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by others.6 It is hoped that the historical study can enrich the theory and contribute to the contemporary policy discussion.

2. The Dutch and the English Government Bond Markets

Dutch Bond Market

The Dutch revolt against the Habsburg Empire that began in 1568 placed new demands on public finance. The tax burden had to be increased and wartime gaps in tax collection had to be filled by borrowing. As the federal government did not have the administrative apparatus or the political power to collect taxes, the seven provincial states that comprised the United Provinces had to carry the burden. They negotiated a formula to split this burden among them through a quota system. Each of the provinces, in turn, allocated part of the burden to the city magistrates and tax farmers within its territory(de Vries and Woude 1997) pp. 91-129).

Wartime gaps in tax collections had to be filled by borrowing. The mechanism used in taxation – of shifting the burden down from the federal to provincial governments – was used for borrowing as well. By 1574, the public debt of Holland, by far the largest (and best-documented) province, stood at 1.4 million guilders. In 1600, it reached nearly 5 million guilders.(Tracy 1985; ‘T Hart 1993) The debt kept rising throughout the 17th century (See Figure 1). Much of the borrowing was from lenders with close ties to the State. Some of it was forced upon involuntary lenders. The province facilitated the creation of a secondary market in its bonds in order to allow liquidity to its coerced creditors. As we shall see, a similar order of things and similar motivation allowed the formation of a market in shares. The secondary market in bonds would make use of the well-developed commodities marketplace with its regularly published (since 1583) price list and other information-flow and transaction-cost-reducing institutions. By the end of the 16th century, Amsterdam, the dominant city in Holland and in the federation as a whole, was an active marketplace for commodities, freight, insurance, foreign currencies and government bonds (Braudel 1982) pp. 100-106 (Kohn 1999). As we shall see, shortly after the formation of the VOC, its shares were also traded there. The Amsterdam Beurs building was built in 1611, shortly after the establishment of the Bank of Amsterdam (Wisselbank). The Tulip Mania of 1636-7 manifested the sophistication and centrality of the Amsterdam markets (de Vries and Woude 1997) pp. 147-58; (Garber 2000), pp. 15-83).7   

The fundamental change in taxation and borrowing that took place in the Dutch Republic in the late 16th and early 17th centuries is often referred to by historians as the financial revolution. It is viewed as a key to the economic growth and political power of the Dutch Republic in its 17th century Golden Age. There are a number of disagreements with respect to the

6 For LLSV, see, for example: Berkowitz, D., K. Pistor, et al. (2003). "The Transplant Effect." American Journal of Comparative Law 51(2): 163-204, Berkowitz, D., K. Pistor, et al. (2003). "Economic Development, Legality, and the Transplant Effect." European Economic Review 47(1): 165-195, Pistor, K., Y. Keinan, et al. (2003). "Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries." World Bank Research Observer 18(1): 89-112.; Beck, T., A. Demirguc-Kunt, et al. (2003). "Law and finance: why does legal origin matter? ." Journal of Comparative Economics 31(4): 653–675. Beck, T. and R. Levine (2005). Legal Institutions and Financial Development. Handbook for New Institutional Economics. C. Menard and M. M. Shirley. Dordrecht, Springer.For North and Weingast, see: Clark, G. (1996). "The Political Foundations of Modern Economic Growth." Journal of Interdisciplinary History 26(4): 563-588, Sussman, N. and Y. Yafeh (2006). "Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690 1790." The Journal of Economic History, 66(4): 906-935.

7 For the Amsterdam stock market of the late 17th century, see Neal, L. (1990). The Rise of Financial Capitalism: International Capital Markets in the Age of Reason. New York, Cambridge University Press..

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