Fortunately for the Dutch, in 1602 the gifted leader of the States General, Johan van Oldenbarnevelt, and the influential stadholder Prince Maurice were able to cajole the provinces into accepting a single combined monopoly organization to handle all commerce to the Indies.
The new organization, the VOC, strongly resembled the nation that gave it birth. Each of the original six companies was given its own regional head office, or chamber. A national board of seventeen overseers, the Heeren XVII, oversaw these six offices. The Heeren were apportioned roughly in accordance with the national population: one each from the four smaller provinces; four from the second-largest province, Zeeland; and eight from Holland. So that the latter did not command an absolute majority, the seventeenth member alternated between Zeeland and one of the four remaining provinces.
The Company’s charter granted it the ability to hire military personnel, with the sole proviso that they swear fealty to the States General, and to wage war, so long as it was “defensive.” (The EIC was also allowed to conduct military operations, and, as we’ll soon see, the English and Dutch companies frequently exercised this privilege against each other.) Given that communication with the East Indies took a year in each direction, the VOC behaved as a sovereign nation wherever it went, with a free hand to physically destroy its Asian competitors whenever the Heeren XVII, or a particularly aggressive local governor or commander, felt like it.
The VOC, and along with it the West India Company (WIC), chartered twenty years later with the same military potential, were not slow to use force of arms. Between 1602 and 1663, the two companies tried to pick off Portuguese and Spanish settlements in Chile, Brazil, East and West Africa, the Persian Gulf, India, Sri Lanka, Indonesia, China, and the Philippines. In reality, the WIC and VOC, two private companies, conducted the first world war, a grab for spices in Asia, sugar in Brazil, and slaves and gold in Africa.12
The results were mixed. The Dutch largely succeeded in India and Indonesia; by the late seventeenth century, the Portuguese were left with only tiny enclaves at Goa and Timor. The Dutch failed miserably at Manila, Macao, and, most importantly, in Africa. Unable to seize the Portuguese bases in Angola and Mozambique, the VOC was forced to establish a new outpost at Africa’s remote southern tip, the Cape Colony, in order to protect its Indian Ocean routes.
Impressive as was the war-making machinery of the VOC and WIC, their most potent weapon was Dutch finance. In 1602, investors provided the VOC with 6.5 million guilders in initial funding—about $100 million in today’s money—to hire men, purchase ships, and acquire silver and trade goods to exchange for spices. This capital was permanent, that is, if things went well, it would yield profits that would go mostly to pay for the expansion of business. Although the investors hoped for a modest annual dividend, they had no reason to expect to see their original 6.5 million guilders back anytime soon. This may not seem at all unusual to the modern investor, but at the beginning of the seventeenth century, the appearance of permanent capital in Holland demonstrated an extraordinary degree of confidence in Dutch financial institutions.13
By the early seventeenth century, all roads led to the Netherlands. This nation, physically smaller than Portugal and with only a slightly larger population (1.5 million in 1600), assembled the first truly global trading system. To this day, success or failure in the global marketplace depends not on size but on advanced political, legal, and financial institutions; by 1600, the Netherlands had far and away the world’s finest, putting it in the best position to challenge the Portuguese trading empire. True, Holland was still in the midst of a fight for independence from Spain—the Eighty Years’ War, which would not end until 1648, with the Treaty of Münster. In spite of that conflict, the Netherlands was still in far better shape than Spain, England, or any other European nation. Drake’s exploits, the defeat of the Armada, and the EIC’s slight head start aside, the realm of the Tudors and the Stuarts was roiled by religious strife, had only primitive and unstable financial markets, and was eventually to be plunged into a devastating civil war. France and Spain were even further behind, plagued with crown monopolies and chronic bankruptcy. By contrast, the Dutch confederation was one of the few European states free of the curse of absolute monarchy, possessed of vigorous legal and financial institutions, and relatively tolerant of the ambitious and able of all religions.
Two simple pairs of statistics tell the tale. Economic historians estimate that in 1600, per capita gross domestic product in England was around $1,440 in current dollars, versus $2,175 in Holland. (The comparable figures for Spain and Portugal were $1,370 and $1,175, respectively.)14 These figures hint at the yawning technological and commercial gap separating Holland and England as the race for colonial supremacy began, but institutional and financial differences between the two nations proved even more important. In England, reputable borrowers (that most certainly did not include the crown), paid 10 percent on their loans, versus 4 percent in Holland, with the Dutch government getting its credit at the lowest rates of all. By contrast, in England, where the crown could, and often did, repudiate its loans, lenders charged it higher rates than those for good commercial borrowers.15
Why were Dutch interest rates so low? By the year 1600, because of its curious lowland geography and cultural capital, the Netherlands had become the most financially advanced nation in Europe. Much of its best farmland lay below sea level, laboriously reclaimed over the centuries with dikes and windmills (the latter used to power pumps). These projects were locally run and financed, and the rich new lands they exposed yielded not only an agricultural bounty, but also a population of empowered and prosperous peasants unbeholden to any crown or feudal overlord.
These reclamation projects stimulated the nation’s credit markets. Dikes and windmills were expensive, and local church and municipal councils raised the required funds in the form of loans. This turned Holland into a nation of capitalists; merchants, aristocrats, and even rich peasants tended to invest their spare guilders in the bonds used to finance the reclamation projects. This tradition carried over into trade; after 1600, Dutch citizens would consider it just as natural to own a fractional share in a trading vessel to the Baltic or the Spice Islands.16 Eventually, merchants and brokers sliced ownership into ever smaller pieces: not just half or quarter shares, but thirty-seconds and even sixty-fourths. To this day, the Dutch are among the world’s most aggressive international investors.
Dividing ownership in this way was the essence of “Dutch finance,” whose genius lay in allowing entrepreneurs and investors to spread risk. In 1610, court documents showed that the estate of one petit bourgeois merchant consisted of shares in twenty-two ships: thirteen 1/16 shares, seven 1/32 shares, one 1/17 share, and one 1/28 share.17 Fractional shares not only made it easier for merchants to bear prudent risks, but also allowed investors to increase their margin of safety by blunting the damage done by the loss of an individual ship or an unsuccessful commercial outcome. This in turn increased the willingness of investors to provide capital, which further lowered interest rates.
Another Dutch financial innovation that served to decrease risk (at least when used properly) was the futures market—the “buying of herrings before they be catched.”18 Essentially, such markets assigned prices to given amounts of commodities at some point in the future—say for a thousand pounds of herring one year hence. These financial instruments could then be bought and sold just like the actual item. The Dutch did not invent this concept—it was well known in both southern Europe and the Muslim world—but they refined and institutionalized it to a degree never before seen. By selling futures, Dutch farmers and merchants could be assured of a given price for their products six or twelve months hence. By purchasing futures, buyers could avoid disastrous price rises in the interim. Shippers could also acquire maritime insurance as a hedge against loss of their cargoes at sea, yet another risk-sharing device. Fractional shares, futures contracts, and maritime insurance all served to stimulate commerce.
The same was also true of a nation’s ability to support its military. Four percent interest rates meant wealth and power; 10 percent, poverty and impotence. The ability of the Dutch to borrow, combined with the turbulence of English politics, gave Holland a head start that England would not overcome until its financial and political institutions were reformed generations later.
The sad state of England’s financial markets manifested itself in the EIC’s puny initial capitalization: £68,000, just one-tenth of that of the VOC.20 Moreover, the English company’s capital was not permanent; it had to be completely returned to investors as soon as the company’s ships sailed back up the Thames and their merchandise was sold. On more than one occasion, investors were paid with spices instead of specie and took delivery of bags of pepper in place of pounds sterling.21
Imagine for a moment how hobbled Microsoft and Boeing might be in their competition with foreign companies if they had to return the entirety of their initial investment capital each time they completed development of a software product or an aircraft, then had to repeat the process with each new project. Imagine further that they occasionally sent their shareholders a stack of software disks or a wing spar in lieu of a dividend check. This describes, more or less, the handicap borne by Holland’s competitors.
For almost a century, the EIC played the role of the obnoxious kid brother of the VOC. In 1622, for example, the Dutch company had eighty-three ships under its command in Asian waters, while the English had just twenty-eight, roughly the ratio of interest rates between the two nations. One Dutch observer noted:
It is a great mistake on the part of Your Honors to suppose that the finest trading opportunities in all the world can be seized and held in the face of all the world by keeping 30, 40, or perhaps 50 ships and yachts in the fairway.22
Finance and ships were not the only edge the Dutch had on the English. Even though the VOC’s structure reflected the divisions within the United Provinces, the EIC was even more decentralized. Less a trading company than a guild, the English company allowed each of its members to trade on his own account, owning only the ships in common with other members. Since both the voyages and the merchants were separately financed, there was almost no cooperation where it mattered: at the EIC’s trading posts. When disputes broke out among English traders in Asia, they had to be sorted out in London, half a world and a two-year round-trip away. At Bantam in Java, near modern-day Jakarta, there were three different English trading offices. Not only did the merchants of EIC trade their own goods; they were free to compete directly with their own company.23 The VOC, by contrast, sent to Indonesia a strong governor-general with full authority over all of the company’s officers.
Since the States General had been its midwife, the VOC could count on government support, both military and political. But the EIC, a private company of loosely confederated merchants, could not expect shelter from attack by foreign trading powers abroad or from protectionism at home.
The decentralization of the EIC also made it more susceptible to corruption than the VOC. Although the behavior of Dutch traders and sailors was hardly upstanding in this regard, the employees of the EIC treated its ships as their own, transporting large amounts of trade goods for their accounts to and from Asia. As one EIC official wrote to his directors:
Concerning the private trade of the English . . . Your Honours must believe that if the Company of England were served according to the manner in which Your Honours are served it would long since have surpassed the Dutch Company.24
Another great advantage that the Dutch had over England, and over its other European rivals, was in maritime technology. The decrease in piracy in northern European waters after 1595 allowed the development of a round, slow, but highly efficient vessel known as the fluitschip, or “flute ship,” which required less than half the crew of other vessels of similar tonnage. Initially, the craft was victimized by its own success; its efficiency threw so many sailors out of work that many turned back to piracy.25
By 1605, the VOC realized that if profits were to be maximized, it needed a monopoly not just in Holland’s spice markets but in those in the rest of the world as well. In order to accomplish this, it would need permanent bases in Asia where it could store trade goods, repair and provision ships, and coordinate activities without interference from local rulers or the Portuguese. The following year, the Company unsuccessfully attacked Portuguese Malacca, then turned its attention eastward to the Spice Islands and Java.
Spanish forces from Manila had occupied the Moluccan island of Ternate in 1606, and when the sultan appealed to the VOC for help against them, the company sent troops. Over the next several decades the Dutch slowly pushed the Spanish out of the Moluccas.26 Because of the delay in communication between the Indies and Europe, the last battle in the Dutch war of independence from the Spaniards took place on Ternate in 1649, fully one year after the signing of the Treaty of Münster in 1648.27
The subsequent course of the takeover of Asian trade by the VOC pivoted on Holland’s takeover of the Bandas, Moluccan flyspecks placed in history’s crosshairs by a unique soil that made them the world’s only source of nutmeg and mace.
During the sixteenth century, the Portuguese and the Spanish had reduced the clove-producing north Moluccans to vassalage by exploiting the rivalry among their islands, particularly that between Ternate and Tidore. At the same time, the south Moluccans, especially the Bandanese, prospered. Left relatively undisturbed by the Iberians, they collected nutmeg and mace from the forests that covered their islands as they had done for more than a thousand years. They grew wealthy by shipping to Malacca, two thousand miles to the west, their own nutmeg and mace, as well as cloves from their northern neighbors.
Banda (Nutmeg) Islands
The VOC quickly recognized that if it was to monopolize the spice trade, the Bandanese would have to go. And go they did, with a brutality and efficiency that would become the trademark of Dutch policy in Asia. The largest, and most important, part of the Bandas consists of three island remnants of a caldera—Lonthor, Neira, and Gunung Api. A few miles west lies tiny but fertile Ay; and a few miles farther west, the most isolated of the group, the even tinier Run.
Like the north Moluccans, the Bandanese welcomed the Dutch, when they first arrived in 1599, as a counterweight to the overbearing, proselytizing Portuguese. The VOC easily hoodwinked the islanders into yielding their nutmeg exclusively, at artificially low prices. It is not clear whether or not the Bandanese understood the documents they signed, but whatever the case, disputes soon arose. The islanders were totally dependent on barter with neighboring islands for their food supplies, a fact the Dutch seemed not to appreciate at first. Simply to avoid starvation the Bandanese almost immediately “violated” the “agreements” with the VOC. Worse, in 1609 the inhabitants of Neira granted Captain William Keeling of the EIC permission to build a trading post.
Both the disregard of the Bandanese for the niceties of European contractual propriety and the insouciance of the freeloading Britons, who had expended no military capital in the Moluccas, enraged the Dutch, in no small part because English competition had driven up purchase prices. That same year the VOC sent a delegation to Lonthor to “negotiate” a new agreement. The islanders fell on the Dutchmen as soon as they landed and cut to pieces forty-seven soldiers and officers. A Dutch rescue party arrived too late.
Among the members of that party was a young “junior merch
ant” whose name later became synonymous with Dutch efficiency and brutality: Jan Pieterszoon Coen. Before embarking for the Indies, he had spent his teenage years as an apprentice to a branch of a Dutch merchant company in Rome, where he learned the new science of double-entry bookkeeping, which was not yet in widespread use in Holland.
Coen shipped out in 1607 to the East Indies for three years (during which he served on the unsuccessful Lonthor rescue party). He then returned to Holland for two years. In 1612 he was sent out again as a “senior merchant.” In this capacity Coen submitted a brilliant analysis, based on the new bookkeeping techniques, of the VOC’s operations, Discoers Touscherende den Nederlantsche Indischen Staet, which soon caught the attention of the Heeren XVII. In his report, Coen, a true spiritual ancestor of the modern bean-counting MBA, wielded the cutting-edge management tools of the seventeenth century, and observed that the company was turning very little profit on its complex operations. He recommended two courses of action: first, that a monopoly be obtained on the three precious “fine spices”—nutmeg, cloves, and mace—and second, that this be done at any cost, including the ruthless exploitation of local workers and the importation of Dutch colonists and slave labor.
Whether or not Coen’s involvement with the Lonthor massacre informed the recommendations of the Discoers and his later brutality is not known. One thing, however, was perfectly clear. The new trade was to be accomplished with force of arms:
Your Honors should know by experience that trade in Asia must be driven and maintained under the protection and favor of Your Honors’ own weapons, and that the weapons must be paid for by the profits from the trade, so that we cannot carry on trade without war, nor war without trade.28
Splendid Exchange, A Page 27