Growth - The Dutch Example; W. J. Peterson

GROWTHTHE DUTCH EXAMPLE GROWTH. Economic development. The planned expan sion of the world's poorer economies outside the com munist orbit. These are the watch'words of today's seven major international lending agencies with offices in Washington, D. C., in which the United States Govern ment is either the largest or the only shareholder. (Old est is the Export-Import Bank, founded in 1934, which neither exports nor imports; nor is it, in the usual sense of the word, a bank. Newest, still in the planning stage, is the International Development Association, which will make loans to poor nations that cannot qualify for credit at the World Bank nor the other agencies under existing relatively easy regulations.) Such fervor to dispense money abroad, to fight com munism through upbuilding "underdeveloped" nations, raises questions: Are government-to-government loans often gifts in disguise-with their usual accompaniments of exchange control, inflationary schemes, tariff protec tion, full employment practices, tax gimmicks, CastroDr. Peterson is Associate Professor of Economics at New York Uni versity and a weekly contributor to the Wall Street Journal.

261 WILLIAM H. PETERSON like "agrarian reform," and so on, the best road to na tional economic growth? If so, how then did the United States and Britain flower in the nineteenth century as the two richest nations in all the world? What of Japan which leaped from feudalism to industrialism in the late nineteenth and early twentieth centuries? And what of the Netherlands in the sixteenth and seventeenth cen turies? For is there not a tested second road to national eco nomic growth, namely, laissez faire? Before considering the Dutch example, it might be well to note that growth) in underdeveloped and devel oped economies, has assumed· a sloganeering function. As Lawrence Fertig, Scripps-Howard financial and eco nomic columnist, observed recently: "The inflationists' new device is to wave the banner of 'growth.' Of course, they say, we are against inflation. Of course, they assert, we are not in favor of zooming prices. But after all, they quickly ask, isn't growth the really important thing-shouldn't we achieve growth (with government in the driver's seat as planner and spender) even at the expense of some inflation?"1 Fertig's contention that growth-and-inflation is a false correlation is borne out in a recent study by economists of the New York Federal Reserve Bank covering eco nomic development in 16 countries from 1950 to 1957.

These economists found that in countries in which prices advanced only moderately or not at all, annual 1 See the next article in this volume.

GROWTHTHE DUTCH EXAMPLE 263 rates of growth were generally close to 6 per cent. In countries where there were heavy inflationary pressures during this period-and where, by and large, U. S. for eign aid was much greater-rates of growth varied widely, ranging from less than. one to more than 7 and averag ing around 4 per cent. So, the thesis that growth depends on inflation de mands critical examination. It is an old thesis, and though exploded time and again in the past (see, e.g., Andrew Dickson White's classic-Fiat Money Inflation in France 2 ) it crops up ever anew. The antiquity of the thesis can be seen from the following quotation by John Law, who became Controller General of France and in itiated the Mississippi Bubble inflation from 1716 to 1720: Domestick Trade depends on the Money. A Greater Quan tity employes more People than a lesser Quantity. A limited Sum can only set a number of· People to Work proportion'd to it, and 'tis with little success Laws are made, for Employing the Poor or Idle in Countries where money is scarce.3 So, when John Law got economic command in France, he implemented his inflationary scheme, inadvertently courting and finally embracing economic ruin for both France and himself.

The Dutch example was in full display for Law and his employer, Louis XV. But, like so many lessons of 2 A new edition with an introduction by Henry Hazlitt is avail able through the Foundation for Economic Education, Irvington on-Hudson, N. Y. 3 Law, John. Money and Trade Considered. Edinburgh, 1705.

264 WILLIAM H. PETERSON history, the example was ignored. No rich uncles show ered the Dutch of the sixteenth and seventeenth cen turies with aid. No Point Four teams of technical ex perts surveyed their lowlands for likely sites for fac tories, warehouses, harbors, and other projects. No Eco nomic and Social Council issued reports decrying the Havenations for failure to share their economic gains with their less fortunate neighbors. How did the Dutch miracle happen? And to many it was a miracle. The Dutch were not blessed with nat ural resources. If anything, nature had cheated them with seas which had periodically flooded the lowlands, thus requiring expensive dikes. A contemporary ob server, Daniel Defoe, noted that the seventeenth cen tury Dutch had "neither Corn, Hemp, Tar, Timber, Lead, Iron, Arms, Ammunition, woolen Manufacture, or Fish of their own Growth." For these commodities, the Dutch took to the sea-and hence became known, initially, as the Sea-Beggars.

To Max Weber and others, religion was the answer to the Dutch miracle. The Protestant Reformation, sup posedly, opened the floodgates of business prosperity. The Calvinists even had their own regime in Amster dam for eleven years (1611-22). The keynote of Calvin ism, particularly as it was developed by the Dutch Puri tans, was complete dedication to one's calling.What ever a man's pursuit, it was his Christian duty to give it his fullest effort. The tradesman in his own shop "could most confidently expect the presence and bless ing of God." Thus pursuit of profit, in free and honorGROWTH-THE DUTCH EXAMPLE 265 able trade, was no longer tainted; quite the contrary, it was Christian virtue. Sloth was the sin. But perhaps the best answer to the Dutch miracle was trade-trade, and its corollaries of freedom, prop erty, and economic gain (and without the progressive income tax!). In the sixteenth century, Antwerp-then in the Netherlands-was the queen city of all Christendom; in the seventeenth,· it was Amsterdam. Each week some two thousand freight wagons and ten thousand peasant carts passed through Antwerp's gates with the manufac tures and foodstuffs of the Continent. As many as four hundred ships came in on the same tide, spreading on Antwerp's docks silks and spices from the East, wool from England, pitch from Sweden, tallow from Nor way, furs from Russia, and fish from the Seven Seas. In surance became big business in sixteenth century Ant werp-ship and cargo insurance and even life insurance.

The Antwerp Bourse, founded in 1531, was the world's first stock exchange. Little wonder, then, Defoe said of the Netherlands population: The Dutch must be understood to be as they really are, the Carryers of the World, the Middle Persons in Trade, the Factors and Brokers of Europe: That, as is said above, they buy to sell again, take in to send out; and the greatest Part of their vast Comme~ce consists in being Supply'd from all Parts of the World, that they may supply all the World again. But trade is only part of the story, apparently. The Dutch, as may be gathered from the presence of the Antwerp and Amsterdam Exchanges, were investors as 266 WILLIAM, H. PETERSON well as traders. Frugality and steady trade furnished the savings. Savings, in turn, furnished the capital for their mercantile searchings and trade centers and outposts the world over. Above all, the soundness of the Dutch currency unit, the florin, won world renown and respect as is seen in the volume of Dutch banking and insur ance business. The florin of that era knew virtually no depreciation-no "planned" inflation. And this was a big reason it attracted· so much business.

Aspects of the Dutch business behavior can be seen in the observations of Sir William Temple, English am bassor to The Hague in 1668: The [Dutch] merchants and tradesmen are of mighty in dustry. Never has any country traded so much and consumed so little. They buy infinitely, but 'tis to sell again. They are the great masters of Indian spices and Persian silks, but wear plain woolen and feed upon their own fish and roots. They sell the finest of their cloth to France and buy coarse out of Eng land for their own wear. They send abroad the best of their own butter and buy the cheapest out of Ireland for their own use. They furnish infinite luxury which they never practice and traffic in pleasures which they never taste. Sir William shrewdly pinned down the Dutch secret. "Their common riches," he. wrote, "lie in every man's spending less than he has coming in." Self-indulgence was out, for "the general intention every man has is upon his business .... All appetites and passions seem to run lower and cooler here than in other countries, avarice excepted. Their tempers are not airy enough for joy, nor warm enough for love."

This observation· was shared by the philosopher DesGROWTH-THE DUTCH EXAMPLE 267 cartes who lived in Holland from 1629 to 1640: "Every man thinks only of himself and his business interests and whoever has nothing to do with business and trade ... is completely disregarded." Such comments, while having some measure of truth, are to a degree obviated by the burst of great Dutch art. Art requires patrons, an economic surplus. And a measure of Dutch prosperity can be seen in the parade of the Dutch masters: Brueghel, Vermeer, Hals, Steen, Rubens, Rembrandt. If such paintings were for the rich, the middle class home had its appointments. A. con temporary historian noted that "the plainest and most modest burgher had a house full of pictures, and there was nothing unusual about finding from one to two hundred paintings in a modest home." To be sure, Dutch business success in the sixteenth and seventeenth centuries was not always. onward and upward. The Tulip Craze of the early seventeenth cen tury (in 1609, one prize bulb was sold for 13,000 florins) broke in 1638, bringing financial hardship to thou sands. And in the end, beginning with the Anglo-Dutch wars of 1652-1674, business somehow became inextrica bly entwined with empire. The Netherlands had be come, if temporarily, a "world power." And the era of the bourgeois man of the lowlands, who had reached Java in the East and the Hudson River in the West, was largely no more.

At any rate, the secret of the Dutch example of eco nomic development is plain-it was· trade., not inflation; growth was natural, not manipulated.