Bochove, Christiaan van (2008) “Integration of Denmark-Norway in the Dutch capital market”, chapter 4 in The Economic Consequences of the Dutch. Economic integration around the North Sea, 1500-1800, Amsterdam: Aksant, 90-125.
The early modern markets for goods and labour were highly integrated. As the country’s Golden Age came to an end, by 1700, Dutch capital was increasingly finding investment opportunities abroad, chiefly in Great Britain but also in the Danish Kingdom (p.90). It had not always been the case. For instance around 1600, trade with Norway was conducted with cash rather than bills of exchange, a sure sign of poor integration. The concentration of trade in the hands of a local business elite (rather than scattered between small producers) made this modernization possible. By the mid century Norwegian merchants started drawing credit from Amsterdam (p.93).
Staying private, going public
Dutch capital became the key to numerous Danish private ventures as well as (after 1760s) semi-public trading companies exploiting a monopoly (p.98). Variations in the interest demanded in different occasions indicate that the Dutch investors had a good understanding of the various risks run by each type of enterprise (p.100).
The Danish monarchs seem to have able to accede the Dutch financial markets as early as the mid-16th century (p.101). Dutch investment in the Scandinavian public debt on a significant scale however only started after the first quarter of the 17th century. While the maximum amount of outstanding capital at any moment remained low (2.5-3.5 million guilders) until the 1730s, in the subsequent period if grew to a maximum of 27 m. and an average of 18.5 m. (p.103). Unsurprisingly these funds were used to finance a near-constant state of war (p.104).
The king’s word
Interest rates on short-term debt for the king decreased from 12% in 1564, to 6% in the 1660s to 3-4.5% in 1723. On long-term debt it went from 6% in the 1650s to 4% a century later (p.105).
“The decreasing interest rates […] were of great economic and political importance. They allowed the Danish Kings to increase pending while keeping absolute interest payments constant” (p.106).
Borrowing in the Netherlands rather than domestically made sense for the Danish monarchs since the Dutch base rate was the lowest one could find at the time in Europe (due to abundance of capital). In other words, the Dutch financial modernity decreased transaction costs so much over the 17th century that it could make up even for the risk premium attached with poor reputation and the lack of funded debt (p.111).
The first foothold
As other governments, the Danish monarchy first gained access to the Amsterdam capital market through merchant houses already involved in their country. Several public bodies also extended credit to the Danish kings after 1650, most likely for strategic considerations, in particular, keeping the Sound open to Dutch trade (p.115).
Similarly, it is likely that Holland offered guaranties for some of the Kings loans, helping to keep interests low. The authorities thus acted at the very least as mediators between the foreign monarch and the public. However, by the end of the 17th century the new banking houses relieved both the merchants and the government from their roles in the loans to the Danish king (p.116).
Honour amongst thieves
The rates practiced by the Dutch merchants were tapped by a legal maximum according the Danish tradition (usually 6%) but this often allowed them to overcharge the sovereign in other transactions (p.117). The real interest rates thus remain murky at best. On the other hand the creditors were often forced to accept payments in kind however unpractical this may be (p.118). As foreigner, the Dutch creditors had none of the political pressure point that allowed their English counterpart to force their monarch into fiscal stability.
The Danish king could allocate a given source of income to the repayment of a loan. The payment of the Sound toll was particularly useful as it could be done in Amsterdam (p.120). Highly liquid collaterals were also frequently deposited in the Netherlands (VOC shares, jewelry; p.121).
While the transaction costs (courtage, commission) seem to have been fairly stable over the 18th century, the difference in interest rates between the loans granted to the Danish king and those to the state of Holland decreased from 3% to 1.5% (p.122). This decrease of the additional premium seems to indicate that the king was becoming an increasingly trusted partner. As a result, Dutch investors went from owning 16% of the Danish public debt in 1660 to 41% by the mid 1780s (p.123). The rising revenues from the tolls in the 18th century are likely to have greatly favoured the Danish kings’ ability to draw on Amsterdam credit.
Disclaimer: this summary is written by the contributors of the blog and not by the author of the article. Any mistake is Manuel’s fault (and he shall be punished).