How the Dutch East India Company Inadvertently Created the World’s First Stock Market
To tell the story of the world’s first stock exchange is to tell the story of the Dutch East India Company, for the creation of the latter led directly to the formation of the former.
The Dutch East India Company was created to solve many problems plaguing the Dutch shipping industry. For one thing, the journey to and from the East Indies was long and arduous. Many ships from Amsterdam and Zeeland never returned, putting their organizers out of business. On top of this, Dutch merchant companies engaged in fierce competition with each other, bribing experienced captains and navigators into the service of their rivals and even going so far as to sabotage entire expeditions. This game without a winner continued until 1602.
That year, the States General – the highest governing body of the Dutch Republic – decided to intervene. To improve the country’s economy and protect its trade networks from the Portuguese, he issued a charter that merged the aforementioned companies into a single company. This company, dubbed the Dutch East India Company or VOC for short, would receive a monopoly on all trade between the Dutch Republic and East Asia. (The abbreviation VOC comes from the Dutch name of the company: “Vereenigde Oostindische Compagnie”.)
The charter also specified the methods by which the VOC would raise capital for its early expeditions. “All residents of such lands,” reads Article 10 of the charter, “may purchase shares of this corporation.” Funding was provided by all sections of Dutch society, from wealthy businessmen to their servants; The VOC’s accountant, Barent Lampe, paid his maid a bonus in the form of shares. By the end of the initial public offering, the VOC had raised 3,674,945 guilders from 1,143 people.
The first stockbrokers
Shareholding has changed the relationship between companies and their investors. Prior to the formation of the VOC, contact between the two parties had been personal rather than professional; the money was entrusted to individuals and not to companies. On the other hand, it is the charter of the VOC which indicated to the shareholders what type of dividends to expect.
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In order to raise as much money as possible, the charter also allowed VOC shareholders to liquidate their investment midway through the contract. Later, the authors of the charter added an additional provision allowing shareholders to transfer their shares to other investors. With this, VOC became not only the first company in the world to issue stock, but also the first company to encourage stock trading.
The first person to trade his VOC shares was Jan Allertsz tot Londen, who did so even before the company’s ships left the Netherlands. Allertsz’s reasoning for this decision was twofold. First, he no longer had the necessary means to pay his next installment. But more importantly, demand for VOC shares – of which only a fixed number were issued – had risen sharply after the company’s IPO, meaning Allertsz could sell for more than he had. paid.
Over time, more and more investors followed in Allertsz’s footsteps. Barent Lampe’s accounting records reveal that eight other transactions took place in the same month.
This increase is the result of clever marketing. During the IPO, the VOC emphasized profit potential but said almost nothing about risk; Merchant Pieter Lijntgens was one of many shareholders who had hoped to pay his subsequent installments using dividends earned from the first, only to run into trouble when those dividends never materialized.
The formation of the oldest stock exchange in the world
In order for Allertsz to sell his shares, he and the buyer had to go to the private residence of VOC director Dirck van Os. Here, the transaction would be witnessed, approved and recorded by at least two VOC employees. This formality represented the end of a trade. The rest took place in the streets of Amsterdam, where investors heckled and sometimes fought until they reached an agreement.
During the day, entire neighborhoods were flooded with traders. There were so many of them that the city of Amsterdam decided to allocate a space dedicated to this new form of business. St. Olaf’s Chapel, located near the Damrak in the city center, was chosen to become the world’s first stock exchange building. Here, stocks were traded alongside commodities like salt, grain, and timber.
Some scholars have disputed the oft-repeated claim that the Amsterdam Stock Exchange was indeed the world’s largest. As Fernand Braudel writes in Civilization and capitalism“State debt securities were negotiable (…) in Florence before 1328, and in Genoa, where there was an active market in the luoghi and paghe of the Casa di San Giorgio, not to mention Kuxen shares in the German mines which were listed as early as the 15th century at the Leipzig fairs.
However, what interested Braudel in Amsterdam was not the stock exchange itself but rather the “speculative freedom” of the transactions that took place there. Trading shares in the VOC was speculation in the purest sense of the word as there was no way of knowing whether a particular expedition would end in success or failure. This uncertainty has encouraged the implementation of various risk assessment strategies that characterize stock markets today.
A day at the Amsterdam Stock Exchange
Despite opening its doors more than three centuries ago, business on the Amsterdam Stock Exchange closely resembles life on Wall Street. Much of what we know of its day-to-day operations comes from The confusion of confusions, a 1688 book by Spanish Jewish writer Joseph Penso de la Vega. Written as a Platonic dialogue between a philosopher, a merchant, and an experienced stockbroker, it is the oldest known book on the subject of trading.
De la Vega describes the stock exchange as an extremely turbulent and hostile environment. Shareholders who fall in love with trading become completely engrossed in the practice, watching the market as if their lives depended on it, he writes. Transactions often degenerate into shouting matches or fights. Most brokers cannot be trusted; they trick their customers into thinking that prices will go up when in reality there is no way of knowing if they will.
Although de la Vega’s label of “the most bogus and infamous company in the world” may have been well-deserved, the stock market has also made a significant contribution to the Dutch economy. Transcontinental expeditions were as risky as they were expensive. Prior to the creation of the VOC, most merchant businesses were unable to stay afloat for more than four years. By issuing shares, the East India Company could generate the capital needed to plan several voyages at once.
The company’s financial experience paid off. At its peak, the VOC was valued at nearly $8 trillion in today’s dollars. For context, that’s almost four times the value of Apple today. In fact, it’s the highest valuation of any company in history. The East India Company did not owe all of its success to the stock market – its monopoly status played a major role in this. However, the Stock Exchange allowed the VOC to use capital to which its competitors had never had access.