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`hrr;).'//fncfl. handle. net/ I I 245/2,6596}
`
`File ID
`Filename
`Version
`
`uvapub:8596 1
`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:H'11dl.hand1e.net;'1124531.342 701
`
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`
`1
`
`TS1012
`
`1
`
`TS 1012
`
`

`
`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
`
`

`
`Frontcoverz Gen-it Adliaensz. Berckheyde, Town hall on Dam Square (1672), detail,
`Rjjksmuseum 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
`
`tL’1‘\-1:rkr"ijgi11g V2111 dc graad van doctor
`aan de Unix-'e1‘siteiL van Amsterdam
`
`op gezag \-"an do Rector Maglfificlls
`prof. dr. D.C. van den Boom
`Lt:-.n over:-itaan van rrrcn door h(*.L College voor promotics in gcstciclc
`commissie, in hot openbaar Le verclecfigen in do Auia der U11iVf.’.I'Silt‘it
`
`op vrijdag 28januari 201 1, to 13.00 our
`
`door
`
`Lodewijk Otto Petram
`
`gclJorcn to Apcldoorn
`
`4
`
`

`
`5
`
`

`
`CONTENTS
`
`List of figures
`
`List of tables
`
`List of maps
`
`List of abbreviations
`
`Introduction
`
`Confexl, fzisioriogropfgy and tnoog-'
`Scope and mzaciure
`.S‘ou:rce*s
`
`Part I - Taking the measure of the market
`
`1
`
`A chronology of the market
`Introduction
`
`1' 602 - 77:9 s‘z£oscrij:£ion
`I 607 - T722 einergonre gyro darn.-‘alive: niorket
`1 609- I 0 - Isonr: Jo M'nire
`I 60.9 {:9 -- Firs! dioidersd ciinrié-nzions
`
`I 61' 1' - Exchange building
`1 622 - T729 relation oeitonzn lite co-nrtpnny and its 5;''1oJ'ef1oz'(t'er5
`.3 6305 and 1' 640.5‘ - Intenrzodiolion and o rfzongtirqg tron:/,=oJitz'on ofitfte trading conznznnigv
`I 6603 - Tranifrzg .c£'nb5 and rosconma
`Conrfrtriortr
`
`2
`
`Long-term developments
`Intmdzrclion
`
`.-"M{oi'k££ ortiz.-fig):
`..-’\"ionoer yonder’:
`.S'I':on= pm and dirndenrir
`Divergent (J'eoez'o,{Jn1£n£§.' Anmemirtrrr and /Jrrip/taint’ rrznrfcets
`Concfnrions
`
`VII
`
`VII]
`
`VIII
`
`IX
`
`6
`
`17
`E7
`E7
`20
`24
`
`28
`30
`32
`36
`45
`
`59
`:39
`59
`
`6'4
`65
`68
`74
`
`6
`
`

`
`Part II — The organization of the market
`
`3 Contract enforcement
`
`!n.£r0dm?£ion
`
`77:3 £'8‘g(I£'_}(;'(Ifi?£’E£»‘0F':"f
`Pnllate erfiarcerrnent rnerfzanisvrr.
`(§‘onw'I:5i0n5
`
`Appendix - Sitar! summaagv qfmur! cases
`
`4
`
`Risk seeking and risk mitigation
`Introduction
`
`Carartterpary-' risk
`Poryfifio risk
`Corzdusirms
`
`5
`
`Information
`Introducliorz
`
`:'m.Ie3Im'.s" in/formation needs‘ in thefiitti decade rgf.-9'22 sea-‘eratemtfz cer.*.a'.m_)J
`;’VIrn'ke.‘. reartiom to iJ*_I/?J?‘:P?i’£’1:"-fr}???
`The injimmztian. networks cy‘"CIz-nstiarz andjewisfr share .'.‘mdm‘
`Cu::ciusir»n5
`
`Conclusions
`
`Epilogue — Reassessing Coryizsién de co7y‘iz5"iones
`
`Summary (in Dutch)
`
`Appendices
`Appendix A - iilontiafv 5:303‘? price A.rns“.fe:'dam rfzambfl !'()(:, 1'602-! 698
`Appendix B - Dividend dirtn'.bu(io:1.s‘ I’()(;, 1602-! 700
`Ap/)e.rm’i.t C - Gfossagy
`
`Acknowledgements
`
`Bibliography
`Pn}?1a1_'p somws
`Ptzbiisfzed pn'.m.(.1g2 sozrmzr
`Semna’r1:_)v Eizerrzture
`
`Index of names and places
`
`91
`
`.91’
`
`97
`I 07
`I 1 4
`
`H5
`
`1 18
`I 18
`
`I20
`134
`I 45
`
`148
`I 48
`
`I50
`156'
`I 65
`I 75
`
`180
`
`186
`
`190
`
`196
`I 96
`204
`206
`
`210
`
`21 1
`21' I
`2 I I
`213
`
`219
`
`VI
`
`7
`
`

`
`LIST OF FIGURES
`
`Figure 1.1 Forward contract used in a transaction between V\"i11em 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 de Keyser, interior, painting bvjob
`Adriaensz. Be1'ckheyde(between 1670 and 1690)
`Figure 2.1 5-day period share transfers, \’0C Amsterdam chamber, 1609
`Figure 2.2 5-day period share transfers, \-‘OCI Amsterdam chamber, 1639
`Figure 2.3 5-day period share transfers, VUC Amsterdam chamber, 166?
`figure 2.4 5-day period share transfers, \’()(: Amsterdam chamber, 16??
`Figure 2.5 5-day period share transfers, VOC: Amsterdam chamber, 1688
`Figure 2.6 Monthly ‘.’()C: share price, Amsterdam chamber, September 1602
`February 1698. Missing values derived from linear interpolation.
`Figure 2.7 Monthly ‘.-"QC share price, Amsterdam chamber, September 1602 -
`February 1693
`Figure 2.9 Yeariy high-low-average \-'()(: share price, Amsterdam chamber, 160?-
`1698
`
`Figure 2.10 Yearly dividends as a percentage of the nominal value of \-'O(: shares,
`1620-1699
`
`54
`
`55
`
`56
`76
`77
`78
`79
`80
`
`81
`
`82
`
`83
`
`84
`
`85
`Figure 2.12 Dix-idend as a percentage of" market value, 1620-169?
`86
`Figure 2.13 Real dividend and \-'0(: share price, 1630-98
`Figire 2.14 Share price data ofthe Amsterdam, Nlicldelburg, Enkhuizen and Hoorn
`chambers of the VOC, 161 1-1685
`8?
`
`Figure 4.1 Forward and repo transactions represented in diagram Form
`Figure 4.2 Size of loans granted on shares pledged as co11atera1, 16-19-1688
`Figure 5.1 vat: share price, 7_]uly 1671 - 31 December 1672
`Figure 5.2 V-"QC: share price, Ibjanuary 1688 - 22 November 1688
`
`146
`147
`178
`179
`
`VII
`
`8
`
`

`
`LIST OF TABLES
`
`Table 1.1 Spot transactions of Christolfel andjan Raphoen, 1626-42
`Table 2.1 Total number of shareholders’ accounts, Amsterdam chamber \"O(:, 1602
`and 1679-1695; number of active accoullts and share t1'ansfers, 1609, 1639,
`1667, 1672 and 1688
`
`38
`
`64
`
`Table 2.2 Share price data oftlte Middelburg, Enkhuizen, and Hoorn chambers of
`the \--'()(1
`
`75
`
`Table 3.1 Court of Holland, Extended sentences
`Table 3.12 Court. of Holland, Case files
`
`High Council, Extended sentences
`Table
`Table 4.1 Estimated costs of_]eronimus V"e1ters' 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 ofthe Exchange (161 1)
`
`57
`58
`
`VIII
`
`9
`
`

`
`LIST OF ABBREVIATIONS
`
`BT
`
`Bibliotheea Thysiana, Leyden
`
`I),-\S
`
`_].R. Bruijn, 17.8. Gaastra and I. Sehéffer, I)::I:!:—A.s‘.=Ta!ir .w':z'pping in the :’7!f2 and
`
`i6’.!‘iz centzmies {3 \-'0ls., The Hague 1979-87).
`
`1-11c:
`
`N.-\
`
`PA
`
`PIG
`
`RAL‘
`
`English East India Company
`
`Nationaal Arehief, The Hague
`
`Persmuseum Amsterdam
`
`P0rtugees-Israelitiselle Gemeente
`
`Het Utrechts Arehief
`
`S.-X.-'\
`
`Stadsarehiel‘Amsterdani
`
`VOC:
`
`Vereiiigde Dost-Indisehe Compagnir:
`
`\-\-‘IE:
`
`\'Ve5t-Indisehe Compagnie
`
`.\.-Nbte on Ch".?‘?'t’??£_‘)‘
`
`The Dutch currency, the guilder gf), was divided into ‘.20 stlziverzr; eaeh s.fuir..'er' was sub-
`
`divided into 16 penrairzgen. In addition to wilders, the Dutch also used pounds Flemish
`
`(})V1). The nominal value eni'V-‘OC shares was, for example, often expressed in pounds
`
`Flemish. One pound Flemish equaled six guilders. To make eurrene.y figures more
`
`easily comprehensible,
`CCl"H.S.
`
`l have e0n\-'erled 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, VOC, 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
`
`speculated 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 fiinction
`
`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 role 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? 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 VOC, judicial institu-
`
`tions of the Dutch Republic and merchants who were active on the securities market,
`
`' Dias Henriques to Levy Duarte, 1 November 1691, SM, PIG, inv. or. 677, pp. 897-8.
`‘ Words market with an asterisk (*) are further explained in Appendix C - Glossary.
`3‘ Maureen O’Ha.ra, ‘Presidential address: Liquidity and price discovery’, 3:3-Irma! ryffinance 58 (2003)
`1335-1354, there 1335.
`3 Ranald C. Michie, He global‘ securities market.’ (I histogr (Oxford 2006) 26.
`
`12
`
`12
`
`

`
`this book analyzes how the secondary market for VOL shares could develop into tl1e
`
`world's first modern securities market.
`
`Context, I'tirmnTograj2fy and £»’:ea:9=
`
`How the secondary market for \-'OC shares started ofi" in the first decade of the seven-
`
`teenth century is well known.‘ In 1602, the States General of the Dutch Republic
`
`granted the \--’()C a charter For a period of 21 years, with the provision that an interim
`
`liquidation would follow after ten yearsf’ Inhabitants of the Dutch Republic were
`
`called upon to invest in the new company. The \-’0(: thus became a priyate.ly-owned
`
`company in which the authorities of the Dtttch Republic had a large say. The capital
`
`subscription was a great success: in Amsterdam alone,
`
`1 143 investors signed up for
`
`f3,6'/'9,9l5.'5 According to a clause on the first page of the subscription book of the
`
`\-'O(:, 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 buyer's ac-
`
`count in the capital book?
`
`These clear rules for ownership and transfer of ownership reduced investors’
`
`hesitaney about trading the valuable shares that existed only on paper. Secondary
`
`market trading therefore took a start immediately after the subscription books were
`
`closed.“ However, the real incentive to trade. shares emerged later. The directors of
`
`the VOL: 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, pa1rticula1'ly: Oscar (lelderhlom and _]oost _]onker, ‘Completing a financial remlution: The li-
`nance of the Dutch East India trade and the rise of the Amsterdam capital market,
`l:‘).‘l;‘J-ltilili. 7712'
`jmm.=:1't rifernrtnrrtir .f:tr!n.f1' (34 {QUU4} 54 l -572.
`7‘ T’or 21 general account of" the Iouliding ol'tl1c \TJ('., se.e:_].A. van (lcr Chijs, (':‘¢’.'-o’n}vdrrt:Li' (fer ,i't.ic.r’Jtt.*ag mm (19
`I"e.=r:.eri{gde 0.1’. (Jo-mpr.=gm}r we (fer rzizzatrrgrleri z-urn dc .-'\"m‘er!arrd5r.-is regerirqg brtrrgflérsdr de mart up O:Jst—i’mi.=}"l
`(L-'(?fJf‘t‘? mm
`deer .t'tit‘t'a'i;rg 1‘or:rrygrir1grr1 (Leyden I857}. This book also contains 21 transcription of the 16012 charte r. The
`text oflllc first charter can also be lhnntl onlinc: ht1'p://www.vocsite.nl/geschicdcnis/octrooi.html An
`English translation is also online available:
`|ittp:/ /mvw.austra|iaonthcmaporg.au/<:omcnt/\-'icw/50/59
`" The total capital stock of the \’U(: amounted to f6,-129,588; .\'Iiddell)urg coI1trihutedfl,3(lU,~l05
`{2U".»"u‘,I, Enkhuizen f54-0,0(}U [3°»'u}, Delft -'l[i9,4Ul]
`{?°x'u}, Hoorn _f‘.3ti(i,8fi3 {4".«’ujI and Rotterdam
`f l ?3,(}fl[l I.’_3“_.=’uj: l-lcnk den Hcijcr, Dr gexirtrooieerde ro:n,bagn.'}?.' de l-''()(.' 9:: dr’
`l'i"’:'C‘r1t'.t E-‘t‘.'tJ?'.fn'Jf):"t'.T ma dc’ nrtrtrrifxice
`vertrinatsr-r'znp I__De\'enIer ‘?.t]U5_] 61. According to the liistorical purchasing power calculator of the [l'llt"l‘l1£1-
`tional Institute of‘ Social History in Amsterdam {see http:/ /\nvw.iisg.nl/ hpwl calculate.pl1p_‘J, the value
`olthe I602 subscription would amount to almost C100 million today.
`7 A facsimile and transcript of the first page of the subscription book can be found in:J.G. van Dillen,
`Ho’. rittafrta rtrt3:deeNirJ1rder5Jrg1'.tte:' t.-rm (fa Ifm.=m':lm.r{ern’mn (.rl€.i' OrJ.t‘t-Iridurlir Cta:.=i;‘)ng7.=:'e tT'l1t' Hztguc I958] 10:‘)-ti.
`3 Gt?l(lc'l'l')l0l‘t'I antL]o11ker, Tionipleting‘.
`
`13
`
`13
`
`

`
`granted. Again, no intermediate liquidation took place. Consequently,
`
`the capital
`
`stoek* of the \-"on: became defects fixed.“ In the end, the company would stay in busi-
`
`ness for almost two centuries and the capital stock rernained 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 \-"O(: 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 Vomrmnpag-
`
`nt'e§n., the predecessors of the \"O(: 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, be.c.ause after
`
`liquidation, investors eottld decide not to reinvest. Investors knew that they could al-
`
`ways get their money back within a few years" time.'" 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 ofa securities market going.” The capital stock of the
`
`English East India Company (1~‘.I(:._ founded 1600'], for example, only became fixed in
`
`165?. Before that time, the tilt: repeatedly issued new stock to fund its fleets; the EIC
`
`was thus basically a series of separate companies that worked together as the BIG. '3
`
`Remarkably, already in the later Middle Ages, secondary markets for public
`
`debt had emerged iI1 Italian city states. Venice, Genoa and Florence were the first
`
`'-’ Den Heijel‘, Dr grr2t‘tmniéerde rnmfmgitie, 59,615.
`'“ Oscar Gelderblom, Abe dejong and ‘]oostL]onker, “An Atlrniralty lbt‘ Assia. Isaac le t\-'lai1‘e and con-
`[lieting conceptions about the (‘orporate go\'ernant‘e of tl1e \‘U(.'', in: Jonathan 0.5. Koppell [_ed.}, Tire
`origins gfsftrirdinlrfer r'm't*nrr3r_‘v I,'Basingstoke, forthcoming 201 l_].
`” Anne L. Mttrphy, T716 o:'tfgi:r.r q[En_.g!i.r:‘:_fiarrnriat’ merfrets. Im'e.n'.moit and yieetalation Figfiire the .S'r1tn‘.r‘.= Sea Birbbte
`{Cambridge 2009).
`'9 Ron Harris,
`lndrrsfria-t'.i.:in_g :'.€ng!£sl.=
`2000} ll?-8, 120-1, 127.
`'3‘ The lixerl capital stock ofithe Ii[(i in 165? amounted to £793.78? W.R. Seott, Tier? ron_c!i!1d1'nn and
`_fiH(mrTt’ qfEngh'.rt':.
`.S'rn££i.r;’: and 1risf:jnin!—.i'tod€
`rntnparties to 1720 [I C'nmprIr:t'e.rjhi'florrt;g:: tmdr, rriirmfzrrtion. _fi.:‘a"zirtg
`and ntiniaqg (Clanihridge l9] 2} I29. I92. Michiel de_]ongh, ‘De ontwikkeling van zeggelischapsreeltteii
`ran aandeelliouders in cle 17*‘ en I8" eeuw",
`ll"'nrking;mpcr rj2009';u. At the exeliange rate ol‘ I654 ("the I657
`rate is unavailableju, 793,782 equaled approximately f8.‘.25U.{)U0: N.\’\'. Poslliunius. .M°'rferz’r1r.'r2’s'r:‘tr* prj5ge-
`.m":ir3dmi.t'
`I: (£o:°det'e:r{9:ijzs;r of; 0’! t"mtr.r ran A.r.=:.t‘:‘errt’rr:it r'535—}9I 4.
`I-"I-"ir_s'.n’kr;r:'.rm re _=I;it.mv.m’a:n F6091’ .9}-I Ley-
`dett I94!-3} 592.
`
`Fart‘: rntrrprsrmtrslzijj mar! brts't'rm.s- rngganiaaticrrr, I720-I844 {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.” Veiiiee, for example, consolidated all its
`
`outstanding debt in a so-called mtmte in 1262. The original obligations were converted
`
`into shares in the ntrmte 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. lV’Ioreo-
`
`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 liquidity needed to pay for the upcoming debt issue.‘-3 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 secondary 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 17203.”
`
`This short overview has identified the factors that led to the emergence of a
`
`secondary market for \-'O(': 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 Gelderblom ancljonker 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.” Apart from these
`
`" Set‘, partiI:‘ular1_v: Reinhold C. .\-ltlcllcr, ‘Ute l-"flatten lacing}-' r:m.='ket: barrio‘, prtriirs. arm’ the public debt,
`f500 {Baltimore 1997}.
`'7‘_]tI1ius Kirshner, 'EncL;ml:Icring private claims to public debt in renaissance Florence”, in: Vito Pier-
`giovanni {cd,), 73:? grater?! rgftfm batik (I5 ir.=.rt:}‘i:ti'ni.' mm’ the drtlelnfiiiient iji;";ii:iii:_ei.'—im.ti:m.r {aw [Berlin 1993} 19-76.
`Meir Kohn, ‘The capital market before 1600’, Dm‘tmauh‘t C'o£t'egt> ttnnlring fmfier nr. 99-06 (1999) 10-1 1.
`'“_]amcs D. Tracy. .--lfinarsriat rt'::at':ttion in the Habsbtrig .-'\'é?tIrei'i"niir!.<.‘ Rama and r.cw:‘rrn'e:'s in the roam! ' :3fHm.'i"mrrt'.
`!.5!5-1565 (Berkeley 19851. Oscar Gelclerblom and _]oos1_]onker, ‘A cr_unditio:1::| miracle. ’I"l1c market
`forces that shaped Holl:mcl's public debt rnanagement’, l|"nrkirig,‘Jtzper (12010) ‘.21 , ‘.2-1-7.
`'7 Larry Neal, The’ Hit? -r3;f,‘inarii‘ir:I rrIfJitru’i.i1rt.' intmmtiana! rnpitaf i::ri:'.{'rLs' in I'll? Age ufRmsrm {_CIamhridgc 19‘:}(l_‘_I
`10.
`
`.’2()t')—
`
`”‘ ;\-'l.I'" Smith, Tgjral-(gflirir::'.i' in gflécteit mm rile: Ain.s'tera’r:.=:i.i't':‘tr bett.='.\' (T he Hague 1919:]. Oscar Gelderbloni
`and Joost Junker, ‘Amsterdam as the cradle of modern futures and options trading, 155-U~1(i5ll’. in:
`\\’illiam N. Goetzmann and K. Gccrt Rouwenhorsl ['ec|s.}. 77:2 nrigin.i' :if:,wi’m?.' Jiiefinanrinl 3'rinnt'm'ioi:.i' flint
`c‘i':’r1i'.r’r1' rrindetn rrtfiifnl .mark£l.r Oxford 2005} 189-205. The article 'Con1pleting°, by the same authors, has
`been mentioned above. This article Ibeused on the funding offiast India trade in the Dutch Republic
`
`15
`
`15
`
`

`
`studies, most economic historians merely marveled at the sophistication of the market
`
`in the late seventeenth eentuiy. They iisedjosseph de la \*'ega’s high-flown description
`
`of the share trade in Corgjiuiéri de cargfitsiaaes, 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' Braudel"s in-
`
`terpretation of the financial developments in Amsterdam was that ‘ce qui est nouveau
`
`51 Amsterdam, c’est le volume, la lluidité, la publicité, la liberté speculative des transac-
`
`tions. Le jeu s’y méle de facon lréiiétique, lejeu pour le jeu."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
`
`iiiliill 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
`
`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."="3 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
`
`ant] argued that the emergence ofa secondary market for shares completed tl1e financial revolution of
`the sixteenth ccnttlry, as has been advanced hyjalnes D. Tracy: Tracy, /l_firmm:iriI irrzzr,-Ztttiori.
`'9 Dutch translation oi'l)e la \"ega’s work, with a good introduction by ;\-'I,I*'._j. Smithzjossepli Pt-nso de
`la Vega, Crirgfirntin dc’ cnrgfi4.s‘i:Jnr.i' Ifl[i88_], 31.17,]. Smith [:ed.} (T he Hague I939"). The best English {abridged}
`cditinnzjossttp I1 Penso dc la \-"cga, Chrgfitrinrt dr rn:gfi:.rione.r t'g1']o.re,‘i:‘i dr la Vega I688. Porn‘.-m.r de.i‘rn‘;;tir;e gf‘(i".=e
`.=lm.n‘erdmn Si‘.-ark Etrfiaagr (I688) Hermann Kellenbenz cd. [Cambridge 1957}.
`‘~“'jona1han Israel, amongst others, relies heavily on De la \-"cga._ for example in: Jonathan 1. Israel,
`'_]ews and the stock exchange: the Amsterdam Iinancial erasli of 1688‘, in: idem ('cti._},
`i'J.=}:.r,mra_s- a'itfl':.5n :1
`dia.g()ora.']m-'.r, C9‘p:'u-j’rzc.r mm’ the tt.'rm.'d maritime rnipir.r.i' {}.'340- I 740) {_Le‘\_-‘clen 2UC'2_} 4-=1-9-87. Also: Charles
`Wilson, .-lnglr)—1)m‘r/: r:mm1ri'r.r.’ rlnrljinmw in the r.'igl:£t*ert{:’: F-t‘.'.'ftt9' r._CaInbridgc l9-ll, reprinted in l9{i('i]:. Geof-
`frey Poitras, Tire er.-rfv ltiitnpr qfifinrinrial .=2rmioma"r.c, H78— .-’77€.'frnm rarm:ie?:'r1'm’ aiffftiitefit.‘ In :'g',.I'?? nn:tr:z'£ir.s mm’
`_,ir;ir1t.r£or!r.r [Cheltenh:u'n 2000:] 315. 385-7.
`9' Violet Barbour. C':2p:'ma'i.w::: .Fr:..im.r!.v:'r1'r.-m in we a‘r'z'rntt>r::fl': ren£m_'J' {Baltimore 1950} 142.
`9'-9 Fernand Brande], Lé'5js.*.=.*.\' rte i"r'r!'mng.°.=. C‘izI.i:’i.i'rztinrr ninléiielfe. émnnmie rt ra,rJftaa"i.rn.=.r4.
`.\'l’e—.\'I-‘me .n'én’e II (Paris
`1979} 8 [-2.
`1"‘ l.)ouglass C. North, :':c.m'!ution:.'_,
`
`in.r£itu.'irmrn' ritaiqgr am’ .err;.-wm.='r ;;rg£-izmarirr {Clan1lJri(i_s,rt- i990‘: 3.
`
`16
`
`16
`
`

`
`state. The. institutional framework of markets generally consists ofa 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
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`another way, economic actors always search for ways to obtain benefits from eco-
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`nomic interaction at the lowest transaction costs possible.“ Acemoglu,johnso11 and
`
`Robinson divide transactions costs into three categories: ‘ll those that increased the
`
`mobility of capital; 2) those that lowered information costs; and 3) those that spread
`
`risk.’93‘ 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 traits-
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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 beltavior, meant that less effort was
`
`needed to check a possible cottnte1party’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
`
`the second half of the seventeenth century allowed them to mitigate the risk of their
`
`investment portfolios.
`
`55.0/Jr and .r£rttrt.‘m'e
`
`The scope of this book is limited to the seventeenth-century Amsterdam market for
`
`\-'00 shares. The focus on the. scve.nteenth century flows, in the first place, from the
`
`fact that it is widely known, mainly front De la Vega's work, that Amsterdam boasted
`
`‘-"' Sheilagh Ogilvie, "‘\\-'hate\'er is, is right"? Economic institutions in pre-industrial Europe’, Eraimmir
`!2in‘rii_1= i'e*viz’tt' tit} I'I‘2tJ07) 541.1-U8-l, [here (558.
`l\'orlli, l'it_wt.=}'::ti:ii:3, I25. Daron Aczetnoglu, Simon _jo|1nsou am:l_]ames A. Robinson, ‘Institutions as a
`fundamental cause of long-run growth", in: Philippe Aghion and Steven N. Uurlauf [_eds._j:, HamJ'btirJil' of
`mmwiiir gmztrlzi [Anistcrclarn 2t_)05_'i 38.3-472.
`2" According to Ross I.e\-inc. markets with high trading activity provide an incentive for traders to
`gather‘ prict:-relevant ittlurmationi 'Intuiti\'ely, with larger and more liquid ntarkets. it is easier lbr an
`agent who has acquired inforntation to tlisgtiise this private information and make money by trading in
`the market.‘ As a result, prices on liquid markets reveal relatively move information about" the assets
`that are being tradt‘.(l. Ross Levine, ‘Finan('e and growth: Lheory and evidt‘1it‘c", in: Philippe .-\ghion and
`Steven N . Dui'latil‘t'etls.'], flrtririburtl‘ r_:f:r:mamir'grmrfli '.'Amsterdam 2‘t)t}5jI 865-93-l-. there 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 fixture 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 stadhoider W'illia:n
`
`111. Although Murphy 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-centuiy Dutch Republic where a secondary market for company equity ex-
`
`isted. The organizational structure of‘ the \-''O(:, with six semi-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 cliambers, 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 tliriving securities market that provided its participants a range of fi-
`
`nancial services. This happened only in Ains-terdam.33 I will also pay some attention to
`
`Middelburg, however. The Middelburg chamber of the \-’OC: had the second-largest
`
`capital stock and consequently, the development of the l\-"Iiddelburg market came clos-
`
`est to that of Amsterdam. As I will show in chapter 5, traders used the liquidity of the
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`l\-licldelhurg market for arbitrage* purposes; they tried to be the first to use informa-
`
`tion available on the Amsterdam market For transactions 011 the Micldelburg market
`
`and vice versa.'-’‘’ Finally, shares in the Dutch “lest India Company (WICJ, founded
`
`1623) were also traded on the secondary market. However, investors generally kept
`
`away from these shares. The disproportionately large government interference in the
`
`.'-J.
`37 .\'Iu1'plty. 775:2 or{gfrr.i' .'y"Eng{n':‘t_/r::(r:rt'iaE m(n'!rt*.*.r,
`‘J3 The development o['thc markets in equity olithe smallest chambers stalled soon after the suhsc ription
`of I602. Sec cliapter 2. section Divcrgient dcvelopnientsz Alnsterdttln and peripheral markets on page
`68 fl‘.
`
`1"-' Cf. page I59 ll”.
`
`18
`
`18
`
`

`
`it-‘lt: made investors afraid that the company management would behave too opportu-
`
`nistically. Moreox-'er, investors were well aware that the it-'I(.: was a financial disaster. I
`
`will therefore focus on the trade in \-'O(: 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-
`
`teenlh—century history of the market in general. Part It explores in more detail how the
`
`market was organized.
`
`Part 1 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 \-’O(: 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 afier the important
`
`first decade of the century in which the market emerged, the Amsterdam market for
`
`\-'00 shares entered into a second stage. of deve.lopment 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 bec.an1e increasingly
`
`anonymous and hence answers the question how the market for \-‘DC: 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 lega