The financial history of the Dutch Republic involves the interrelated development of financial institutions in the Dutch Republic. The rapid economic development of the country after the Dutch Revolt in the years 1585–1620 accompanied by an equally rapid accumulation of a large fund of savings, created the need to invest those savings profitably. The Dutch financial sector, both in its public and private components, came to provide a wide range of modern investment products beside the possibility of (re-)investment in trade and industry, and in infrastructure projects. Such products were the public bonds, floated by the Dutch governments on a national, provincial, and municipal level; acceptance credit and commission trade; marine and other insurance products; and shares of publicly traded companies like the Dutch East India Company (VOC), and their derivatives. Institutions like the Amsterdam Stock Exchange, the Bank of Amsterdam, and the merchant bankers helped to mediate this investment. In the course of time the invested capital stock generated its own income stream that (because of the high propensity to save of the Dutch capitalists) caused the capital stock to assume enormous proportions. As by the end of the 17th century structural problems in the Dutch economy precluded profitable investment of this capital in domestic Dutch sectors, the stream of investments was redirected more and more to investment abroad, both in sovereign debt and foreign stocks, bonds and infrastructure. The Netherlands came to dominate the international capital market up to the crises of the end of the 18th century that caused the demise of the Dutch Republic.
Introduction To fully understand the peculiarities of the history of the system of public finance, and that of the closely related system of private (international) finance and banking of the Dutch Republic, one has to view it in the context of the general history of the Netherlands and of its institutions, and of the general Economic History of the Netherlands (1500–1815).
Those general histories differ in an important way from those of centralized Western European monarchies, like Spain, France, England, Denmark and Sweden in the early modern era. The Netherlands were highly decentralized from their origins in the Habsburg Netherlands in the late 15th century, and (other than the monarchies just mentioned) successfully resisted attempts to bring them together under the centralized authority of a modern state. Indeed, the Dutch Revolt that gave rise to the Republic of the United Netherlands, effectively resulted from resistance against attempts by the representatives of king Philip II of Spain, the Habsburg ruler of the country, to institute such a centralized state and a centralized system of public finance. Where in other instances the modern fiscal system resulted from, and was made subservient to, the interests of a centralizing monarchical state, in the Dutch instance the emerging fiscal system was the basis of, and was mobilized in the interests of the defense of, a stubbornly decentralised political entity.
Ironically, the Habsburg rulers themselves pushed through the fiscal reforms that gave the rebellious provinces the wherewithal to resist the power of the sovereign. Emperor Charles V needed to increase the borrowing capacity of his government to finance his many military adventures. To that end it was necessary to put in place a number of fiscal reforms that would ensure that the public debt could be adequately serviced (thereby increasing the creditworthiness of his government). In 1542 the president of the Habsburg Council of State, Lodewijk van Schoor, proposed the levy of a number of taxes throughout the Habsburg Netherlands: a Tenth Penny (10 percent tax) on the income from real property and private loans, and excise taxes on beer, wine, and woollen cloth.De Vries and Van der Woude, p. 92 These permanent taxes, collected by the individual provinces, would enable the provinces to pay enlarged subsidies to the central government, and (by issuing bonds secured by the revenue of these taxes) finance extraordinary levies (beden in old Dutch) in time of war. Other than expected, these reforms strengthened the position of the provinces, especially Holland, because as a condition of agreeing to the reform the States of Holland demanded and got total control of the disbursement of the taxes.
Holland was now able to establish credit of its own, as the province was able to retire bond loans previously placed under compulsion as enforced loans. By this it demonstrated to potential creditors it was worthy of trust. This brought a market for voluntary credit into being that previously did not exist. This enabled Holland, and other provinces, to float bonds at a reasonable interest rate in a large pool of voluntary investors.De Vries and Van der Woude, pp. 93–94
The central government did not enjoy this good credit. On the contrary, its financing needs increased tremendously after the accession of Philip II, and this led to the crisis that caused the Revolt. The new Regent Fernando Álvarez de Toledo, 3rd Duke of Alba tried to institute new taxes to finance the cost of suppression of public disturbances after the Iconoclastic Fury of 1566 without going through proper constitutional channels. This brought about a general revolt in the Netherlands, particularly in the northern provinces. Those were able to withstand the onslaught of the royalist forces militarily, because of the fiscal basis they had built in previous years.
Of course, they now withheld the subsidies to the central government their taxes were supposed to finance. That central government was therefore forced to finance the war by transfers from other Habsburg lands, especially Spain itself. This led to an enormous increase in the size of the Spanish public debt, which that country was ultimately unable to sustain, and hence to the need to accept Dutch independence in 1648.De Vries and Van der Woude, pp. 94–95
As explained in the general article on the economic history of the Netherlands, the political revolt soon engendered an economic revolution also, partly related to political events (like the rise of the Dutch East India Company and its West-Indies colleague), in other respects unrelated (like the revolutions in shipping, fisheries, and industry, that seem to be more due to technological innovations). This economic revolution was partly the cause of, and partly helped along further, by a number of fiscal and financial innovations that helped the Dutch economy make the transition to "modernity" in the early 17th century.
Public finance The "constitution" of the new Republic, the Union-of-Utrecht treaty of 1579, tried to lay the basis of a revolutionary new fiscal system. It put in place a rudimentary confederal budget system that charged the Raad van State (Council of StateThe current Wikipedia article discusses only the modern Dutch Council of State. The Council of State under the Republic was more of an executive council, accountable to the sovereign States-General of the Netherlands.) with drafting an annual Staat van Oorlog (war budget). This budget was presented in a "General Petition" to the States-General for (unanimous) approval.De Vries and Van der Woude, p. 96
The treaty next required that the tax revenues for the financing of this budget would be levied "...equally in all united provinces, and at the same rate.". Furthermore, it prohibited internal tariffs and other taxes discriminating against residents of other provinces. Alas, these two latter provisions were never implemented. Instead, the provinces continued the practice under the Habsburg rulers that the provinces paid a fixed quotum (the repartitie) of the budget. Holland's contribution was the norm from which the contributions of other provinces were derived. After some changes the quota were fixed in 1616 as follows (to remain unchanged till 1792): Friesland one-fifth of Holland's share; Zeeland (after some diligent bargaining) 16 percent; Utrecht and Groningen one-tenth each; Gelderland 9.6 percent; Overijssel 6.1 percent; and Drenthe (though not represented in the States-General) 1 percent.De Vries and Van der Woude, p. 99
The States-General had only two direct sources of income: it taxed the Generality Lands directly, and the five Admiralties set up under its authority, financed their activities nominally from the Convooien en Licenten levied on trade.De Vries and Van der Woude, p. 98 Otherwise, the provinces determined themselves how they would collect the revenues to finance their repartitie. Within the provinces there were other quota systems to determine the contributions of the cities and of the countryside. In Holland, the city of Amsterdam was by far the largest contributor (though this was different from Habsburg times, when Delft made the relatively largest contribution), which explained the influence that city wielded, even at the national level.
This system remained in place throughout the life of the Republic. Simon van Slingelandt made an attempt in 1716 to reform it by giving more power to the center. He convened the Groote Vergadering (a kind of constitutional convention) in that year, prompted by the fact that the Generality faced a liquidity crisis in 1715, when most provinces fell into arrears on their contributions. However, this august body rejected all reform proposals, opting instead for "muddling through". Ten years later Van Slingelandt was made Grand Pensionary of Holland, but on condition that he not press for constitutional reforms.De Vries and Van der Woude, p. 122 Except for a reshuffling of the provincial quota in 1792, a real reform of the system had to wait till after the demise of the Republic. The public debt was consolidated on a national level in 1798, and the system of taxation only unified in 1806.
Taxation
As Holland was the most important province, usually paying 58 percent of the total budget,De Vries and Van der Woude, p. 99; as other provinces were often in arrears, and Holland then took up the slack, it often paid even more. it is probably useful to concentrate the discussion on this province (also because other provinces modeled themselves on the Holland system). It based its fiscal structure on the system inherited from the Habsburg era, mentioned above, but extended it in important respects.
The most important source of revenue, collectively known as gemene middelen (common means), were a set of excise taxes on first necessities, especially on beer, wine, peat, grain, salt, and the use of market scales. These were essentially transaction taxes, as they were levied at a fixed rate, not ad valorem (the revenue stamps introduced later in the 17th century basically fall in the same category as they tax transactions in commerce). In the 1630s this type of tax accounted for two-thirds of Holland's revenue. It then amounted to about ten guilders per capita (while per capita income for most people may have been much lower than the average of about 150 guilders a year). These taxes were levied on the seller of the good, who presumably passed them on to the consumer. They were collected by tax farmers, who bought their farms at auction, at least until the Pachtersoproer in 1748 put a stop to this practice. In Holland the real abuses of the system, though perceived to be great, may not have been as serious as the French abuses of the tax farms in that country. This was, because the tax farmers were numerous, low-status, and politically subordinate to the city Regenten, for which they formed a convenient barrier against popular discontent. Because of this weak position the Dutch tax farmers may have been less able than their French colleagues to exploit their privileges.De Vries and Van der Woude, p. 103