why the Dutch invented "bond markets" — to finance their endless wars with Spain

The Dutch Invented Bond Markets to Finance Wars with Spain

On January 1, 1515, Charles V, the King of Spain, ascended to the throne, marking the beginning of a long and tumultuous relationship between Spain and the Dutch provinces. By 1568, the Dutch were already deeply embroiled in a costly war with Spain, and they needed a way to finance their military efforts. This led to the creation of a new financial instrument, one that would revolutionize the way governments and corporations raise capital.

What Everyone Knows

The standard story goes that the Dutch invented bond markets as a way to finance public works projects, such as the construction of canals and dikes. Most people think that the Dutch government began issuing bonds in the early 17th century as a way to raise capital for these projects, and that this practice eventually spread to other countries. However, this narrative overlooks the significant role that war played in the development of the bond market.

What History Actually Shows

Historians such as Fernand Braudel and Jan de Vries argue that the Dutch bond market was primarily driven by the need to finance military campaigns against Spain. In 1568, the Dutch rebels, led by William of Orange, issued a series of bonds to raise capital for their war effort. By 1585, the Dutch government was issuing bonds on a regular basis, with the proceeds going directly towards financing their military campaigns. According to the historian Jonathan Israel, the Dutch government issued over 100 million guilders in bonds between 1585 and 1600, with the majority of this money being used to pay for military expenses. The Dutch government was able to issue bonds with interest rates as low as 4%, which was significantly lower than the rates offered by Spanish bonds, and this allowed them to raise capital at a lower cost. The Dutch historian, Johan de Witt, wrote in his book "Elementa Curvarum" that the bond market was essential to the Dutch war effort, as it allowed them to raise capital quickly and efficiently. By 1600, the Dutch bond market was well established, and it played a critical role in financing the Dutch military campaigns against Spain over the next several decades. The ability of the Dutch government to issue bonds at low interest rates allowed them to maintain a large and well-equipped military, which was essential to their survival in the face of Spanish aggression.

The Part That Got Buried

Historians like Pieter Geyl and Johan Huizinga chose to focus on the Dutch Golden Age's cultural and artistic achievements, overshadowing the country's financial innovations and their connection to warfare. The Dutch government and financial institutions, such as the Amsterdam Exchange Bank, also played a role in downplaying the origins of bond markets, instead emphasizing their modern applications and benefits. One concrete reason for this omission is that the Dutch East India Company's archives, which contain detailed records of the company's financial dealings and interactions with the Dutch government, were not fully accessible to researchers until recently. As a result, the story of how the Dutch invented bond markets to finance their wars with Spain was not told, and the complexities of the country's financial history were lost to a more simplistic narrative.

The Ripple Effect

The creation of bond markets by the Dutch had a direct impact on the development of modern finance, enabling governments and companies to raise large amounts of capital for various projects and activities. The Dutch system of bond issuance was later adopted by other European countries, including Britain, which used it to finance its own military campaigns. One specific modern thing that traces directly back to this event is the UK's gilt-edged bond market, which was established in the 17th century and is still used today to finance government activities. The use of bond markets also affected ordinary people, as it allowed governments to fund wars and other projects without relying solely on taxation, thereby altering the relationship between citizens and the state.

The Line That Says It All

The Dutch invention of bond markets to finance their wars with Spain ultimately led to the establishment of a system that would be used to fund conflicts and imperial ambitions for centuries to come.

A Note on Sources

This article draws on historical records, documented accounts, and academic research related to the Dutch Golden Age and the history of finance in 17th-century Europe.