It is time we had an up-to-date book on the origins of the modern state and industrial commerce. Industrial commerce is based on industrial processes that decrease costs of production. These decreases in the cost of production often require capital and capital generally has required a solid and stable financial system.
Many books on industrial commerce have looked at the marketing innovations of Josiah Wedgwood and the technological importance of the steam engine. But a critical question is: Where did our present financial system come from?
The books for a good research base to write on this subject already exist. The books are: The Dutch Republic, Debt, Corporations and The Rothschildıs.
It is time to have someone write the authoritative book on the history of our financial system. The following is my outline of such a book.
The key historical date is November 1621, the place Holland. That is when the Dutch Republic chartered the first corporation: the Dutch West Indies Corporation. The shares of the new corporation were successfully sold to the public on the Amsterdam bond market.
Before the historic event of November 1621 could happen four institutions were needed: A Republic, a bond market, a prosperous commercial trading nation and managerial skills. All four of these institutions are directly tied to each other.
A Republic is needed for a bond market as we explain later. A Republic was possible only among a people with long democratic traditions and a strong sense of individuality. That definition of necessary and sufficient conditions for a Republic applies to the Protestant peoples of the North Sea and the Baltic: Angles, Saxons, Frisians, Dutch, Danes and Swedes. These people asserted their individualism and intellectual sovereignty by becoming Protestants in the period from 1490 to 1560.
The first Republic was formed in Holland a decade later, in 1572, by peoples from these same cultural groups. The Dutch Republic was the model for America and many later democracies.
In the Europe of 1572, when the Dutch Republic was formed, taxes were collected in the form of custom duties, monopolies on salt and luxuries, dues from guilds, taxes on gentry held land, extortion by threat of death on local Jewish communities and assessments on estimated wealth of merchants. Tax collectors conventionally made the tax assessments, collected the taxes and paid a portion to the State.
Tax collection, everywhere, was inherently corrupt, unreliable and inefficient.
The Dutch Republic rapidly evolved a new tax collection system. The Dutch hired salaried tax collectors. Tax revenues increased dramatically and became a reliable source of State revenue. The notion of salaried tax collectors grew out of a century of Dutch experience with dikes and levies that required maintenance crews and reliable taxation on the farmers who were the beneficiaries of the dikes and levies.
For a variety of reasons, a democratic government using salaried tax collectors resulted in a more efficient tax system than had previously existed anywhere in Europe. Holland thrived.
Bonds and a bond market became possible in the Dutch Republic because the State had a reliable source of tax revenue and a democracy. An elected Assembly of State quickly proved to be a reliable bond paying institution. Princes, lords and kings governed all other European States. Consequently, all other States borrowed as individual sovereigns from wealthy lenders as personal borrowers. Princes, lords and kings were notoriously fickle with variable and often dubious credit records. Lenders to European aristocrats and lords regularly went out of business.
The State of Holland was truly a state and quickly showed itself to be credit worthy; especially since the Assembly members were often the very same commercial people who loaned their money to the state in the form of buying bonds.
The availability of stable credit worthy bonds promptly created a bond market in Amsterdam. The bond market was the source of credit for the first corporation and for the thriving commerce of Amsterdam and Rotterdam that were rapidly emerging. The first Republic was able to issue bonds and borrow at 3-4% interest rate.
A prosperous commercial trading nation was the direct consequence of a Republic with an efficient tax system. By 1600 the Dutch had taxed themselves sufficiently to build good ports, to open the first five major European Universities with excellent engineering and technical schools and to build the second largest navy, after the Spanish.
The Dutch used their newly created navy to protect and escort their commercial shipping, fend off pirates in the English Channel and North Sea, and conquer several global trading ports. Americans know that the Dutch bought Manhattan to carry out trade on the Hudson with inland tribes. At the same time the Dutch captured Goa in India, Java in Indonesia, Curacao in the Caribbean and Macao in China from the Portuguese. The Dutch shared Japanese trade with the Portuguese.
With the global supply sources in place and the beginnings of a financial market, Holland rapidly became an entrepot of trade.
Amsterdam was a Protestant town rapidly becoming a cosmopolitan trade city. The tolerance of commerce and the presence of good Universities attracted highly skilled artisans and commercial traders from all of Europe, including the displaced Jews driven out of England, Spain and Portugal by the Inquisition and Huguenots driven out of France. The pool of human diversity arriving in Holland created extraordinary growth in the wealth of Holland. The growth of wealth quickly created a thriving middle class. Holland became an intellectual and artistic center as well.
Managerial skills appear to be necessary for a modern financial system. Managerial skills appear to be necessary to operate large-scale decentralized businesses. A financial market, bonds and the bureaucracy around it require a modest level of meritocracy. Armies are large-scale organizations with management, usually run with managers rather than run based on nepotism. Armies may have been a source of managerial training, except that soldiers had higher social status at the time than merchants.
The origin of managerial skills, a synonym, in my mind, for meritocracy is most likely to have grown out of the same source that generated the tax collection system; the dike maintenance social structures. The concept of maintenance seems to me to be the origins of management. Managerial skills appear to arise out of a democratic milieu and an anti-aristocratic consensus. This is usually the milieu of a maintenance organization. The Chinese and many other Asian societies had maintenance systems for their irrigation, but they were submerged in highly non-democratic societies. Holland had dikes around which to organize maintenance organizations. (Interestingly, South Korea grew rapidly in after 1955. The main industrial corporations all had their origins as maintenance companies that serviced the United States Army during the 1950-53 Korean War.)
The Dutch contribution to the modern financial system didnıt stop with the creation of the system. The Dutch gave their system to the world. The Dutch became so rich and powerful that they invaded and conquered England in 1682. England became the threat to other nations and the model for finance for France and much of Europe.
The Dutch installed their military leader, William of Orange as King of England and installed his wife, Mary, as queen. King William and Queen Mary proceeded to duplicate the Dutch institutions familiar to them in their new country: England. William and Mary, as we know them, created a strong and independent assembly, Parliament, which survives continuously to this day; they introduced the Dutch taxation system of salaried tax collectors.
With the Dutch taxation system in place England could have high quality government bonds and a thriving bond market. England prospered immediately as a result and became the mighty Britain of the 18th Century that we know.
Britain, a large nation, with a much larger population, promptly eclipsed Holland, in the naval and commercial world.