From innovation to financial market failure

We study securitization and the impact of cheap credit on economic fluctuations in the context of three Dutch Caribbean colonies between 1760 and 1780. During that period the Dutch set up large slave plantations producing coffee and sugar. These were high capital sensitive investments (especially due to high cost of slave labor) that were financed through mortgage backed securities issued in Amsterdam and other large towns in the Dutch Republic. Starting in 1765 there was an incredible boom in the amount of credit made available to the Caribbean colonies, leading to an increase in collateral values. The tides turned in 1773; due to a short lived financial crisis credit flows stopped and the entire process went into the reverse. Many highly levered planters ended up in bankruptcy. The purpose of our research project is to identify the relevant drivers of this boom-bust process that is reminiscent of many financial crises, including the recent Great Recession.

The project is funded by the Institute for New Economics Thinking.

Peter Koudijs
Stanford University
&
Abe de Jong
Erasmus University Rotterdam