The World's Oldest Debt
It keeps going and going and going and going...
Over the last month I’ve talked repeatedly about bonds, such as when Argentina defaulted on some of the bonds they issued and one of their naval vessel was seized by creditors. Usually bonds aren’t that exciting. However, in my own backyard there is a pretty cool bond that Yale University (of course) owns:
This is a picture of the oldest active bond in the world. It was issued in 1648, a whopping 375 years ago.
In 1648 a Dutch water authority issued bonds in order to pay for the upkeep of local dykes. Dykes are of crucial importance to the Dutch; without them the country would be much smaller. In fact, one thousand years ago, the country was about a sixth smaller than it is today. In order to increase the amount of agricultural land, the Dutch began to build dykes around 1300. It’s really amazing to think of the amount of land that the Dutch reclaimed from the sea by hand.
However, this was expensive, even at the time. So Dutch water authorities would issue bonds. These bonds were similar to other bonds. A bondholder would lend the issuer money, and the bond issuer would pay interest to the bondholder until the bond hits maturity, when the issuer pays back the bondholder the principle. Today, the most common bond sold by the US Treasury are Treasury Bills, which last from four weeks to a year. 10 year treasury notes are also popular. For those that want an even longer investment, the US Treasury will even sell you a 30 year bond.
This Dutch water bond is unique, however, in that it has no date of maturity. It is called a perpetual bond, meaning that the bondholder pays the issuer the principle of the bond, and then receives interest in perpetuity.
Several governments, including that of the United States, have issued perpetual bonds over the years. They were called Consols, or consolidated bonds:
The above photo is a pictures of a 50 dollars bond that pays four percent interest. The interest was paid quarterly, so the an owner of this bond would be paid 50 cents every three months. The one catch is that the issuer can choose to redeem the bonds at any time, so in this case the US government can pay the bondholder $50 and then the bond is closed.
The UK also issued perpetual bonds, and redeemed their final outstanding bonds in 2014. Unfortunately, I believe these were some of the final perpetual bonds in existence, so you cannot buy any on the open market today.
For whatever reason, however, the Dutch water authority has never asked to redeem their bond, either because they don’t want to or because that isn’t an option in the contract. The result is that the bond still pays interest. Every decade or so, a member of Yale University’s Beinecke Library will travel to The Netherlands to receive their hard-earned money. The water authority will add another line to the paper addendum (the original goatskin bond is not allowed to leave the Beinecke Library) and pay interest. One has to wonder what Niclaes de Meijer, the original bondholder from 1648, would think of all this.
How much is all this worth? Well the original bond cost 1,000 Carolus Guilders. According to one website, a master carpenter could expect to earn 450 Guilders per year. The water bond originally paid 5% interest (later reduced to 2.5%), so originally the bond paid out 25 Guilders per year. Today, the bond pays out about $13 per year.
According to the Yale article, the interest rate changed from 5% to 2.5% in the 17th century, or relatively quickly. I would love to know the details on this, but none are provided. Regardless, even if the bond only paid 2.5%, after 375 years it has paid out roughly the equivalent of 9,375 Guilders. Not bad for a 1,000 Guilder investment - provided you don’t mind collecting over several centuries.