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`Imp.‘//hdf. handle. net/1'1 245/2. 85961
`
`Fiie ID
`Filename
`Version
`
`uvapub:85961
`Thesis
`unknown
`
`SOURCE (OR PART OF THE FOLLOWING SOURCE):
`Type
`PhD thesis
`Title
`The world's first stock exchange: how the Amsterdam market for Dutch
`East India Company shares became a modern securities market, 1602-1700
`L.O. Petram
`FGw: Instituut voor Cultuur en Geschiedenis (ICG)
`2011
`
`Author(s)
`Faculty
`Year
`
`FULL BIBLIOGRAPHIC DETAILS:
`
`http://hd1.hand1e.net/1 1245/1.342701
`
`( '0,-J}-'r‘ig.*1r
`
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`('rear:'vc ('mnmrm.\‘)_
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`
`1
`
`IBG LLC ET AL. - EXHIBIT 1015 PART 1
`
`1
`
`IBG LLC ET AL. - EXHIBIT 1015 PART 1
`
`

`
`THE WORLD’S FIRST STOCK EXCHANGE
`
`How the Amsterdam market for Dutch East India Company
`
`shares became a modern securities market, 1602-1700
`
`Lodewijk Petram
`
`2
`
`

`
`Frontcover: Gerrit Adriaensz. Berckheyde, Town hall on Dam Square (1672), detail,
`Rijksmuscum Amsterdam
`
`3
`
`

`
`THE WORLD’S FIRST STOCK EXCHANGE
`
`How the Amsterdam market for Dutch East India Company
`
`shares became a modern securities market, 1602-1700
`
`ACADEMISCH PROEFSCHRIFT
`
`ter verkrijgillg van de graad van doctor
`aan de Universiteit van Amsterdam
`
`op gezag van de Rector Magnificus
`prof. dr. D.C. van den Boom
`ten overslaan van een door het College Voor promoties ingestelde
`commissie, in het openbaar te verdedjgen in de Aula der Unive rsiteit
`
`op vrijdag 28jar1uar“i 201 1, to 13.00 uur
`
`door
`
`Lodewijk Otto Petram
`
`gcborcn Le Apeldoom
`
`4
`
`

`
`5
`
`

`
`CONTENTS
`
`List of figures
`
`List of tables
`
`List of maps
`
`List of abbreviations
`
`Introduction
`
`Context, nistoriograptgy and ttieog
`Scope and structure
`Sources
`
`Part I - Taking the measure of the market
`
`1
`
`A chronology of the market
`Introduction
`
`I 602 - The suoscrifition
`1 607 - Wee emergence ofa derivatives market
`I 609- I0 - Isaac to Maire
`I 609— I8 First dividend distrio-utions
`
`I 61' 1' - Evccfzange building
`I 622 - Wee relation between tfie company and its snareftotders
`t630s and I 6405 -- Inteimediation and a changing composition oft/ze trading community
`I 6605 - Trading ctubs and rescontre
`Cono:’n.riont
`
`2
`
`Long-term developments
`Introduction
`
`ft/{arket activity
`Number iftraders
`Snare price and dividends
`Divergent a’eoetopments‘.' Amsterdam and penptierat rnarkets‘
`Conctusions
`
`VII
`
`VIII
`
`VIII
`
`IX
`
`1
`
`2
`6
`9
`
`17
`1 7
`
`I 7
`20
`24
`28
`
`30
`32
`36
`45
`:32
`
`59
`5.9
`
`59
`64
`65
`68
`7 4
`
`6
`
`

`
`Part II — The organization of the market
`
`3 Contract enforcement
`
`Introduction
`
`Ttte tegoifiomework
`Private enflorcernent mecnonisrn
`Conclusions
`
`Appendix - Snort snrnrnoagv ofconrt cases
`
`4
`
`Risk seeking and risk mitigation
`Introduction
`
`Connterpory risk
`Poryotio risk
`Conclusions
`
`5
`
`Information
`Introduction
`
`Investors’ injorrnntion needs in t/tejirst decode the sezrenteent/2 centttfjr
`Market reactions to irfinnotion
`Wee infimnotion networks ofC.‘/tr.-istion nndjeooislt snore traders
`Conclusions
`
`Conclusions
`
`Epilogue — Reassessing Corgfizsion de coryilsiones
`
`Summary (in Dutch)
`
`Appendices
`Appendix A - Montnb snore price Arnsterdorn chamber !-''O(;; 1' 602-1’ 693
`Appendix B - Dividend distributions I-‘()(:, I602} 700
`Appendix C - Glossary
`
`Acknowledgements
`
`Bibliography
`Prirnop sources
`Pubtisited primary sources
`Secondary Eiteroture
`
`Index of names and places
`
`91
`.92’
`97
`107
`114
`I15
`
`118
`H8
`I20
`I34
`I45
`
`148
`I48
`I50
`
`156
`I65
`175
`
`180
`
`186
`
`190
`
`196
`I96
`204
`206
`
`210
`
`211
`21'}
`21'}
`213
`
`219
`
`VI
`
`7
`
`

`
`LIST OF FIGURES
`
`Figure 1.1 Forward contract used in a transaction between V'\='i11ern Muijlman and
`Philips de Bacher, 2 September 1644.
`Figure 1.2 Amsterdam Exchange of Hendrick de Keyser, etching by C._]. Visscher
`(1612)
`Figure 1.3 Amsterdam Exchange of Hendrick dc Keyscr, interior, painting byjob
`Adriaensz. Berckheyde (between 1670 and 1690)
`Figure 2.1 5-day period share transfers, \-’OC Amsterdam chamber, 1609
`Figure 2.2 5-day period share transfers, \-"()C Amsterdam chamber, 1639
`Figure 2.3 5-day period share transfers, \-’(')C Amsterdam chamber, 1667
`Figure 2.4 5-day period share transfers, \-'OC Amsterdam chamber, 1672
`Figure 2.5 5-day period share transfers, \-‘QC: Amsterdam chamber, 1688
`Figure 2.6 Monthly ‘.»’0(‘: share price, Amsterdam chamber, September 1602 -
`February 1698. Missing values derived from linear interpolation.
`Figure 2.7 Monthly ‘JOC share price, Amsterdam chamber, September 1602 -
`February 1693
`Figure 2.9 Yearly high-low-average \-'(')C share price, Amsterdam chamber, 1602-
`1698
`
`54
`
`55
`
`56
`76
`77
`78
`
`79
`80
`
`81
`
`82
`
`83
`
`Figure 2. 10 Yearly dividends as a percentage of the nominal value of \-'OC shares,
`1620-1699
`
`Figure 2.12 Dividend as a percentage of market value, 1620-1697
`Figure 2.13 Real dividend and \-'OC share price, 1630-98
`Figure 2. 14 Share price data of the Amsterdam, Middelburg, Enkhuizen and Hoorn
`87
`chambers of the VOC, 1611-1685
`146
`147
`178
`179
`
`Figure /-1. 1 Forward and repo transactions represented in diagram form
`Figure 4.2 Size of loans granted on shares pledged as collateral, 1649-1688
`Figure 5.1 \-’(_)C share price, 7July 1671
`31 December 1672
`Figure 5.2 voc: share price, Gjanuary 1688 - 22 November 1688
`
`84
`85
`86
`
`VII
`
`8
`
`

`
`LIST OF TABLES
`
`Table 1.1 Spot transactions of Christoffel andjan Raphoen, 1626-42
`Table 2.1 Total number of shareholders’ accounts, Amsterdam chamber \-'00, 1602
`and 1679-1695; number of active accounts and share transfers, 1609, 1639,
`1667, 167’? and 1688
`
`38
`
`64
`
`Table 2.2 Share price data of the Middelburg, Enkhuizen, and Hoorn chambers of
`the \-'00
`
`75
`
`Table 3.1 Court of Holland, Extended sentences
`Table 3.2 Court ofl-lolland, Case files
`
`High Council, Extended sentences
`Table
`Table 4.1 Estimated costs ofjeronimus Velters’ forward and repo transactions
`
`1 15
`l 17
`
`1 17
`125
`
`LIST OF MAPS
`
`Map 1.1 Main share trade locations in the first decade of the seventeenth century
`Map 1.2 Main share trade locations after the opening of the Exchange (161 1)
`
`57
`58
`
`VIII
`
`9
`
`

`
`LIST OF ABBREVIATIONS
`
`BT
`
`Bibliotheca Thysiana, Leyden
`
`I).-\S
`
`_].R. Bruijn, F.S. Gaastra and I. Sel16lI'er, 1)utd:—Asia!ic s‘kz}Jping in the 37!}: and
`
`18% centzmfes (3 vols., The Hague 1979-87).
`
`I-:I(1:
`
`NA
`
`PA
`
`PIG
`
`RAU
`
`English East India Company
`
`Nationaal Archief, The Hague
`
`Persmuseum Amsterdam
`
`Portugees-Israélitische Gemeente
`
`Het Utrechts Archief
`
`SAA
`
`Stadsarchief Amsterdam
`
`\-"'00
`
`Verenigde Oost-Indisehe Cornpagnie
`
`WIC
`
`\Nest-Indisclle Compagnie
`
`_Nbte on curremgy
`
`The Dutch currency, the guilder (f), was divided into 20 stzzimzs; each swine?‘ was sub-
`
`divided into 16 penmfngm. In addition to guilders, the Dutch also used pounds Flemish
`
`[pVl). The nominal value of \-'()(I shares was, for example, often expressed in pounds
`
`Flemish. One pound Flemish equaled six guilders. To make currelltty fiyres more
`
`easily comprehensible,
`CC DIS.
`
`I have converted everything into guilders divided into 100
`
`10
`
`IX
`
`10
`
`

`
`11
`
`11
`
`

`
`INTRODUCTION
`
`‘This little game could bring in more money than contracting charter parties for ships
`
`bound for England’, wrote Rodrigo Dias Henriques to Manuel Levy Duarte on 1 No-
`
`vember 1691.‘ Dias Henriques was referring to the ‘game’ of trading shares of the
`
`Dutch East India Company (Verenigde Oost-Indische Compagnie,
`
`\-'OC, founded
`
`1602) and its derivatives* on the Amsterdam securities market. He acted as exchange
`
`agent for Levy Duarte and performed a high number of transactions on his account.
`
`The most notable feature of the exchange dealings of these Portuguese Jewish mer-
`
`chants was that they consisted solely of very swift trades; Dias I-Ienriques made sure to
`
`always settle the transactions within a few days or a fortnight at most. He actively
`
`spec.ulated on short-term share price* movements, while at the same time making sure
`
`that his portfolio did not become too risky
`
`and,judging by his quote, he was rather
`
`good at it. Dias Henriques could perform these swift dealings because by the end of
`
`the seventeenth century, a very active secondary market* for securities existed in Am-
`
`sterdam.
`
`Modern securities markets have two functions: price discovery* and the provi-
`
`sion of liquidity“. The interaction of traders in the marketplace, in other words, de-
`
`termines the price of the assets that are traded on the market. The liquidity function
`
`means that as a result of the concentration of traders in the marketplace, traders can
`
`easily buy or sell assets. Straightforward as these market functions may seem, they play
`
`a very important roie for investors: they allow investors to reallocate their asset hold-
`
`ings at low cost, enabling them to manage their financial risks according to their per-
`
`sonal preferences.9 Securities markets thus provide major advantages to investors.
`
`The secondary market for VOC shares became the first securities market in his-
`
`tory that provided these advantages to investors. Hence it was in seventeenth-century
`
`Amsterdam that ‘the global securities market began to take on its modern form’.3 Us-
`
`ing hitherto unexplored source material from the archives of the V()C1,judicial institu-
`
`tions of the Dutch Republic and merchants who were active on the securities market,
`
`' Dias Henriques to Levy Duarte. l l\'-ovember l69 l, .‘-l.-\.-'\, PIG, inv. nr. 677. pp. 897-8.
`‘ Words market with an asterisk {*} are further explained in Appendix C - Glossary.
`'3 Maureen O’l-lara, ‘Presidential address: Liquidity and price discovery’, jmtrnrrt’ rgffinmtrt.’ 58 (2003)
`1335- I354-, there 1335.
`3 R-anald C. M iehie, 'T'.=r giulm-I .s‘ecmr'tt}r.s' marfirct.‘ a r':i.n!a1_”}‘ (Oxford 2006) 26.
`
`12
`
`12
`
`

`
`this book analyzes how the secondary market for \--'0(: shares could develop into the
`
`world’s first modern securities market.
`
`Context, historiograpfy and tlteopv
`
`How the secondary market for \-'OC shares started off in the first decade of the seven-
`
`teenth century is well known} In 1602, the States General of the Dutch Republic
`
`granted the VOC a charter for a period of 21 years, with the provision that an interim
`
`liquidation would follow after ten years.-"’ Inhabitants of the Dutch Republic were
`
`called upon to invest in the new company. The \-'OC thus became a privately-owned
`
`company in which the authorities of the Dutch Republic had a large say. The capital
`
`subscription was a great success: in Amsterdam alone, 1143 investors signed up for
`
`f3,679,9l5.‘5 According to a clause on the first page of the subscription book of the
`
`\-'0C, shareholders could transfer their shares to a third party. On this same page, the
`
`procedure for registering share transfers was laid down:
`
`the buyer and the seller
`
`should go to the East India house where the bookkeeper, after two company directors
`
`had approved the transfer, transferred the share from the seller’s to the huyer’s ac-
`
`count in the capital book?
`
`These clear rules for ownership and transfer of ownership reduced investors’
`
`hesitancy about trading the valuable shares that existed only on paper. Secondary
`
`market trading therefore took a start immediately after the subscription books were
`
`closedfi‘ However, the real incentive to trade shares emerged later. The directors of
`
`the VOC: did not liquidate the company after ten years and at the end of the first char-
`
`ter, in 1623, they requested a prolongation of the charter, which the States General
`
`"f See, particularly: Oscar Gelderhlom and _]oost Junker, ‘Completing a Iinancial revolution: '1‘ht=-. Ii-
`nance of the Dutcli East India trade and the rise of the Amsterdam capital market, 159.’)-l6li?’, 771:’
`jimmrtf ryfrcnitomir a":irtn;}' 64 [2(}U4} 641-[$72.
`3 For a general account ofllte founding oflhe \'0(:, see:_].:\. van der Chijs, (£es'ci::i*(:’mis' (fir 5'ticf1fing can dz
`Iéurm {gale 0.1. C'am_tmgnie an o'er are-niregelert z-rm dc ..-Nhferfrrrtdsr.-':e' regertngr beirqflienrie dc! ma rt up Oasi—Inciiéi i'L-'€fJi‘t" (ran
`daze .i'tir.r‘n'irtg uoorrgfgirtgmt [Leyden i857}. This brink also contains a transcription -of the 1602 charter. The
`text ofthe first charter can also be found online: l1ttp://wwwxocsitc.nl/geschiedenis/octrooi.l1tml An
`English translation is also online available:
`http:/ /www.ztustralia0I1thcma]).ot'g.au /contcnt/vicw/ 50/ 59
`'3 The total capital stock of the \'0(: amounted to f6,429,588; Middelburg contributed fl,30(},405
`{2U".r’u]I, Enkhuiaen [54-0,000 (8%), Delft f4-59,41-U0 {7%}, Hoorn f§26fi,86B (4”fa‘,' and Rotterdam
`fl ?3,0(lU (3%): Henk den Heijer, Dr geadrooieerale rnt::])agnir.' (fr VOC en (fr WK.‘ (IE5 t-'onri'n_fM:'.r a-mt ale’ nrtarttloze
`:.IertnnoLtr:fmp [_De\-‘enter 2005] (ii. According to the historical purchasing power calculator of the Interna-
`tional Institute of Social History in Arnsterdani
`l1ttp:/ /www.iisg.nl/ hpw/ calculate.php), the value
`of the 1602 subscription would amount to almost CIUU million today.
`7 A facsimile and transcript of the first page of the subscription book can be found in:_].G. van Dillen,
`Hr! rltmftlt’ rtrtrt(t’e.el':‘iattr2'rstr.=agf.rIr:' van (fr Ki?!P1PJ'_’fHi.h'}."?'dfl?ft d8?‘ On.rt—Btdf.rr:’n? Corttpngriie [The Hague 1958) 105-6.
`3 Gelderblom 2tt](lJ0l1l<t'.l', ‘Completing’.
`
`13
`
`13
`
`

`
`granted. Again, no intermediate liquidation took place. Consequently,
`
`the capital
`
`stoek* of the VOC became defects fixed.“ In the end, the company would stay in busi-
`
`ness for almost two centuries and the capital stock remained fixed during the entire
`
`period. Since investors generally do not want their money to be locked up for that a
`
`long period of time, they used the secondary market to sell their shareholdings to a
`
`third party.
`
`The fixed capital stock of the VOC was unique. Shipping companies in late-
`
`medieval Italy and, from the mid-sixteenth century onwards, also in England and the
`
`Low Countries were often equity*-financed, but these companies were always liqui-
`
`dated after a single expedition to the destination. The same went for the Vom'.cemf3ag-
`
`ntkéa, the predecessors of the \-*'OC that had equipped expeditions to the East Indies
`
`from 1594 onwards. The proceeds of the liquidation were divided among the inves-
`
`tors. In many cases, the company was reestablished immediately after liquidation and
`
`participants were given the opportunity to reinvest their money in the new partner-
`
`ship. Consequently, there was little need for secondary market trading, because after
`
`liquidation, investors could decide not to reinvest. Investors knew that they could al-
`
`ways get their money back within a few years’ time. '0 Likewise, it took until the end of
`
`the seventeenth century before a secondary market for shares emerged in England."
`
`Before that time, there were no joint-stock companies with a sufficiently large fixed
`
`capital to get the development of a securities market going.” The capital stock of the
`
`English East India Company (F.I(‘.:, founded 1600], for example, only became fixed in
`
`H357’. Before that time, the EIC repeatedly issued new stock to fund its fleets; the EIC
`
`was thus basically a series of separate companies that worked together as the LZIC. '3
`
`Remarkably, already in the later Middle Ages, secondary markets for public
`
`debt had emerged in Italian city states. Venice, Genoa and Florence were the first
`
`‘-' Den Hcijcr, De gm.r.‘tmnia’rd.<.° rnntpagnie, 59, 63.
`"' Oscar Gclderblom, Abe dejong a:1(l_]oos1Jo11ke1', “An Admiralty for Asia. Isaac le Maire and con-
`flicting conceptions about the corporate governance of the \‘(')(.E’, in: Jonathan G.S. Koppell (ed.), Tar
`an'gim gf_r;‘rareJ':o!rt'er rm't*nrar)r(Basi11gstoke, forthcoming 201 I].
`” Anne L. Murphy, The oiigias r_JfEngIisfi_finanrirtI m(tr'!m‘s. Imwstmem‘ and rfircrtlatian effort’ the .S‘ottt:‘.= Sm Babble
`{Cambridge 2009).
`'3 Ron Harris,
`Inri:t5tn}t£iz:}t_g r':}:rg!is!.= Eat:-2‘ erttrrfireriettrsfifi and f)t¢‘s‘ftt€35 or;gani.zr:ti:2n,
`2000}ll7-8,120-1,121
`'5 The fixed capital stock of the Ial(I in 1657 amounted to £793,782. W.R. Scott, The r:m.i!itttIt'or.' and
`fimimfr ryfEngft.rl1,
`.S‘rn££i.w)‘: and Irisizjnint-stark rorttpaniers to 1720 ll (.'nn:,(:arzierfl2rfiare{gn trade. rritanization, _fi.c:‘iirz_g
`and mining (Cambridge l9l2} I29, I92. Nlichiel de jongh, ‘De ontwikkeling van zeggeiischapsrecliten
`van aandeelhouclcrs in dc 1?" en 18" ceuw’, l-I/arking paper [200‘:l). At the exchange rate of 1654 (the I65?
`rate is unavailable), fi793,?82 equaled approximatclyf8,25[l,00(}: N.W. Posthumus, .Nera’e:'lr:nrfsc!ie prjsger
`.rrIti.r3ds;zi.r 1: (}oe’de?rr’n,{J:ijze;t up do:
`.'5mr.r t-‘rm Am.r£erzi'an: 158.‘I—}9)' 4.
`l'l"i.rs£fI'rne::rrrri £2 zlmmidnrn }6‘09—19}-F Ley-
`den l9~"r3) 592.
`
`!72{}—irfH4 (New York
`
`14
`
`14
`
`

`
`states to consolidate their public debt - a revolution in public finance, because it eased
`
`the process of underwriting new debt issues.” Venice, for example, consolidated all its
`
`outstanding debt in a so-called moms in 1262. The original obligations were converted
`
`into shares in the invites and investors could subsequently transfer the title to these
`
`shares by way of assignment. Secondary markets came into being, but these markets
`
`did not have the characteristics of a free market, since new loans were often forced
`
`loans. Hence, the. decision to invest was not taken by the investors themselves. tVIoreo-
`
`ver, the number of transfers typically rose when a new forced loan was announced,
`
`which indicates that some shareholders were forced to dump their shares on the sec-
`
`ondary market to get the liqttidity needed to pay for the upcoming debt issue.” This
`
`innovation in public finance failed to spread to other parts of Europe, however. In the
`
`Low Countries, the provinces kept issuing short—term debt and it would take until at
`
`least 1672 before seeondaiy trade of any significance took place in government debt in
`
`the Dutch Republic.“‘ The English government recognized the advantages of secon-
`
`dary market trading in the early eighteenth century. It started to use the secondary
`
`market to sell its debt in transferable annuity obligations in the 17205.”
`
`This short overview has identified the factors that led to the emergence ofa
`
`secondary market for VOC: shares in the Dutch Republic. Very little is known about
`
`the subsequent development of the market, however. Smith studied the trade in de-
`
`rivatives, focusing on official regulations and pamphlets that addressed the share
`
`trade, and Gelderhlom and jonker discussed the history of derivatives trading on the
`
`Amsterdam exchange from 1550 to 1650, mentioning the emergence of several types
`
`of derivatives and analyzing similarities and differences in the trade in equity deriva-
`
`tives and forward* contracts that were used in the grain trade.'8 Apart from these
`
`"' Sec, particularly: Reinhold CI. .\»lueiler, T719 Venetian along}-' ntarket.‘ banks. firtrtirs, and If!» pitblir debt,
`I500 {Baltimore 1997).
`'5Julius Kirshner, ‘Encumhering private claims to public debt in renaissance Florence’, in: Vito Pier-
`giovanni {ed.), Tilt»? growth’: rflifte: brrml as iasti£1:a'n:.= and the dwelnprnent ry"inom_r}'—busines.r Ina: (Berlin 1993} 19-76.
`Meir Kohn, ‘The capital market before l60[l’, Da.='tmottth C'rJll'ege tonrlrirrg paper nr. 99-06 (1999) 10-1 1.
`'”Jamcs D. Tracy, Ajinartrial reanltstion in the Hab.s‘fmi;g _-’\:'}:t:’:e?rt'rtii(t’.r.' Return and r.m£em'er5 in Mt‘ rnmty r3fHnl!aitrt',
`I515-15623 {Berkeley 1985). Oscar Gelderblom and _]oosI_]or1ke1', ‘A conditional miracle. 'l'l1e market
`forces that shaped Holland's public debt management’, l'l"nrki.=.=g paper (2010) 2] , ‘.24-7.
`'7 Larry Neal, '17:? nits’ rgffirtaitriml rrI,;‘)i!ali'sr:t.' tittemalinnal crtfrital ntrmlz’!s in tire Age rfffltrtson {Cambridge 1990)
`I0.
`
`)'2'‘(){)—
`
`'” V1.1’ Smith, Tijrl-(_rj?aircs' in g,-‘fé.-:.-181: arm (is Ant.s'fer(Ia3n_\'ckr baits: (The Hague I919). Oscar Gelderblom
`and Joost jonlter, ‘Amsterclann as the cradle of modern Futures and options trading, 1550-1650’, in:
`‘William N. Goctzmann and K. Geert Rouwenhorst {eds}, 7719 m'gim' ryfisalttr: .'.-'tafimnt‘t'rtl irtnn:.'rt!ion.r Ilia!
`rr'm!m" modern capital mar:l'£;‘.r {Oxford 2005} l89-205. The article ‘Completing’, by the same authors, has
`been mentioned above. This article liocused on the funding ofliast India trade in the Dutch Republic
`
`15
`
`15
`
`

`
`studies, most economic historians merely marveled at the sophistication of the market
`
`in the late seventeenth century. They used Josseph de la Vega’s high-flown description
`
`of the share trade in Cbigfizsién de corgfiuioaes, the famous account of the share market
`
`dating from 1688'“, as a starting point for their work?“ Others tried to catch the sig-
`
`nificance of the market in very general phrases. Barbour, for example, wrote that
`
`‘Amsterdam gave [existing financial instruments] more precise formulation, greater
`
`flexibility and extension, and used them effectively over a wider field.’2' E-raudel’s in-
`
`terpretation of the financial developments in Amsterdam was that ‘ce qui est nouveau
`
`it Amsterdam, c’est le volume, la iluidité, la publicité, la liberté speculative des transac-
`
`tions. Lejeu s’y méle de facon frénétique, le jeu pour le jeu."-3'-3-' Superficial as these ob-
`
`servations may seem, they touch upon some very important aspects of the market.
`
`The flexibility and enhanced formulation of the financial instruments meant that in-
`
`vestors could use them to manage their financial risks. Moreover, the market could
`
`fulfill its core functions price discovery and liquidity only because of the increase in
`
`trading activity. This raises the questions which factors led to the sophistication of
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`financial instruments in Amsterdam? And what caused trading activity to increase on
`
`the Amsterdam market?
`
`In this book, the development of the market will be examined from an institu-
`
`tional perspective. In the most widely used definition, institutions ‘are the rules of the
`
`game in a society or, more formally, are the humanly devised constraints that shape
`
`human interaction.”-" Institutions consist of formal and informal rules. Informal rules
`
`are not enforceable by law; they mostly depend on social sanctions for their enforce-
`
`ment. Formal institutions, such as laws and official regulations, are enforced by the
`
`and argued that the emergence ofa. secondary market for shares completed the linancial revolution of
`the sixteenth centLln_,-‘, as has been advanced by James D. Tracy: Tracy, A ffmintirti resniittion.
`"' Dutch translation of'De la V’ega’s work, with a good introduction by .\'I.F._]. Smithzjosseph Penso de
`la Vega, Corfir.rio'n dr co:gfii.s‘ianr.r (1688), \I.F,]. Smith [_ed.} (The Hague 1939). The best Eiiglish (abridged)
`(‘(‘liIl0l’1I_IOSS(?p h Penso de la Vega, Chrgfitrinri dc .-:nnftm'orie’.r b '_}n.re];!t de la Vega I638. Pa-i'!I'on5 derirnptitre ryfltte
`Am.ri'erdrIm Stork Errhangc (1688) Hermann Kellenbenz ed. Cambridge I957}.
`3"’ Jonathan Israel, amongst others, relies heavily on De la Vega, for example in: Jonathan I. Israel,
`jews and the stock exchange: the Amsterdam Iinaneial crash of 1688’, in: idem (ed.},
`.’).='a.ipt=rr:.a‘ at-itiitir a
`dfn.rpera.']eLt=5, (I9-‘pin-j’eit!5 arm’ the world niaritiine rnipir.r.i' (}.‘340-I740) {Leyden 2002) 4-Ll-9-87. Also: Charles
`Wilson, Aitgt'o—1)::¢‘o’t rarnnzrirr andfinanrr in the mlgirteeiitit t‘8.’iilw_'}' (Cambridge I941, reprinted in 1966). Geof-
`frey Poitras, 772:’ er.-rt’;-‘
`.’u'stn:_;: nJ(:finrutria! rmiiomiee,
`f478—}776.'finm mrmiterruzt’ rtritftfitefft.‘ to lg)?! nnit:u't£er and
`join! .nfon|'r.i' {Cllieltenliain 2000) 3].’), 385-7.
`1” Violet Barbour, C'(t,bitm't'5m in Am.r£em’am in the m'rn!.«.>mt:‘z rentmy {Baltimore 1950} 142.
`‘33 Fernand Brande], I.r.rjtm' dc? !'éciz::r:gr.
`(.‘it-flisatian naattirielfe, émnornir rt capt'tat't'.m:.w,
`.\'I'er—.\’I’me siérie [1 (Paris
`1979} 81-2.
`95 Douglass C. =.\lorth, Iiutitutiomj, iru'£itu.'iana£ change aim’ eranwmis ;.:e'ig"t}.=marire (Cambridge 1990} 3.
`
`16
`
`16
`
`

`
`state. The institutional framework of markets generally consists of a combination of
`
`formal and informal institutions.
`
`The theory of institutional economics argues that institutional innovation takes
`
`place because economic. actors always search for ways to reduce transaction costs. Put
`
`another way, economic actors always search for ways to obtain benefits from eco-
`
`nomic interaction al the lowest transaction costs possible.“ ./\cemoglu,‘]ohnson and
`
`Robinson divide transactions costs into three categories: ‘lj those that increased the
`
`mobility of capital; 2) those that lowered information costs; and
`
`those that spread
`
`risk.’9*" These three categories will be addressed in this study. I will show how the de-
`
`velopment of a sophisticated enforcement mechanism ensured traders that their trans-
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`actions would be consummated by the market. Because traders had a high level of
`
`certainty that their trades would be completed, they were more inclined towards trad-
`
`ing, which increased the mobility of capital. The market also lowered information
`
`costs. The use of intermediaries and particularly the creation of trading clubs, whose
`
`participants could easily monitor each other’s behavior, meant that less effort was
`
`needed to check a possible counte1party’s creditworthiness. Furthermore, as a result of
`
`the high trading activity, the share price was constantly updated to the beliefs of the
`
`trading populations.‘-’‘‘ This reduced the need for investors with long-term investment
`
`horizons to find price-relevant information; they could rely on the prices quoted on
`
`the exchange. Lastly, the range of derivative instruments available to the traders by
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`the second half of the seventeenth century allowed them to mitigate the risk of their
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`investment portfolios.
`
`Scope and struc.-fure
`
`The scope of this book is limited to the seventeenth-century Amsterdam market for
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`\-’(_)('.' shares. The focus on the seventeenth century flows, in the first place, from the
`
`fact that it is widely known, mainly from De la Vega’s work, that Amsterdam boasted
`
`3' Sheilagh Ogilt-"ie, “‘\'\-'hatever is, is right"? Economic institutions in pre-industrial Europe’, Economic
`liixtogr :':::,!im! 50 (2007) 649-684, there 656.
`‘-*7‘ North, Institiitioos‘, I25. Daron Acemoglu, Simon Johnson and James A. Robinson, ‘Institutions as a
`fundamental cause oflong-run growth", in: Philippe Aghion and Steven N. Durlauf (eds), Handbook of
`rcrmoriiio g'ro£t:f/i [Amsterdam 2005) 385-472.
`9“ According to Ross Levine, markets with high trading activity provide an incentive for traders to
`gather price-relevant information: ‘Intuitively, with larger and more liquid markets, it is easier for an
`agent who has acquired information to disguise this private information and make money by trading in
`the market.’ As a result, prices on liquid markets reveal relatively more information about the assets
`that are being traded. Ross Levine, ‘Finance and growth: theory and c\-'ide11ce.°, in: Philippe Aghion and
`Steven N. Durlauf(eds.), Ifooribuofir q,"ero:ioo:ir,:,rroLo!!i {Amsterdam 2005) 865-934, [here 872.
`
`17
`
`17
`
`

`
`a highly sophisticated securities market by the end of the seventeenth century, but the
`
`path of development towards becoming the first modern securities market has re-
`
`mained obscure. Secondly, a study on the seventeenth-century Amsterdam securities
`
`market provides new material for future research on the transfer of financial know-
`
`how from Amsterdam to London in the late seventeenth century. The London securi-
`
`ties market started developing quickly from around 1688 onwards - shortly after the
`
`invasion and subsequent accession to the English throne of Dutch stadholder ‘William
`
`III. Although Nlurphy has recently argued that the London market developed largely
`
`by itself, the timing of the stock market boom in London still suggests that the Dutch
`
`experience must have had some influence on the developments in England.” This
`
`book on the securities market in Amsterdam will aid new researchers in identifying to
`
`what extent the London financial markets profited from Dutch financial experience.
`
`It
`
`is important to note that Amsterdam was not the only city in the seven-
`
`teenth-century Dutch Republic where a secondary market for company equity ex-
`
`isted. The organizational structure of the \-*'O(:, with six serni—independent chambers,
`
`resulted in the emergence of six separate markets. However, due to the smaller capital
`
`stock of" the Middelburg, linkhuizen, Hoorn, Delft and Rotterdam chambers, these
`
`peripheral markets experienced different development paths. Shares in these cham-
`
`bers were, of course, occasionally transferred, but what this study tries to unravel is
`
`how the transition took place from a market where company shares were occasionally
`
`transferred to a thriving securities market that provided its participants a range of fi-
`
`nancial services. This happened only in Amsterdam.” I will also pay some attention to
`
`Middelburg, however. The Middelburg chamber of the \-’()C had the second-largest
`
`capital stock and consequently, the development of the Middelburg market came clos-
`
`est to that of Amsterdam. As I will show in chapter 5, traders used the liquidity of the
`
`Middelburg market for arbitrage* purposes; they tried to be the first to use informa-
`
`tion avaiiable on the Amsterdam market for transactions on the Middelhurg market
`
`and vice versa.‘-"-° Finally, shares in the Dutch ‘Vest India Company (WICI, founded
`
`1623) were also traded on the secondary market. However, investors generally kept
`
`away from these shares. The disproportionately large government interference in the
`
`3'7 .\-'Iu1'phy, 7710 origins qf'Errgl'is':’t_/inrrrrriaf nraralrctv, 5.
`2” The development ofthe markets in equity of the smallest chambers stalled soon after the subscription
`of I602. See chapter 52. section Di\-‘crgient developments: Amsterdam and peripheral markets on page
`68 fl".
`
`9-“ Cf. page 169 ll‘.
`
`18
`
`18
`
`

`
`wit: made investors afraid that the company management would behave too opportu-
`
`nistically. Moreover, investors were well aware that the wI('.' was a financial disaster. I
`
`will therefore focus on the trade in \-'OC shares only.
`
`My analysis of the development of the secondary market for \--'(.)C shares into
`
`the first modern securities market is structured in two parts. Part I treats the seven-
`
`teenth—centtrry history of the market in general. Part It explores in more detail how the
`
`market was organized.
`
`Part I starts, in chapter 1, with a chronological overview of the key develop-
`
`ments that shaped the market during the seventeenth century. Subsequently, chapter
`
`2 analyzes long-term developments, such as the increase in trading activity on the
`
`market, the number of active traders, the dividend policy of the \-"DC and the diverg-
`
`ing development of the Amsterdam market in comparison with the peripheral share
`
`markets in the Dutch Republic. The findings of part I show that after the important
`
`first decade of the century in which the market emerged, the Amsterdam market for
`
`\-'00 shares entered into a second stage of development in the period 1630-50; this
`
`stage brought about the transition into a modern securities market. The two principal
`
`developments during this period were a staggering increase in trading activity and the
`
`appearance of new groups of traders on the market.
`
`Part 11 goes deeper into the developments that made the organization of risky
`
`financial transactions possible in a market that grew in size and became increasingly
`
`anonymous and hence answers the question how the market for VOC shares could
`
`develop into a modern securities market. Chapter 3 discusses the formal and informal
`
`institutions that guaranteed that traders lived up to their agreements. My argument is
`
`that
`
`the traders built a private enforcement mechanism on top of a formal legal
`
`framework. The private enforcement mechanism was needed because large parts of
`
`the forward trade were unenforceable by law. Because of the existence of a clear legal
`
`framework, which took shape through official regulations and court judgments in the
`
`first three decades of the seventeenth century, traders knew exactly whicli transactions
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`were unenforceable by law. This awareness was key to the good functioning of the
`
`market: the traders recogiized the risks of the forward trade and adjusted their deal-
`
`ings accordingly.
`
`In chapter 4-, I discuss how traders could use the market to manage and con-
`
`trol their financial risks - this being the princip