Stabel P. and Haemers J. (2006) Financial revolution: the supply side story (… almost)

Stabel, Peter and Jelle Haemers (2006) “From Bruges to Antwerp. International commercial firms and government’s credit in the late 15th and early 16th century”, in Banca, Crédito y Captial. La Monarquía Hispánica y los antiguos Países Bajos (1505-1700), eds. Carmen Sanz Ayán and Bernardo J. García García, Madrid: Fundación Carlos de Amberes, p.20-38.

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The Financial Revolution – i. e. the gradual increase of government spending made possible by an increasing reliance on loans obtained from the capital markets – has essentially been studied from the side of the public demand. The ability of the markets to match this demand being regarded almost as a given. Meanwhile the impact the governments’ enormous financial needs may have had on private finance have hardly been addressed (p.22).Founding paradox

Interest rates on government loans grew steadily over the 16th century, jumping from 17.6% in the 1510s to 27.9% in the 1550 – with even a peak at 48.8% in 1552 – and at the end of his reign, Charles V even found “Antwerp bare of money” (p.24). Paradoxically, at that time, on the Netherlandish capital markets, the price of capital for private creditors decreased from around 20% in the 1510s to 11% thirty years later. Two observations can drawn from these observations:

  1. The government’s creditworthiness collapsed (in absolute terms and relative to private credit).
  2. Government demand, however important, only marginally affected private credit.

But then why would any financier risk his assets by lending to a borrower with such a bad record? (p.25)

Early Habsburg

Under the rule of Maximilian I, in the Habsburg Netherlands, Luccese, Florentine and Genoese financiers lent heavily to the prince (sometimes using the crown jewels as collaterals), as they had done before under the Bourguignon rule (p.26). For those merchant-bankers, both representing large firms such as the Medicis and lesser ones, public finance was a secondary – if lucrative – activity with high risks attached. “Government credit made financiers into preferential partners for other business deals”, in particular, for the provision of luxury goods to the ruler’ court. Finally, the merchants learned how to turn public credit contracts into marketable assets they would sometimes sell off thus decreasing the probability for the original debtor to run out of liquidity (p.31).

Towards bankruptcy

Under Charles V, financiers were still willing to lend to the prince but they demanded that the reimbursement of the loans be secured by the assignment of a given source of fiscal revenue. For instance, the Fuggers obtained mining rights in Central Europe (p.32). Castillian taxes and the American yearly flow of precious metals became the most common guaranties.

At this game, larger firms with deep pockets and extended political connections had a unmitigated advantage. Them alone could bear the cost of uncertainty and then take advantage of the monopolies and tax collecting activities granted by their royal creditor. Lesser companies simply could not compete (p.34). A vicious circle was at play: greater risks kept smaller firms at bay, the oligopoly thus created drove interest rates up, which in turn made repayment more difficult and consequently further increased the risks born by the debtors. Clear evidence of the deterioration of public credit: even irregular and extra-ordinary income was used as collaterals. One possible reason behind the fact that lending never stopped is that high flying financiers  used this opportunity to have a stake of both sides of the fence and join the administration with all the prestige, might and opportunities attached to it (p.35).

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