How exactly did the Dutch win the trust of the financial system? Firstly, they were sticklers about repaying their loans on time and in full, making the extension of credit less risky for lenders. Secondly, their country’s judicial system enjoyed independence and protected private rights – in particular private property rights. Capital trickles away from dictatorial states that fail to defend private individuals and their property. Instead, it flows into states upholding the rule of law and private property.
Imagine that you are the son of a solid family of German financiers. Your father sees an opportunity to expand the business by opening branches in major European cities. He sends you to Amsterdam and your younger brother to Madrid, giving you each 10,000 gold coins to invest. Your brother lends his start-up capital at interest to the king of Spain, who needs it to raise an army to fight the king of France. You decide to lend yours to a Dutch merchant, who wants to invest in scrubland on the southern end of a desolate island called Manhattan, certain that property values there will skyrocket as the Hudson River turns into a major trade artery. Both loans are to be repaid within a year.
The year passes. The Dutch merchant sells the land he’s bought at a handsome markup and repays your money with the interest he promised. Your father is pleased. But your little brother in Madrid is getting nervous. The war with France ended well for the king of Spain, but he has now embroiled himself in a conflict with the Turks. He needs every penny to finance the new war, and thinks this is far more important than repaying old debts. Your brother sends letters to the palace and asks friends with connections at court to intercede, but to no avail. Not only has your brother not earned the promised interest – he’s lost the principal. Your father is not pleased.
Now, to make matters worse, the king sends a treasury official to your brother to tell him, in no uncertain terms, that he expects to receive another loan of the same size, forthwith. Your brother has no money to lend. He writes home to Dad, trying to persuade him that this time the king will come through. The paterfamilias has a soft spot for his youngest, and agrees with a heavy heart. Another 10,000 gold coins disappear into the Spanish treasury, never to be seen again. Meanwhile in Amsterdam, things are looking bright. You make more and more loans to enterprising Dutch merchants, who repay them promptly and in full. But your luck does not hold indefinitely. One of your usual clients has a hunch that wooden clogs are going to be the next fashion craze in Paris, and asks you for a loan to set up a footwear emporium in the French capital. You lend him the money, but unfortunately the clogs don’t catch on with the French ladies, and the disgruntled merchant refuses to repay the loan.
Your father is furious, and tells both of you it is time to unleash the lawyers. Your brother files suit in Madrid against the Spanish monarch, while you file suit in Amsterdam against the erstwhile wooden-shoe wizard. In Spain, the law courts are subservient to the king – the judges serve at his pleasure and fear punishment if they do not do his will. In the Netherlands, the courts are a separate branch of government, not dependent on the country’s burghers and princes. The court in Madrid throws out your brother’s suit, while the court in Amsterdam finds in your favour and puts a lien on the clog-merchant’s assets to force him to pay up. Your father has learned his lesson. Better to do business with merchants than with kings, and better to do it in Holland than in Madrid.
And your brother’s travails are not over. The king of Spain desperately needs more money to pay his army. He’s sure that your father has cash to spare. So he brings trumped-up treason charges against your brother. If he doesn’t come up with 20,000 gold coins forthwith, he’ll get cast into a dungeon and rot there until he dies.
Your father has had enough. He pays the ransom for his beloved son, but swears never to do business in Spain again. He closes his Madrid branch and relocates your brother to Rotterdam. Two branches in Holland now look like a really good idea. He hears that even Spanish capitalists are smuggling their fortunes out of their country. They, too, realise that if they want to keep their money and use it to gain more wealth, they are better off investing it where the rule of law prevails and where private property is respected – in the Netherlands, for example.
In such ways did the king of Spain squander the trust of investors at the same time that Dutch merchants gained their confidence. And it was the Dutch merchants – not the Dutch state – who built the Dutch Empire. The king of Spain kept on trying to finance and maintain his conquests by raising unpopular taxes from a disgruntled populace. The Dutch merchants financed conquest by getting loans, and increasingly also by selling shares in their companies that entitled their holders to receive a portion of the company’s profits. Cautious investors who would never have given their money to the king of Spain, and who would have thought twice before extending credit to the Dutch government, happily invested fortunes in the Dutch joint-stock companies that were the mainstay of the new empire.
If you thought a company was going to make a big profit but it had already sold all its shares, you could buy some from people who owned them, probably for a higher price than they originally paid. If you bought shares and later discovered that the company was in dire straits, you could try to unload your stock for a lower price. The resulting trade in company shares led to the establishment in most major European cities of stock exchanges, places where the shares of companies were traded.
The most famous Dutch joint-stock company, the Vereenigde Oostindische Compagnie, or VOC for short, was chartered in 1602, just as the Dutch were throwing off Spanish rule and the boom of Spanish artillery could still be heard not far from Amsterdam’s ramparts. VOC used the money it raised from selling shares to build ships, send them to Asia, and bring back Chinese, Indian and Indonesian goods. It also financed military actions taken by company ships against competitors and pirates. Eventually VOC money financed the conquest of Indonesia.
Indonesia is the world’s biggest archipelago. Its thousands upon thousands of islands were ruled in the early seventeenth century by hundreds of kingdoms, principalities, sultanates and tribes. When VOC merchants first arrived in Indonesia in 1603, their aims were strictly commercial. However, in order to secure their commercial interests and maximise the profits of the shareholders, VOC merchants began to fight against local potentates who charged inflated tariffs, as well as against European competitors. VOC armed its merchant ships with cannons; it recruited European, Japanese, Indian and Indonesian mercenaries; and it built forts and conducted full-scale battles and sieges. This enterprise may sound a little strange to us, but in the early modern age it was common for private companies to hire not only soldiers, but also generals and admirals, cannons and ships, and even entire off-the-shelf armies. The international community took this for granted and didn’t raise an eyebrow when a private company established an empire.
Island after island fell to VOC mercenaries and a large part of Indonesia became a VOC colony. VOC ruled Indonesia for close to 200 years. Only in 1800 did the Dutch state assume control of Indonesia, making it a Dutch national colony for the following 150 years. Today some people warn that twenty-first-century corporations are accumulating too much power. Early modern history shows just how far that can go if businesses are allowed to pursue their self-interest unchecked.
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