In 1588, Philip dispatched the Spanish Armada, with the Pope’s blessing, to commit the same genocide against English Protestants that he had perpetrated in the Netherlands and that the French were committing against the Huguenots. Queen Elizabeth desired the help of the Dutch navy against the Armada and so ordered her representatives in the Netherlands to cooperate more with Holland. Due to Leicester’s clumsy rein, the Holland regents consolidated their power under the brilliant leadership of Johan van Oldenbarnevelt, the Advocate for the States of Holland. Thus began the golden age of the Dutch under its first republican government.
Military innovations
By 1590, the Dutch Republic had transformed itself. Israel wrote, “Successful state-building on the scale achieved in the 1590’s, by the Republic, occurs only rarely in history…” In the midst of war and internal dissention, the Dutch had created new institutions and reformed the military and economy in ways that would make them a world power for almost two centuries.
The Dutch military took the offensive and regained much of the territory they had lost, at the same time setting new, higher standards for the conduct of soldiers. In the past, European soldiers had been free to murder, rape and steal from citizens. In contrast, Dutch generals disciplined their troops so well that villagers around Geertruidenberg felt safe to sell produce to Dutch troops during their siege of the city, and fine ladies would visit the scene of battle. The city capitulated in 1593 after four months. In all of their re-conquests, the Dutch never intentionally killed civilians as the Spanish had. By 1597, “…what initially had been a precarious strip of rebel territory had become one of the great powers of Europe.”
The Dutch had the second largest standing army after Spain and one of the largest navies. Innovation became its hallmark. The Dutch military reforms signified a turning point in the history of soldiering and military organization, introducing changes that spread across Europe. Soldiers who committed crimes against civilians could expect a jail sentence for rowdiness and theft, and the death sentence for rape or abduction. The Venetian ambassador was surprised that, unlike elsewhere in Europe, towns in the Dutch Republic competed to have garrisons quartered in them because of the economic benefits. The Brandeburg-Prussia military tradition originated in the Dutch reforms, while the Swedes employed Dutch tight discipline, extended infantry lines, counter-march and mobile field artillery with their most devastating effect in defense of Protestants on the German battlefields of the 1630’s and 1640’s.
Freedom
Throughout the seventeenth and eighteenth centuries, the Republic gave its citizens greater liberty than any other European society of its time. Based on freedom of conscience, Dutch openness extended much further, creating a “general liberty and ease, not only in point of conscience, but all others that serve to the commodiousness and quiet of life, every man following his own way, minding his own business, and little enquiring into other men’s,” according to a letter from the English ambassador Sir William Temple in 1672.
An Italian who settled in Amsterdam in 1683 contrasted the freedom of Holland with the “corruption, institutionalized despotism, and lack of respect for the individual, which, in his opinion, characterized the decayed Italian republics of Venice and Genoa.” The freedom that Dutch women enjoyed impressed visitors the most. Even young, unmarried women came and went as they pleased unchaperoned. Dutch wives were less subservient to their husbands and less likely to be beaten by them, as were servants.
While foreigners expressed surprise at the extent of Dutch freedoms, they usually responded with criticism, resentment, disdain and outright hostility. Many were appalled with the religious diversity and freedom of discussion. Others disapproved of the liberty of women, servants and Jews, whom other countries confined. The mixing of common folk with nobility as if they were equals outraged gentlemen. The United Provinces “were widely perceived in Europe as a seedbed of theological, intellectual, and social promiscuity which subverted the usual, and proper, relations between men and women, Christians and non-Christians, masters and servants, nobles and non-nobles, soldiers and civilians, perversely refusing to accord the noble, the soldier, and even the husband the honour and status which were their due.”
This attitude of distrust toward freedom characterized the responses of much of the rest of the world when they encountered the concept. “The Japanese, when first exposed to Western influences in the nineteenth century, had great difficulty translating ‘freedom’; they finally settled on jiyu, which means ‘licentiousness.’ The same held true of China and Korea,” according to M. I. Finley in The Ancient Economy. Freedom puzzled Muslim writers as well. Bernard Lewis wrote in Islam in History, “The first examples in Islamic lands of the use of the term in a clearly defined political sense come from the Ottoman Empire in the late eighteenth and early nineteenth centuries, and are patently due to European influence, sometimes to direct translations from European texts… Early references to freedom in works of Muslim authorship are hostile, and equate it with libertinism, licentiousness, and anarchy.”
Yet Dutch society was more prone than other European societies to repress bawdiness, eroticism, undisguised homosexuality, and street prostitution. While women adopted French fashion, “society simply would not tolerate the plunging necklines and flaunting of the bosom prevalent, at the time, in France, England, and Italy.” But it was precisely the Dutch emphasis on morality and order that enabled their women to move about freely and unaccompanied without being molested. Solitary males and females could wander, day or night, in town or country with relatively little fear of being robbed, or assaulted. The Dutch invented the first neighborhood watches and gave the world the first public streetlights in order to reduce crime and check wife beating.
Dutch ingenuity
As the rest of Europe, the economy of the Netherlands had remained static until the 1580’s. Then it exploded. One reason for the breakaway performance was the productivity of its agriculture. Cameron wrote in A Concise Economic History, “In the course of the sixteenth and seventeenth centuries Dutch agriculture underwent a striking transformation that merits its description as the first ‘modern’ agricultural economy.” The Dutch were the first in Europe to cross over from the subsistence farming that had sustained humanity for millennia to specialization and production for the marketplace.
Subsistence farming takes place when farmers try to produce all of the food that their families and animals will eat, as well as wool and cotton for clothing and other necessities. American artists, historians, poets and novelists idolize self-sufficient agriculture, but farmers know well its deficiencies. To achieve self-sufficiency, farmers must become experts in a wide variety of production techniques, from raising sheep, cattle, horses, pigs and chickens, to growing wheat, corn, rye, cotton, flax, and hemp as well as the means to process them. With specialization, a farmer can concentrate on a few commodities and produce higher quality goods for less. As a result, he will need fewer tools. But the most important benefit comes from producing the items most in demand in the market because those products command the highest prices. He can then use some of his profits from the sale of those items to purchase what his family and livestock need at a cost lower that what he could produce them for himself. In some cases, Dutch farmers would grow and sell wheat, which could command a premium price in the cities, and purchase cheaper rye for their families to eat. Dutch agriculture pioneered the formula for success that the great developmental economist Peter Bauer discovered later and wrote about in From Subsistence to Exchange and other Essays:
One general feature of the early stages of economic progress is the replacement of subsistence production by market production for wider exchange. This process is accompanied by certain types of capital formation, important categories of which are incompletely recorded in statistics or altogether unrecorded. This applies to the establishment, extension, and improvement of agricultural properties, for instance the planting of cocoa or rubber trees in plantations on s
mall holdings where the output is collected and distributed by traders. These categories of capital formation are indispensable for the advance from subsistence production. They usually do not require monetary savings or investment, which explains why they often escape statistical record. My experiences in West Africa and Southeast Asia, in which I studied the cocoa industry and the rubber industry, have alerted me to the significance of such categories of capital formation.
Dutch farmers specialized in high-value livestock and dairy products that required large quantities of feed such as hay, clover, and turnips. The intensive agriculture practiced by the Dutch also demanded high inputs of fertilizer, which animals produced in abundance. Cameron wrote, “So great was the demand for fertilizer that some entrepreneurs found it profitable to specialize in collecting urban night soil and pigeon dung, for example, which they sold by the canal-boatload or cartload—an activity that incidentally kept Dutch cities cleaner and more sanitary than others.” Dutch agriculture proved so profitable that entrepreneurs invested substantial capital in reclaiming land from the sea, by draining lakes and marshes, and by planting peat bogs after the peat had been sold as fuel.
The Dutch restructured the financial industry of Europe, too. In 1609 they created the first public bank. De Vries wrote, “The Bank of Amsterdam succeeded instantly in attracting depositors, who became the envy of Europe for their access to deposit, transfer, and payment services that were trustworthy, safe, efficient, and virtually costless.” Credit became widespread and interest rates low, about half the rate in England. According to De Vries, Amsterdam’s financial institutions offered unparalleled opportunities: “One could trade commodities as well as financial instruments such as company shares and government bonds; one could buy sea insurance, arrange for freight, and get foreign exchange quotations.”
Most importantly, however, the bank severely reduced two evils dating from the ancient world – debasing of coins and fractional reserve banking. The previous chapter described the first debasement of coins by Solon in Athens in 594 and the ruin the practice caused there and in Rome during the third and fourth centuries. Monarchs often took on debt they could not afford in order to fight more senseless wars and build monuments to their vanity. Then they would devalue the nation’s coins by adding base metals to the silver and gold while stamping the value as if the coins contained pure metal for the purpose of escaping that debt. The practice was fraud, but all monarchs considered it their right and duty. The Bank of Amsterdam ended that practice for merchants who held accounts with it, although smaller banks continued the practice.
The other evil, fractional reserve banking, it much more esoteric and therefore has the potential to cause much more havoc. With coin debasement, people could easily determine how much precious metal coins contained and adjust prices accordingly. Fractional reserve banking has the same effect as coin debasement but is much more subtle and therefore dangerous. As with coin debasement, fractional banking probably began with temples that acted as banks in the early centuries of history. Fractional banking refers to the fact that banks keep only a portion of the money deposited on hand to meet the daily demands of the depositors while loaning out the rest. It refers only to demand deposits in which the depositors think that all of their money remains in the vault and they can withdraw all of it whenever they wish. It does not apply to money that people give to the banker for the purpose of lending it to others for a period of time because in those cases the depositor does not expect to get his money back on demand at any time but must wait for the borrower to repay it.
Fractional banking of demand deposits appears to a few economists as fraud and many scholars have labeled it that. The Roman Empire outlawed the practice without stamping it out. The excellent Spanish economist, Jesus Huerta de Soto has written the definitive history of fractional banking in his Money, Bank Credit and Economic Cycles and he considered the practice grossly immoral. De Soto makes excellent points, but several of the Church scholars of the Salamancan school defended it on moral grounds. I will pass on the moral judgment while pointing out that the practice has caused all of the boom-and-bust cycles in history other than those caused by crop failures, war or coin debasement.
Banking started in the third millennium B.C. in temples and probably fractional reserve banking with it. But the first known incident happened in 393 in ancient Greece. Of course, few people knew that bankers or goldsmiths were conducting fractional reserve banking until they went to the bank to withdraw their money and the banker could not deliver. That was how a friend of the philosopher and lawyer Isocrates discovered the practice. Isocrates represented his friend in court and accused the banker of misappropriating his friend’s deposit according to Jesus Huerta de Soto in Money, Bank Credit and Economic Cycles. The banker had loaned most of the friend’s money to others and would have met the friend’s demand for his money had his debtors repaid their loans. But the business ventures failed and the debtors could not pay, or could not pay fast enough. As a result, Isocrates’ friend lost his deposit.
Bank failures always hurt more than one person and that was most likely the case in Isocrates’ situation as well. De Soto recounts the history of many of those bank failures, which would usually cause widespread economic depression as people learned that most of their savings had disappeared. Naturally, people would cut back on consumption in order to rebuild their savings and cause consumer goods businesses to fail. Economists rediscovered the dangers of fractional banking and bank failures in the nineteenth century, but had to wait for the great Austrian economist Ludwig von Mises to explain that credit expansion leads to investments in the wrong businesses in the capital equipment sector followed by the failure of those businesses and the onset of the recession, which has become known as the Austrian business-cycle theory.
The Bank of Amsterdam reduced the threat of boom and bust cycles caused by credit expansion followed by bank failures, but it was incapable of eliminating all credit expansion because fractional banking is very lucrative; it is essentially a license to counterfeit without the burden of having to print paper money. The Dutch suffered through some credit induced booms and busts as a result of the excessive issues of bills of exchange by businesses, which would have worked in much the same way as fractional banking.
One famous episode that may have been the national obsession with the Turkish Tulip that led to the “tulip mania” in 1637 and the financial disaster afterwards. In their defense, the Tulip bubble resulted from an expansion of the money supply, possibly in the form of gold entering the country, but more likely through an expansion of bills of exchange which served as an early form of paper money. Similar bubbles popped in the U.S. with the dot.com bubble of the 1990’s and the housing bubble of the first decade of the next century. But we should keep in mind that the Dutch viewed Tulip breeding as a new technology and developed an obsession with it in the same way that the U.S. suffered from an obsession with the internet in the dot.com bubble of the late 1990’s.
The Dutch changed the way government finances worked, too. Before the revolt, Holland used tax revenue to retire government bonds and demonstrate the credit worthiness of the government. Afterward, the Republic continued to pay its debts, a rare practice among European governments. More common across the continent was the habit of forcing wealthy citizens to loan money to the state only to have the king default on the loan. Because of its fair treatment of lenders and regular repayment of loans, the Republic could borrow at much lower interest rates. The Dutch created modern international lending in 1688 when they invaded England and enthroned Willem III, the Dutch Stadholder. Willem set in motion constitutional changes, following practices in the Dutch Republic, that made England the first country outside of the Republic “to achieve creditworthiness capable of attracting voluntary, long-term Dutch investment in its public debt and in the English joint-stock companies,” according to De Vries. The Bank of England was created in 1694.
The Dutch added a twist to the practice of c
olonization that the Spanish and Portuguese had pioneered. They devised a joint-stock monopoly company backed by the state but observing policies established by a board of directors. In 1601 they created the United East India Company, which took the Spice Islands from the Portuguese in 1605. The Dutch West India Company emerged in 1621. Shares of both were traded on the stock exchange. Their charters instructed the companies to promote the Dutch Reformed Church as the sole public Church in their colonies, but at the same time allow for a freedom of conscience similar to that enjoyed in the Netherlands. However, the directors saw Catholicism as an enemy so the East India Company expelled all of the Catholics from territories it acquired.
The Dutch did not follow the Spanish practice of forcing natives to convert to Christianity, but they saw a purpose in the companies greater than just financial gain. Willem Usselincx, whom Israel called “the most notable Dutch economic writer of the early seventeenth century,” lobbied for the creation of the Dutch West Indies Company in order to take the gospel, along with Christian civilization to the native inhabitants. Usselincx believed that peaceful trade would prove more effective than the forced conversions practiced by the Latins, arguing that “the Indians would become more civilized and become accustomed to labor in order to enjoy the fruits of labor,” according to Ruben C. Alvarado in his article “Redeemer Nation” published in Common Law Review.
God is a Capitalist Page 27
