The Amsterdam Crisis

The Seven Years’ War had been extremely good for Amsterdam. Neutral Dutch merchants financed and shipped what the belligerents needed, and the great merchant-banking houses funded it with acceptance credit — bills of exchange that each house endorsed in turn, so that a single cargo might carry the guarantee of five firms at once. Each endorsement made the paper look safer, and safer paper meant more of it.

Peace, signed in February 1763, was the displacement in reverse. Wartime demand vanished, commodity prices fell hard, and the collateral behind the bills was suddenly worth less than the bills themselves. The house of De Neufville — the most aggressive of the accepting firms, and by then essentially a machine for turning endorsements into leverage — suspended payments in July.

Because the endorsements had bound the houses to each other, the failure did not stay local. It ran along the chains through Amsterdam, then to Hamburg and Berlin, taking dozens of firms with it in a matter of weeks. The Bank of Amsterdam, which had never conceived of itself as a rescuer, eventually lent against commodity collateral and slowed the collapse — an early, half-formed rehearsal of the lender of last resort the book spends its second half arguing about.

Two centuries before securitization, 1763 had already produced its essential features: an instrument that made risk look diversified while concentrating it, a boom that ended not in a crash of prices but in a crisis of who owed what to whom, and the discovery that a chain of guarantees is only as strong as its weakest signatory.

What it cost

1763 fell on a narrow world of merchant houses, and the record it left is a record of merchants: bankruptcy accords, not wage rolls. What survives shows the crisis running well past the thirty-eight houses that failed in Amsterdam. Schnabel and Shin count more than a hundred banks brought down across Amsterdam, Hamburg and Berlin, most of them in Hamburg, and the accords settled in the bankruptcy courts record what their creditors got back.

• 100+ banks that succumbed across Amsterdam, Hamburg and Berlin, most of them in Hamburg Schnabel and Shin, Liquidity and Contagion: The Crisis of 1763, Nuffield College, Oxford, p.18
• 11% the accord de Neufville’s creditors were awarded at the court of bankruptcy; across the failed Amsterdam houses the average was 43 per cent for those that reopened and 10 per cent for those that did not Schnabel and Shin, Liquidity and Contagion: The Crisis of 1763, Table 4.5, from Jong-Keesing’s bankruptcy records
• over 75% the fall in Berlin grain prices between May and August 1763 — the collapse that broke the merchants who had bought up the departing Russian army’s granaries in Poland Schnabel and Shin, Liquidity and Contagion: The Crisis of 1763, p.15, citing Skalweit

Johann Ernst Gotzkowsky was Berlin’s pivotal merchant, who in 1760 talked the Russian occupiers down from a levy of four million thaler and pledged himself for much of the rest. He was also de Neufville’s partner in the grain deal. The failures of houses he was entangled with brought him down in 1763. Selling his porcelain works to Frederick II let him pay all his creditors 50 per cent in cash, and over three more years he paid the neediest among them a further 400,000 thaler. In 1767 one of them swore out a warrant against him; a stranger’s surety stopped it being served. He died poor in 1775.

What followed

No government fell and nothing was reformed. Frederick II broke the strict law of bills of exchange to impose a payments standstill on Berlin houses and organised bailouts that the New York Fed’s history of the episode counts among the first driven by a financial crisis, going through Gotzkowsky’s books himself. The law itself was left untouched, which is one reason Amsterdam had its next crisis nine years later. Prussia came off worst: credit stopped, projects were abandoned, and a second wave of bankruptcies followed in 1766.

Schnabel and Shin, The Crisis of 1763, pp.18–20; Narron and Skeie, Crisis Chronicles: The Commercial Credit Crisis of 1763, Federal Reserve Bank of New York, 2014

Phases on show: displacementboomdistresspanic