Dutch Securities for American Land Speculation in the Late Eighteenth Century
The end of the 18th century was one of the most innovative periods in the history of securitization. Public markets for mortgage-backed securities are among the most interesting developments of the period. In The Netherlands, a network of merchant investment bankers used sophisticated methods for structuring loans based on overseas properties as collateral. In 1793, the Holland Land Company issued two structured notes to purchase millions of acres in Western New York. In 1794, the purchase and development of property in the newly-designated capital city of Washington D.C. was financed by mortgage-backed bonds underwritten by Dutch merchants. These securities raise questions about why investors trusted in the value of overseas property as collateral, and whether the expected rates of return on the instruments were commensurate with their risk. In our analysis, we address these questions by exploring how the early mortgage-backed securities were based on earlier collateralized fixed income instruments in the Dutch market, as well as other 18th century experiments with securitization and collateralization of land. We argue that these innovative securities resulted from an institutional framework that easily accommodated novel fixed income issues, and came on the heels of large gains to market speculation in American debt.
I acknowledge research support from Yale University
K. Geert Rouwenhorst
I am a principal in SummerHaven Investment Management, an investment company