Age of Invention: Capital Finds a Way
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This week’s research has been especially diffuse, as I try to tie up a few loose ends for the book I’m writing — largely without success, as having pulled on each thread, they just keep on unravelling.
One of these loose ends was a throwaway remark in Lewes Roberts’s 1638 description of the world through the eyes of an English merchant. In talking of Amsterdam, he noted how it had become wealthy because of the “great plenty of moneys which they deliver out at easy rates of interest”, which was now seeking investment opportunities with which to earn higher returns. Lacking land, he says, the Dutch had few options left with which to employ their savings, except long-distance navigation. Certainly, as Davis Kedrosky pointed out the other week, Dutch agriculture was from very early on extremely intensive. They had done all they could to squeeze every last investment opportunity out of their limited land. And as for the flow of savings into commerce, it was certainly a factor in the success of the Dutch in the Indian Ocean.
But what made me really sit up and take notice is that Roberts also mentioned how Dutch capital had also been going abroad: “of late days England, and other neighbouring countries are found to have their estate going at interest according to the custom of the place”. Whereas the Dutch were only able to get returns of about 4-5% in the Netherlands, in countries like England they could get as much as 8%. Having begun to exhaust major investment opportunities at home, Dutch savings pursued the higher rates of return abroad — even when they threatened national interests, and despite the authorities occasionally trying to prevent it. To misquote a character in Jurassic Park: “capital, uh, finds a way”.
Dutch capital appears to have primarily flowed to countries near the Baltic — Denmark, Sweden, Poland-Lithuania, and Russia. There, Dutch investors put up the capital to sink mines, drain swamps, exploit forests, dig canals, build mills and launch ships. One of the many successes of Dutch investment was the dramatic growth of the Swedish iron industry, which in the early seventeenth century seemingly grew out of nowhere to dominate the European market. Even England, which in 1590 had been almost self-sufficient in iron, occasionally even exporting some of the stuff, was by 1700 relying on Sweden for half of its supply.
Yet England was a major destination for Dutch capital too, as Roberts’s comment makes clear. In 1618-19, eighteen foreign merchants were arrested on the fairly ludicrous charge of having exported £7m in cash, largely to the Netherlands. This may simply have been one of James I’s many cash-grabbing schemes, alongside the sale of knighthoods and monopolies. But it may also have been prompted by the ever-increasing flow of interest payments back to the Netherlands. Although the arrested merchants were let off with some fines, and some of them were even knighted for their financial services to the king, the episode appears to have left Dutch investors and creditors spooked. When circulating coinage became scarce in 1621, some members of Parliament “were of opinion the withdrawing of the Dutch merchants was the cause of this sudden damp”.
Dutch capital soon returned, but it was often a source of tension. Dutch investors put up vast sums in the 1620s and 30s for the engineer Cornelius Vermuyden to drain the English marshes and fens — their reward was often thousands of acres of reclaimed land, to be put to pasture or plough. The king encouraged the schemes, taking a cut of the proceeds for himself. But the locals were often unhappy. The marshy so-called “wastes” were of economic importance to the poor: a source of thatch for shelter, of peat for heat, and of fish and fowl for food. And local landowners were annoyed by the diversion of waters that made their pastureland rich. Fennish resistance to the investments often turned violent, as catalogued in James Boyce’s book Imperial Mud.
Other commentators lamented that the “innumerable wealth” of the Dutch was impoverishing the kingdom. “What trades are there in which they have not stocks going, or scriveners with money to lend,” asked admiral Sir William Monson, “what land is to be sold, or mortgage to be had, that they have not the first refusal of?” Monson thought it self-evident that they were taking masses of money abroad, and that they had captured various English politicians to support their interest, to the detriment of the country. He warned that “the Hollander plays the part of a panther, which has a sweet scent, but a loathsome face, which makes other beasts follow till he has got them into his clutches.” Although the English might get some capital up-front, he fretted that thanks to high interest rates within a few years the Dutch would have recovered the full amounts of their loans and still be raking in the interest payments to boot.
It’s hard to say exactly how much the Dutch invested in England, but it doesn’t appear to have bought them much political influence. Many of those with direct experience of finance tended to worry about policies that would drive Dutch capital away, but to little avail. When in 1624 the English Parliament debated reducing the maximum legal interest rate on loans from 10 to 8 per cent, MPs against the proposal — including a very senior merchant representing London — estimated that the Dutch had about £800,000 invested in the country and “would carry it elsewhere”, probably to Italy or Spain. Such heavy-handed economic policy would, they said, “breed a garboil” (a wonderful archaic word for turmoil).
Yet the anti-usurers carried the day: an alliance of religious moralisers, MPs who as debtors stood personally to gain from the change, and a few who believed that the Dutch had purposefully lowered their own interest rates in order to give themselves a competitive advantage in trade. They seem to have ignored the argument already being made by many economic thinkers of the time, that Dutch low interest rates were simply a reflection of underlying economic conditions. (When the maximum interest rate in England was lowered again in 1651, to 6 per cent, it was when a lot of Dutch capital had probably already fled the upheaval of civil war.)
It seems likely that the reductions in the maximum interest rate will have shrunk the pool of capital available to English merchants and manufacturers, from creditors both at home and abroad. But it does not seem to have slowed economic development down for long. Dutch capital may well have gone elsewhere in search of higher returns — it’s hard to say for sure — but in the late seventeenth and early eighteenth centuries London was again flush with foreign cash. With such a plenty of capital in the Netherlands, the investment opportunities of a rapidly urbanising and industrialising England were simply too good to pass up.
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