Amsterdam Business Guide
Merchant banks and the international capital market:
The remarkable growth of Dutch involvement with the international capital market, especially in the second half of the 18th century, was mediated
by what we now would call merchant banks. In Holland these grew out of merchant houses that shifted their capital first from financing their
own trade and inventories to acceptance credit, and later branched out specifically into underwriting and public offerings of foreign
government bonds (denominated in Dutch guilders) in the Dutch capital markets. In this respect the domestic and foreign bond markets
differed appreciably, as the Dutch government dealt directly with Dutch investors (as we have seen above).
Dutch involvement with loans to foreign governments had been as old as the Republic. At first such loans were provided by banking houses
(as was usual in early-modern Europe), with the guarantee of the States General, and often also subsidized by the Dutch government.
An example is the loan of 400,000 Reichstalers to Gustavus Adolphus of Sweden around 1620 directly by the States General. When the king
could not fulfill his obligations, the Amsterdam merchant Louis de Geer agreed to assume the payments in exchange for Swedish commercial
concessions (iron and copper mines) to his firm. Similar arrangements between Dutch merchants and foreign governments occurred
throughout the 17th century.
The transition to more modern forms of international lending came after the Glorious Revolution of 1688. The new Dutch regime in
England imported Dutch innovations in public finance to England, the most important of which was the funded public debt, in which
certain revenues (of the also newly introduced excises after the Dutch model) were dedicated to the amortization and service of the
public debt, while the responsibility for the English debt shifted from the monarch personally, to Parliament. The management of this
debt was entrusted to the innovatory Bank of England in 1694.This in one fell swoop put the English public debt on the same footing of
creditworthiness in the eyes of Dutch investors, as the Dutch one. In the following decades wealthy Dutch investors invested directly
in British government bonds, and also in British joint-stock companies like that Bank of England, and the Honourable East India Company.
This was facilitated as after 1723 such stock, and certain government bonds, were traded jointly on the London and Amsterdam Stock Exchanges.
But this applied to a safely controlled ally like England. Other foreign governments were still deemed "too risky" and their loans
required the guarantee, and often subsidy, of the States General, as before (which helped to tie allies to the Dutch cause in the wars
against France). After 1713 there was no longer a motivation for the Dutch government to extend such guarantees. Foreign governments
therefore had to enter the market on their own. This is where the merchant banks came in, around the middle of the 18th century,
with their emmissiebedrijf or public-offering business. At first, this business was limited to British and
Austrian loans. The banks
would float guilder-denominated bonds on behalf of those (and later other) governments, and create a market for those bonds. This was
done by specialist brokers (called entrepreneurs) who rounded up clients and steered them to the offerings. The banks were able to
charge a hefty fee for this service.
The rapid growth of foreign investment after 1780 (as seen above) coincided with a redirection of the investment to governments other
than the British. Many Dutch investors liquidated their British portfolios after the Fourth Anglo-Dutch War (which immediately resulted
in a rise in British interest rates) and reinvested in French, Spanish, Polish (an especially bad choice in view of the coming
Partitions of Poland), and even American government loans. The appetite for such placements abated a little after the first
defaults of foreign governments (like the French in 1793), but even under the Batavian Republic (which itself absorbed the bulk of
available funds after 1795) investment in foreign funds did not fall-off completely. This may have been due to the fact that Dutch
investors did not always realize the riskiness of this type of investment. They were often badly served by the merchant banks,
who had a vested interest in protecting their sovereign clients to the detriment of the bondholders. This is also indicated by the
very slight agio of the interest rate of these risky loans over that for domestic bonds.
This apparent credulity on the part of the Dutch bondholders resulted in serious losses in the final years of the independent
state, and during the annexation to France. The Dutch state for the first time in centuries defaulted after that annexation
(a default that the new Kingdom of the Netherlands continued after the Netherlands became independent again in 1813). This
tiercé (a dividing of the debt into two parts repudiated debt and one part recognized debt) followed the earlier repudiation
of the French debt that had also devastated Dutch bondholders that had switched into French debt shortly before. The losses
in the period 1793 to 1840 may have totalled between one-third and one half of Dutch wealth.
Commercial credit and insurance:
As explained in the general article on the economic history of the Netherlands under the Republic, the Dutch entrepôt function was very important.
One of the reasons Amsterdam was able to win this function after the Fall of Antwerp was the commercial credit offered to suppliers and buyers,
usually as part of the discount on the bill of exchange. By prolonging and rolling-over such short-term credits, suppliers and customers
could easily be tied to the entrepôt. The low interest rates usually prevailing in the Republic made the maintenance of large inventories
feasible, thereby enhancing Amsterdam's reputation as the world's Emporium.
Though this commercial credit was originally tied to the trading operation of merchant firms, the sheer scope of the entrepôt created
the opportunity for the trading in bills apart from this direct business, thereby serving third parties, even those not doing direct
business with the Netherlands. Two kinds of financial trading, divorced from commercial trading, began to emerge by the beginning of
the 18th century: trading on commission, and accepting houses. The first consisted of trading of agents (called commissionairs) on
behalf of other merchants for a commission. Their role was therefore intermediation between buyers and sellers, leaving the conclusion
of the business to those parties themselves.
The second consisted in guaranteeing payment on bills of exchange from third parties. If the third party issuing the bill would
default, the accepting house would pay the bill itself. This guarantee of course was provided for a fee. This service need not
have any connection with Dutch traders, or even with the Dutch entrepôt. It served international trade in general. Though this
divorce between credit provision and trade has been interpreted as undermining Dutch trade itself in the age of relative decline
of Dutch commerce, it probably was just a defensive move in a time of increasing foreign competition, protecting a share for
Dutch commerce, and providing another outlet for commercial capital that would otherwise have been idle. The size of this
business was estimated to be about 200 million guilders around 1773.
Much lending and borrowing of course occurred outside the formal economy. Unfortunately, it is difficult to document the size of
this informal business. However, the archived registers of the notaries form an important source of information on this business,
as those notaries acted as intermediaries bringing lenders and borrowers together (not least in the mortgage-loan
business). Also,
probate inventories, describing the estate of deceased persons, show the intricate web of credit transactions that occurred on a
daily basis in the Republic, even between its humblest citizens.
Mercantile trade brought risks of shipwreck and piracy. Such risks were often self-insured. The East-India Company armed its vessels,
and maintained extensive military establishments abroad, thereby internalizing protection costs. Arming merchantmen was quite usual
in those days. However, the type of cargo vessel most often used by the Dutch, the Fluyt ship, went usually without guns, or was but
lightly armed. This made ship and crew vulnerable to capture by Dunkirk privateers and Barbary pirates. In the latter case captured
crews were often sold as slaves. To finance the ransoming of these slaves so-called slavenkassen (slave treasuries) were set up
with the support of the government, some of which still exist as charitable foundations, like the one in Zierikzee.
Other examples of self-insurance were the partnerships of ship owners, known as partenrederijen (which is probably best
translated as "managed partnership", although these were precursors of joint stock companies). These spread the financial
risks over a large number of investors, the participanten. This type of business organization was not limited to ship owning,
of course. Investment in windmills and trekschuiten often took this form also.
But insurance was also formalized as a contractual business, first offered by merchants as part of their normal trade, later by
specialized insurers. This type of business started with marine insurance. In 1598 (three years before a similar institution was
established in England) the city of Amsterdam instituted a Kamer van Assurantie en Avarij (Chamber of Marine Insurance) which
was charged with regulating this business. This drew on the example of Antwerp where this business had been going on for a
long time before that. From 1612 on the Assuradeuren (insurance brokers) had their own corner in the Amsterdam stock exchange,
where they offered policies on hulls and cargoes to many different destinations. From 1626 the prijscourant (offering stock
and bond prices) of the Dutch stock exchanges offered quotations for ten destinations. A century later that number had grown
to 21. A large number of private firms insured domestic and foreign shipping alike, making Amsterdam Europe's principal center
for marine insurance until the third quarter of the 18th century. One of these companies, founded during the 1720 Dutch
financial Bubble (related to the English and French bubbles of the same year) as the Maatschappij van Assurantie, Discontering
en Beleening der Stad Rotterdam has been continuously doing business as an insurance firm, Stad Rotterdam Verzekeringen, to this day.
These marine insurers at the end of the 18th century branched out to fire insurance. However, that type of insurance had
already been pioneered at the end of the 17th century by a remarkable mutual insurance company of owners of paper-making
windmills, called the Papiermakerscontract, though other types of industrial windmills were also admitted. The first
known such policy dates from 1694. In 1733 no less than 72 windmills were insured with an insured value of 224,200 guilders.
The company remained in business till 1903.
Another form of insurance that was popular from time to time was life insurance. However, private insurance companies could
usually not compete with government life annuities when the government was active in this market. We therefore see this
activity only in the period between 1670 and 1690, when Holland suspended the issuance of lijfrenten, and again after
1710, when the province again withdrew from this market. After 1780 the French government started to dominate this
market with its life annuities. The private life-insurance contracts often took the form of group investment pools
that paid pensions to nominees. A peculiar feature was often a tontine format that offered windfall profits to surviving
nominees. In the 18th century these pools were marketed and controlled by brokers, which gave them a professional character.
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