• 1  P. L. Rousseau & R. Sylla, 2006, p. 4; D. C. North & B. R. Weingast, 1989, p. 803; P. G. M. Dickso (...)
• 2  W. Fritschy, 2003; O. C. Gelderblom & J. Jonker, 2011; D’M. Coffman & L. Neal, 2013; S. R. Epstein(...)
• 3  D. Acemoglu & J. A. Robinson, 2012; N. Sussman & Y. Yafeh, 2006; D’M. Coffman, A. Leonard & L. Nea (...)

1A state’s credible commitment to debt is supposedly a key factor for various financial revolutions throughout history that formed a basis for modern financial systems and economic growth, due to the protection of property rights.¹ Although a positive link between finance and growth appears to exist, the causal relation between early-modern public finance, financial markets and economic growth continues to be debated.² Similarly, the widespread notion that institutions that protect property rights fostered growth has been both criticised and elaborated on.³ This paper contributes to the debate by analysing the default of the Dutch province of Groningen in the 1680s in relation to the Dutch political institutions and the capital market.

• 4  J. De Vries & A. Van der Woude, 1997; L. O. Petram, 2011; J. D. Tracy, 1985; J. L. Van Zanden & B. (...)
• 5  J. L. Van Zanden & M. R. Prak, 2006; M. R. Prak & J. L. Van Zanden, 2014; O. C. Gelderblom, 2009, (...)
• 6  J. L. Van Zanden & M. R. Prak, 2006, p. 140; E. H. M. Dormans, 1991; W. Fritschy, 1988; M. C. ’t H (...)
• 7  J. I. Israel, 1995; W. Fritschy, 2003; J. D. Tracy, 1985; O. C. Gelderblom, 2009; M. C. ’t Hart, 2 (...)

2The Dutch Republic is a noteworthy object of study in this respect in several regards. Firstly, the Republic has been portrayed as the first modern economy, not in the least because of its advanced financial sector.⁴ Secondly, the Dutch Republic’s institutional organisation consisted of representative units ‘between medieval communes and modern nation-states’, which supposedly simultaneously created agency and improved fiscal morale.⁵ Thirdly, the Dutch maintained a large public debt with low interest rates, which can be seen as indicator for a modern political economy.⁶ Finally, the Dutch late sixteenth-century financial and tax revolutions financed its struggle for independence and coincided with its rise as major European power.⁷ Considering these features in the light of the ‘credible commitment’ thesis, sovereign default would seem unlikely in the Dutch Republic.

• 8  Regionaal Historisch Centrum Groninger Archieven (hereafter: RHC-GA), Archief van de Staten van St (...)

3Yet during the 1680s the province of Groningen defaulted on its creditors in Holland and did not solve the problem until 1761. In the 1660s and early 1670s, the province of Groningen borrowed extensively from creditors in the province of Holland, in the form of redeemable and life annuities. The province had, however, trouble servicing the debt and began running into arrears from 1672. Gradually, an increasing number of annuities remained unpaid. During the 1670s and 1680s, the States of Groningen made irregular payments to creditors in Holland. In an attempt to restructure the debt, the province of Groningen reached an agreement with the possessors of redeemable annuities, in 1686. This was not, however, the case for life annuity holders. The majority of the life annuity holders received no interest payments after 1685, which made the default complete. In spite of requests from creditors and the provincial States of Holland, Groningen refused to pay. Until the Holland creditors invoked the Law of Reprisal in 1759, the States of Groningen were able to get away with it. A final agreement to solve the issue was only reached in 1761; the Groningers promised to pay 60% of the unpaid sum of 1.1 million guilders.⁸

• 9  F. Velde & D. Weir, 1992, p. 5; M. Drelichman & H.-J. Voth, 2011; C. Álvarez-Nogal & C. Chamley, 2 (...)
• 10  L. Van der Ent & V. Enthoven, 2001, p. 10-11.
• 11  M. Tomz, 2007; C. M. Reinhart & K. S. Rogoff, 2009; J. Eaton & M. Gersovitz, 1981.
• 12  R. Esteves & J. T. Jalles, 2013; G. Sandleris, 2014.
• 13  M. Drelichman & H.-J. Voth, 2013; H. I. Grossman & J. B. Van Huyck, 1988.
• 14  K. S. Mitchener & M. D. Weidenmier, 2010; K. Oosterlinck, L. Ureche-Rangau & J.-M. Vaslin, 2013; J (...)
• 15  C. J. Zuijderduijn, 2007, p. 63; A. Greif, 2006, calls this collective liability for debt the Comm (...)
• 16  M. Van der Heijden, 2006, p. 20.
• 17  A. Greif, 2000.

4To understand how Groningen’s temporary deficits evolved into a persistent default, we need to understand the Dutch Republic’s institutional organisation and the province’s position within the federation. This is a vital element of the analysis, because defaulting risk differs for domestic and foreign creditors. By defaulting on the creditors in Holland, Groningen singled out a specific and easy to identify group, which was a common practice in early-modern Europe.⁹ Moreover, creditors living in Holland were not represented in Groningen’s assembly, which consisted of people living in Groningen. This deprived them of the credible commitment check on public finance.¹⁰ Therefore, external commitment mechanisms were necessary to credibly commit the province. To mitigate sovereign default risk, the literature emphasises four mechanisms to increase commitment to external debt (re)payments: the role of reputation for future borrowing,¹¹ economic spillover effects,¹² contingent debts,¹³ and sanctions or supersanctions.¹⁴ The use of sanctions had been frequent in the Low Countries during the late middle ages, when the Law of Reprisal provided external creditors with the right to seize or imprison citizens of a defaulting public body – with very disruptive consequences for the economy of the towns involved.¹⁵ Yet, Van der Heijden argued that this form of contract enforcement became extinct during the late 16th century.¹⁶ Perhaps the disruptive consequences fostered its extinction, while the incorporation of the various provinces into the Dutch federal state might have offered alternatives to overcome the fundamental problem of exchange.¹⁷

• 18  W. Fritschy, 1988, p. 70-73; J. De Vries, 1968; S. R. Epstein, 2000, p. 31.

5This paper maintains that Groningen’s credit relation with its creditors in Holland was neither internal nor external, but a mix of both, due to the federal structure. As a result, neither type of commitment mechanism worked. In this institutional twilight zone, the federal government and Groningen’s provincial government – States of Groningen – discovered a common ground that marginalised the Holland creditors. Their interest was subordinated to the interest of Groningen’s provincial state and the common cause of the Republic’s security. Consequently, this paper adds to the debate about the alleged institutional incompetence of the Dutch Republic as cause of its decline and to the debate about the relation between credible commitment to debt and state formation in general.¹⁸

• 19  R. J. Fruin, 1901, p. 175, 184-185.
• 20  Ibidem, 182.

7The Dutch Republic emerged from the Dutch Revolt or Eighty Years’ War (1568-1648). The treaty of the Union of Utrecht (1579) laid down the provinces’ common mutual defence obligations. Hence, this document was not designed as a constitution for the Dutch Republic, although it was the only formal document binding the provinces together. The States-General became an assembly of delegates from sovereign provinces, with the sole prerogative to decide about foreign affairs and about warfare.¹⁹ These decisions had to be taken unanimously, so each province possessed a veto.²⁰ Even though this form of government had disadvantages, including laboriousness, provincial autonomy formed the essence of the Dutch political system. Within this institutional context Groningen occupied a unique position.

• 21  W. J. Formsma, 1967, p. 235; M. Schroor, 2008a, p. 153-158.
• 22  W. J. Formsma, 1967, p. 235, 368; M. Schroor, 2008a, p. 153-154.
• 23  E. H. Waterbolk, 1967, p. 235.

8Groningen only formally became a province of the Dutch Republic in 1594 with the Treaty of Reduction (Tractaat van Reductie). This document was drawn-up after the Dutch States Army captured the city of Groningen that year. Whereas the countryside of the province (Ommelanden) had remained loyal to the Revolt, the city had returned to the Spanish side. The Treaty of Reduction arranged the conditions under which Groningen became a member of the Union. For defensive reasons, the States-General did not want alienate the city. Therefore, the city and countryside were joint as equals into one province, each member holding one vote in the provincial States. This equal power sharing often paralysed the political process because votes became easily equally divided.²¹ To overcome deadlocks, the Treaty of Reduction granted the States-General the power of settling disputes.²² These far-reaching powers of the Generality circumscribed Groningen’s provincial autonomy, a unique situation within the Dutch Republic.²³

• 24  R. J. Fruin, 1901, p. 196, 204, 334, 379, 391.
• 25  M. C. ’t Hart, 2014, p. 154-155; L. Van der Ent & V. Enthoven, 2001, p. 6-7.
• 26  M. C. ’t Hart, 1993, p. 79; H. L. Zwitzer, 1982.
• 27  E. H. M. Dormans, 1991; W. Fritschy & R. Van der Voort, 1997; P. Brandon, 2013.

9Moreover, the States-General already possessed the right to enforce payments for the common defence of the Dutch Republic, in case of serious arrears. Any defaulting province could even be forced to pay by military means, although this was rare.²⁴ This might seem draconic, but the Generality depended heavily on the provincial contributions to finance army and navy; over 80 per cent of the income came from the provincial coffers and more than 80 per cent of the expenses were intended for the military.²⁵ To remedy the constant quarrels about the contribution to the Generality, the provincial shares in the annual central budget became fixed in 1616, an arrangement which lasted for almost two centuries.²⁶ Nonetheless, securing income for the Union’s defences remained the Generality’s major concern throughout the existence of the Dutch Republic.²⁷

• 28  M. C. ’t Hart, 1993, p. 170.
• 29  Ibid., p. 165-172.
• 30  Ibid., p. 167-171; E. H. M. Dormans, 1991, p. 145.

10In order to ensure the regular payment of troops, the States-General could issue loans in expectation of future provincial contributions. During the Eighty Years’ War, most of the sums that the Generality borrowed covered provincial contribution arrears.²⁸ Yet, as the Generality’s own income was but meagre, its credit depended on factors beyond its direct control: ‘military solicitors’ who advance payments to the troops, the personal credit of the Union’s Receiver and provincial contributions.²⁹ The Generality’s credit greatly improved during the early seventeenth century, as Holland’s credit backed these loans and stood surety for the interest payments.³⁰ The Generality depended, nonetheless, much on the provinces’ willingness to meet their financial obligations. The Generality’s credit would have benefited from more control over its income, yet the provinces’ fiscal autonomy prohibited this.

• 31  E. H. M. Dormans, 1991, p. 145-147.
• 32  Ibid., p. 152.

11Eventually, this system of borrowing under the guarantee of the Generality was pushed beyond its limits between 1691 and 1715. The more than twofold increase of the Generality debt – from 28.8 million guilders in 1691 to 61.2 million in 1715 – was almost entirely caused by the provinces’ inability to provide sufficient funds to pay for the military. Understandably, the provinces also had trouble in finding the means to pay interest over the Generality’s debt and arrears built swiftly. In 1715, the system collapsed as the provinces’ belated payments led to the closure of the Union’s Exchequer office for nine months.³¹ For the remainder of the eighteenth century, the Council of State – as executive committee of the States-General – scarcely issued loans anymore.³² The 1715 default once more demonstrated the Generality’s dependence on the provincial contributions to the central budget. The lack of control over the means to pay the interest to creditors put the Generality at the mercy of the provincial governments. Groningen’s exceptionalism in this regard, seems to have had a positive influence on the public finance of both province and the Generality.

• 33  M. Schroor, 2008a, 159-160; L. Van der Ent & V. Enthoven, 2001, p. 14-15.
• 34  L. Van der Ent & V. Enthoven, 2001, p. 18.

12Getting Groningen to pay proved difficult from the moment it joined the Union in 1594. The city of Groningen resisted the introduction of new taxes, most notably the ‘common means’ (gemene middelen) or farmed excises on consumption. The city complained that it would be overburdened compared to the countryside. The arrears rose to 490,000 guilders so the States-General, afraid that the Spanish might again establish a foothold in the north, sent over a delegation of officials in 1600 together with troops to enforce payments. The Generality even built a stronghold (dwangburcht) at the city’s east gate to keep popular unrest in check, force the provincial States to agree, and secure payment of the arrears.³³ Having raised tax rates and obtained promises of better behaviour, the States-General withdrew its troops and dismantled the stronghold in 1607.³⁴

• 35  J. De Bruijn, 1983, p. 76, 86; M. Schroor, 2008a, p. 161-163; L. Van der Ent & V. Enthoven, 2001, p (...)
• 36  M. C. ’t Hart, 1993, p. 170.
• 37  H. Boels & H. Feenstra, 2008, p. 267.
• 38  L. Van der Ent & V. Enthoven, 2001, p. 16, 271-272.
• 39  Nationaal Archief, The Hague (hereafter: NA), Archief van Anthonie van der Heim (1710) 1737-1746, (...)
• 40  L. Van der Ent & V. Enthoven, 2001, p. 272-273.
• 41  M. R. Prak, 2005, p. 267.

13This episode was merely a first intervention in Groningen’s provincial politics and public finance. Between 1622 and 1628 the Generality enforced another tax reform, to increase the province’s tax revenue.³⁵ Consequently, Groningen’s need for the Generality guaranteed loans decreased after the 1620s, and troops allocated to Groningen’s pay role were regularly paid.³⁶ Between 1650 and 1749 the province received no less than thirty-six embassies from the States-General, either to solve internal conflicts or to obtain payment of arrears.³⁷ For instance, in 1726, one such delegation arrived to solve the disputes that had risen about the question how to pay for the arrears on loans the Generality had issued on behalf of Groningen.³⁸ This delegation repeated the opinion of a Groningen States committee, six years earlier, to sell-off provincial domains.³⁹ The provincial government rejected this proposal in favour of other solutions that improved the provincial finances.⁴⁰ The 1726 delegation was more than justified, since Groningen had paid nothing to service its Generality debt between 1715 and 1725.⁴¹ Hence, the province’s default on Holland debt during the 1680s was not the first problem Groningen had in managing its public finance – and certainly not the last.

• 42  J. Glete, 2002; M. C. ’t Hart, 2014; C. Tilly, 1992; J. Brewer, 1989; F. Velde & D. Weir, 1992, p. (...)
• 43  This approach roughly follows the one pursued by M. Drelichman & H.-J. Voth, 2010.
• 44  F. Velde & D. Weir, 1992, p. 5; M. Drelichman & H.-J. Voth, 2010.

15Warfare formed the single main expense of early-modern states, including the Dutch Republic, for which a mixture of loans and taxes was employed.⁴² This section outlines the major developments of Groningen’s provincial finances throughout the time of the Dutch Republic. It maps the overall development of primary income and expenses, to assess the sustainability of Groningen’s debts. From the calculated primary government budget balances, periods of primary deficits and surpluses indicate the province’s liquidity shortage, subsequent need for borrowing and its ability to pay its creditors. Probing these figures allows for a deeper understanding of the ultimate causes of Groningen’s default: whether long-term solvency or a short-term liquidity crisis were the real problem for the unpaid creditors in Holland.⁴³ Early-modern states often resorted to default soon after a war had ended, when the debts incurred could not be serviced by tax revenue.⁴⁴ The section begins by framing Groningen’s public finance in the context of the Dutch Republic’s political history in the years preceding the default.

• 45  M. C. ’t Hart, 1993, p. 78-86; H. L. Zwitzer, 1982; P. Brandon, 2013, p. 43.
• 46  M. C. ’t Hart, 1993, p. 38-39, 81; M. Schroor, 2008b, p. 255; G. Vermeesch, 2006.
• 47  M. Schroor, 2008a, p. 157, 172; M. Schroor, 2008b, p. 255.
• 48  M. Schroor, 2014, p. 214.

16Despite the Generality’s formal responsibility, the costs of warfare affected the provincial finances directly, due to a peculiar system of repartition of military costs. The 1616 apportioning of the provincial contributions merely allocated the distribution of the total annual budget administratively. After approving the annual budget, each province individually made the actual payments up to the amount agreed. Consequently, most of that money did not reach the Generality’s coffers, but was spent by the provinces on behalf of the States-General, preferably within their own province. Yet, as Holland paid the lion’s share of the budget, it also paid for the upkeep of garrisons in other provinces and tried to exert control there.⁴⁵ Garrisons in fortress and cities’ fortifications in the more peripheral provinces had to protect the Republic’s core region – Holland, Zeeland and Utrecht.⁴⁶ Groningen formed a vital link in the defence of the northern part the Republic – a position it never failed to mention in disputes within the States-General.⁴⁷ Therefore, the increased tax revenues after 1600 were also employed to improve the city’s fortifications.⁴⁸

• 49  J. I. Israel, 1995, p. 770-772; E. H. Waterbolk, 1967, p. 256-257; M. Schroor, 2008b, p. 256-257.
• 50  J. I. Israel, 1995, p. 796. The wars against England and France are better known by their separate (...)
• 51  A. T. Schuitema Meijer, 1972.
• 52  Ibid., p. 257-259; M. Schroor, 2008b, p. 257-260.

17The strength of Groningen’s defences was severely tested in the two wars with Münster in 1665-1666 and 1672. During the Second Anglo-Dutch War (1665-1667), Bernhard von Galen, prince-bishop of Münster, attacked the Dutch Republic. His troops invaded Drenthe, Overijssel, Gelderland and Groningen in 1665. Although the city of Groningen remained untouched, the Republic’s northern defences proved no match for Von Galen’s army. External aid was necessary to withstand the bishopric troops; Amsterdam and Zeeland sent troops and ammunition, and a French intervention force eventually caused the bishop to withdraw, only to return seven years later.⁴⁹ In 1672, the Year of Disaster in Dutch historiography, the Republic was attacked by England, France and the bishops of Cologne and Münster.⁵⁰ This time Von Galen’s army actually besieged the city of Groningen for more than a month, without taking it.⁵¹ Again troops came from Holland to aid Groningen’s defence, while large parts of the countryside were flooded to impede the invading army’s progress.⁵² Both invasions and especially the attack on the city in 1672 burdened the provincial finances heavily, since the normal tax revenue could not procure the required money, while military expenses rose vastly.

• 53  J. I. Israel, 1995, p. 736-738.

18Raising sufficient income was a recurrent problem for Groningen’s government and, consequently, for the Generality. The Generality-imposed tax reforms during the 1620s doubled Groningen’s tax revenue to approximately 1 million guilders annually. Despite that increase between 1628 and 1664 a deficit remained of 17,750 guilders per year. This can be attributed to the Dutch involvement in the Eighty Years’ War until 1648, the First Anglo-Dutch War (1652-1654) and assistance to the Danish in their war against Sweden in 1659 and 1660.⁵³ Deficits soared massively, however, with the two Münster invasions; from 1665 until the end of the Franco-Dutch War (1672-1678), Groningen’s shortfall rose to an annual 117,750 guilders. These exceptional deficits incited the province to borrow money on an unpreceded scale, as will be discussed below.

• 54  Because the Dutch Republic managed to remain out of most wars during the eighteenth century, Groni (...)
• 55  L. Van der Ent & V. Enthoven, 2001, p. 91-95, 110-119, 189-193, 294-298, 328, 359-362.

19To honour its debt, Groningen needed a primary surplus in the period that followed the loan issues. During the final two decades of the seventeenth century, the province did have a surplus of 154,000 per year, which dropped to some 70,000 per year for most of the eighteenth century.⁵⁴ So Groningen did have money for its creditors, with the major exception of the War of the Spanish Succession (1702-1713). During that war the province again ran into huge deficits.⁵⁵

• 56  J. C. Riley, 1982; L. Neal, 1990; L. Neal, 2000; P. Dehing, 2012, p. 265-271.
• 57  L. Van der Ent & V. Enthoven, 2001, p. 291, p. 404. These unpaid/residual sums (restanten) were co (...)
• 58  Ibid., 2001, p. 128.

21Capital markets play a vital part in facilitating payments by covering liquidity short-falls. Amsterdam was the West-European centre for sovereign borrowing.⁵⁶ Groningen did not use that market up to 1665. In fact, the province hardly borrowed at all. Borrowing was limited to a few ten thousands per year, as shown in Figure 4. In total it hardly exceeded one million. This was for two reasons. Firstly, until the 1620s, Groningen’s own creditworthiness was limited and it relied on the Generality’s credit. Secondly, the increased tax income from the 1620s diminished the need for extensive borrowing. From the 1630s, Groningen probably smoothed payments by running arrears on its contribution to the Generality budget, because it relied decreasingly on the Union’s formal credit.⁵⁷ During 26 years between 1620 and 1664, the province borrowed nothing at all. Until 1665, this policy worked because of the relatively small deficits and alternating surpluses and deficits. So, when Groningen entered the Amsterdam capital market in 1665, it was a newcomer there.⁵⁸ This section argues that Groningen’s entry turned out to be disastrous.

• 59  Ibid., p. 110-119.

22The inroad into Groningen’s budget following the Münster invasion can be best illustrated than by the amount borrowed in these years. In 1665, Groningen’s provincial government borrowed 578,050 guilders, twice the amount the following year and an additional 558,774 guilders in 1667.⁵⁹ Whereas the total amount of loans obtained prior to 1665 was limited to one million guilders, twice this amount was borrowed in these three years alone.

• 60  Ibid., p. 285; P. G. M. Dickson, 1967.
• 61  F. Velde & D. Weir, 1992.

23The States of Groningen issued two types of annuities in the 1660s: redeemable annuities (losrenten) and life annuities (lijfrenten). The former paid a fixed annual amount until the issuer reimbursed the principal; the latter paid a fixed sum during the lifetime of the nominee, but the principal was not repaid. Therefore, life annuities did not technically result in a consolidated debt, but only an obligation to pay the annual sum agreed. Because of this difference and the inherent mortality risk, the coupons of the life annuities typically yielded 1.5 to 2 times higher interest rates than redeemable annuities. When Groningen issued redeemable annuities, they nominally yielded 4% to 5%, whereas life annuities had a nominal interest rate of 8% to 10%.⁶⁰ Life annuities were consequently considered expensive.61

• 62  RHC-GA, SvSL, inv.nr. 96, f. 28v, 14th May 1669.
• 63  W. Fritschy, 1996, p. 216; J. I. Israel, 1995, p. 770.
• 64  Zeeuws Archief (hereafter: Z.A.), Staten van Zeeland Rekenkamer C (hereafter: RkC), inv.nr. 4510, (...)
• 65  R. Liesker & W. Fritschy, 2004, p. 382.

24However, the nominal coupons for life annuities declined for Groningen during the 1660s and early 1670s. This suggests its reputation improved on the Holland capital market. Remarkably, when the States of Groningen offered 9% to investors in Holland in 1669, it simultaneously offered investors in Groningen 10%.⁶² This could either indicate a lack of trust in Groningen vis-à-vis Holland or a lack of funds. As Table 1 shows, compared to the province of Overijssel, which also was attacked by Münster troops, Groningen’s credit stood higher.⁶³ Zeeland paid initially lower coupons on life annuities in 1666, but increased these rates to 9% in 1671.⁶⁴ Only the wealthy province of Holland persistently issued life annuities at lower rates in this period.65

• 66  The resolution books show a hiatus: inv.nr. 13 ends on March 3rd 1666, while inv.nr. 14 continues (...)
• 67  RHC-GA, SvSL, inv.nr. 2698. This refers to the Second Anglo-Dutch War and the first invasion by Vo (...)
• 68  RHC-GA, SvSL, inv.nr. 2698.
• 69  C. J. Zuijderduijn, 2007, p. 83.

25Although the original resolution approving the issue of the life annuities in Holland is lost, some original life annuities have been preserved.⁶⁶ On 30 March 1666, the States of Groningen decided to issue a life annuity in Amsterdam. It declared the motive for its reliance on lending money as the immediate need for ready cash during this troublesome period (beswaerlijke tijden) it experienced.⁶⁷ Although such statements would not necessarily have built trust, the regents in Groningen probably tried to signal that the lack of funds was a temporary problem. It simultaneously implied that the funds would be spent on the common cause of the Republic. Moreover, Groningen promised that semi-annual interest payments would be paid in Amsterdam. To this end it pledged all provincial revenue streams, present and future ones, together with all provincial possessions, either within Groningen or beyond its borders. All provincial legal institutions would support this pledge.⁶⁸ Yet this pledge posed a serious risk, since the States of Groningen committed the whole community to the debt, as was the custom under the Law of Reprisal.⁶⁹ Clearly, all provisions were intended to build trust and increase the convenience for the Holland creditors. This increased the chances of a successful issue.

• 70  L. Van der Ent & V. Enthoven, 2001, p. 91-95, 110-119, 190, 287, 328, 329-362. This included the 1 (...)
• 71  O. C. Gelderblom & J. Jonker, 2011, p. 18.
• 72  Groningen merely paid 1.5 years of interest to Holland creditors between 1672 and 1680. RHC-GA, Sv (...)

26In spite of the deficits following the second Münster invasion, the States of Groningen borrowed less than during the first Münster war. The provincial deficit cannot explain the modest provincial borrowing. The province borrowed a mere 465,000 guilders throughout the Franco-Dutch War, while the provincial deficit in 1675 alone was larger than that.⁷⁰ Probably there was a supply side problem. The conflict with Britain, France and the German prince-bishops created a scarcity of cash in the Dutch Republic.⁷¹ Furthermore, the provincial credit began to falter, which might have made creditors reluctant to provide additional funds.72

• 73  RHC-GA, SvSL, inv.nr. 1896, f. 682r.
• 74  L. Van der Ent & V. Enthoven, 2001, p. 284, 287.

27The province’s urgent need for money emerges from the extraordinary measures taken in 1672. Groningen resorted to a 5%-forced loan, levied over 1 per cent of the inhabitant’s wealth. Furthermore, the coupon on newly issued life annuities increased from 9 to 10 per cent at the beginning of the year and more later.⁷³ The provincial executives (Gedeputeerde Staten) also forbade the conversion of redeemable annuities into life annuities in 1675.⁷⁴ These measures indicate that the province had considerable trouble in finding sufficient cash until the war ended in 1678.

• 75  Groningen merely paid 1.5 years of interest to Holland creditors between 1672 and 1680. RHC-GA, Sv (...)
• 76  L. Van der Ent & V. Enthoven, 2001, p. 128.
• 77  Ibid..
• 78  J. E. Heeres, 1890; P. A. Loosjes & J. Wagenaar, 1789, Vol. 23, p. 140-141; J. Kok, 1785, Vol. XVI (...)

28Peace brought little improvement for the provincial finance. Interest payments were still overdue in 1680.⁷⁵ After Groningen’s arrears evolved into a default in the 1680s – as will be analysed in the next section – the Provincial States had only two options left for borrowing. Firstly, it could rely on the credit of the Generality. It exercised this option especially during the War of Spanish Succession. Secondly, the Provincial States could borrow money within the province borders, although the domestic resources to tap into were limited.⁷⁶ After the War of Spanish Succession the borrowed annual amounts of the 1660s only exceeded 500,000 guilders in 1744, 1752, 1753 and 1795. Not until the Fourth Anglo-Dutch War (1780-1784) Groningen did borrow outside the provincial borders.⁷⁷ By that time, the conflict over the unpaid interest to the creditors in Holland was resolved.⁷⁸ For most of the eighteenth century Groningen refrained from entering the capital markets. Additional loans to service its debt were thus unnecessary. This indicates that Groningen’s debt was sustainable in the long-run, and the 1660s deficits created exceptional but temporary liquidity needs.

• 79  D. Acemoglu & J. A. Robinson, 2012; D. Stasavage, 2011; D. C. North & B. R. Weingast, 1989.

30Default was a common phenomenon in early-modern Europe. Although the magnitude of these other cases differs, they offer valuable theoretical insights for this case. Early-modern sovereign defaults are often explained as the excesses of absolutist regimes. Unbound by representative assemblies monarchs overspent the budget and consequently defaulted.⁷⁹ Yet the Dutch Republic was no absolutist state and possessed representatives assemblies.

• 80  F. Velde & D. Weir, 1992.
• 81  M. Drelichman & H.-J. Voth, 2011.
• 82  F. Velde & D. Weir, 1992, p. 5.
• 83  F. Velde & D. Weir, 1992; M. Drelichman & H.-J. Voth, 2011.

31Recent research offers a more nuanced alternative interpretation for early-modern sovereign defaults. Velde and Weir argued for eighteenth century France that the defaults were part of a system to manage the debt. Persistent interest payments would ruin the state’s public finance.⁸⁰ More recently, Drelichman and Voth argued that Philip II of Spain ‘priced-in’ the defaulting risk. The Spanish king paid creditors in advance to compensate for a future default.⁸¹ This made the defaults expected, partial and specific; only a specific asset was targeted.⁸² The creditors anticipated to that by requesting a higher coupon for only a specific part of the debt. Consequently, assets with the highest yields formed the most likely target for a default, mostly higher coupons that had been paid for a longer period of time. Thereafter, creditors and debtor entered into renegotiations to reach an agreement quickly. This guaranteed future lending and borrowing. In this alternative interpretation, sovereign default was the consequence of a deliberate policy.⁸³ There was thus neither sheer inability to manage their public finance nor a deliberate violation of the creditors’ property rights by absolutist kings.

• 84  NA, Provinciale Resoluties, inv.nr. 715, p. 1279-1285, provincial resolution of the States of Holl (...)
• 85  RHC-GrA, SvSL, inv.nrs. 1890, 1891, 1892, 1894, 1896, 2276. Between 1666 and 1672, 750 life annuit (...)
• 86  The arrears or default, thus, began after half a year after the last paid instalment. It still pro (...)

34When in 1761 the default was finally settled, a list was drawn up of the old life annuities. A first remark is that only those who possessed the asset for at least 15 years were eligible to the settlement.⁸⁴ Hence, not all life annuities that still circulated are taken into account. This 1761-record of claims lists a total of 338 annuities, equalling about half of the annuities sold between 1666 and 1672.⁸⁵ It contains the names of the buyers and nominees, the original purchase date, the date of death of each nominee, the last instalment paid, the amounts of annual interest and the total sum of unpaid interest between the last instalment paid and the nominees’ death.⁸⁶ This information forms the basis for the following analysis of the development of the default in the 1680s. Even though the list only contains half of the life annuities issued, it is probably representative for the handling of all the unpaid life annuities. The 1761-list is a random sample on which the States of Groningen could not exercise any influence.

• 87  J. E. Heeres, 1890, p. 189.

38Finally, the apparently unstructured nature of the default implies that Groningen did not use the excuse that risk was priced-in to differentiate among the creditors; those with higher coupons were not structurally earlier defaulted upon than others. This was also clear from the brief comparison with other provinces issuing life annuities in the Dutch Republic, as shown in table 1. Groningen’s offered coupon of 8% to 10% appears not excessive. Indeed, the States of Groningen only began to invoke the argument of excessive coupons when the creditors from Holland increase pressure to compensate the default in the 1750s. In 1759 the States of Groningen claimed that the creditors had received their interest for 20 years, which allegedly had yielded the creditors a profit on top of recouping the original investment.⁸⁷

• 88  10 years × 10% = 100%

39Archival data from 1761 allows us to test this claim. Life annuities returned a net loss in the first years after they were purchased, because the purchase amount was not be returned for life annuities. Hence, the net cumulative return of a life annuity is equal to the number of years the instalment is paid times the annual coupon minus the original purchasing sum. For instance, the break-even point of a 10%-life annuity was 10 years.⁸⁸ Only a minority of the investors received the claimed 20 years of interest payments: only 16 out of 338 annuities equalled or exceeded 20 years. The remaining 95% of the life annuities received payments for 11 to 20 years. On average Groningen did not live up to the contractual obligations for more than 16 years and 10 months. This was considerably less than the 20 years claimed by the Groningers in 1759.

• 89  O. C. Gelderblom & J. Jonker, 2011, p. 20.
• 90  M. Drelichman & H.-J. Voth, 2011, p. 14.
• 91  F. Velde & D. Weir, 1992, p. 33.

40The returns, indeed, provide little support for this claim. Assessing the possible excessive compensation requires both the returns on these life annuities and alternative risk-free assets, as a measure of opportunity costs. To begin with the latter, a loan collateralized by a VOC-share might be considered one of the safest assets. This risk-free asset yielded 3.5 per cent in 1677 to 2.5 per cent in 1683.⁸⁹ The defaults by Philip II of Spain provide an indication of the additional profitability in case of sovereign default. After a default short-term assets yielded an additional 3.16 percentage points on top the opportunity costs of 7.14 per cent, making a total of 10.3 per cent.⁹⁰ Similarly, alternative expensive debt instruments in eighteenth-century France yielded up to 3.5 percentage points more than life annuities that returned 5.24 to 10 per cent.⁹¹ For Groningen, the average annual return on investment was a mere 3.4%, after deducting the purchasing sum of the life annuities that was not to be returned. Within the group there are large differences per year of purchase. Annuities issued in the three years that offered an annual interest rate of 10% nominally, eventually yielded 4.9% to 4.2%. Yet those issued at 9% in 1669 and 8% in 1671 returned 2.7% and 1.25% respectively. Buyers of annuities in 1672, who were offered 9% to 10% nominal interest rate, yielded 2.2% eventually. If Groningen had offered a reasonable compensation in advance, the effective yield had to have been at least 3 per cent more than the 2.5 per cent opportunity costs: a 5.5 per cent yield. If the buyers of life annuities also factored death risk, the coupon should have been even higher. Clearly, Groningen offered the investors too little to compensate a future default.

• 92  RHC-GA, SvSL, inv.nr. 96, f. 21r, 16th September 1668.
• 93  NA, Raad van State: Extra Aanwinsten 1904 XII, inv.nr. 23c.

42This section examines the process of Groningen’s gradual default from the provincial correspondence in the 1670s to 1680s. The first signs of financial difficulties already appeared during the late 1660s and early 1670s. In September 1668, the Generality was the first victim of Groningen’s financial misbehaviour. The States of Groningen repudiated all payments on Generality debts incurred prior to 1665.⁹² The Council of State reacted as before by sending an embassy over. Its reaction could be easily coordinated, as the Generality was the sole creditor that fell victim.⁹³ Although this could be interpreted as fitting the pattern of a notoriously complicated relation with the States-General, creditors might have observed this with suspicion.

• 94  RHC-GA, SvSL, inv.nr. 96, f. 41v, 15th April 1671.
• 95  RHC-GA, SvSL, inv.nr. 96, f. 41v, 26th August 1671.

43Meanwhile, Groningen’s provincial government tried to maintain trust by stipulating the prompt payment of redeemable and life annuities in Amsterdam in 1671.⁹⁴ Payment seems already to have become problematic. Four months after this stipulation, the States of Groningen allowed the auditing committee to dispose of the interest the former provincial receiver had left unpaid in Holland.⁹⁵ Hence, when Groningen issued another loan in 1672, the creditors had already witnessed inaccurate interest payments. This might have incited them to demand a higher risk premium.

• 96  RHC-GA, SvSL, inv.nr. 96, f. 41v, 9/19th January 1672.
• 97  RHC-GA, SvSL, inv.nr. 96, f. 41v, 18th January 1672.
• 98  O. C. Gelderblom & J. Jonker, 2011, p. 9.
• 99  RHC-GA, SvSL, inv.nr. 1896, f. 672r-681r.

44The difficulties with the sale of the life annuities in 1672 might indicate that the market must have begun to doubt Groningen’s ability or willingness to pay debts to others as well. Because the market did not absorb 8%-coupon life annuities, in January 1672, Groningen raised the offer.⁹⁶ Consequently, the province decided to issue life annuities at 9 or 10 per cent at most, in Holland and in Groningen.⁹⁷ It was, however, stipulated that this offer was to be kept secret; probably because it would reveal the province’s desperation for funds. Such an instruction is consistent with the findings of Gelderblom and Jonker, who argued that the local tax receivers in Holland had considerable bargaining power vis-à-vis the investors and played one against the other by rationing information.⁹⁸ From February to April, the States of Groningen managed to issue 48,000 guilders worth of 10% life annuities in Holland.⁹⁹

• 100  Het Utrechts Archief (hereafter: HUA), Notarissen in de stad Utrecht 1560-1905, inv.nr. U083b009, (...)
• 101  RHC-GA, SvSL, inv.nr. 96, f. 121r, 2nd June 1681.
• 102  RHC-GA, SvSL, inv.nr. 1457, f. 605r-605v, 7/17th August 1680.

45The actual semi-annual interest payments were conducted by a local agent, called Christoffel Indisraven. He was a merchant, who also performed other services, for instance, the purchase of fuses from a fuse maker in Utrecht.¹⁰⁰ Since he was later authorised to reclaim expenses, he probably advanced sums on Groningen’s behalf.¹⁰¹ Presumably, he advanced interest payments as well, although the total amounts would have exceeded his purse. In any case he did not advance the total arrears that began to arise from 1672. Between April 1672 and 1680 the creditors in Holland merely received one and a half years’ of interest.¹⁰²

• 103  A. T. Schuitema Meijer, 1972.
• 104  RHC-GA, SvSL, inv.nr. 1896, f. 682r.
• 105  RHC-GA, SvSL, inv.nr. 1896, f. 682r-685r.
• 106  RHC-GA, SvSL, inv.nr. 96, f. 55r, 7th March 1673

46The irregularity in interest payments was probably war related. The province suffered from the siege of July and August of 1672.¹⁰³ After Von Galen retreated, the States of Groningen turned once again to the Amsterdam capital market. In September the Groningers offered life annuities, differentiated by age of the nominees, ranging from 10% to 33.3% per year.¹⁰⁴ This overly generous offer did yield Groningen another 93,000 guilders.¹⁰⁵ The absurdly high coupons probably reflects the combination of increased demand for capital due to the war and the high defaulting risk for Groningen. The infrequent payments between 1672 and 1680 were probably also the result of payments to the military being prioritised. In 1673, the States of Groningen stipulated that interest payments came second after the troops were paid, favouring those that had matured the longest time ago.¹⁰⁶ The meagre payments suggest that there was little left for the creditors.

• 107  NA, Raad van State: Extra Aanwinsten 1904 XII, inv.nr. 23c, p. 17-18, 1st June 1677.
• 108  RHC-GA, SvSL, inv.nr. 96, f. 75v, 2nd March 1678.
• 109  RHC-GA, SvSL, inv.nr. 96, f. 76r, 27th April 1678.

47In 1677, the States-General mediated in a conflict between the city and the Ommelanden. In exchange for more autonomy over legal, administrative and financial matters, the Generality demanded at least two months of payment to the soldiers. The States-General simultaneously urged the States of Groningen to pay at least one year of interest to the creditors in Holland.¹⁰⁷ This diplomatic pressure had an effect. In March 1678, the States of Groningen accepted the States-General’s advice; it agreed to resume the payments of the redeemable and life annuities in Holland.¹⁰⁸ It still took over a month to sign the order to pay the troops and the Holland creditors.109

• 110  RHC-GA, SvSL, inv.nr. 96, f. 110r, 20th March 1680.
• 111  RHC-GA, SvSL, inv.nr. 96, f. 110r, 20th March 1680. Purchasing debt on the secondary market was pr (...)
• 112  RHC-GA, SvSL, inv.nr. 96, f. 112r, 25th June 1680.
• 113  RHC-GA, SvSL, inv.nr. 96, f. 114v, 21st August 1680.
• 114  RHC-GA, SvSL, inv.nr. 96, f. 114v, 21st August 1680.
• 115  RHC-GA, SvSL, inv.nr. 96, f. 114v, 21st August 1680; f. 115r, 21st August 1680.

48In 1680, the States of Groningen took a more active attitude towards its Holland debt. In March, it established a committee to explore the possibilities of converting arrears into new debt and reducing the interest on redeemable annuities from 5% to 4%.¹¹⁰ On the same day, it established another committee that had to take care for Holland debt that was purchased on the secondary market.¹¹¹ On 25 June that same year, the States decided to pay one semi-annual instalment on the first of July and another three months later – a proposal that we will detail below.¹¹² On the 21st of August, it took a series of decisions concerning the life and redeemable annuities. First, it designated certain taxes to fund the debt to pay the interest payments on life and redeemable annuities. This was the result of negotiations between the States of Groningen and “gentlemen from Holland” (Hollandsche Heeren).¹¹³ Second, to reassert its seriousness on this matter, the States ordered the tax receiver to use these taxes for these payments, on penalty of losing his office, even if other provincial public bodies urged him to spend the money differently.¹¹⁴ Third, copies of these decisions were to be sent to the provincial government of Holland, together with the instruction to Indisraven. Finally, the States summoned Indisraven to Groningen to collect the money to pay the first instalment in Amsterdam.115

• 116  RHC-GA, SvSL, inv.nr. 1457, f. 605r-605v, 27th September 1680, f. 615v-616r.
• 117  RHC-GA, SvSL, inv.nr. 1457, f. 605r-605v, 27th September 1680, f. 618v-619r.
• 118  RHC-GA, SvSL, inv.nr. 1457, f. 605r-605v, 7/17th August 1680.

49In September 1680, Indisraven wrote an address to the States of Groningen, where he stated that the majority and most important creditors were willing to accept the restructuring proposal of 25 June. This proposal was to convert the arrears into new debt and reduce the interest on redeemable annuities from 5 per cent to 4 per cent on condition that a semi-annual instalment was paid immediately and all future ones would be promptly paid.¹¹⁶ He argued that if the States would not pay the creditors, no one in Holland would lend a penny to Groningen anymore.¹¹⁷ This was the consequence of Groningen’s irregular payments in the previous years: it had merely paid one and a half years’ of interest to creditors in Holland since 1672.¹¹⁸ The proposed conversion of arrears into new debt, seems to have applied to all annuities, redeemable and life annuities alike.

• 119  RHC-GA, SvSL, inv.nr. 96, f. 114v, 21st August 1680; f. 115r, 22th April 1681.
• 120  RHC-GA, SvSL, inv.nr. 96, f. 120r, 1st June 1681; f. 120v, 2nd June 1681.

50The following spring, the States stipulated that Indisraven should receive an additional sum to pay the creditors. This should not exceed 10,000 guilders.¹¹⁹ In June 1681, the States of Groningen offered a conversion of redeemable annuities that were in arrears into 8 per cent life annuities.¹²⁰ Together with the aforementioned attempts to convert arrears into new debt, the provincial government seems to have tried to restructure the debt in various ways. This was probably ineffective as negotiations with Holland creditors continued while arrears accrued.

• 121  RHC-GA, SvSL, inv.nr. 96, f. 156v, 6th January 1683; f. 157v, 28th February 1683; f. 158r, 1st Mar (...)
• 122  RHC-GA, SvSL, inv.nr. 96, f. 158r, 1st March 1683; f. 159r, 3rd March 1683.
• 123  RHC-GA, SvSL, inv.nr. 96, f. 164v, 22nd June 1683.

51In early 1683, matters began to turn for the worse. From that moment the States received complaints, transmitted by Indisraven, that creditors in Holland received unequal payments.¹²¹ A certain Gerhardt Block acted as a representative of creditors in Holland and would write a report to Indisraven.¹²² In June, two delegates, Bothenius and Piccard, hastened to Amsterdam to pay another semi-annual instalment on life and redeemable annuities.¹²³ These defective payments and the ad hoc committee sent to Holland seem temporary makeshifts, rather than a policy to tighten the screws on the creditors.

• 124  RHC-GA, SvSL, inv.nr. 96, f. 196v, 25th February 1686; f. 199r, 26th February 1686.
• 125  RHC-GA, SvSL, inv.nr. 96, f. 110r, 20th March 1680; f. 196v, 25th February 1686.
• 126  RHC-GA, SvSL, inv.nr. 96, f. 196v, 25th February 1686; f. 200v, 27th February 1686.
• 127  RHC-GA, SvSL, inv.nr. 96, f. 238v, 3rd March 1688; f. 259r, 20th October 1689.

52In the two following years, 1684 and 1685, most of the life annuity holders received their last instalments. These partial and irregular payments might be interpreted as part of the ongoing renegotiations with the Holland creditors. Following the advice of the Generality, a number of creditors agreed in February 1686 to a reduction of 25 per cent of its redeemable annuities.¹²⁴ The States also continued to try to buy up annuities, both redeemable and life annuities, in Holland.¹²⁵ These securities probably sold below par, due to Groningen’s bad payment behaviour. Buying these annuities through the secondary market was consequently cheaper than reimbursing the creditors at face value. The dismissal of Indisraven as broker for Groningen in the same month is presumably best explained from the perspective of these renegotiations. The States of Groningen dismissed him because of continued payments to creditors in Holland.¹²⁶ By withholding interest payments, the States of Groningen increased pressure on the creditors. If Indisraven then still paid these creditors, that strategy would have had little effect. In spite of his dismissal, Indisraven, reappeared twice to receive instalments, in 1688 and 1689, destined for interest payments on both life and redeemable annuities.¹²⁷ This reaffirms the impression of increasing arrears that gradually evolved into a default that was seemingly random within the group of life annuity holders, whereas the redeemable annuity holders struck a bargain with Groningen’s government.

• 128  RHC-GA, SvSL, inv.nr. 96, f. 237r, 2nd March 1688; f. 239r, 3rd March 1688.
• 129  F. Broner, A. Martin & J. Ventura, 2010.

53Unable to reach a collective agreement, the States of Groningen continued to work around the life annuity holders, using the secondary market for this purpose. Besides these direct purchases, mentioned in 1680 and 1686, it explicitly allowed – encouraged – inhabitants of Groningen to buy up Groningen public securities in Holland. The inhabitants could then reinvest this in return for 6 per cent life annuities, to a nominee that was an inhabitant of Groningen.¹²⁸ The practice of re-trading public bonds in the domestic market has previously been described as an instrument for creditors to mitigate the effects of a default.¹²⁹ This case demonstrates that the defaulter could use the secondary market as well to help solving its problems. It moreover shows that the secondary market for public debt within the Dutch Republic was already well-developed.

• 130  RHC-GA, SvSL, inv.nr. 2700.
• 131  F. Velde & D. Weir, 1992, p. 31.

54The States of Groningen’s preparedness to renegotiate was still not limited to the redeemable annuity holders. In 1689, the province negotiated a contract with Christoff count of Rantzow concerning his four life annuities. A lump sum of 20,000 guilders was paid to compensate for the unpaid interest of 16,000 guilders that had accumulated between 1678 and 1689. The payments of this redemption money were to be made in three equal instalments: one immediately, the other two through the office of Hendrik Staats and sons in Amsterdam. It was stipulated that if the remaining two payments were too late, the entire arrangement would be void. In that case the previous payment should be considered as partial redemption on the arrears, whereas the interest was to be paid according to the original conditions of the life annuities contract with priority in Amsterdam. The case is even more interesting because king-stadtholder William III of Orange, was one of the nominees of the life annuities.¹³⁰ The question remains whether this count of Rantzow bought this asset as agent of William, or whether it was allowed to nominate third parties as happened in late eighteenth-century France.¹³¹ Nonetheless, individual renegotiating was possible, but did not lead to an agreement between Holland’s life annuity holders and the States of Groningen. Perhaps the problem was that the conditions and prospects within this group of creditors varied more than for the redeemable annuity holders. This larger variation was the result of the design of the asset, since the expected returns depended on the life expectancy of each individual nominee. Hence, it might have been the case that the nature of the life annuity caused too much heterogeneity to reach a solution that would satisfy all life annuity holders equally.

• 132  M. Tomz, 2007, p. 196-219.

55It was not preordained that the life annuity holders eventually fell victim to an outright repudiation of payments. For a while, both life annuity holders and possessors of redeemable annuities suffered from the postponed payments that resulted from liquidity problems. Whereas the latter managed to negotiate a deal, the former did not. Although the creditors in Holland as a group were targeted, the differentiation between redeemable annuity holders and life annuity holders was the outcome of a renegotiation process and not a premeditated plan. The redeemable annuity holders accepted an interest reduction in return for a resumption of payment, the large majority of the life annuity holders did not receive a penny for the next 75 years to come. Consequently, this case demonstrates why coordinating punishment proves so difficult for bondholders.¹³² Moreover, a remarkable result of this partial default was a regression in the functioning of free financial markets for public debt; prior to the default capital freely flowed to Groningen, thereafter Groningen depended on the Generality’s credit.

• 133  Ibid., p. 53-54; C. M. Reinhart & K. S. Rogoff, 2009, p. 80-81; M. Drelichman & H.-J. Voth, 2011.

56Compared to other public defaults, Groningen’s default persisted for a remarkable long period. Usually a state in default could not issue new loans. Creditors barred defaulting states from new loans until the old debts were restructured. Consequently, credit rationing confined the duration of the default to the moment the defaulter needed to borrow money again, mostly within a few years.¹³³ So, why did it take so long before the creditors in Holland reached an understanding?

• 134  RHC-GA, SvSL, inv.nr. 96, f. 233v, 18th November 1687.
• 135  RHC-GA, SvSL, inv.nr. 96, f. 242v, 26th June 1688.
• 136  RHC-GA, SvSL, inv.nr. 96, f. 243v, 27th July 1688.

58The States of Groningen used their strategic position in negations with the Union. In November 1687, the States of Groningen informed the Generality that the maintenance of its fortifications required the import of money from outside the province. As a lever, it withheld its payments to the Generality, until the other provinces had paid their contributions.¹³⁴ In exchange for Groningen’s approval to the building of 36 new warships, it required a loan for the maintenance of the fortress, seven months later.¹³⁵ In turn, the Council of State sent over an embassy to discuss this matter.¹³⁶ Without Groningen, the Dutch defences in the north would have been severely weakened. Hence, it was in the clear mutual interest of the Generality and the Groningen provincial administration to maintain the border fortresses in good condition.

• 137  P. A. Loosjes & J. Wagenaar, 1789, Vol. 23, p. 139-140; J. E. Heeres, 1890, p. 188.
• 138  P. A. Loosjes & J. Wagenaar, 1789, Vol. 23, p. 139-140; J. E. Heeres, 1890, p. 175-176, 183, 192.
• 139  Nationaal Archief, The Hague (N.A.), Raad van State: Extra Aanwinsten 1904 XII, inv.nr. 23c.
• 140  P. A. Loosjes & J. Wagenaar, 1789, Vol. 23, p. 140.
• 141  J. E. Heeres, 1890, p. 183, 192.

59On the other hand, the States-General protected Groningen against harsh measures by the life annuity holders. However, whereas fully sovereign borrowers had to come to terms with the market in order to issue new debt, Groningen was offered an escape route by borrowing under guarantee of the States-General. Groningen did not need the free market to obtain the loan. This made credit rationing an ineffective means for contract enforcement. This also made the States-General Groningen’s main creditor that assured that it received prioritized payments. This becomes clear from the report by the aforementioned generality-commission in 1726. It declared that Groningen was already burdened enough by paying the Generality’s debts and interest and could not pay others.¹³⁷ The States of Holland, nonetheless, repeatedly and fruitlessly admonished the States of Groningen to come to terms with the creditors, during the 1730s.¹³⁸ In 1739, it delivered an ultimatum to its Groningen counterparts that was to expire in May the following year.¹³⁹ However, the outbreak of the War of Austrian Succession in 1740 halted Holland’s pressure, since internal harmony was required during this international conflict.¹⁴⁰ Negotiations and mediation by stadtholder William IV after the war also remained without effect.¹⁴¹

• 142  Ibid., p. 184-185.
• 143  Ibid., p. 182-183.
• 144  P. A. Loosjes & J. Wagenaar, 1789, Vol. 23, p. 142-143.
• 145  J. E. Heeres, 1890, p. 190-197.

60The default was only ended when the creditors in Holland invoked the ‘medieval’ Law of Reprisal. In October of 1759, the States of Holland allowed the creditors to seize ships and goods of Groningen’s inhabitants in Holland.¹⁴² The creditors argued that if Groningen could pay other bills, it also could pay them. Adding that all that all Groningen’s inhabitants were liable for their provincial debt was a clear invocation of the Law of Reprisal.¹⁴³ Remarkably, in the middle of the conflict the Generality granted a safeguard against the seizing by Holland’s creditors of money designated for the payment of the Generality’s debts and interest.¹⁴⁴ Again, the protection of the Generality’s interest prevailed over those of the private creditors. Eventually, the States-General mediated an agreement that granted compensation to the heirs of the annuity holders of 10% cash, 50% in 2.5% bonds, in October 1760.¹⁴⁵ Hence, both the persistence and solution of the default depended on the Generality’s mediating position between creditors and defaulter.