Keeping the Ship of State Afloatonderzoekschoolpolitiekegeschiedenis.nl/wp-content/uploads/2014/07/...Keeping the Ship of State Afloat Zeeland’s Sovereign Debt Management, 1600-1800

UvA Keeping Zeeland Afloat – Leiden Int. Conf. Pol. Hist. Alberto Feenstra

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Keeping the Ship of State Afloat

Zeeland’s Sovereign Debt Management, 1600-1800

Alberto Feenstra

University of Amsterdam

[email protected]

This version: 20 August 2014

Work in progress. Please do not quote or cite without permission.


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Description of the research project

The project is titled ‘Finance without frontiers? The integration of provincial money

markets in the Dutch Republic’, and analyses when and how money markets in the

Dutch Republic integrated. The literature takes that integration more or less for

granted and makes Holland interest rates to stand for the entire country, but his is

mistaken. The few data we possess for interest rates in other provinces show

deviations, suggesting that it took time for markets to integrate. What then limited

integration? Were there barriers to the free movement of capital, risk factors, or

institutional differences that made investors demand a higher reward? What made

those differences disappear, and when? The present scarcity of provincial interest

rate data also prevents us from understanding the patters of economic growth

across the Republic. The project will collect qualitative and quantitative data about

interest rates, transaction costs and market prices for public debt and private credit

transaction, combining these into a comprehensive analysis of money market

integration in the Dutch Republic. In doing so it will contribute to the theoretical

debate about interest rates as a gauge for the quality of money market institutions,

and provide new insights about how to understand similar integration processes

today.

The current paper is a case study analysis of the debt management by the

province of Zeeland. In examining this, the case helps to find answers on questions

about relationship between economic development, institutional environment and

market conditions on the capital market. Specifically, the presence of a local capital

market availed the provincial government with ample money at low cost. Whether

this was a good or bad effect remains matter of debate. On the one hand it

impeded structural reforms of the political system, on the other hand, it is

questionable whether a centralised government would have benefitted equally from

Zeeland’s local capital.


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Introduction

Low interest rates are often considered to be the result of a set of modern

institutions, which lower transaction costs because of a good protection of property

rights ((Acemoglu and Robinson, 2012; North and Weingast, 1989). Other studies

focus on the second component of interest variation: defaulting risk premium

(Drelichman and Voth, 2014; Tomz, 2007; Velde and Weir, 1992). In that view low

interest rates represent a low defaulting risk. Finally, opportunity costs are,

mistakenly, much neglected as factor in interest rate variations. In this paper I will

argue that this third component, which reflects supply and demands, was the prime

explanatory factor for Zeeland’s low interest rates throughout the seventeenth and

eighteenth centuries.

Research into seventeenth- and eighteenth-century Dutch sovereign

borrowing generally focussed on the interest rates of the province of Holland. Tracy

(1985) recoined Dickson’s (1967) concept of a financial revolution in England, for

the case of Holland, which attributed great value to provincial borrowing in

financing the Revolt. Fritschy (2003), however, shifted attention from borrowing

towards the importance of Holland’s fiscal reforms, as precondition for financing the

Dutch Revolt until the Peace of Westphalia in 1648. Instead of a financial revolution

based on borrowing, she advocates it was rather a ‘tax revolution’ that enabled the

Dutch to finance the Revolt. These revolutions in public finance are important

because they coincided with the beginning of economic leadership by these

countries: the seventeenth-century Dutch Golden Age and the British Industrial

Revolution.

Notwithstanding the merits of these analyses, the ‘Dutch’ studies are almost

exclusively based on the province of Holland, and consequently neglect

developments in the other provinces that – together with Holland – formed the

Dutch Republic. This “Hollandocentrism” is a common and understandable

inadequacy of Dutch historiography (Brandon, 2013). Nevertheless, focussing on

Holland means telling only part of the story and probably the most successful part.

For Holland was the richest, most populated and most urbanised province (De Vries

and Van der Woude, 1995, pp. 67–95, 123–129). Hence, we might expect the

situation in other provinces was less rosy.

Whether this was really the case, we need to know more about other

provinces. In this paper, the province of Zeeland is used as a case study to analyse

how another member of the Republic managed their public finance. The case of

Zeeland is particularly interesting because the situation there resembled Holland’s


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quite at the beginning of the Republic, but seems to have ended-up less fortunate

(Noordegraaf and Van Zanden, 2005, pp. 403–405; Prak, 2005, pp. 134, 251;

Price, 2000, pp. 65–66).

Economic developments greatly determine a state’s financial capacity. The

health of Zeeland’s public finance, in turn, determines the defaulting risk of the

province and, thus, the sustainability of the provinces’ sovereign debt. As we will

see, the province’s public finance was unsustainable, because it relied heavily on

borrowing to cover structural deficits. Although this unsustainable solution

supposedly would have resulted in higher interest rates, this was not the case.

Moreover, Zeeland’s unsustainable debts did neither lead to a default nor to debt

restructuring.

Why this was the case, and how Zeeland managed to avoid such drastic

measures is the question addressed in this paper. In order to answer this question,

I analyse Zeeland’s public finance in relation to the capital market. In the first

section, I provide a general overview of Zeeland’s public finance during the period

of the Dutch Republic. From this analysis it becomes clear that despite fiscal

expansion the provincial deficits remained, and the provincial government

increasingly used loans to cover these budgetary gaps. In the second section, I

examine the borrowing instruments and development of interest rates. It is

apparent from this analysis that the low nominal interest rates at issuance were

representative for the markets perception of the provinces’ creditworthiness. Then,

I will compare Zeeland with Holland in the same period, to provide more

perspective on Zeeland’s public financial situation. Moreover, institutional renewal,

which according to the institutionalist school might have lowered interest rates even

further, was absent. Finally, the paper concludes by arguing that Zeeland’s low

interest rates can only be reasonably explained by a capital surplus in Zeeland and

Holland.

Zeeland’s Public Finance

A proper understanding of Zeeland’s relation to the capital market first requires a

certain understanding of the province’s public finance; whereas primary deficits in

the government budget increased the need for loans from the capital market,

primary surpluses allowed for reimbursements. This section analyses Zeeland’s

public finance, from a general overview at the beginning to a more detailed analysis

of the components of income and expenditure at the end. In order to understand

the composition of Zeeland’s budget, one must realize the specific historical context


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as being part of the Dutch Republic, which emerged from an armed revolt against

the Habsburg Crown.

Since the Revolt formed the beginning of the independent Republic, it may

come as no surprise that a large proportion of Zeeland’s expenses related to

warfare – although this proportion shifted over time as we will see later (Veenstra,

2009, pp. 55–59). European states budgets increased vastly after 1500, due to the

explosive rise in the cost of warfare because of the so-called “military revolution”.

The war budget could absorb as much as 75 per cent of the tax revenues during

the early-modern era (Drelichman and Voth, 2014, pp. 26–27; Tilly, 1992, p. 74).

Similar shares were paid by the Dutch; especially after the Truce (1609-1621) the

military costs increased dramatically: around 1640, the Republic spent no less than

86 per cent of their budget on warfare (’t Hart, 1993, pp. 59–63).

All this had to be paid for. As a federation, the Dutch Republic had to find a

way to distribute the financial burden of the military over the Seven Provinces that

formed the Republic. Large regional differences in economic structure justified the

right of each province to set its own tariffs, as long as they contributed their fixed

share of the budget.(Fritschy, 1988, pp. 34–35) From 1616 until 1792, all the

provinces contributed a fixed proportion to the common budget. Zeeland’s share

was a little over 9 per cent, which meant the third largest contribution after Holland

(58 per cent) and Friesland (11.5 per cent) (Zwitzer, 1982). This contribution of

Zeeland to the Generality amounted approximately 1 million guilders per year, but

could rise to 5 million during wartime (Veenstra, 2009, pp. 55–59).

Besides its contribution to the Generality level, Zeeland also had provincial

expenses. Whereas the general expenses mainly consisted of expenses for the

common defence system – over 85 percent went to army, navy and fortresses –

the primary provincial expenses mainly consisted of wages and other administrative

expenses (Veenstra, 2009, pp. 250–290). In fact, Zeeland’s military expenses were

externalised from the provincial budget. Hence, in order to have a unambiguous

view of the total expenses carried by Zeeland’s inhabitants, both types of must be

analysed jointly.

Two different developments of provincial and general expenses clearly

emerge from a comparative analysis. General expenses visibly relate to warfare;

almost all wars fought by the Republic show from figure 1: the Eighty Years’ War,

until 1648, the three Anglo-Dutch Wars, with a large peak in 1672, the Nine Year’s

War (1688-1697), the War of Spanish Succession (1702-1713), and the Austrian

War of Succession (1740-1748), and finally, the fourth Anglo-Dutch War (1780-


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1784). The provincial expenses tell a different story: these costs constantly

increase over time. Why that was the case will be analysed in more detail below.

Figure 1: Provincial and General Expenses of Zeeland, 1583-1795

Source: (Veenstra, 2009, pp. 55–59)

Before turning to the shifting composition of the provincial expenses, I want to

briefly focus on the sole revision of the quote system in 1792. By then the general

assembly of the Dutch Republic, the States-General, decided to allow Zeeland a

50% reduction in its contribution. This was motivated by referring to the unhealthy

state of Zeeland’s public finance (Fritschy, 2012, p. 22).

To identify the source of these unhealthy finances, we must take the

provincial revenues into account as well. Zeeland’s tax incomes show an overall

increasing trend with a few hiccups, such as 1673 when a number of new taxes

were introduced (Veenstra, 2009, p. 65). Annual tax income rose from about 1

million guilders in 1630 to around 2 million by the 1680s and further increased to a

little under 3 million during the remainder of the eighteenth century.

If we now look at the primary income and expenses, it seems that the

situation could not have been as bad as this reduction suggests. Overall, primary

incomes and expenses moved rather similarly and, during large parts of the

eighteenth century, income exceeded expenses. Between 1574 and 1795, there are

157 years with a positive primary government budget balance and 65 with a

0

1,000,000

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Provincial Expenses (excl. redemptions)

General Expenses (excl. redemptions)


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negative one. Hence, if the primary government budget balance is overall positive,

the problem lies elsewhere.

Interest payments might form the explanatory factor of the poor state of

Zeeland’s public finance, because they are excluded from the primary budget. We

clearly see the effect of the debt service to the Government budget balance: an

overall negative balance with and a positive balance without interest payments. The

number of positive and negative years is now exactly reversed to 157 negative

years and only 65 years with a positive balance.

Figure 2: Government budget balance incl. trend lines, 1574-1795

Source: (Veenstra, 2009 passim)

A breakdown of the expenses confirms that the increasing amounts paid on

debt service were responsible for the deteriorating state of Zeeland’s public finance.

In the early seventeenth century, the province spent the largest part of its budget

on wages, salaries and pensions, complemented with subsidies to navy, cities and

allies. In the second half of the eighteenth century, interest payments absorbed the

lion’s share of the provincial budget. No less than 42 per cent of the provincial

expenditures directly flowed to Zeeland’s creditors (Veenstra, 2009, pp. 204–207,

250–257).

Obviously, the States of Zeeland were aware of these financial problems and

tried to cope with the deficits. To decrease deficits public bodies had three options:

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Balance (Primary)Balance (incl. interest payments)Linear (Balance (Primary))Linear (Balance (incl. interest payments))


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increase tax revenue, cut-backs and borrowing. As will become clear in the

remainder of the paper, Zeeland tried each option. The first option can be

subdivided into two categories, indirect taxes depending on economic growth or

direct taxation on wealth.

I will start by examining the former category. Excises formed the basis of

taxation within the Dutch Republic that each individual province levied, even though

tariffs differed. Zeeland introduced these new taxes – the so-called common means

(gemene middelen) – on the same day as Holland (Veenstra, 2009, p. 19). After

their introduction in Holland in 1574 public revenue increased so dramatically, that

Fritschy labelled this a tax revolution (Fritschy, 2003, p. 70). Although population

increased as well, tax revenue per capita rose and this was reinforced by an

expanding economy. The same hold for Zeeland in those early stages of the Revolt,

as we will see in more detail in the third section.

Since these common means were levied from the sale of all kind of basic

necessities, their per capita revenues mirror economic developments of each

province. Even if we, incorrectly, assume that there were no tariff raises, Zeeland’s

economy was at best stagnant from 1630 to 1750. The provincial States, however,

increased the tariffs multiple times, predominantly after the War of Spanish

Succession (Veenstra, 2009, pp. 150–200). Unfortunately, it is at presence

impossible to distinguish between the influence of each excise raise, because this

would require the examination of all transactions per type of excise, per district, per

year (Veenstra, 2009, pp. 31, 92–117).1 It remains, nevertheless, clear that after

1630 Zeeland’s economic growth had come to a halt, and the level of income from

the common means could merely be maintained by these tariff raises.

Hence, the States of Zeeland had to find alternative sources of income that

did not depend directly on economic growth to cover its expenses. They did so in

two related ways; increasing direct wealth taxes and increased borrowing. I will

examine this latter category separately below and in more detail in the next

section. Taxation on wealth gained importance from the later seventeenth century

onwards as can be seen from figure 3. To this end they introduced a number of new

taxes predominantly around the second Anglo-Dutch War or the France-Dutch War

that started in 1672 (Veenstra, 2009, p. 65). The most important instrument to tax

the wealth and income Zeeland used a tax called familiegeld (family tax), which

was first introduced in 1622, abolished and reintroduced several times. After 1705

only the tariffs and number of tax categories changed, but the family tax remained

1 Zeeland consisted of 37 tax districts and levied 38 types of excises, while there are archival records

from 1574 to 1795, which results in over 300,000 records.


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an important source of tax revenue (Brusse, 2011, pp. 106–111; Veenstra, 2009,

pp. 192–194).

Figure 3:total income per type of 1574-1795


Although some of these new taxes in this period were abolished or reduced soon

after their introduction, a number them were reintroduced or raised even quicker

due to the outbreak of the Nine Years’ War in 1689. This included the taxation of

the possession of government bonds, which was introduced in 1673 and levied from

the nominal value of the bonds. Consequently, the interest paid-out to creditors

was effectively lowered with the tax rate, which was almost constantly set on 2% of

the bond’s nominal value after 1689(Veenstra, 2009, pp. 65, 188–189). From that

year on taxes on wealth and income contributed about half the share of the

provincial tax income. Hence, Zeeland’s public finance tapped successfully into

wealth that was already present.

The year 1747 proves illustrative for the situation in Zeeland. More

specifically, that year a tax called ‘Free Gift’ [Dutch: Liberale Gift], was levied from

total wealth: 2 per cent for those who owned more than 2,000 guilders worth, 1 per

cent for those possessing between 1,000 and 2,000 guilders and a voluntary

percentage for the less-fortunate. This incidental tax levy increased direct tax

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

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OtherSubsidies, Materials & Money to others (Admirality, cities and allies)ReimbursementsInterestWages, Salaries & Pensions


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revenue from 1 million to 2.7 million guilders and Zeeland’s total budget of 2

million was increased to 3.7 million guilders (Veenstra, 2009, pp. 194, 74–83).

Although these numbers alone do not allow for a precise estimate of the

wealth, we can make a tentative estimate of the minimum level of total wealth in

Zeeland. To estimate a lower bound, we must assume that all revenue came from

those owning 2,000 guilders or more. In that case Zeeland’s wealthiest inhabitants

possessed approximately 85 million guilders worth of assets, which equalled 42.5

times Zeeland’s annual Government budget.2 Obviously, there was plenty of private

capital available in Zeeland, which was only incidentally utilised by the States. In

other words, Zeeland’s inhabitants remained rich, at least as late as the mid-

eighteenth century, and meanwhile its government became poorer.

Figure 4: Amount of loans, 1574-1795


Even though direct taxation doubled the provincial income, it remained insufficient

to cover the deficits. The States of Zeeland, however, utilised the available private

wealth in other way: borrowing money. This remained relatively modest until about

1700. On average they borrowed 200,000 guilders annually between 1650 and

1700. During and after the War of Spanish Succession two things changed in

Zeeland’s borrowing behaviour. The first change is the direct relation between

2 1.7 million / 2% = 85 million guilders. Alternative was 1.7 / 1% = 170 million guilders.

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500,000

1,000,000

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borrowing and warfare. Between the end of the Eighty Years’ War and the War of

Spanish Succession borrowing was closely related to warfare. In the period that

followed, Zeeland did borrow money in all but 5 years (1717, 1731, 1780, 1786,

1787), even though they were involved in only two more wars: the War of Austrian

Succession and the fourth Anglo-Dutch War, 12 years in total. The second change is

the magnitude of the loans, which increased to almost 900,000 guilders per year

between 1700 and 1800. If we add the loans to the tax revenue, we see that

Zeeland balanced its deficits by increasing its borrowing.

[Figure 5: Total income and expenditure including loans and debt service,]


What do we expect to happen, if we see that structural deficits are countered with

increased borrowing? Surely, this is an unsustainable solution; it seems the perfect

recipe for a public default. It also seems reasonable to expect that creditors

demanded a higher compensation for the risk on such a default and thus a rise in

interest rates? Moreover, an increase in taxation on government bonds meant an

interest reduction, for which creditors probably wanted to be compensated. How

the capital markets evaluated Zeeland’s creditworthiness and the province’s relation

to the capital market will be given in the next section, which presents a more

detailed examination of the province’s borrowing behaviour.

-2,500,000

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Decreasing Interest Rates and Debt Instruments

Capital markets have hardly been researched for Zeeland in the pre-modern era.

This is a striking difference with the numerous studies on capital markets in the

province of Holland (e.g. Carter, 1975; Neal, 1990; Petram, 2011; ’t Hart et al.,

1997). Also the seminal work of Jan De Vries and Ad Van der Woude’s (1997,

1995), who claim that the Dutch Republic was the first modern economy in the

world, is primarily based on Holland. One of their main reasons to reach this

conclusion was the presence of integrated markets, including capital markets (De

Vries and Van der Woude, 1997, p. 693); also their claim concerning the capital

market integration is solely based on data in Holland (De Vries and Van der Woude,

1997, pp. 120–121). Van Zanden, De Moor and Zuijderduijn (2012, p. 5) have

argued that Holland already by the fourteenth century possessed the modern

institutions that De Vries and Van der Woude discovered, which furthered a highly

developed capital market and growth. More specifically, they found that modern

institutions lowered risk premium and thus caused low interest rates in late-

Medieval Holland (Van Zanden et al., 2012, pp. 4, 18). Instead of focussing on a

discussion about the supposed modernity of Zeeland’s capital market, this section

merely examines the development of the interest rates at which Zeeland could

borrow from the capital market, what debt instruments they used to that end, how

we can explain these developments and whether capital market integration

extended to interprovincial cross-border borrowing as well.

Before we can understand what factors caused interest rate variations, we

need to know at what rates Zeeland actually borrowed during the seventeenth and

eighteenth centuries and what factors might possibly explain this. I begin with the

latter question. Besides the afore mentioned risk premium, interest rates also

depend on transaction costs (i.e. all additional costs for concluding a contract) and

on supply and demand (a compensation for opportunity costs for capital), which we

call the base rate (Van Bochove, 2008, p. 107).

Zeeland’s unsustainable policy of balancing structural deficits with temporary

means, led us to expect that interest rates would rise due to a higher risk premium.

However, if we examine the interest rate of the main debt instrument, the bills

obligatory, we observe decreasing nominal interest rates in the early seventeenth

century that remained low throughout the eighteenth century. By 1639 the States

of Zeeland paid 6.25 per cent nominal interest, which had decreased to 4 per cent

by 1668 – an equal footing with Holland. In 1702 this decreased even further to 3

per cent and even to 2.5 per cent between 1722 and 1745. This level briefly rose to


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4 percent by the end of the War of Austrian Succession, but quickly returned to 3

per cent, which remained the interest rate until 1792. Hence, strangely enough

Zeeland combined structural and increasing deficits with decreasing and very low

interest rates.

Figure 6: Nominal interest rates per loan type, 1730-1795

Source: Zeeuws Archief, Rekenkamer C, inv.nrs. 4510, 4580, 4590, 4600, 4630, 4840, 5080, 5340,

5850, 5970, 5990, 6000, 6010; Archief van de Familie Schorer, Toegang 157, inv.nr. 159, (Notulen van

Zeeland, 1798 6 July 1632, 21 February 1640, 30 April 1641, 16 August 1641)

This presents us with a puzzle. In order to understand how Zeeland obtained its

money, we need to know what debt instruments they used and how they operated

in relation to the capital market. In wartime Zeeland complemented the use of the

bills obligatory with other debt instruments. Up until the end of the War of Austrian

Succession, the province issued life annuities, with flat rates between 8 and 10 per

cent. A report of the provincial Court of Audit in 1713 called the life annuities a

“lethal” instrument and advised to no longer use it (Zeeuws Archief, Toegang 87

Verz Verheye v Citters, Inv. nr. 125b). This advice was not immediately practised,

but in 1716 they no longer offered a 9% or 10% flat rate as before, but used age

categories, ranging from 5% to 10%. After 1716, until the end of the War of

Austrian Succession, the States of Zeeland did not issue any life annuities. Only in

1747 – the same year as the Free Gift – they reinstated this instrument, again

00.005

0.010.015

0.020.025

0.030.035

0.040.045

0.050.055

0.060.065

0.070.075

0.080.085

0.090.095

0.10.105

0.11

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Inte

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%)

Bills obligatory Redeemable annuities

Life annuities Lottery loans


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using age categories. Still, the States needed urgent money, and once again

offered a flat rate in 1748. This was the last time Zeeland issued life annuities.

Instead, the lottery loans, which were introduced in 1749 became the

preferred instrument to supplement bills obligatory in times of emergency. Each

loan was divided into two categories, a smaller part yielded 2.5 per cent to the

creditor and the rest of the creditors earned 2 per cent nominal interest (Zeeuws

Archief, Rekenkamer C, inv.nr. 5850). Naturally, there was the element of change

to potentially higher yields, which made these loans more attractive than the bills

obligatory that paid 3 per cent for certain.

Moreover, Zeeland used the lottery loans to acquire money outside the

provincial borders, in the province of Holland. From 1751 onwards lottery loans

were sold and interest paid in Amsterdam (Middelburghse Courant, d.d. 24 October

1758). During the 1770s this type of loans was also issued in The Hague (Zeeuws

Archief, Rekenkamer C, inv.nr. 5910 ). To give some indication of the geographical

origin of the money, invested in lottery loans, I drew up table 1, concerning the

year 1785.

1770 1777 1779

Middleburgh (Zeeland) 70% 53% 39%

Amsterdam (Holland) 30% 24% 32%

The Hague (Holland) 23% 30%

Table 1: Geographical distribution of payments of lottery loans in 1785, per year of issuance

Source: Zeeuws Archief, Rekenkamer C, inv.nr. 5910

Table1 shows the decline in relative importance of Middleburgh compared to

Amsterdam and The Hague. Of course, these are just the payments of one year and

only for lottery loans. So this only provides a first impression. Nevertheless, this

development raises questions about the reasons why Holland’s share increased,

compared to Zeeland’s. Perhaps, the reason to turn to Holland for more capital was

that Zeeland’s own habitants became aware of the province’s financial problems.

This might, then, have limited the possibilities to issue a loan domestically in

Zeeland and would have led to creditors demanding a higher risk premium. That

such unfavourable conditions on the domestic market incited Zeeland’s provincial

government to find resources elsewhere remains presently a hypothesis that needs

to be tested, however.

On the other hand, the provincial government acknowledged the bargaining

power of the market, as becomes clear from the minutes held by the provincial


15

States. In 1719, they offered their creditors the choice to either receive

reimbursement or accept an interest reduction from 4 to 3.5 per cent ((Notulen van

Zeeland, 1798, 4 June 1719). The States could act like that because their position

vis-à-vis the creditors was strong at that time. For new loans could be issued as low

as 3 per cent and even 2.5 per cent from 1722 onwards. This suggests that there

was ample capital and limited investment opportunities, which significantly lowered

the total interest rate.

By the mid-eighteenth century this situation had slightly changed. Instead of

trying somewhat longer to issue a loan at a lower interest rate, the States decided

to act quickly. For they feared that a too long timespan in issuing the loan could

damage their reputation (Notulen van Zeeland, 1798, 18 February 1754). The

province paid, however, merely 3 per cent nominal interest on the loan, which

makes us wonder what the States had hoped for. Until the end of the eighteenth

century, Zeeland maintained this level of the nominal interest rate, which suggests

that the market deemed this as a reasonable compensation and no lucrative

alternatives appeared that may have increased the interest rate.

Market prices show much faster and precise appraisal of Zeeland’s credit

than nominal interest rates at issuance. Yet these prices are often absent from the

source –in Zeeland the notary archives were bombed during WWII and

consequently lost. Fortunately, eighteen transfers of bills obligatory have been

preserved in the personal administration of Johan Guilielmus Schorer (1733-1783)

who – being a member of a Zeeland patrician family – served as receiver of the

domains and alderman in Middleburgh (Van der Bijl, 1981 , Bijlage VII) & (Zeeuws

Archief, Archief van de Familie Schorer, Toegang 157, inv.nr. 159). Due to this

background he was probably well-informed, which suggests these transfer prices

were representative for the market value of the bills. Hence, these scarcely

preserved transfers are highly informative about the sophistication of the secondary

market for public securities in Zeeland between 1760 and 1780.


16

Figure 7: transfer of a 3% bill obligatory, in Middleburgh (1774)

Source: ZA, Archief van de Familie Schorer, Toegang 157, inv.nr. 159.

The first remarkable feature of these transfers is use of pre-printed standardised

forms, on which various items could be filled-out. Obviously, there was space for

the nominal value and interest rate of the security, the issuer and the issuance

date. Furthermore, the place and date of the transaction had to be filled-out just

like the names of the buyer and seller. Somewhat less obvious was the possibility

to fill-out the market value, both in percentage and in money. Together with the

remaining interest this determined the total sales price, for which also was left

space on the forms. Additionally, there was space for the name of the broker. Some

forms even allowed to transfer multiple assets at once, for which the pre-printed

lines were repeated and numbered, ending with a total value of the entire

transaction. Notwithstanding the variety of brokers closing the deals, all transfer

were made by means of similar forms – except for one hand-written transfer –

which suggests that it was common practise to use these forms. Whereas the mere

presence of pre-printed standardised forms already points toward a sophisticated


17

secondary market, the pre-designed possibilities of the forms and common use

provide additional indication there was an active market for bonds in Zeeland.

The contents of the forms are at least as telling as the exterior and

consequently expand the insight into the function of the market. Firstly, issuance

dates range from 1706 to 1760, which shows a long period of circulation for these

assets. Secondly, only two bills were bearer bonds – dating from 1757 and 1760 –

the rest was written onto a person’s name. Thirdly, the nominal value amounted on

average 1,034 guilders (£ 172 Flemish), with the lowest value 480 guilders (£ 80

Flemish) and the highest 2,000 guilders (£ 333.33 Flemish). Finally, all bills had a

nominal interest rate of 3 per cent, except for one bill issued in 1737, which was

issued at 2.5 per cent. This suggests that 3 per cent was more or less the going

rate for these bills, but that deviations below that rate were exceptional. The first

examination of the yield – calculated from their market sales price – confirms this

picture since it was on average merely slightly below 3 per cent.

Since an average value for a period of twenty years is not too instructive, we

also examine the fluctuations within this period. The chart below presents the

effective interest rates for each of the 18 normal bills obligatory transferred – which

are calculated by dividing the nominal returns nominal by the market price of the

bills. The fluctuations are limited, with a maximum effective interest rate of 3.23

per cent, a minimum of 2.69 per cent and a standard deviation of 0.13 per cent.

This, at least, suggests the rate on the secondary market was very much like the

official nominal interest rate at which the provincial administration issued on the

primary market.


18

Figure 8: current yield’s in Middelburgh (1760-1780)

Source: ZA, Archief van de Familie Schorer, Toegang 157, inv.nr. 159.

To conclude, contrary to theoretical predictions, the interest rates at which

Zeeland could borrow money declined and remained low despite the unhealthy

state of the public finances. It seems like the States of Zeeland experimented

successfully in trying to find the bottom of the market and just find new sources of

money. They used various debt instruments for different purposes and after 1750

also found a new market in Holland. Not risk premium but the relation between

supply and demand seems to have determined the level at which the province could

borrow.

Zeeland’s public finance in perspective

Arguably, the States of Zeeland benefitted from abundant capital and relatively few

investment opportunities , which allowed them to borrow inexpensively – perhaps

even too cheaply considering their structural deficits. Before we conclude that

Zeeland was seduced into borrowing cheap money, instead of reforming its public

finance, we need to examine what options they had for improving their financial

situation. As mentioned earlier, Zeeland had three options to repair the problem of

structural deficits: increase taxation, decrease expenses or increase borrowing. The

2.60%

2.70%

2.80%

2.90%

3.00%

3.10%

3.20%

3.30%

1755 1760 1765 1770 1775 1780 1785


19

first two options are structural solutions, the third one is unsustainable.

Interestingly, Zeeland increasingly used this latter option. The question, then, is

why Zeeland kept relying on borrowing to cover its structural deficits.

To answer this question, I will first evaluate the alternatives of tax raises

and budgetary cut-backs. In the first section I showed that Zeeland attempted to

raise its tax revenues, by tariff increases on excises and levying taxes from wealth

and income. These measures proved, however, insufficient to cover the deficits.

Hence, the first question is why did they not increase tax revenue somewhat more?

Although tax increases are never a popular decision, taxes in Zeeland

arrived already at such an high level at an early date that they probably had

reached a ceiling by the late seventeenth century. This high level of taxation

becomes apparent from a comparison with other European states. State budgets

increased vastly throughout Europe during the early-modern period, due to the

aforementioned military revolution. Whereas the average tax revenue equalled 3.5

days of an urban wage at the beginning of the sixteenth century, this had risen to

twelve days by the end of the eighteenth century (Drelichman and Voth, 2014, p.

28). Tax pressure in Zeeland, expressed in numbers of days’ work, was even higher

than in Holland – whose inhabitants were considered the most heavily taxed people

of their time (Fritschy, 1985, 1990, pp. 65, 70, 1988, pp. 66–67). This number

increased in Holland from eleven days around 1600 to twenty-five days around

1700 and thirty-seven in the final decades of the eighteenth century, as shown in

table 2. Tax pressure in Zeeland already equalled an elven days’ wage during the

1580s, twenty-five days during the seventeenth century and almost forty days’

wages throughout the eighteenth century. If we take into account that Dutch wage

levels were also relatively high from an international perspective, we must conclude

that both provinces extracted large amounts from their populations (De Vries and

Van der Woude, 1995, pp. 707, 742).

This way of depicting tax pressure tells only part of the story, however, since

it does not distinguish between the various sources of tax revenue. Although the

distinction is imperfect, comparing tax revenue from the common means and total

tax revenue offers a tentative impression of the distribution of the tax pressure

over various parts of society. Every member of society paid the former, since these

indirect taxes related to the purchase of daily necessities, whereas direct taxes on

wealth and income were levied only from persons with a certain wealth and

consequently burdened the more-well-to-do relatively more. This distinction is

applied in table 2, which provides an comparative overview of tax pressure in


20

Zeeland and Holland expressed in daily wage equivalents for both total taxation per

capita and the share commons means within.

Total Tax income (p. capita)

Total Tax income (p. capita)

Tax income Common Means (p. capita)

Tax income Common Means (p. capita)

Tax pressure (days work)

Tax pressure (days work)

Tax pressure Common Means (days work)

Tax pressure Common Means (days work)

Period Zeeland Holland Zeeland Holland Zeeland Holland Zeeland Holland

1574-1580

9.7

1.9

2.4

1.4

16.2

5.5

4.1

4.1

1581-1590

12.4

4.4

6.2

2.9

24.3

11.3

10.3

6.3

1591-1600

20.9

6.9

8.4

4.5

33.1

12.4

13.7

7.6

1601-1610

14.2

10.5

7.8

6.6

17.3

16.2

10.3

10.2

1611-1620

12.2

10.8

7.5

7.8

15.5

15.8

9.8

11.1

1621-1630

14.9

16.4

9.6

9.1

20.7

24.3

12.3

12.7

1631-1640

19.3

20.2

11.1

10.1

24.9

23.5

14.2

11.6

1641-1650

17.5

19.3

10.7

10.8

22.5

21.1

13.7

12.4

1651-1660

16.8

13.8

9.4

9.2

22.7

15.4

12.5

10.6

1661-1670

15.0

16.2

8.4

9.2

17.8

18.6

10.0

10.1

1671-1680

27.5

18.4

9.8

9.6

39.4

20.5

13.3

10.4

1681-1690

22.2

17.4

9.6

11.5

26.8

20.5

11.2

12.7

1691-1700

31.5

24.7

9.6

11.6

39.1

27.4

11.9

13.0

1701-1710

34.6

25.6

10.2

11.0

41.3

28.3

12.1

12.2

1711-1720

31.8

24.4

9.3

10.8

38.0

26.7

11.1

11.8

1721-1730

28.9

25.2

9.3

11.4

34.5

27.2

11.1

12.3

1731-1740

27.5

26.7

9.4

11.5

32.8

28.6

11.3

12.4

1741-1750

29.9

31.3

8.9

9.2

35.6

34.6

10.7

10.1

1751-1760

29.4

30.2

10.1

11.3

35.1

33.1

12.1

15.5

1761-1770


21

32.7 33.5 11.7 14.7 39.0 36.5 14.0 16.1

1771-1780

33.7

32.0

11.6

14.1

40.2

35.0

13.9

15.4

1781-1790

34.6

33.1

11.7

14.2

41.4

36.4

13.9

15.6

1791-1795

44.8

37.0

12.0

13.9

53.4

40.7

14.4

15.3

Table 2: Tax pressure in working days p. decade: about here]

Source: (Brusse and Dekker, 2013; Brusse and Mijnhardt, 2012; Brusse, 2011; De Vries and Van der

Woude, 1997, pp. 610–611 unskilled labour: average of “Hod carrier”s wages’ and “Unskilled wages”,

1995, p. 74; Fritschy, 2003, 1990; Liesker and Fritschy, 2004; Lourens and Lucassen, 1997; Priester,

1998, pp. 95–99, 668–675 unskilled labourers and farm-hands; Veenstra, 2009, pp. 55–59).

The comparison between the tax structure in both provinces reveal some

remarkable results. Firstly, although the total per capita tax revenue in Zeeland

exceeded for the most part Holland’s revenue, tax income from the common means

was generally higher in Holland. Secondly, only during three decades in the

seventeenth century total tax pressure in Holland was higher than in Zeeland,

expressed in days’ wages, whereas tax pressure stemming from the common

means was generally somewhat lower in Zeeland. This means that Zeeland

obtained relatively more tax revenue from its wealthier inhabitants than Holland

and, hence, distributed the burden of taxation more equally relative to financial

capacity.

The reason Zeeland shifted the burden to wealthier class might have been

the reaching of a political ceiling of taxing the ‘commoners’. This ceiling was already

reached by the 1590s, when the revenue from common means amounted 13.7

days’ wages. With the exception of the 1630s and 1640s, Zeeland did not reach this

level until the 1770s, and did not really exceed this thereafter. Holland, in contrast,

increased the revenue from the common means, both in per capita amounts as well

as in number of days’ wages. They could do so because Holland experienced still

some economic growth, which was absent in Zeeland (Van Zanden and Van

Leeuwen, 2012). Additionally, Holland maintained a higher degree of urbanisation –

although some towns experienced demographic decline – whereas urbanisation in

Zeeland declined during the eighteenth century (Brusse, 2011, p. 38; De Vries and

Van der Woude, 1995, pp. 74–75).

Considering the large incidental revenue from the Free Gift in 1747 – and

the underlying wealth – the strategy Zeeland employed was the best option they

had and consequently still obtained more per capita than Holland did. It

nevertheless seems that, with a stagnating economy and population, Zeeland had


22

reached the political limits of taxing the riches by the end of the seventeenth

century, which means that other solutions had to be found.

If the province of Zeeland could no longer increase its income, the other

option was to find cutbacks. However, Zeeland controlled merely about 20 per cent

of their primary expenses, the remaining 80 per cent were contributions to the

central budget. Since this contribution was a fixed share in the total, Zeeland’s veto

on the total amount of the central budget would have paralysed the Republic’s

decision-making process.

Insert Figure 9: of primary expenses in Zeeland, 1583-1795


The alternative was to be allowed a permanent reduction of their share to the

Generality. Already by the 1760s, the provincial States of Zeeland lobbied for a

lower contribution the Generality, because of the unhealthy state of their public

finance. Their requests were, however, denied by the States General, on advise of

the other provinces (National Archives (The Hague, Provincial resolutions, inv.nr.

309). Only by 1792, they were allowed a 50% reduction in their contribution. What

the eventual effect of the 1792-reduction would have been is impossible to

determine, because the Dutch Republic was dissolved in 1795.

Meanwhile, the Zeeland’s provincial government had sought rapprochement

with Great Britain. Soon after the Fourth Anglo-Dutch War (1780-1784), Laurens

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15

83

15

91

15

99

16

07

16

15

16

23

16

31

16

39

16

47

16

55

16

63

16

71

16

79

16

87

16

95

17

03

17

11

17

19

17

27

17

35

17

43

17

51

17

59

17

67

17

75

17

83

17

91

General Expenses in % Primary Expenses Provincial Expenses in % Primary Expenses


23

van de Spiegel, Grand Pensionary of Zeeland wrote a secret memorandum about

the consequences of Zeeland coming under British protection and seriously

discussed this with the English ambassador in 1786. Van de Spiegel deemed it

necessary for this province to retain its independence, either as part of a federal

Dutch Republic or as independent province under the British Crown. In any case, a

he wanted to prevent a Dutch unitary state, which would have resulted Holland’s

hegemony over Zeeland (Neele, 2011, p. 105).

Still, this was the eventual outcome of the Batavian Revolution of 1795. By that

time, Zeeland was more heavily indebted than Holland, in per capita guilders.

Despite paying more taxes than the people in Holland, Zeeland’s inhabitants also

had to maintain a larger public debt. Remarkably, Zeeland’s representatives in

Dutch parliament opposed the unification the longest and the fiercest (Neele, 2011,

pp. 105–106). We must, therefore, conclude that Zeeland’s ship of state was a

sinking one by that time, although they tried everything in their power to turn the

tide, except giving up their independence.

Holland (1796) Zeeland(1796)

Debt (in mln. gld.) 454.0 52.9

Debt p. capita 579.8 662.8

Debt Service (in mln. gld.) 12.5 2.1

Debt Service p. capita (in guilders) 16.0 25.8

Table 3: of per capita debt in Holland and Zeeland in 1796

Sources: (Dormans, 1991, p. 165 tabel 4.17 Overzicht “Nationale Schuld”; For population estimates of

Zeeland: Priester, 1998; Brusse and Dekker, 2013; Brusse and Mijnhardt, 2012; Brusse, 2011; For

population estimates of Holland: De Vries and Van der Woude, 1995, pp. 74–75) & Zeeland’s debt: ZA,

Rekenkamer C, inv.nrs. 5990, 6000, 6010.

So, was Zeeland indeed seduced into increased borrowing, instead of reforming? No

indefinite answer can be given on the basis of the current analysis. Abundant – and

thus cheap – money made borrowing indeed attractive. On the other hand, the

States of Zeeland increased taxation, but this had probably reached a political

ceiling in two instances. First, the per capita tax revenue from the common means

stabilised as early as the late sixteenth century, which suggests the tax burden for

ordinary people could not be extended beyond that level. Second, the taxation of

wealth and income was not increased after the 1680s, which can mean two things:

either the social support for further tax increases was lacking or borrowing seemed

a better alternative. Taking into consideration that Zeeland’s inhabitants paid even

more per capita taxes than those in Holland, they might have been among the most


24

heavily taxed people of their time, which made borrowing an attractive solution

especially when capital was cheap.

When unable to increase the income side of the budget, the province was

forced to find options to save expenditures. Given the structure of its expenditures,

20 per cent in Zeeland and 80 per cent to the Generality, the latter component

offered the largest opportunity to cut back expenses. Over thirty years of

negotiations eventually yielded the province a 50 per cent reduction. However,

when the States-General granted this in 1792, both Zeeland as sovereign province,

and the Dutch Republic as a hole, were in the dawn of their existence.

Until that time the States of Zeeland had to find other ways to cover its

deficits. The abundance of capital present in their territory availed them with the

possibility to borrow relatively cheap. While trying to find a more durable solution,

borrowing was the best option they had in the meantime. Consequently, this

temporary measure became a structural – yet unsustainable – response to

increasing deficits.

Conclusion

Contrary to what might be expected, Zeeland’s interest rates for sovereign

borrowing did not increase while its budgetary deficits grew. This effect presents us

with a puzzle, since interest rates contain a risk premium to compensate creditors.

If a public body suffers from structural deficits, the risk of defaulting on its debt

increases and consequently the compensation for this risk run by creditors should

equally increase. Risk premium is, however, not equal to the total interest rate; the

price of capital is also determined by transaction costs and opportunity costs. The

latter equals the price of risk free capital and is the outcome of the relation

between demand and supply of capital. Capital scarcity would increase this base

interest rate, whereas capital abundance would decrease it. Since risk premium

cannot explain Zeeland’s low interest rate, this component seems to have been the

decisive factor for this odd phenomenon.

In order to make a reasonable case that an oversupply of capital indeed

lowered the interest rate, we need to find evidence that capital was in excess.

There are a number of clues pointing in that direction. First, when Zeeland needed

to extend its income, from the 1670s onwards, they primarily did so by taxing

wealth. Secondly, the tax revenue from the Free Gift in 1747 demonstrates that


25

there was ample capital among Zeeland’s inhabitants. Capital was so plentiful in

Zeeland that its price was very low.

While capital was probably abundantly present in Zeeland, investment

opportunities were relatively scarce. The economic low tide between 1630 and 1750

diminished the demand for capital, which resulted in a very low interest rate.

Moreover, Zeeland’s provincial government was able to attract even more capital

from Holland as well, at least during the second half of the eighteenth century.

In spite of the richness of its inhabitants, the provincial government was

unable – or unwilling – to collect more than they did. Instead of increasing taxes

even further, the States of Zeeland choose to utilise the capital by borrowing at low

interest rates. This was the most attractive option, certainly in the short-run, since

saving expenses required the cooperation of the other provinces. The negotiations

about Zeeland’s request for a lower contribution were so time consuming, that the

eventual reduction was only granted three years before the Batavian Revolution

ended the sovereignty of the individual provinces.

What does this tell about capital market integration within a political

federation? Perhaps we may argue that Zeeland got trapped by its membership of

the Dutch Republic. Although it allowed them to remain sovereign, this came at a

high price. Reforms were perhaps most necessary for the expenditures, for which

the province depended on the willingness of the other provinces. The rigidity of the

repartition system and the reluctance to adjust this to the changed economic

circumstances meant that Zeeland’s sovereign debt increased to a very high level.

Admittedly, Zeeland did not default on its debt. Still this was only the result of the

abundant and cheap money, which allowed to postpone a restructuring of the

provincial debt.

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