The following is Methods of Prosperity newsletter number 5. It was originally deployed July 20, 2023. As of March 28, 2024, original subscribers have received up to issue number 41.
Previously on Methods of Prosperity: Holy Roman Emperor, Charles V accumulated wealth from trading with and taking wealth from civilizations. Explorers including Ferdinand Magellan sailed around the world in ships capable of long journeys and battles. Silver, precious metals and spices were imported from the New World. No sovereign countries existed yet. Instead, territories were ruled by kings and wealthy families. The House of Habsburg, of which Charles V was the head, was the most powerful of these dynasties in the western world. They controlled vast territories across Spain, Austria, and the Netherlands. Belgium, Germany, and Italy were also ruled by The Holy Roman Empire. Charles V ruled over Portugal indirectly through his marriage to Isabella, the daughter of the late King Manuel I of Portugal. Papal states were ruled by The Catholic church, whose relationships with monarchs and nobles followed typical patterns of elites working in mutually supportive ways to hold power.
Referred to as The Spanish Price Revolution, the influx of silver from trade and conquests led to severe inflation. As Spanish demand for foreign products exceeded exports to foreign markets, prices increased. When scarcity of goods is in a deficit to the amount of money in circulation, inflation occurs. On top of that, coins were gradually debased by kings. The Spanish Price Revolution wasn’t only contained to Spain, but also affected other parts of Europe. The lower and middle classes suffered from rising food prices. Ultimately, money printing would become a habit as an attempt for governments to cover out-of-control deficits.
Remember Jakob Fugger, who financed the wars led by Charles V? He was a staunch Catholic who encouraged the church to charge for “indulgences” – fees to pay down Purgatory time. Well, eventually there was a revolt against the Church. The Reformation challenged the religious authority of the Catholic Church and sparked a series of political and cultural transformations across Europe. Protestantism undermined the power of The Holy Roman Empire and The Habsburgs.
The Reformation was a major cause of the 30 Years War, which began in 1618 and lasted until 1648. The conflict began in Bohemia, where Protestant nobles rebelled against the Catholic Habsburg rulers. The war soon spread throughout much of Europe, with major powers such as France, Spain, and Sweden joining in the fighting. The 30 Years War was one of the most devastating conflicts in European history, leading to widespread famine, disease, and death. It also marked the end of the Holy Roman Empire as a unified political entity and contributed to the decline of the Habsburg dynasty.
After all the dust settled, The Dutch emerged as the new economic power. This brings us to the invention of Capitalism in the 1600’s.
Part 5. The Dutch East India Company and the Invention of Capitalism.
It was over. No longer under the control of Habsburgs’ Spain, in 1581 The Dutch gained sovereignty. They would gain more wealth and power than The Habsburgs as well as China (the world’s leading empire). It would be known as The Dutch Golden Age. The Dutch empire would rise in the typical way from 1581 until around 1621. Led by William The Silent, The Dutch successfully revolted against Spain in the Eighty Years War. The Dutch Republic was one of the first modern nation-states, with a centralized government and a strong sense of national identity.
The Dutch East India Company, also known as VOC (the abbreviation of Vereenigde Oost-Indische Compagnie), was a trading company established by the Netherlands in the 17th century to establish and maintain trade with Asia. You could say they invented the corporate logo mark, as it was recognized around the world. It was one of the largest and most powerful trading companies in the world, with a monopoly on trade with Asia until the 18th century. The company was granted significant powers by its government, acting as a sovereign state within the Netherlands. Business was literally war. VOC was allowed to establish colonies and negotiate treaties by brute force. This company had its own army and navy.
While modern companies have a CEO, this company had a war officer making decisions. The head of the company was the Governor-General, who was appointed by a board of seventeen directors called Heeren Seventien (The Lordship Seventeen) who had their head office in Amsterdam. The Governor-General was responsible for the administration of the company’s affairs in the East Indies. The first Governor-General was Pieter Both, who served from 1610 to 1614. The most famous Governor-General was Jan Pieterszoon Coen, who served from 1619 to 1623 and from 1627 to 1629. He was appointed director-general of the Indian trade in 1613. As Governor-General of Java (1619), he destroyed the native town of Jacatra, and founded Batavia, the capital of the Dutch East Indies.*
The Bank of Amsterdam was established in 1609 during the Eighty Years’ War, where the Dutch Republic fought for independence from Spanish rule. During this time, many Dutch merchants would deposit their money with the Bank of Amsterdam for safekeeping. The Bank began issuing paper receipts for these deposits, which became widely accepted as a means of payment. These receipts, or banknotes, were considered to be as good as gold because the bank was required to redeem them for their face value in coins upon demand. As the Dutch Empire grew in power and influence, the Bank of Amsterdam’s banknotes became the preferred currency for international trade. Merchants in other countries would use these banknotes to settle their debts, as they were backed by the reputation of the Dutch Republic and the stability of its banking system. This made the Bank of Amsterdam’s banknotes the world’s first reserve currency, as they were widely accepted and held in reserve by other central banks.
Amsterdam became the world’s most important financial center. The first reserve currency of the world was the Dutch Guilder. In referring to the world’s first reserve currency, we are specifically referring to banknotes. When referring to the coin made of precious metal known as the Guilder, that is type one money.
The two most important inventions of the Dutch were their sailing ships capable of sailing around the world and doing battle, and formalized capitalism. The Dutch invented capitalism as we know it. While it advanced society, it also had deadly consequences. Production, trade and private ownership had existed before. The problem was that sailing those ships around the world was dangerous and expensive. If one ship was lost, the whole enterprise could fail. They invented a concept known as the economy of scale. That is, going big in order to mitigate risk.
Equity markets did not exist yet. The ability of large numbers of people to collectively buy ownership of money making endeavors through public equity markets was a new invention. The Dutch East India Company was the first to provide this, and the first stock exchange of 1602 signified the invention of capitalism. This was revolutionary.
In 1609, the Bank of Amsterdam was established as an exchange bank to protect commercial creditors from unreliable commodity money in general circulation. You have to remember that until the Guilder, there was no world standard. This stabilized the world economy and put the Netherlands coinage, letters of credit, and the Dutch financial system at the center of global finance. The Guilder banknote was type two money, which gave it world reserve currency status. Because of this, the Guilder was both a medium of exchange and a storehold of wealth. By around 1650, the Amsterdam banknote was accepted anywhere from Moscow to London.
Note: last week I mentioned The British East India Company. The British East India Company (EIC) was created in 1600, two years before the VOC, and was given a monopoly on British trade with the East Indies for 15 years. The EIC was given broad powers similar to the VOC, and it came to focus most of its efforts on the Indian subcontinent, taking control of much of the area by 1857 when a rebellion led to the establishment of formal British governmental colonial control. Compared to the VOC, the EIC had a smaller initial investment and was less successful in its early years. However, the EIC eventually surpassed the VOC in terms of size and influence, becoming the dominant European power in India.
* Jacatra was the name of the area before it was renamed Batavia by the Dutch in 1619. This region later became part of the Dutch East Indies, present-day Jakarta, Indonesia. Initially established as a trading post, Batavia grew into a significant colonial center, serving as the capital of the Dutch East Indies. The city was crucial for Dutch colonial administration and trade, symbolizing both immense wealth and brutal colonization.
Before we move forward into the history of capitalism, next week would you mind studying another king? The wealthiest one since king Solomon: Mansa Musa.
–Sean Allen Fenn
