Five Wars, Five Bear Markets: The Anglo-Dutch Wars of the late 1600s
Bryan Taylor, Chief Economist, Global Financial Data
Five wars. Five bear markets. You would almost think there was some causation.
England and the Netherlands fought wars to dominate international trade in the seventeenth century. Unlike most wars, the Anglo-Dutch wars were fought on oceans, not on land. The English were successful in the first Anglo-Dutch War and the Dutch in the second and third. The fourth war didn’t occur until a century later in the 1780s and by that time the British Royal Navy had become the most powerful in the world.
How did the three wars in the seventeenth century affect financial markets? Unfortunately, financial markets were not very active in the seventeenth century. Although commodities were actively traded and currencies were bought and sold between different countries in Europe, only two stocks actively traded in Amsterdam and English stocks traded infrequently. There was no active bond market in existence since many government bonds were life annuities that were tied to a particular individual. The only record we really have of the behavior of financial markets in the seventeenth century is Dutch East India Co. stock, but there is enough there to allow us to analyze how each of the three Anglo-Dutch wars in the seventeenth century and the War of the Grand Alliance brought about a bear market. The Third Anglo-Dutch War that began in 1672 led to the Rampjaar (Disaster Year) during which East India Stock lost half of its value and the Dutch Republic almost went bankrupt.
The Anglo-Dutch Wars
The Vereenigde Oost-Indische Compagnie (Dutch East India Company) was founded in 1602, raised money in both Amsterdam and London, and founded colonies in North America, India and Indonesia. By the middle of the century, the Dutch had more merchant ships than all other European countries combined. The Netherlands’ Eighty-Year War with Spain ended in 1648 with the Treaty of Munster which gave the Netherlands their freedom.
The English Civil War broke out in 1642 and Oliver Cromwell became the ruler of England, beheading King Charles I in 1649. Cromwell expanded the English navy while the Dutch attempted to reduce the number of ships in their navy once the Treaty of Munster was signed. The English passed the first of the Navigation Acts in October 1651 which only allowed goods to be imported into England on English ships. England also demanded that ships from other countries strike their flags to salute English ships.
The First Anglo-Dutch War occurred between 1652 and 1654. When Lt. Admiral Maarten Tromp refused to strike his flag to an English ship on May 29, 1652, the Battle of Dover followed, and England declared war on the Netherlands on July 10, 1652. Tromp was killed in the Battle of Scheveningen on August 10, 1653. Since both sides were financially exhausted, they sued for peace which came with the Treaty of Westminster on April 5, 1654, but the treaty did not resolve the commercial rivalry between England and the Dutch. Although there is not much information on the price of Dutch East India Co. stock, what data we do have is illustrated in Figure 1. The price of the stock fell from 652 florin on December 31, 1651, to 434 florins in September 1652 and 340 florins by September 1657. This showed a 48% decline in the price of Dutch East India Co. stock.
Figure 1. Dutch East India Co. Stock Price, 1645 to 1700
The Second Anglo-Dutch War occurred between 1665 and 1667. The English Restoration of 1660 put Charles II on the throne in England. English merchants thought they could take global economic primacy away from the Dutch. In 1665, the English seized several Dutch ships and took over the colony of New Netherlands (now New York). The war carried on for the next two years and in June 1667 in a surprise attack, known as the Raid on the Medway, the Dutch sailed up the Thames, set fire to ships of the English navy and towed away England’s second largest ship. It was one of the most humiliating defeats in British military history. Fearing an open revolt against him, Charles ordered a peace treaty to be signed with the Dutch. The price of Dutch East India Co. stock fell from 482.25 in April 1663 before the war to 309 by August 1665, a 36% decline. It wasn’t until October 1667 that the price of the stock recovered to 454 after the Dutch had defeated the English in the war.
The Third Anglo-Dutch War occurred between March 27, 1672, and February 19, 1674. During this war, the English were allied with the French against the Dutch. The wider French-Dutch War took place between 1672 and 1678. The French quickly overran most of the Dutch Republic in May and June 1672 leading to what was known as the Rampjaar (Disaster Year) when the Dutch feared being defeated by the French and the state faced bankruptcy. The Dutch West India Co. went bankrupt on September 20, 1674, as a result of the debt it had accumulated during the three Anglo-Dutch Wars, and reorganized as a new Dutch West India Co. By the end of 1672, the Dutch regained much of the territory they had lost, and between June and July 1673, the English and Dutch fought three indecisive naval battles. Charles II agreed to the second Treaty of Westminster in February 1674 and the Third Anglo-Dutch War ended, though the conflict between the Dutch and the French continued for another four years.
The price of Dutch East India stock fell from 493 in December 1671 to 280 in June 1672, a 43% decline. As the Dutch regained their territory, Dutch East India Co. stock recovered and rose in price to 376 by the end of 1672. Dutch interest rates also reflected the impact of the war. Yields on government bonds rose from 3.75% in 1671 to 12.5% in June 1672 and 6.5% in 1673. Clearly June 1672 was when Dutch financial markets were at their most bearish with the price of both Dutch East India Co. stock and government bonds at their lowest point. English East India Co. stock rose from 70 to 130 between 1665 and 1668, then declined to 80 by 1672.
The Dutch and English Ally Against France
In 1678, the Dutch and English allied against the French. Louis XIV succeeded in seizing Ypres and Ghent in March 1678 driving the price of Dutch East India Co. stock down once again. The French were defeated in the Battle of Saint-Denis on August 13, 1678, leading to a formal peace treaty on September 17, 1678. During the conclusion of the French-Dutch war in 1678, the price of Dutch East India Co. stock suffered another 30% decline, falling from 458.5 in June 1676 to 306.5 in May 1678.
A fifth bear market occurred in Dutch East India Co. stock between 1688 and 1697 when the War of the Grand Alliance took place. In it, Louis XIV fought a European alliance that included the Dutch Republic, England, Scotland, the Holy Roman Empire, the Spanish Empire and the Savoyard State. In this case, the Dutch and the English were allies against the French. When Louis XIV crossed the Rhine and invaded the Holy Roman Empire in September 1688, war ensued. By 1696, the belligerents were financially exhausted, and they sued for peace leading to the Peace of Ryswick. British revenue rose from £1.26 million in 1685 to £4.82 million in 1696 while total government debt rose from £0.7 million to £16.7 million between 1688 and 1697. The British government ran a deficit of £5 million in 1697. Dutch East India Co. stock fell from 563.5 in February 1688 to 416 in October 1688, a decline of 26%.
Five Wars, Five Bear Markets
Of course, the record of bull and bear markets in the last half of the seventeenth century only relies upon the record of one company, the Dutch East India Co, so the movements are more exaggerated than if there had been 100 firms listed on the Amsterdam exchange. Nevertheless, it is clear that the Anglo-Dutch Wars impacted financial markets negatively in the seventeenth century. Each declaration of war led to declines in the price of Dutch East India stock of over 20%, though the price of the stock recovered once peace was declared and the commercial operations of the Dutch East India Co. returned to normal.
There were five bear markets in Dutch East India Co. stock in the second half of the 1600s. All five were caused by wars the Dutch were involved in. The price of the stock recovered once the war ended, and peace allowed the Dutch East India Co. to carry out trade once again. Anyone who believes that stocks benefit from war should study the Netherlands in the seventeenth century or England during the American Revolution where they will find the contrary.