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Treaties and Tulips:
17th Century Dutch Financial Innovations
Preston Nunez
June 5th, 2015

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The Netherlands maintains status as a prominent core country in the modern world
primarily because of their extensive contributions to modern economics and modern finance.
This paper will observe the conditions in which the Dutch Republic rose to be a dominant force
in global trade in the 17th Century. Furthermore, it covers which structures and innovations
Italian cities contributed to the rise of the Dutch and which innovations the Dutch built for
themselves to succeed in trade, giving birth to modern global capitalism. This paper will include
an overview of many different aspects of the Dutch Republic, from geography to politics and
economics, focusing more specifically on how these conditions facilitated various financial
innovations and immense economic growth.
This paper will show how some of the key economic innovations of the Dutch Republic
have influenced the modern world, these innovations include the first international corporation,
the first stock exchange marketplace, the first central bank, and the birth of stock futures trading
and fractional reserve banking. Great emphasis is placed on the Dutch contributions to modern
finance, utilizing a technical approach to understanding the Republic’s place within the
expanding world market. Finally, I wage that the decline of the Dutch Republic as the dominant
hegemony was instead a successful venture because of their continued emphasis on populace
welfare instead of economic efficiency.
The beginning of the implementation of capitalism as a world­system is debated between
Immanuel Wallerstein and Giovanni Arrighi, the latter believing the united city­states of Italy in
the 15th century to be the first clear example of a capitalist world power. Wallerstein, however,
believes the city­states insufficient for world­power because their trading routes and thus their
influence in general, was geographically limited to the Mediterranean Sea. Regardless, the

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debate lies in definition and when we consider real world influence, the Italian city­states set the
foundation for capitalism as a world­system.
For sake of detailed discussion on the foundational principles set by the city­states, we
look to Giovanni Arrighi who identifies these city­states as the world’s first cycle of
accumulation. A systemic cycle of accumulation, according to Arrighi, is based around the
Marxist general formula of capital, MCM’. The formula consists of Money ­> Commodity ­>
Money Prime and is the easiest way to describe the idea of capital in that money makes a
commodity and that commodity makes money and profit (prime). Arrighi breaks the formula
down into two phases, MC is the material expansion phase which alternates from the CM’ phase
of financial rebirth and expansion (Arrighi, 6). While the Italian city­states of the 15th century
operated on a less than global scale, Arrighi still claims their importance by proving their
contribution to the first phase of the first cycle of capitalist accumulation, the material expansion
phase (Arrighi, 89).
The Italian city­states remained unformed and war stricken for most of their existence up
until a shift from warfare to diplomacy in 1454. Arrighi asserts that “the modern interstate trade
system began with a regional subsystem of capitalist city­states that emerged in northern Italy.
The city­states featured separate and independent politically jurisdictions held together by the
principle of the balance of power and dense networks of residential diplomacy” (Arrighi, 38).
What allowed the congregation of Italian cities to shift from warfare to diplomacy was the Peace
of Lodi, which served as the first example of an interconnected city­state cooperative but
independent model of government. The Peace of Lodi connected primarily the ‘big four’ of
Italian cities: Milan, Florence, Genoa and Venice, crucial in establishing a balance of power

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between themselves. Balance of power is the cooperative competition between economic forces
and is the mechanism of which capitalist states can reduce costs, in this case protection costs,
both absolutely and relative to their rivals.
The Italian cities maintained their distinct markets, Florence in textiles, Milan in metals,
Venice in maritime spice trade, and Genoa in maritime silk trade (Arrighi, 89). The value of
these capitalist industries made them a target for territorialist invasion, but they did not have the
size or strength to provide for the military defense power for themselves. The Genoan city­state
negotiated protection costs from Spain, meaning they could focus solely on their industry of
choice and externalize the cost of protection. The protection­producing industry of the Italians
had utilized some of the costs of protection to indirectly fuel their economy and market
exchanges. Essentially, while sponsoring armed forces, those soldiers spent their pay to consume
the goods of within Genoa, boosting both economic and military power simultaneously. It was
this externalization of protection costs the allowed Genoa to gain large amounts of financial
capital and propagate maritime trade throughout the Mediterranean, completing the MC cycle of
accumulation within the world system (Arrighi, 156).
The territorialist rulers of the 15th and 16th century, primarily the Spanish and
Portuguese in the Iberian peninsula, began searching for ways to incorporate the Italian wealth
and trade success into their empires. To compete, the Spanish and Portuguese began taking
financing from the Genoese to compete with and crowd out the Venetian Mediterranean trade
dominance. The Portuguese became successful but the Spanish shared less of the trade success.
The Spanish and the Habsburg Imperial House suffered in Mediterranean and began to fall in the
wake of new mini­empires arising that followed capitalist­economic logic rather than

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territorialist­imperialist logic. The systemic chaos that arose from the failing of the largest
world­empire opened up the world conditions for a new hegemony to replace it. Thus, the shift to
Dutch hegemony that will follow marked the final stake in the transfer from territorialist power
to capitalist power as the operating mode of the modern world­system. “The new system rests on
international law and the balance of power, a law operating between rather than above states and
a power operating between rather than above states (Gross, 54­5). Out of this modern
world­system comes the Dutch Republic as the core of the new western capitalist world system
in the seventeenth century, according to Wallerstein and Arrighi. Wallerstein introduced the
concept of the “world­economic system” to contrast from the previous imperial world­empire
system (Wallerstein, 1978­80).
The history of the Dutch Republic begins with seventeen lowland provinces and their war
for independence from the political and religious hegemony of Spain. Beginning in 1568, King
Philip II of Spain worked to regain control of the revolting provinces, Spain reclaimed all but
seven of the provinces by 1581. The Northern seven provinces collaborated to become the
United Provinces, or the Dutch Republic to evade the high taxes and lack of representative rule
of King Philip II (Darby, 48). Each of the seven provinces had distinct trading histories similar to
the city­states of Italy only their trade routes were centrally located in the Baltic Sea, where
together they controlled over half of the ships. The Dutch specialized in the import of grain and
timber from states such as Russia and Sweden by use of the Baltic Sea. The Dutch, acting as a
middleman, would ship these goods back to the Republic to export to other countries. “The
Baltic trade was the foundation of Dutch trading success: it provided the Republic with a source
of raw materials for export and underpinned its trade with Europe” (Hammal, 17). Once the

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profitability of trade within the Baltic sphere surpassed the profitability within the
Mediterranean, new capitalist world­economy made the natural shift to emphasize Baltic trade.
Following their independence the Dutch continued to block grain and timber trade routes
to the southern Spanish provinces for many years. This not only weakened the Spanish provinces
in the south, but the Spanish themselves imposed so many regulations upon the provinces that
many of the elite intellectual citizens including financiers fled to the northern United Provinces.
The new Dutch Republic proposed free markets in both commodities and the factors of
production along with open politics emphasizing conservative values of property rights. Upon
these foundational principles they were able to achieve levels of organization and technological
advancement that allowed for the economic expansion and market­based consumerism needed to
fuel the economy past the Dutch competition.
Based on the free market trading platform, the Dutch gained capital and influence
through the expansion of European trade through the Baltic Sea, as well as maritime trade routes
to the Levant. The Levant trade routes consisted of crowding out the existing influence of
Venetian dominance within that Mediterranean region. “Dutch trips to Italy, West Africa, and
South America pioneered during the late 1580s and 1590s took much longer to complete than the
Baltic run, the artery of the Dutch Republic’s foreign trade. As often as not, Baltic ships did two
to three round trips in the sailing season, but a single voyage to Italy or West Africa and back
took ten to 12 months” (Gelderblom, 642). The issues of distance, time and risk to complete the
longer trades routes proved to be minimal because these routes expanded rapidly throughout the
1590’s. “As West African trade grew, it spawned larger partnerships running more than just a
single ship. Eventually this led to the establishment of more permanent companies selling equity

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shares” (Gelderblom, 642). The Dutch influence on facilitating maritime trade throughout the
world­system continued to expand, from Baltic, back to Mediterranean to gain influence and pull
power from Italy, and eventually they spread their influence to dominate Atlantic trade.
The beginning of the sixteenth century marked the shift in Dutch expeditions towards a
focus on Asia. Key factors in this shift include the costs involved were typically double to
quadruple what they had been throughout Africa and the Caribbean. These inflated costs
exceeded the budget of sole merchants and even small organizations of traders combined, also,
the added distance and time involved in Asian trade multiplied the risk involved in making the
ventures. “Several of the pioneering Asian voyages took ten to 15 years to wind up and more
than 20 percent of ships sent out to Asia were lost” (Gelderblom, 645). Most investors could not
justify the ventures until the creation of the Dutch East Indies Company in 1602. This company
was granted trade rights because by the Dutch Republic and they began to take joint­stock, in
hopes of enabling the individual investors once again. The company was able to recruit politician
shareholders so that they remained politically favorable and relevant while fundraising enough
capital to complete and expedite long trade routes to Asia (Hammal, 20).
Created by the Dutch East India Company to regulate their individual investors and
stocks was the Amsterdam Stock Exchange, later named the Amsterdam Bourse, the world’s first
large­scale and largely unregulated stock exchange. The support from investors and the global
trade networks led the Dutch East India company to be considered the world’s first multinational
corporation. The company’s shares became quite popular because of the increased possibility of
a successful trip which would contribute huge dividends, as well as the shares provided the

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investors with a quick and liquid way out of bearing the burden of risk if a maritime trade trip
proved unsuccessful.
This table shows exactly how the amount of traders and average share price increased over time.
The period of 1603­1607 involved an abundance of small investments from individual merchants
and traders and as a result, during the next period of 1608­1612 the company experienced a
nearly three hundred percent growth.
Based upon the massive success and capital accumulation of the Dutch Republic between
1595 and 1612, a secondary market had emerged from the start of the Dutch East India company.
“Investors started borrowing on the security of VOC shares, they began to speculate, and they
even staged the world’s first ever bear raid in 1609/10” (Gelderblom, 658). The figure below
compares the line of cumulative investments with the line of cumulative returns (Gelderblom):

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Figure 1 poses several interesting points of interest, the biggest being that before the Dutch East
India company and the usage of joint stock, these ventures were largely a negative cash flow
business. This is primarily because only after the implication of financial technologies and stock
trading did the Dutch East India company’s long­distance trade ventures become profitable.
Also, “Figure 1 shows cumulative investments in various ventures at an estimated 1.4 million
guilders in 1599, and 5 million guilders two years later. Notably in 1600 and 1601 total revenue
of the early voyages lagged about 1.5 million guilders behind total investment. Hence the
determined efforts the initiators of new trips made to find fresh sources of capital” (Gelderblom,
662).
The creation of a highly liquid market in Dutch East India shares coincided with falling
interest rates on short­term borrowing. This is due to the general reallocation and leveraging of

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risk, thus consequently the pacification of returns as we can see below in Figure 5 (Gelderblom):
Proceeding the Dutch East India company, the Amsterdam markets returned high interest rates
around eight percent. Once the Dutch East India company flooded the market with their shares
that produced a more accountable, but lower overall return, the interest rates dropped around one
percent within the first 6 years. Around 1616 the average return percentage overall began to fall
once again to around five percent within three years. “The declining interest rates are remarkable
because Amsterdam experienced a prolonged commercial boom from 1590 to 1620. In addition
to the funding of traditional trade between the Baltic Sea and the Atlantic coast of Portugal,
Spain, and France, Amsterdam merchants needed capital for countless long­distance enterprises
in Europe and beyond. Judging by the interest rates, this growing demand for capital does not
appear to have strained supply at all” (Gelderblom, 667).
Shortly after its debut, the Dutch East India trading company had garnered enough
support to turn a profit, as seen above. Again, they managed to raise the cumulative capital
invested in these Asian trade routes nearly three hundred percent, which we can tie back into
Marx’s original formula of capital accumulation, MCM’. High levels of international trade

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coupled with new financial innovations can garner huge capital gains in a relatively short period
of time, Thus, the Dutch fall under the CM’ cyclical phase of financial rebirth and expansion.
The Dutch East India company was an extremely progressive company, both easily accessible to
investors of all financial backgrounds, and completely transparent and open about their
transactions. Another peculiar trait to the share trading with the Dutch East India company was
that “subscribers had a period of several years in which to pay up their commitment, the Dutch
East India shares had a built­in speculative element from the start. Several merchants subscribed
to more shares in the new company than they were planning to hold on to” (Gelderblom, 671).
This feature to shareholding with the Dutch East India company is important for understanding
the cycles of financial markets, and more importantly, the basis of financial crisis.
To combat the sporadic and chaotic exchange of different currencies from all over the
world that poured into the Dutch Republic because of the far reaching trade routes and expanded
interest in investing with the Dutch East India company, the Bank of Amsterdam was founded in
1609, It is the first example of a true central bank and it was originally set to regulate the various
forms of currency, as well as fight against the debasement of the Rixdollar, the Dutch primary
form of currency (Quinn, 45). Debasement is the process by which a currency is purposefully
devalued by those holding and transferring the currency, for example, the money­changers and
cashiers would be able to take weight off of a gold coin and accumulate additional wealth
overtime by slightly devaluing coins they handle. From its origination, the Bank of Amsterdam
operated upon a book­entry payment system which enabled them to satisfy the high volume of
large commercial transactions flowing through Amsterdam (Neal, 121­2).

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Throughout the seventeenth century, the Bank of Amsterdam managed to successfully
implement two additional functions crucial to the booming Dutch economy. First, the bank
created forms of money not directly redeemable by coin, this was an effort to remove coins from
the market so that the bank and government could effectively regulate the value of the currency.
Also, the Bank of Amsterdam began to manage the value of their money through revolutionary
free market operations and the application of bank deposit receipts. These receipts revolutionized
the existing Amsterdam financial markets because they were future pricing options that could be
traded with very little regulation. They shifted large debts that would otherwise be solidified for
long periods of time, they started at six months, and enabled them to be traded freely boosting
liquidity. Adam Smith wrote about these receipts in Wealth of Nations describing the trade of
bank debt receipts explaining how “the person who has a receipt … finds always plenty of bank
credits, or bank money to buy at the ordinary price; and the person who has bank money … finds
receipts always in equal abundance” (Smith, IV.3.20). This technology persuaded more investors
to buy up debt with the Bank of Amsterdam because they were no longer locked into lengthy
contracts, instead these receipts built up the market confidence and contributed to the
stabilization of the value currencies that were the foundation to the Republic’s wealth.
The combination of stock and debt liquidity coupled with the Dutch East India
company’s inherent model of speculation, not having to pay all that you invest up front, became
the foundation and catalyst for the first speculative trading bubble. The bubble was built upon the
trade and export of Dutch tulips and the tulip pricing contracts grew in value rapidly the few
years before 1637. The Dutch were prominent in the fishing industry and the foodstuffs industry
in general, their main commodities for export were gin, herring and cheese. Proceeding 1637,

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tulip bulbs became the Netherlands fourth largest export and the prices continued to rise amongst
investors who often times never even handled the tulips themselves (Mackay, 76). In fact,
Mackay asserts that because the tulips took between seven and twelve years to develop from
seed to flowering bud, most of the trading and speculation happened on the predictions of value
once the tulips were introduced to the market in the future.
The trading value of the tulip bulbs became so far removed from the tulips intrinsic value,
that at one point the realization occurred to investors that they could no longer afford ventures in
the tulip industry. The greater fool theory applies directly to this scenario where this price
disconnect only continued to grow as long as there was another ‘fool’ to pay more for the tulip
contracts. Unfortunately, the greater fool ceased to exist in February of 1637 when a popular
tulip auction had no interested investors to patronize it. The stated value of the tulips fell
completely within just a few months and many investors lost fortunes overnight, dubbing the
event Tulipomania. While the future contracts trading of tulip bulbs took place apart from the
Dutch stock exchange, this sharp decline incapacitated many individual investors, in turn
damaging the Dutch economy. The Dutch Republic responded to this impact, in attempts to
lessen the overall economic impact, by declaring that all futures contracts of tulip bulbs could be
nullified with a payment of ten percent of the contracts value (Mackay, 79).
In 1648, the Peace of Westphalia implemented a new world system of rule founded upon
the idea that there shall no longer be an authority over sovereign states. This brought down the
empiric rule of the Spanish Habsburg rule over the southern provinces in the Netherlands. The
Peace of Westphalia also abolished many of the trade restrictions that were developed during the
ongoing Thirty Years War between 1618 and 1648. This abolition allowed a wider range of trade

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to occur and enable further economic growth in the Netherlands in which they could successfully
bounce back from any financial mishaps with events like Tulipomania. The Dutch now officially
distinct from Spanish rule continued to use capital gains to form a prominent military, both on
land, but mostly at sea in efforts to preserve and protect their world enterprise. Where the
Genoese before them had gained capital based upon the externalization of protection costs, the
Dutch internalized these costs which contributed a key factor in the requirements for world
economic hegemony in the modern world­system (Arrighi, 224).
By 1720 the Dutch influence on the trade routes they had built had become diluted with
ventures and industrial activity from neighboring economies. Specifically, the massive
expansions of industry that took place in England and the United Kingdom as a whole. The
Dutch financed both the French and the English throughout their economic expansions and
global conflicts however, the Dutch ultimately allied with the French leading the British to
retaliate against them. Great Britain as a competitor of the Dutch systems began additionally
combining the mercantilist forces of trade restrictions and the technological innovation of
industrialization. For the English, this meant producing goods unique to their region at a lower
cost than could be found elsewhere, for the world trade, this meant an emphasis placed on
English goods. At a pivotal turning point, the London Stock Exchange began providing better
returns on goods than the Amsterdam Bourse could and investors followed the profits to the
London market. The decline of trade and profitability led the Dutch to cease global trade efforts
in the mid­18th century, eventually putting an end to the Dutch East India company. The London
Stock Exchange could provide better returns on investment because of the internalization of

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production costs, so not only did they possess internalized protection, they also began producing
for themselves leading to cheaper manufacture and higher profit margins (Arrighi, 226).
Overall, this shift towards investments in the United Kingdom, England specifically,
comes as a purely economic shift. There are several instances where the Dutch set themselves up
for this because they made choices with a pragmatic approach, not a purely economic mindset.
Ultimately, the Dutch Republic considered the trade system as an integral mechanism to the
propagation of their commercial, cultural and state views (Bulut, 799). This means that the Dutch
‘decline’ was really only a rejection of economic expansion at the expense of their culture and
citizens rights. In England the production was largely based on the lowering of wage labor costs
and the industrialization of cities, the Dutch refused to submit their established culture to these
demands of the world economy.
In conclusion, the Netherlands remain a prominent core country in the modern
world­system primarily because of their extensive contributions to modern economics and
modern finance. The Dutch Republic rose to dominance in global trade throughout the 17th
century based upon their building of the structures and innovations Italian cities. The usage of
geographical location and politics of free­trade and tolerance led the Dutch to rapid innovation
and expansion within the world­economy. The Dutch contributions and innovations are still very
prominent in our modern world­system, for example the multinational corporation is the
platform for economic dominance. Stock exchanges are spaces in which investors can buy into
large multinational corporations at almost any level of investment that can afford. The central
bank is crucial to the success and support of modern nations and the stability of their currency,
and the ideals of fractional reserve banking and future contracts trading are still revolutionize and

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used throughout the world. Finally, The decline of the Dutch Republic as the dominant world
power was proven to be a successful venture because of their continued emphasis on populace
welfare, the culture and livelihood of their citizens, instead of economic efficiency like in the
United Kingdom.

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