Abstract
Lodewijk Petram in his charming narrative reminds us that the world’s first stock exchange did not emerge in the contemporary capitals of financial capital – New York or London – but rather in Amsterdam at the beginning of the 17th century. The origins of the stock exchange lay in the problem of financing the Dutch East India Company which first launched its global trading operations in 1602. Petram’s volume on finance complements in many ways the recent book Accounting by the First Public Company: The Pursuit of Supremacy, by Warwick Funnell and Jeffrey Robertson that concentrates on the use of accounting in managing the great commercial leviathan. Petram’s study also provides insight into the physical development of markets and neighborhoods in the busy entrepot situated at the mouth of the Amstel River.
Petram cleverly introduces his work by discussing Joseph Penso de la Vega’s 1688 work entitled, Confusions de Confusiones. De la Vega’s tome recounts the reactions of three fictional observers – a merchant, a philosopher and a stock trader – to the many complex arrangements that conditioned the market’s operations and price discovery function. While Petram is unable to assess the contemporary impact of this extraordinary work, his analysis emphasizes how stock market practice seemed often at a variance from the merchant’s pragmatism or the philosopher’s logic. What also emerges is an understanding of how deeply ingrained stock market dealing had become in the commercial culture of Amsterdam.
The stock market arose as a means to provide liquidity and to realize speculative profits for investments in the Dutch East India Company. The Dutch Republic’s highest administrative echelon, the States General, issued a charter allowing the sale of shares to finance the foreign trade monopoly through Company registers maintained in Amsterdam, Delft, Einkhuizen, Hoorn, Middleburg and Rotterdam. By 1603 1,143 investors pledged to purchase 100 guilder par value shares that aggregated 1,674,945 guilders. Investors, however, faced the prospect of not receiving any cash return on their shares for extended periods. They had to wait until the firm declared a dividend, usually at the conclusion of a voyage that typically lasted more than one year. The option of liquidating the firm after its first voyages was soon abandoned by the directors after the realization of their new enterprise’s initial financial success. The market provided investors with the ability to adjust their portfolios through the sale or purchase of the firm’s shares. Eventually such trading became centered in the harbor area where commodities were also dealt and which was in close proximity to the docks where crews and mail from arriving ships would often be the source of important news about foreign business and political developments that affected profit expectations. During most of the 17th century the firm’s shares fluctuated between 300 and 500 guilders, thus providing opportunities for capital gain speculation.
Option, forward and repo contracts were also used extensively by Dutch speculators. They had already been used in the older commodity trading markets. These contracts overcame the slow process of share transfer and registration. They were less costly than outright share purchases and enabled fortunate speculators to leverage their gains. These derivatives could be used to offset the risks of holding shares in a portfolio. They also could be used to enhance trader liquidity.
The sources of information available to contemporary investors in appraising share value differed from modern practice primarily with respect to the dearth of accounting data available to the public about the firm and the profitability of its operations. To the directors, such information was proprietary and thus rarely publicly divulged. Prices responded to rumors about the likely size of prospective dividends or whether such dividends would be paid for in cash or commodities such as pepper or cinnamon. Political news such as the outbreak of wars that might threaten the safe return of trading fleets influenced price discovery on the exchange. In these cases those with reliable contacts with state offices in The Hague could profit from better insight into the course of state affairs. News about the impending arrival of fleets also had a strong influence on prices. Investors with access to reliable foreign correspondents often enjoyed the advantage of better understanding of overseas developments that could affect the firm.
The investor community was bifurcated on the basis of religion and ethnicity. Petram notes that native Dutch capitalists tended to invest long-term for security and income. Moderately low-risk company stock could help to diversify investment portfolios that frequently were heavily weighted with real estate, mortgages and government bonds. The market was also served by Jewish traders, many of whose families had taken refuge in Amsterdam from the religious oppression associated with the Inquisition in Iberia beginning early in the 16th century. Discrimination during this era, however, was not restricted to Aragon and Castile. Jews often were compelled to gravitate to the stock market because the city’s guilds that controlled the major crafts and trade would not admit them because of their religion. The stock market did not have such discriminatory rules. Unlike the native Dutch, the Jewish market participants were important sources of market liquidity because of their general preference to engage in short-term trading.
Like modern markets, Amsterdam also had to confront the problems associated with disputes, fraud and bankruptcy. These difficulties were partially offset by the evolution of laws and legal practices that controlled the transfer of property rights for shares and derivatives and for adjudicating bankruptcies. The challenges to smooth market function were also offset to some degree by the formation of clubs composed of individuals with strong reputations for honest dealing and financial capacity. Club members would trade among themselves believing that this would minimize the risk of loss by shunning outsiders with less verifiable standards of personal probity and credit. Like the 11th-century Maghribi traders’ coalition that Avner Greif evaluated in his classic 1989 article, the main compulsion for right action was the fear of expulsion from the club which would be perceived as a general signal of an individual’s moral or financial deficiency.
Although the technologies available to communicate vital financial information were primitive, the picture that Petram presents of 17th-century finance in Amsterdam seems very modern in terms of the contracts and risks confronting those engaged in stock market transacting. The learning that took place during those early years was preserved in the definition of new institutions for controlling the dealing in the equity of giant enterprise. Petram’s excellent study reminds us that the Dutch legacy from the 17th century still continues to shape in fundamental ways our current thinking about the nature of finance capitalism.