in 1784-87 to cover interest payments on the first loan. The bankers took a larger 7% fee for this loan.

The bankers in turn hired brokers to sell pieces of the loans; one of the more prolific of these was Pieter Stadnitski. He formed a syndicate of investors that held $1.34 million of American debts by 1788; these included domestic securities shipped to Europe. So confident was he in the product he was selling that Stadnitski was personally guaranteeing payments of interest to investors to whom he sold American bonds.

A new loan was raised in 1787 but 622,000 out of one million guilders was still unsubscribed for as of early 1788. Pieter Stadnitski offered to fill the rest of the loan in return for having 180,000 guilders of the proceeds go towards paying one year’s interest on his syndicate’s other holdings of American securities; this would have meant treating Stadnitski better than other creditors. The American diplomats in Europe, John Adams in London and Thomas Jefferson in Paris, managed to secure other means of raising money without granting such a concession to Stadnitski. However, this rejection did not deter him from continuing to serve as the foremost vendor of American bonds.

Investment Trusts

In fact, Stadnitski, Van Staphorst, and other Dutch financiers formed a group to invest more in America. The group sent an associate of Stadnitski’s, Theophile Cazenove, across the Atlantic to buy American securities and report on local developments there. The group bought American domestic debts, had them shipped to Europe, grouped them into investment trusts, and had these trusts issue shares to investors in Amsterdam. Because the Van Staphorst firm was issuing bonds to cover American interest payments in Amsterdam, they maintained Dutch demand for American securities which allowed the group to sell more of them to investors.

Bid for French Holdings

Demand from Dutch investors was even beginning to open the prospect of the Netherland’s absorbing French holdings of American bonds, holdings accumulated by this much larger country during its support in the War of Independence. In 1786, Nicolaas and Jacob Van Staphorst expressed interest in buying a part of the French government’s holdings of American securities. The French possessed at least 24 million livres of American debts. These were in default and while the French were applying increasing pressure to secure payment, it led to no meaningful progress.

In the meantime, France’s public finances were in an increasingly sorry state. In fact, France’s own bonds in Amsterdam were trading at yields equivalent to American bond yields in the city. Van Staphorst had reason to be worried that the French might liquidate their American securities to raise money. That in turn would flood the market with discounted and defaulted American securities, destroying demand for the bankers’ own issuance of American loans in Holland.

Van Staphorst bid for the French holdings at a price of 83, a 17% discount to face value. This may seem like a very attractive price for defaulted bonds but it nonetheless sparked a bidding war for these securities. American bidders showed up but, being short of money, they conjured up all sort of plans, including one to pay for the purchase with sales of American land to settlers. In any case, competing bidders were less well funded than the Van Staphorsts and their ideas seemed suspect at best or completely untenable at worst.

Nonetheless, the French were happy to receive competing bids. The Van Staphorst firm realized that if they lost the bidding, then a huge volume of American securities would fall into the hands of speculators which they believed would have to sell their holdings due to their own lack of credit. This risked crushing the market for American securities in Europe under the weight of this excessive volume of securities in need of a new home, no different a situation than if the French themselves liquidated the lot.

Van Staphorst managed to stop a deal at their expense by placing an American loan in Holland that was fully subscribed to, despite the American government not even ordering such a loan. It was now 1790 and as the bidding process had dragged on, American credit had improved to the point where this success was now possible. However, the loan was not intended by the bankers to raise fresh funds for their American client as much as it was designed to kill off the bidding process in France. The Van Staphorst firm used the loan’s success as evidence to the French that it would be silly to dispose of their bonds at any discount at all. Also, the money just raised in Amsterdam allowed the U.S. government to meet overdue payments on the French-held securities, no doubt satisfying the French.

Land Speculations

American loans came to be better regarded in Europe with time. While this helped garner investor interest, speculators saw reduced potential for profits from trading in them. By 1790, American domestic debts came to trade at prices above 90, a relatively modest discount to face value. At these prices, the value of American securities at home would no longer get in the way of raising capital in Europe. In 1791, the U.S. was successfully issuing large loans, 8.5 million guilders, to refinance its loans held by the French government.

Dutch bankers may have been kept busy placing American loans but Dutch speculators moved on from securities and turned to American land investments. From the U.S., Cazenove reported back to his sponsors that more money could be made speculating in land. Van Staphorst declined to participate, keeping their focus on public securities, but the other members of the syndicate began speculating in American land. Initial interest was in buying up land to harvest maple sugar which could compete with Caribbean cane sugar.

Stadnitski raised money to complement the syndicate’s own funds in these ventures; to this end, he published a prospectus in 1792. The partnership was reorganized as the Holland Land Company in 1795, a 3-million-guilder loan was raised, and over five million acres of land in New York and Pennsylvania were purchased. The investment generally proved disappointing though; it could only be resold to poor settlers who needed to finance out their purchases over long-term installment payments. The land would not be entirely sold until 1849.

Lesson

International lending was conducted in a haze in the 18th century. There was limited reliable up-to-date financial information on which to base an investment decision. No doubt this cost many investors a lot of money from time to time and weakened the functioning of the market. These conditions benefited some though. The market for American securities in Amsterdam was helped by the fact that American financial difficulties that were foremost in people’s minds in Philadelphia were not well understood in Amsterdam. Diplomatic developments in Europe, like recognition of the United States, and the selective payments of interest by the U.S. government helped keep the Amsterdam market open to American borrowings when other markets were closed.

More from the Tontine Coffee-House

Read about the establishment of the Bank of New York, which was supported by Alexander Hamilton, the Panic of 1792 in the United States, and the large Anglo-Dutch banking firm Hope & Company. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.