In his famous book
Confusión de confusions Joseph Penso de la Vega wrote: “If one were to lead a stranger
through the streets of Amsterdam and ask him where he was, he would answer
‘among speculators,’ for there is no corner where one does not talk shares.”
And, Lodewijk Petram adds, “the people of Amsterdam were talking about options,
too, and forward selling, quotations and prices, risk and speculation—all
relating to the trade in the shares of the Dutch East India Company (the
Vereenigde Oost-Indische Compagnie, VOC), which had been established in 1602.
Fortunes were made and lost, and the men who engaged in this trade were wholly
in thrall to it.”
Petram did extensive
archival research, including mining the records of active traders, to shed new
light on de la Vega’s account of the Amsterdam stock market. The Dutch edition
of his book appeared in 2011. Columbia Business School Publishing/Columbia
University Press has just released the English edition, The World’s First Stock
Exchange, skillfully translated by Lynne Richards. It’s an engrossing tale.
Traders in Amsterdam
occasionally used questionable strategies--strategies that have endured, in
both legal and illegal manifestations. They engaged in “short selling through
forward contracts, spreading rumors, buying even more shares.” These “vile
practices” were decried in petitions to the government by the directors of VOC,
who argued that they were “very disadvantageous to the investors and
particularly the many widows and orphans.” Petram notes that “the number of
widows and orphans who were dependent on an investment in the Company would
have been very small indeed, but playing on their painful situation pricked the
puritanical conscience of the authorities.” In February 1610 the government
issued an edict banning naked short selling, a ban that share dealers blithely
ignored.
Large numbers of VOC
investors had no direct experience in trading. “If these shareholders wanted to
sell their shares … they had to [travel to Amsterdam and] brave the bear pit of
the exchange, where they were complete novices.”
(p. 102) By 1633, however, they were offered an alternative—to do business with
a market maker (initially, the Raphoen brothers) who would make “a
small margin on every deal because they always offered a little under the
market price when buying and asked for slightly more when selling.”
The Raphoen brothers
also played a major role in standardizing the VOC share at 3,000 guilders, a
huge sum at the time. “And as the share price rose, the amount that actually
had to be paid for a share became even larger. In the 1640s the price of a
Company share stood almost continuously at above 400, which meant that over
12,000 guilders had to be paid for a share with a nominal value of 3,000
guilders. To put this in perspective, in 1645 the substantial and prestigious
canal-side mansion (with a rear annex) at 105 Herengracht was sold for 5,100
guilders.” The always shrewd Raphoen brothers bought up odd lots of VOC stock
and combined them into 3,000-guilder shares, which could be sold for a better
price.
In his famous book Confusión de confusions Joseph Penso de la
Vega wrote: “If one were to lead a stranger through the streets of Amsterdam
and ask him where he was, he would answer ‘among speculators,’ for there is no
corner where one does not talk shares.” And, Lodewijk Petram adds, “the
people of Amsterdam were talking about options, too, and forward selling,
quotations and prices, risk and speculation—all relating to the trade in the
shares of the Dutch East India Company (the Vereenigde Oost-Indische Compagnie,
VOC), which had been established in 1602. Fortunes were made and lost, and the
men who engaged in this trade were wholly in thrall to it.”
Petram did extensive
archival research, including mining the records of active traders, to shed new
light on de la Vega’s account of the Amsterdam stock market. The Dutch edition
of his book appeared in 2011. Columbia Business School Publishing/Columbia
University Press has just released the English edition, The World’s First Stock
Exchange, skillfully translated by Lynne Richards. It’s an engrossing tale.
Traders in Amsterdam
occasionally used questionable strategies--strategies that have endured, in
both legal and illegal manifestations. They engaged in “short selling through forward
contracts, spreading rumors, buying even more shares.” These “vile
practices” were decried in petitions to the government by the directors of VOC,
who argued that they were “very disadvantageous to the investors and
particularly the many widows and orphans.” Petram notes that “the
number of widows and orphans who were dependent on an investment in the Company
would have been very small indeed, but playing on their painful situation
pricked the puritanical conscience of the authorities.” In February
1610 the government issued an edict banning naked short selling, a ban that
share dealers blithely ignored.
Large numbers of VOC
investors had no direct experience in trading. “If these shareholders wanted to
sell their shares … they had to [travel to Amsterdam and] brave the bear pit of
the exchange, where they were complete novices.” By 1633, however, they
were offered an alternative—to do business with a market maker (initially, the
Raphoen brothers) who would make “a small margin on every deal because they
always offered a little under the market price when buying and asked for
slightly more when selling.”
The Raphoen brothers
also played a major role in standardizing the VOC share at 3,000 guilders, a
huge sum at the time. “And as the share price rose, the amount
that actually had to be paid for a share became even larger. In the 1640s the
price of a Company share stood almost continuously at above 400, which meant
that over 12,000 guilders had to be paid for a share with a nominal value of
3,000 guilders. To put this in perspective, in 1645 the substantial and
prestigious canal-side mansion (with a rear annex) at 105 Herengracht was sold
for 5,100 guilders.” The always
shrewd Raphoen brothers bought up odd lots of VOC stock and combined them into
3,000-guilder shares, which could be sold for a better price.
VOC paid a
dividend—somewhat sporadically in the first twenty years and then, starting in
1623, every two years, and finally, from 1635 on, every year or every six
months. “The dividend was still often paid in kind, primarily in the form of
cloves, but the higher frequency and above all the regularity with which the
payments were made caused the share dealers to change their forecasts about the
Company’s profitability. The future now looked very bright.”
The Netherlands was
experiencing a golden age in the first half of the seventeenth century and
people’s purchasing power was rising. VOC shares also rose in price, as (more
famously) did the price of tulip bulbs. Petram notes that “tulip mania has always attracted
a great deal of attention because so much money was offered for something as
commonplace and perishable as a bulb, but the scale of the trade in tulip bulbs
should certainly not be exaggerated. There were some 285 people actively
involved in bulb trading in Haarlem, with an estimated sixty traders in
Amsterdam. By way of comparison, in 1639 in Amsterdam 264 people carried out
one or more share transfers. The total number of active share dealers … would
have been around 350. Amsterdam’s bulb trade was thus nothing more than a
peripheral phenomenon compared with the dealing in shares.”
I’ve recounted bits
and pieces of only about half of the story that Petram tells. He describes the
domination of Jewish traders in the share market in the second half of the
seventeenth century, the rise of information networks, and the split between
the “princes” and the “gamblers” or “players.” The gamblers/speculators “did
not have significant capital in their VOC account but traded in derivatives on
a grand scale” (p. 164) in trading clubs. They “played fast.” Petram
also recounts the events of the “disaster year” of 1672 when the VOC
share price sank like a stone as well as the crash of 1688.
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