Dutch Influence on London Finance

There were several banks conducting both British and Dutch business in the second half of the 18th century. A few of them failed in a financial panic in 1772-73 afflicting both countries. They existed because the financial links between the two places were substantial. After Britain became a more stable place in which to do business during the late-17th century, Dutch capital began to be invested in London’s financial markets. To facilitate this, several financial institutions, instruments, and practices had to be imported to Britain from Holland.

Amsterdam and London

Amsterdam took over from Antwerp as the premier financial center in Europe and developed numerous financial institutions and instruments. The Amsterdamsche Wisselbank, or ‘Bank of Amsterdam’, was founded in 1609 and took in deposits to finance the city of Amsterdam and the Dutch East India Company. Its deposits were occasionally valued at a premium over coined money because confidence in the bank was high and its accounts facilitated easy payments between customers.

The innovations of the Amsterdamsche Wisselbank were significant. The bank’s deposit accounts enabled trade to occur regardless of the supply of metal coins in the city at any given moment. The bank also popularized a common unit of account to replace the myriads of coins circulating in the Netherlands at the time, coins from different countries, provinces, and cities which were periodically debased, so differed even by the year the coins were minted.

An early stock exchange also developed in Amsterdam, where shares in the Dutch East India Company traded hands. Futures contracts and other financial instruments were developed there too. The city possessed a large foreign exchange market allowing large international transactions to be settled in Amsterdam. The Dutch also had a much more stable system of public finance than found in most parts of Europe. During the Netherlands’ War of Independence against Spain, bonds were issued backed by specific tax revenues. They were not standardized, inhibiting the development of a bond market, but they were regarded as among the most reliable investments in Europe.

By comparison to the Netherlands, finance in England and Scotland was comparatively undeveloped. Prior to the late-17th century, there was no large bank at all, or many sophisticated bankers for that matter. Homegrown financial talent was almost nonexistent. Much of the financial services delivered in London were provided by foreigners, often Italian or Dutch. The payments infrastructure was primitive and the supply of money insufficient to develop substantial trade. Borrowing in England, even by the state, often had to be done on a short-term basis only. No investment in the country offered the safety of Dutch bonds.

17th Century

English public finances were in poor shape for most of the 17th century. Dutch public finances were judged to be in better order than those of England, with English diplomat Sir William Temple noting that debts were handled there with “so great ease and exactness both in principal and interest, that no man ever demands it twice”. Developing such a fiscal system in England required developing tax revenues that were reliable enough to support borrowings, among other institutional changes.

To start, the Netherlands levied a much more substantial tax burden on its citizens than did England, but English tax increases in the 1640s mimicked the system of higher excise taxes already found in Holland. Public acceptance and oversight were important. Taxes were put under the direction of the Dutch States General in the Netherlands and, after the English Civil War, English taxation and spending was likewise put under closer parliamentary control as.

“That the Hollanders have the best manner of tax, which is only upon the expense of provisions, by an excise; and doth conclude that no other tax is proper for England but a pound rate or excise upon the expense of provisions.” – The Diary of Samuel Pepys, V 68

One direct connection between the fiscal establishment in London and Dutch practice was Sir George Downing, who held the post of Teller of the Exchequer after having been made an Ambassador to the Dutch Republic. He supported excise taxes as a more stable form of revenue; this eventually served as a tax base with which to service government bond payments. More taxes were also collected centrally rather than by tax farmers, which actually moved the English system away from the Dutch example, which still relied on tax farmers.

Nonetheless, Downing intent was to introduce reforms to provide for England the sort of credibility that the Netherlands already possessed. At the Exchequer, he implemented better recordkeeping and the practice of paying creditors in chronological order. Forced loans largely disappeared after the mid-1660s too. Eventually, Dutch investors began to buy English bonds, perhaps encouraged by the sort of reforms Downing introduced. Thirty-four Dutch investors participated in a state loan in 1693, for example, and the Dutch extended £300,000 to the Bank of England in 1695.

The Bank of England itself may have been based on a Dutch example. William Paterson, one of its founders, had travelled through the Low Countries earlier in life. Whether this offers a possible connection or not, the Bank of England was formed to make a loan to the English state just as the Bank of Amsterdam made loans to the city government. That said, there were many differences in the institutions, such as the fact that the Bank of Amsterdam did not issue banknotes, whereas the Bank of England would.

One area of finance where London’s activity actually greatly outstripped that of Amsterdam early on was in the floating of shares in new companies. Many more English companies were founded in the 17th century and they issued shares which traded hands in a secondary market. One of these was the English East India Company, established right at the start of the century, but in time there were many more chartered companies than in the Netherlands. So, London’s stock market had a markedly more diverse array of traded shares. Areas where London activity exceeded that of Holland would become more common.

18th Century

It was in the following century that London came to overtake Amsterdam in financial relevance. True, the Dutch share of world trade fell but the country remained financially influential. So, the Netherlands remained important and still contributed to the development of finance in Britain. Perhaps the most crucial fact in the relationship between these two countries was that Dutch interest rates were the lowest in Europe, generally 2-3% in the 18th century. By contrast, British interest rates did get as low as 3% but they did not remain so low and were higher than Dutch rates.

Dutch capital flowed to London when enough of a gap appeared in the yield of safe investments in London over those in Amsterdam. These flows regularly lifted the foreign exchange value of sterling compared to the Dutch guilder, which was helpful, since Dutch buying took place when confidence in public finances was otherwise weakened, typically because of the onset of a new war. Dutch bankers developed a business deploying the savings of Dutch households into appealing foreign opportunities and Anglo–Dutch banking firms emerged to channel Dutch investors into British bills and bonds.

George Clifford III of the Anglo-Dutch bank Clifford & Sons

At times, British shares received substantial Dutch interest. During the South Sea Bubble, Dutch investors were invested in London’s stock market. They were also buying up nearly 20% of new stock issuances by the Bank of England between 1720 and 1725. Enough shares in British companies were in Dutch hands that some of these securities traded on the Amsterdam Stock Exchange too. By 1747, listings there including three British shares and four of the country’s government securities; it may not seem like much but these made up 17% of the just forty-one securities listed on the Amsterdam exchange at that time.

By 1764, Dutch investors held approximately 225 million guilders in British bonds. The money was not only extended to the government, the East India Company, or the Bank of England. It was also made available to plantations in America and the Caribbean, particularly after the end of the Seven Years’ War reduced further British government borrowings, meaning Dutch investor capital was diverted elsewhere.

Crisis of 1772-73

So close were the markets in London and Amsterdam that the two cities suffered from a market panic in 1772. The crisis began in London with the failure of Scottish banker and speculator Alexander Fordyce, leading to bank runs as funding for banks in London’s money markets dried up. Fordyce’s failure led to runs on Scottish bankers in London, and in Scotland itself, and the Bank of England intervened to rescue ten important London bankers. Such were the links between the two countries that even the Dutch bank Hope & Co. had exposure to Alexander Fordyce, recognizing over 500,0000 Dutch guilders in losses as a result.

British East India Company shares fell about 27% in the second half of 1772 and Dutch investors were heavily invested in its stock. Many speculators borrowed money secured by company shares at rates as low as 3.5-4%, the same rate as larger banks were able to secure margin loans. The sliding share price triggered calls for more collateral on loans secured by the East India Company stock, loans which could typically be called in by the lender with just six weeks’ notice. As a result, Dutch speculators Hermanus and Johannes van Seppenwolde failed later in 1772. At over six million guilders, their borrowings may have comprised about half of the margin loans outstanding in Amsterdam.

The Anglo-Dutch bank Clifford & Sons, which had exposure both to Fordyce and to van Seppenwolde failed too as its own creditors demanded repayment. Its London affiliate Clifford & Blanckenhagen also closed. Payments were difficult to clear in the wake of its failure and the Bank of Amsterdam took an extended holiday over Christmas-New Years 1772-73, ending only on January 29. Other firms with activities in both London and Amsterdam were ruined, like the Anglo-Dutch firm of John Daniel & Maurice Dreyer. Bills from London firms being ‘protested’, or documented as defaulted by Dutch notaries, grew from 60,000 guilders in the first quarter of 1772 to over 1.3 million a year later.

The crisis of 1772-73 ended with intervention of the Bank of England which could act as a lender of last resort in a manner no contemporary Dutch firm could. That said, other measures were taken by the Dutch to stem the crisis too, albeit not by any one institution alone. By mid-1773, conditions had stabilized. Still, it was the waning days for international finance in Amsterdam. The city lost most of its international economic relevance with its occupation during the Napoleonic Wars. Many of its bankers left for London, one final contribution to finance in that city.

Lesson

From the 13th to the 19th centuries, the leading financial centers in Europe generally migrated northward from Siena to Florence, from Florence to Bruges and Antwerp, from Antwerp to Amsterdam, from Amsterdam to London. The latter cities did not develop their institutions, instruments, and practices independently. There was always a direct relationship between earlier and later financial centers.

Communication facilitated some of this but the links were more numerous than those of this sort alone. Many of the bankers in Bruges and Antwerp in their heyday were Italian, for instance, and early insurance contracts underwritten in London were often governed by Florentine or Antwerp law. The importation of Dutch practices in the 17th century and Dutch capital in the 18th century helped accelerate the development of financial markets in London.

More from the Tontine Coffee-House

Read about the Panic of 1772 and its contribution to American Independence, the Dutch bank Hope & Company, and mutual marine insurance in the Netherlands and Britain. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.