Fritschy W. (2003) A ‘Financial Revolution’ reconsidered

Fritschy W. (2003) “A ‘financial revolution’ reconsidered: public finance in Holland during the Dutch Revolt, 1568-1548”, The Economic History Review, 56/1, 57-89.

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Introduction

A financial revolution is often mentioned as an important pre-condition for the rise of a modern state. Post-1689 Britain is the best-known example: a shift from short-term to long-term public debt guaranteed by the Parliament allowed the British government to increased substantially its budget (p.57). A roughly similar process is said to have taken place in the Netherlands at a provincial level, in Holland in the 1540s for instance state´s annuities (renten) are assumed to have replaced the cities’ short-term obligation (p.58).

Financing the revolt

Initially the Dutch revolt was financed on the nobles’ and the churches’ private funds. But quickly new sources of money had to be tapped. The privateers from Zeeland allowed to self-finance the maritime side of the war (p.59). Foreign subsidies, chiefly from England and France, also represented a significant share of the rebels’ early budget (p.60). The state of Holland also had to pass a 15% debasement of the florin in 1573 (p.61). The Prince of Orange also used the confiscated wealth of the supporters of Spain and of the Catholic Church to compensate its creditors (p.61).

But as far as loans were concerned, the States creditors had considerable difficulties to ensure the repayment of their loans (p.62).Ultimately, the major commanders of the army had to pay themselves their troops in exchange of some vague promises of reimbursement. The credit of Holland was low and little of the Financial Revolution the optimist think happened in the 1540s can actually be observed: the amount of the public debt remained low (p.63).

The Tax Revolution

Actually the double movement of increasing debt burden and decreasing interest rates seems not to have occurred before 1600 and only accelerated after 1621 at the end of the Twelve Years Truce. Debt creation did not represent an important share of the revenues in the last three decades of the 16th century. If additional money was required, a repartition was required from the province’s cities (p.64).

The development of the common means (taxes destined to provincial expenditures), based on the Habsburg fiscal system, was certainly “one of the most important steps in the process of ‘state’ formation in the province of Holland.” Urban excise declined as the provincial taxes took over, an ever widening range of commodities was affected during the 1570s (p.68). For the first time, these duties were not restricted to cities but levied on the whole province including the countryside (p.69).

The doubling of the population of the province during the century following 1540 had a major and positive effect on fiscal revenues, but the jump of the tax burden per caput was the most significant change over the period. For a day labourer, the fiscal burden went from 5 to 16% of his income between 1570 and 1630; for a member of the middle class, this rate went from 6 to 20% (p.70).

Dutch credit (1568-1600)

After the initial shock, during which it had to pass a moratorium on interest payment (1572-5), the province did its very best to restore its credit worthiness, for instance by integrating interest arrears to the principal. To meet the province’s fiscal requirements, as there was little demand for their renten on the free market, the cities had to resort to forced loans from their burghers (p.74).

By the 1580s, some of the cities’ credit situation was such that the state of Holland had to take over the repayment of their debt. During the next decade, although the province sometimes managed to raise capital by way of renten with reasonable interest rate (8.3%), it also had to punctually rely on expensive (12%) obligations (p.75).

Restoring public credit

Around 1600, potential buyers clearly recognized that the risks they were running had significantly lowered (p.76). Interest rates went down and the government tried to convert short-term obligation into long-term renten. But — unlike the British case — this operation failed. Dutch creditors were interested in the indefinite extension of the highly liquid short-term obligations (p.78). Obligations were virtually tax-free but above all they were an efficient way to store value at a time when the creation of money was not keeping pace with the country’s expanding economy. Tellingly, obligations were specially sought after in trade-oriented Amsterdam, which also witnessed the rise of the first modern stoke exchange (p.79).

Conclusion

Hence a ‘tax revolution’ seems to have taken place in Holland before the financial one, thus undermining the usually assumed importance of the latter in the state-making process. More important even, the widening of the tax base that went along with the rise of a modern state apparatus appears key in the lowering of interest rates. Finally the Dutch financial revolution arose from the slow evolution of short-term obligation into a long-term vehicle rather than from a sudden transformation into annuities orchestrated by the state. In this process the agents of change were not the renters but the merchant community.

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