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We're going through some readings regarding how the formation of modern states was structured through the many wars throughout Europe across the centuries, and one of the points that concerns me - which is found in chapter 3 of Charles Tilly's Coercion, Capital and European States - is the innovation of public debt financing that occurred in the Habsburg's Netherlands.

The book mentions that

"(...) critical innovations had occurred between 1515 and 1565, when the States General of the Habsburg Netherlands (...) took steps toward issuing state-backed annuities secured by specific new taxes and bearing attractive interest (...) As a result, 'in an emergency, the Dutch Republic could raise a loan of 1 million florins at only 3 percent in two days'"

I can grasp that this was a strategy formulated by the government so as not to raise taxes too much and too abruptly, thus causing discontent among the population. What I do not understand, however - and haven't found a good explanation for - is how, exactly, did these annuities work. In other words, the internal mechanics of the thing, and possibly a more detailed account on how the whole matter was settled by the government and/or how people reacted to it. To sum it up, any explanation that could make me understand well of the matter would make me happy, if anyone could provide it.

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Tilly cites Geoffrey Parker's The "Military Revolution," 1560-1660--a Myth? as his source. Parker states that:

"It was the Dutch who first perfected techniques of war finance capable of sustaining an enormous army almost indefinitely. The cost of the war with Spain from 1621 until 1648 steadily increased (from an average of 13 million florins in the 1620s to an average of 19 million in the 1640s), but there was not a single mutiny of financial crisis. On the contrary, in an emergency, the Dutch Republic could raise a loan of 1 million florins at only 3 percent in two days."

  • Parker, pp212-213

Parker, in turn, cites as his source Violet Barbour's Capitalism in Amsterdam in the 17th century (page 81). Since I've finally got my hands on a copy of Barbour's book, I will try to summarise her description of the situation.


Public Trust

The key factor was that underpinned the system in Holland and the States General at that time was that the government had gained a reputation for paying what was due, in-full and on-time.

For the prudent, whether of great or modest means, a relatively safe investment was available in loans to the city of Amsterdam, the province of Holland, or the United Provinces. The Dutch were the first of northern peoples to win public confidence for this method of anticipating revenue, and the credit of the metropolis, of a few other towns of the republic, of the richest province and - though to a lesser degree - of the federation, was a singular phenomenon in an age when most European governments were either chronically bankrupt like Spain and Austria, or tottering on the edge of that abyss like Stuart England or Bourbon France.

  • Violet Barbour, Capitalism in Amsterdam in the 17th century, page 81.

Barbour quotes Sir William Temple, who observed that the provincial debt of Holland, bearing interest at 4 per cent was carried:

"With so great ease and exactness both in Principal and Interest, that no man ever demands it twice; they might take up whatever money they desired. Whoever is admitted to bring in his money, taking it for a great deal of favour; and when they pay off any part of the Principal, those, it belongs to, receive it with Tears, not knowing how to dispose of it to Interest with such Safety and Ease. And the common Revenue of particular Men lies much in the Cantores, either of the Generality, or the several Provinces, which are the Registries of these publique Debts."

Temple went on to observe that since the debentures of Holland were exchangeable for cash at par, and were not subject to any fees:

"... whoever has a Bill of any publique Debt, has so much ready Money in his Coffers, being paid certainly at call, without charge, or trouble; and assign'd over in payment, like the best Bill of Exchange."

  • p 254

Raising Funds for War

When it came to raising funds for war, the people with funds to invest were confident that they would get the promised return on their investment (a situation that would continue until the threatened French invasion of 1672). This allowed the government to raise funds quickly since it seems there were more potential investors than there were annuities or bonds (in other words they were over-subscribed).

Barbour described the situation as follows:

The elasticity of Dutch finance in time of war aroused an exasperated respect in the republic's enemies who vainly anticipated the pleasure of seeing it break down. In the Summer of 1664, when war with England loomed, a loan of f. 1,000,000 at 3 per cent was subscribed in two days in Amsterdam. Six months later the English resident reported hopefully: "I do assure you that every penny for this Sumers Equipage must be taken up at interest which is now doing, and enough ods to get it at foure per centum whereas those of Amsterdam said they made no doubt but to helpe the States of Holland to as much money as they pleased at three ..." But a few weeks later: "As to the 3. millions which those of Holland do take up the respective summes were immediately subscribed by such as will lend the same, but especially that million at 8 per cent. for a life rent, and they are at this lime mighty high."

Life rents were life annuities which bore a relatively high rate of interest because they were unredeemable and payments ceased at the death of the annuitant.

In 1666, when England's war effort was already cramped for lack of funds, De Witt was said to have boasted "That of the last eight millions they had taken up, five yet remained untoucht and if they would take up twenty more at foure in the hundred hee was sure they might have it."

So it seems that - even if De Witt was exaggerating - the initial offerings had been over-subscribed.


Interest Rates

In common with modern sovereign debt issues, countries that were perceived as being a higher risk were required to pay higher rates of interest.

To illustrate this, Barbour notes that the provincial debt of Holland in 1662 was about f. 120,000,000. By 1676 this had risen to f. 200,000,000. The interest payable was 4 per cent in both years.

For comparison, by 1676 Charles II of England was paying not less than 10 per cent, and Louis XIV of France something like 15 per cent!


Public Popularity

To give one final illustration of the popularity of public bonds and annuities as investments, Barbour quotes the example of Louis Trip from G.W. Kernkamp's 'Amsterdamse patriciërs'.

"... Louis Trip who, at his death in 1684 left f. 142,999 in debentures and short·term notes of the province of Holland; f. 9,000 in obligations of various Dutch towns; and f. 5,852 in redeemable annuities (lostente-brieven) also issued by municipalities."

Noting that

"At these relatively low rates lending to the local or federal government was a popular investment, and so widely were public debentures subscribed that the security of men of moderate means was inseparable from the security of state or city. Some of the wealthiest men of Amsterdam liked to have a backlog of public securities ..."


Taxes

As for the taxes that underpinned the loans, these weighed heaviest on those least able to pay. Barbour make this point explicitly:

"... still less that the scheme of taxation by which public credit was upheld, had been framed with much consideration of 'ability to bear.' Government was in the hands of the rentier class, closely related through family and investment ties with the wealthy merchant oligarchies of the towns. Rich men, the saying went, "ran between the drops," while an array of excises on most consumer goods and on the commoner activities of living, bore with crushing weight on the peasant, the artisan, the seaman, and the fisherman. Amsterdam and other commercial towns of the federation resisted proposals to raise the customs or otherwise increase the burdens of trade and industry.

  • p 84 (my emphasis)

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