Opper S. (1993): the incredible story of the fleeing Dutchmen

Oppers, Stefan E. (1993) The Interest Rate Effect of Dutch Money in Eighteen-Century Britain. The Journal of Economic History, 53/1: 25-43.

Dutch citizens invested heavily in Britain over the 18th century. Even though the English themselves regarded this phenomenon as a necessary evil, it greatly help the Crown to levy the necessary capital for its expenses over the century (p.28). In the 1740s Dutch financiers in London had become critical for the funding of the government’s deficit. To a large extent it can even be said that the Seven Years War was won thanks to foreign money.

The action of the Dutch financiers in London was not solely to serve as intermediaries with the continent but also to speculate so as to keep the price of bond stable, thus preventing any alarm from their potential clientele (p.29). After the two financial crises of 1763 and 1773, Dutch investors limited their purchase of British debt and reoriented their portfolios towards French and American bonds. This shift of the flow of capital in a very short time ought to have had consequences in terms of interest rates (p.30). This event has been termed “the Dutch cutoff” (p.31).

Model

To capture the effect of the Dutch cutoff, the author divided the period 1750-1795 into two subperiods: before and after 1778. Which produces “two periods of very similar amounts of war-induced borrowing that differ in at least one respect: the willingness of the Dutch to supply new capital” (p.32). Next, the author creates a counterfactual and tries to estimate the yield of the 3% consol of the first period with a model fitted for the second one and then to estimate the same yield but for the second period with a model fitted for the first one. The author finds that in the first case the model of the second period clearly overestimates the interest rate and in the second the model fitted for the first one clearly underestimate it. In quantitative terms, the interest rates of the second period were a full percentage point higher after 1778 (p.37).

A regression analysis indicates that this jump was certainly driven by a difference in demand before and after 1778. In the first period – before the Dutch turned their attention away from English public loans – demand for the 3% consol was some £3.4 million higher on a yearly basis (p.38). As a result, while the Dutch investors held some £35 million of English bonds (out of a total of £140 million) in 1778, following the cut off, five years later this amount had decreased by almost 25% (p.39).

Conclusion

The gap left by the withdralw of the Dutch investors was not filled by other continental investors. Thus it must have been British capital that financed the wars of the end of the 18th century. This conclusion strengthen the hypothesis of a crowding out effect of government demand during the Industrial Revolution (p.40). The Dutch capital moved to France, which managed to close the yield differential it had suffered from during the whole century compared to its northern enemy (p.41).

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