Age of Invention: How the Dutch Did it Better

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One of the weird things about Britain, despite its being the birthplace of the Industrial Revolution, is that its financial infrastructure was for a long time remarkably backward. Its “Financial Revolution”, by which both people and the state began to borrow at ever lower interest rates, only really took off in the early eighteenth century — long after London’s extraordinary growth in 1550-1650, when it had suddenly expanded eightfold to become one of Europe’s most important commercial hubs. Indeed, even for much of the late seventeenth century, England lacked many of the most basic financial institutions that had been used for decades and decades by their most important rival and trading partner, the Dutch Republic.

I was especially intrigued when I stumbled across a discussion of Dutch policies and customs, written up in around 1665 by the young merchant Josiah Child, and published a few years later: a kind of wishlist of many of the things that made the Dutch so wealthy, and which the English continually failed to emulate:¹

1. The Dutch councils of state and war always included merchants who had experience of trading and living abroad — Child was perhaps just angling for some influence here, but for all that merchants were getting more influential, in England they were not actually in charge.

2. Gavel-kind succession laws, whereby all children got an equal share of their parents’ estates, rather than it all going to the eldest. English primogeniture, by contrast, apparently left a lot of gentlemen’s younger sons having to become apprenticed to merchants.

3. High regulatory standards for goods. A barrel of Dutch-packed herring or cod would apparently be accepted by buyers just by viewing the marks, without having to open them up to check. English-packed goods, by contrast, were rarely trusted because the fish would turn out to be rotten or even missing — the English regulators’ stamps of approval were reputedly given to anyone who would pay.

4. Encouragement for inventors of new products, techniques, and import trades, who received rewards from the state, and not just temporary monopoly patents.

5. Ships, called fluyt, which were cheaper to build, required fewer sailors, and were easier to handle. Despite being only very lightly armed, they sailed in fleets for protection, when necessary being convoyed by ships of war. English trading ships, by contrast, were each heavily armed, but with those cannon taking up room and weight that could have been used for carrying merchandise.

6. Education of all children, even girls, in arithmetic and keeping accounts. As Child put it, this infused in the Dutch “a strong aptitude, love, and delight” for commerce. It also meant that husbands and wives were real partners in many businesses — something that impressed almost all foreign visitors to the Netherlands.

7. Low customs duties, but high consumption taxes. Very low customs duties, on both imports and exports, meant that it was often very profitable to trade with the Netherlands. The Dutch were famed for their many ships, and for their granaries bursting with grain, despite growing hardly any trees or crops themselves. To fund their state, they instead overwhelmingly relied on the gemene middelen — taxes on the sale of wine, beer, meat, fuel, candles, salt, soap, flour, cloth, and a host of other goods, with many of the higher rates reserved for expensive luxuries. Much like modern value-added taxes, these taxes on consumption raised revenue while preserving the all-important incentive to save and invest.

8. Thrifty living — which, come to think of it, was probably related to the high consumption taxes, although Childs doesn’t seem to have noticed the connection. Dutch thrift was thought by the English to be especially useful because it allowed wage costs to be kept low — essential for maintaining competitiveness in international markets — while preventing the country having a trade deficit. The English always worried they were sending too much of their silver abroad to pay for French wines and other luxuries, but the Dutch appeared to have prevented this without resorting to import tariffs that might annoy trading partners and prompt retaliation.

9. Religious toleration, which attracted all sorts of industrious immigrants to bring their families and wealth. (Incidentally, as I’ve mentioned before, this was also one of the key attractions of Livorno, set up by the Medici Dukes of Tuscany to be a major trading hub.)

10. The use of the Law-Merchant, which meant that all controversies between merchants and tradesmen were decided in just 3 or 4 days’ time. England, rather strangely for such an increasingly commercial nation, did not develop merchant courts with a specific jurisdiction or a distinct body of merchant law — disputes instead had to be resolved in the royal common-law or equity courts, in the Admiralty court, or else abroad. The English courts, however, were often slow. Child complained that cases often took half a year, and often much longer. (Incidentally, slow and rotten justice in the Court of Chancery, the key equity court used by merchants in England, was one of the reasons Francis Bacon was impeached by Parliament and sacked as Lord Chancellor.)

11. Transferrable bills of exchange — in other words, the circulation of credit notes as a currency. These were not properly supported by English laws, but allowed Dutch merchants to trade a lot more frequently. English merchants often had to wait some six months to a year before receiving all the coin from selling their foreign goods in London, so as to purchase goods again to make fresh trades. They spent much of their time chasing shopkeepers for payment. But the Dutch, by being able to easily buy and sell their credit notes, could “turn their stocks twice or thrice in trade”, immediately settling their accounts and making fresh purchases. (I intend to look into this in a lot more detail soon, as finding a way to bills of exchange transferrable in England appears to have been a major project for many of the mid-seventeenth-century inventors and improvers — after just a cursory glance, transferability was only secured in law as late as 1704.)

12. Banks. Or rather, as Child actually put it, “BANKS”. In England many of the functions of banks gradually evolved from the practices of individual goldsmiths and the scriveners — legal clerks who specialised in property transfers and mortgages. There was certainly nothing so secure as the municipal Wisselbank of Amsterdam, established in 1609, which had various monopoly powers as a clearing-house for bills of exchange and was backed by a vault full of bullion. Nor the municipal Bank van Lening, established in 1614, which was a pawnbroker modelled on the Italian Monte di Pietà, or mounts of piety, designed to make small and low-cost loans to the poor.

13. “PUBLIC REGISTERS” — again capitalised by Child — of all lands and houses sold or mortgaged. This item on the policy wishlist would not be ticked off for England until two centuries later, but the key advantage was to prevent lawsuits over land titles — still cited as a major problem even in the 1690s — and so make land more genuinely secure for mortgages.

Finally, the result of many of these policies was the Dutch had significantly lower interest rates — often just 3-4% when the English were still lending and borrowing at 6-8%. Indeed, this list was made because of a long-standing English policy debate I’ve been researching, on whether to lower the legal maximum rate of interest. (In addition to researching the history of energy, I’ve thinking quite a lot about capital and its availability as part of the work I’ve been doing with Carbon Upcycling.)

Many merchants and other commentators in England seem to have recognised that the Dutch low interest rates were the result of its sheer plenty of credit and security, along with a lack of remaining opportunities at home for further investment — the Dutch did not have much land, and many of the more obvious investments to raise its productivity were done early on. With many wannabe lenders and only a few potential borrowers, interest rates quite naturally fell.

But some English commentators, like Josiah Child, believed that they could achieve the same effects by putting the cart before the horse, having Parliament simply lower the maximum legal interest rates for lending. In England interest rates had been capped at 10% since the mid-sixteenth century, but thanks to the arguments of the likes Child, the cap had been lowered in 1624 to 8%, and then again in 1651 to 6% — all ostensibly to keep pace with the Dutch, whose market rates had been falling even while their legal maximum had remained at a whopping 12% the whole time (a fact that Child and his friends conveniently ignored or brushed away). In the 1660s, when Child was writing, there was a lot of debate about whether to lower the English legal maximum even further, to 4%, though in the end it wasn’t until 1713 that it was brought down to a more moderate 5% (and this for only slightly more intelligent reasons to do with raising cash for the state).

I’d always assumed that this legal rate had lowered more or less in line with the market interest rate in England. But now, having read everything I can find about them, I’m increasingly convinced that the successive lowerings were actually one of the key reasons that England’s financial revolution was so delayed. I’m even toying with an idea that it may have been the cause of England in the 1650s-70s quite suddenly and explosively seeing a whole lot more investment being poured into aggressive colonial expansion and the slave trade. This hypothesis needs a bit more testing and research, but the general idea is this:

Credit in England was very constrained because of poor security and plenty of avenues for profitable investment. The City of London was a special case, able to borrow at rates as low as 5% from a municipally-governed fund that administered the inheritances of the city’s orphans until they came of age. The City in turn often lent money out, seemingly giving preferential rates to the city’s trading companies, as well as lending to individuals.² Although the City must have been considered one of the most reputable and secure borrowers in the country, however, the vast majority of its borrowing from individual lender in the mid-seventeenth century seems to have been at or very close to the legal maximum.³ Otherwise, market interest rates between ordinary borrowers and ordinary lenders seem to have hovered at the level of the cap,⁴ suggesting that it kept being lowered below the rate that the market would bear. Lenders who had previously asked for and received rates of 10 or 8% thus faced a few choices.

1. They could ramp up the security they demanded on loans at the lower maximum rate of 8 or 6%, demanding more guarantors to stand surety for loans, and in general being a lot choosier, likely spending more on brokers’ services to identify only the lower-risk borrowers.

2. Or, rather than indirectly taking a cut of the returns of the people they lent to, they could directly seek higher returns by trading in merchandise or improving land themselves.

3. Or they could simply not risk lending or investing at all, and perhaps just consume their wealth on luxuries like having more servants and fancy coaches.

4. Or, and I think most likely, they could pour their capital into places that had much higher legal interest rates. A lot of lenders in England were actually Dutch, taking advantage of the fact that they could raise money in the Netherlands at just 3-4% and then lend it onto the English at 10, 8, or 6%, depending on the cap. Many of these foreign lenders may simply have switched their lending to higher-interest countries like France, Denmark, Poland-Lithuania, Spain, or Sweden — the spectacular rise of Sweden’s iron industry owed a lot to Dutch capital. But as for English lenders, the most accessible markets for their capital must surely have been both Ireland (legally capped at 10%) and the nascent colonies of New England, Virginia, Barbados, and Jamaica (often with interest rates as high as 15%).⁵

I will need to research this some more, to see if the evidence bears out the theory — I’m especially on the look-out for contemporaries explicitly mentioning how they acted when the cap was lowered, or to the contrary. But if I’m right, it would mean that English politicians may have potentially delayed the country’s own, domestic agricultural improvement and industrialisation, while inadvertently making the horrific practices of the late seventeenth and eighteenth century relatively more attractive to investors.

1. J.C. [Josiah Child], Brief observations concerning trade, and interest of money (London: Henry Mortlock, 1668), pp.3-6

2. I strongly suspect that the rates at which it lent out to corporations and individuals were more for political or charitable reasons, rather than a reflection of market interest rates. But without further detail, I can’t say that for certain.

3. Despite being perhaps the most trustworthy borrower in the country, the City was seemingly still only able to borrow from individuals at 7-7.5% from 1638 until the cap was lowered to 6 in 1651 — and even then it was still having to borrow from some people at 8%. I also wonder how many of the lower-interest loans were considered somewhat charitable given the context of the Civil War and Interregnum, being given by insiders — it appears that at least a third of the value of all its borrowing over the entire period 1638-83 came from city aldermen and guild members, but I’ve not seen a more detailed breakdown. The City otherwise enjoyed a brief window of falling interest rates between 1673 and 1683, when it defaulted, very briefly commanding a 4% competitive with even the Dutch. There was also a brief dip below the 6% cap to about 5% in c.1664, ruined by the great plague and fire. For all the details, see this outstanding new paper by Nathan Sussman, ‘Financial Developments in London in the Seventeenth Century: The Financial Revolution Revisited’, The Journal of Economic History 82, no. 2 (June 2022), pp.480–515

4. Take the goldsmith-banker Sir Francis Child (apparently no relation to Josiah Child), who as late as 1680-1705 was still effectively lending at or even above the 6% legal cap. Stephen Quinn, ‘The Glorious Revolution’s Effect on English Private Finance: A Microhistory, 1680-1705’, The Journal of Economic History 61, no. 3 (2001), pp.593–615. Even as late as 1702-25, Hoare’s goldsmith-bank, when it charged interest at all, only ever lent at the rate of the cap! Peter Temin and Hans-Joachim Voth, Prometheus Shackled: Goldsmith Banks and England’s Financial Revolution after 1700 (Oxford University Press, 2013), pp.61, 75-76

5. Child cited 15% for Barbados and Virginia, and a cap of 8% in New England. He claimed to have direct experience of the Barbados trade — he was not a nice man. J.C. [Josiah Child], A short addition to the observations concerning trade and interest of money. By the same hand, (London: Henry Mortlock, 1668), pp.6-7. The rate of 15% seems about right for Jamaica too, with a whopping 16% called the “bare interest” by one planter in 1668, which seems to have naturally fallen to about 8% by the 1680s as a result of all the investment. See: Nuala Zahedieh, ‘Trade, Plunder, and Economic Development in Early English Jamaica, 1655-89’, The Economic History Review 39, no. 2 (1986), pp.205–22.