The burden of debt

The prosaic, seemingly almost boring, operation of bond markets is permanently underrated in the general public. One could make an argument that the modern world only really emerged when national governments first began to be able to issue public debt, pioneered by the British and Dutch in the 1600s.

Bill Clinton's adviser, James Carville, was astonished at the role bond markets played over governments, commenting in 1993 to the Wall Street Journal (February 25, 1993, p. A1),

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

A bond artifact of that era is in the news. A living artifact from the Dutch Golden Age: Yale’s 367-year-old water bond still pays interest by Mike Cummings.

A 1648 Dutch water bond housed at Yale’s Beinecke Rare Book & Manuscript Library is unique among the tens of thousands of manuscripts that reside there. While most of the Beinecke’s archival holdings are by their nature dead — their original purpose being fulfilled — the water bond lives on. It still pays annual interest more than 367 years after it was issued.

Timothy Young, the library’s curator of Modern Books and Manuscripts, has travelled to Amsterdam this week to visit Stichtse Rijnlanden, a Dutch water authority, and collect 12 years of interest on the bond. Collecting the back interest maintains the bond’s status as a functioning artifact from the Golden Age of Dutch finance. The water authority paid Young 136.20 euros in interest, the equivalent of $153.

“This is a teaching moment because the financial industry changes so rapidly but here we have something very old and constant,” says Young, who curates the Beinecke’s Collection of Financial History in partnership with the International Center for Finance at the Yale School of Management.

According the water authority, Yale’s bond is one of five known to exist. The bonds were issued by the Hoogheemraadschap Lekdijk Bovendams, a water board composed of landowners and leading citizens that managed dikes, canals, and a 20-mile stretch of the lower Rhine in Holland called the Lek. (Stichtse Rijnlanden is a successor organization to Lekdijk Bovendams.)

Yale’s bond, written on goatskin, was issued on May 15, 1648 to Mr. Niclaes de Meijer for the “sum of 1,000 Carolus Guilders of 20 Stuivers a piece.” According to its original terms, the bond would pay 5% interest in perpetuity. (The interest rate was reduced to 3.5% and then 2.5% during the 17th century.)

The interest payments were recorded directly on the bond. The water board used the money raised to pay workers at a recently constructed cribbinge, a series of piers near a bend in the river that regulated its flow and prevented erosion.

Fascinating.