The First Financial Superpower

Look at the history of the first European “global” powers, Spain and Portugal, and you’ll see it is based on military/naval might. But the next power, Holland, had another ace up its sleeve, writes William Bernstein in A Splendid Exchange:

“Their most potent weapon was Dutch finance.”

 

Bernstein elaborates. In 1602, investors poured 6.5 million guilders (that’s $100 million in today’s money) into the Dutch East India Company:

“The capital was permanent, that is, if things went well, it would yield profits that would go mostly to pay for the expansion of business.”

Contrast that with the standard practice of the day: money put in a company had to be paid back after a fixed period… with interest. See how close the Dutch model is to modern day stock investing? This was a sign of an “extraordinary degree of confidence in Dutch financial institutions”.

 

But why was there so much confidence to begin with? Being a lowland country, the Netherlands had to laboriously reclaim land from the sea, via those famous dikes and windmills (“the latter used to power pumps” to remove the water):

“These projects were locally run and financed… the rich new lands they exposed yielded not only an agricultural bounty, but also a population of empowered and prosperous peasants.”

The very nature of the country and its needs (reclamation via expensive dikes and windmills) “turned Holland into a country of capitalists”: everyone from aristocrats to peasants invested their guilders in reclamation projects.

 

This capitalist/investment mindset extended later into trade and businesses. Owning a fraction of a corporation (aka shares) was but a natural extension. This in turn allowed “entrepreneurs and investors to spread risk”, and became the essence of “Dutch finance”.

 

It set off a virtuous cycle: since people were willing to invest, money was easily available which then pushed interest rates lower. Lower interest rates made otherwise unaffordable projects viable.

 

Another Dutch innovation was the concept of “futures”, i.e., a contract whereby you agree to buy (or sell) something at a fixed price at a future date. This, for example, allowed a farmer to not worry about a price dip at the time of harvest. And it allowed buyers to avoid a price spike at the time they needed the item. Well, actually, the Dutch didn’t invent “futures”, but they institutionalized it on a scale never seen before.

 

Who knew that the Dutch were the first financial superpower?!