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`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://hdl.handle.net/11245/1.342701
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`
`CQG, INC., ET AL. EXHIBIT 1018
`
`

`
`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
`
`

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

`
`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 verkrijging van de graad van doctor
`aan de Universiteit van Amsterdam
`op gezag van de Rector Magnificus
`prof. dr. D.C. van den Boom
`ten overstaan van een door het college voor promoties ingestelde
`commissie, in het openbaar te verdedigen in de Aula der Universiteit
`
`op vrijdag 28 januari 2011, te 13.00 uur
`
`door
`
`Lodewijk Otto Petram
`
`geboren te Apeldoorn
`
`
`
`

`
`Promotor:
`
`Copromotor: dr. C.M. Lesger
`
`prof. dr. L. Noordegraaf
`
`
`
`Overige leden: dr. O.C. Gelderblom
`
`dr. J. Goggin
`
`dr. M.C. ’t Hart
`
`prof. dr. H.J. den Heijer
`
`prof. dr. A. de Jong
`
`em. prof. dr. L. Neal
`
`prof. dr. H.F.K. van Nierop
`
`
`
`Faculteit der Geesteswetenschappen
`
`
`
`

`
`VII
`VIII
`VIII
`IX
`1
`2
`6
`9
`
`17
`17
`17
`20
`24
`28
`30
`32
`36
`45
`52
`59
`59
`59
`64
`65
`68
`74
`
`CONTENTS
`
`
`List of figures
`List of tables
`List of maps
`List of abbreviations
`Introduction
`Context, historiography and theory
`Scope and structure
`Sources
`
`
`Part I – Taking the measure of the market
`
` 1
`
` A chronology of the market
`Introduction
`1602 – The subscription
`1607 – The emergence of a derivatives market
`1609-10 – Isaac le Maire
`1609-18 – First dividend distributions
`1611 – Exchange building
`1622 – The relation between the company and its shareholders
`1630s and 1640s – Intermediation and a changing composition of the trading community
`1660s – Trading clubs and rescontre
`Conclusions
`2 Long-term developments
`Introduction
`Market activity
`Number of traders
`Share price and dividends
`Divergent developments: Amsterdam and peripheral markets
`Conclusions
`
`

`
`91
`91
`97
`107
`114
`115
`118
`118
`120
`134
`145
`148
`148
`150
`156
`165
`175
`180
`186
`190
`196
`196
`204
`206
`210
`211
`211
`211
`213
`219
`
`Part II – The organization of the market
`
` 3
`
`5
`
` Contract enforcement
`Introduction
`The legal framework
`Private enforcement mechanism
`Conclusions
`Appendix – Short summary of court cases
`4 Risk seeking and risk mitigation
`Introduction
`Counterparty risk
`Portfolio risk
`Conclusions
`Information
`Introduction
`Investors’ information needs in the first decade of the seventeenth century
`Market reactions to information
`The information networks of Christian and Jewish share traders
`Conclusions
`Conclusions
`Epilogue – Reassessing Confusión de confusiones
`Summary (in Dutch)
`Appendices
`Appendix A – Monthly share price Amsterdam chamber VOC, 1602-1698
`Appendix B – Dividend distributions VOC, 1602-1700
`Appendix C – Glossary
`Acknowledgements
`Bibliography
`Primary sources
`Published primary sources
`Secondary literature
`Index of names and places
`
`
` VI
`
`

`
`
`
`LIST OF FIGURES
`
`54
`
`55
`
`56
`76
`77
`78
`79
`80
`
`
`Figure 1.1 Forward contract used in a transaction between Willem Muijlman and
`Philips de Bacher, 2 September 1644.
`Figure 1.2 Amsterdam Exchange of Hendrick de Keyser, etching by C.J. Visscher
`(1612)
`Figure 1.3 Amsterdam Exchange of Hendrick de Keyser, interior, painting by Job
`Adriaensz. Berckheyde (between 1670 and 1690)
`Figure 2.1 5-day period share transfers, VOC Amsterdam chamber, 1609
`Figure 2.2 5-day period share transfers, VOC Amsterdam chamber, 1639
`Figure 2.3 5-day period share transfers, VOC Amsterdam chamber, 1667
`Figure 2.4 5-day period share transfers, VOC Amsterdam chamber, 1672
`Figure 2.5 5-day period share transfers, VOC Amsterdam chamber, 1688
`Figure 2.6 Monthly VOC share price, Amsterdam chamber, September 1602 –
`February 1698. Missing values derived from linear interpolation.
`Figure 2.7 Monthly VOC share price, Amsterdam chamber, September 1602 –
`February 1698
`Figure 2.9 Yearly high-low-average VOC share price, Amsterdam chamber, 1602-
`1698
`Figure 2.10 Yearly dividends as a percentage of the nominal value of VOC shares,
`84
`1620-1699
`85
`Figure 2.12 Dividend as a percentage of market value, 1620-1697
`86
`Figure 2.13 Real dividend and VOC share price, 1630-98
`Figure 2.14 Share price data of the Amsterdam, Middelburg, Enkhuizen and Hoorn
`chambers of the VOC, 1611-1685
`87
`Figure 4.1 Forward and repo transactions represented in diagram form
`146
`Figure 4.2 Size of loans granted on shares pledged as collateral, 1649-1688
`147
`Figure 5.1 VOC share price, 7 July 1671 – 31 December 1672
`178
`Figure 5.2 VOC share price, 6 January 1688 – 22 November 1688
`179
`
`
`81
`
`82
`
`83
`
`
`
`VII
`
`

`
`
`
`LIST OF TABLES
`
`
`
`
`38
`Table 1.1 Spot transactions of Christoffel and Jan Raphoen, 1626-42
`Table 2.1 Total number of shareholders’ accounts, Amsterdam chamber VOC, 1602
`and 1679-1695; number of active accounts and share transfers, 1609, 1639,
`1667, 1672 and 1688
`Table 2.2 Share price data of the Middelburg, Enkhuizen, and Hoorn chambers of
`the VOC
`Table 3.1 Court of Holland, Extended sentences
`Table 3.2 Court of Holland, Case files
`Table 3.3 High Council, Extended sentences
`Table 4.1 Estimated costs of Jeronimus Velters’ forward and repo transactions
`
`64
`
`75
`115
`117
`117
`125
`
`LIST OF MAPS
`
`
`Map 1.1 Main share trade locations in the first decade of the seventeenth century 57!
`Map 1.2 Main share trade locations after the opening of the Exchange (1611)
`58!
`
`
` VIII
`
`

`
`
`
`LIST OF ABBREVIATIONS
`
`BT
`DAS
`
`Bibliotheca Thysiana, Leyden
`J.R. Bruijn, F.S. Gaastra and I. Schöffer, Dutch-Asiatic shipping in the 17th and
`18th centuries (3 vols., The Hague 1979-87).
`English East India Company
`EIC
`Nationaal Archief, The Hague
`NA
`Persmuseum Amsterdam
`PA
`Portugees-Israëlitische Gemeente
`PIG
`RAU Het Utrechts Archief
`SAA
`Stadsarchief Amsterdam
`VOC
`Verenigde Oost-Indische Compagnie
`WIC West-Indische Compagnie
`
`
`
`Note on currency
`
`The Dutch currency, the guilder (ƒ), was divided into 20 stuivers; each stuiver was sub-
`divided into 16 penningen. In addition to guilders, the Dutch also used pounds Flemish
`(pVl). The nominal value of VOC shares was, for example, often expressed in pounds
`Flemish. One pound Flemish equaled six guilders. To make currency figures more
`easily comprehensible, I have converted everything into guilders divided into 100
`cents.
`
`
`
`IX
`
`

`
`
`
`

`
`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 1691.1 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 Henriques 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 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 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.2 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,
`
`
`1 Dias Henriques to Levy Duarte, 1 November 1691, SAA, PIG, inv. nr. 677, pp. 897-8.
`* Words market with an asterisk (*) are further explained in Appendix C – Glossary.
`2 Maureen O’Hara, ‘Presidential address: Liquidity and price discovery’, Journal of finance 58 (2003)
`1335-1354, there 1335.
`3 Ranald C. Michie, The global securities market: a history (Oxford 2006) 26.
`
`
`
`

`
`this book analyzes how the secondary market for VOC shares could develop into the
`world’s first modern securities market.
`
`Context, historiography and theory
`How the secondary market for VOC shares started off in the first decade of the seven-
`teenth century is well known.4 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.5 Inhabitants of the Dutch Republic were
`called upon to invest in the new company. The VOC 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
`ƒ3,679,915.6 According to a clause on the first page of the subscription book of the
`VOC, 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.7
`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
`closed.8 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
`
`
`4 See, particularly: Oscar Gelderblom and Joost Jonker, ‘Completing a financial revolution: The fi-
`nance of the Dutch East India trade and the rise of the Amsterdam capital market, 1595-1612’, The
`journal of economic history 64 (2004) 641-672.
`5 For a general account of the founding of the VOC, see: J.A. van der Chijs, Geschiedenis der stichting van de
`Vereenigde O.I. Compagnie en der maatregelen van de Nederlandsche regering betreffende de vaart op Oost-Indië, welke aan
`deze stichting voorafgingen (Leyden 1857). This book also contains a transcription of the 1602 charter. The
`text of the first charter can also be found online: http://www.vocsite.nl/geschiedenis/octrooi.html An
`English translation is also online available:
`http://www.australiaonthemap.org.au/content/view/50/59
`6 The total capital stock of the VOC amounted to ƒ6,429,588; Middelburg contributed ƒ1,300,405
`(20%), Enkhuizen ƒ540,000 (8%), Delft ƒ469,400 (7%), Hoorn ƒ266,868 (4%) and Rotterdam
`ƒ173,000 (3%): Henk den Heijer, De geoctrooieerde compagnie: de VOC en de WIC als voorlopers van de naamloze
`vennootschap (Deventer 2005) 61. According to the historical purchasing power calculator of the Interna-
`tional Institute of Social History in Amsterdam (see http://www.iisg.nl/hpw/calculate.php), the value
`of the 1602 subscription would amount to almost !100 million today.
`7 A facsimile and transcript of the first page of the subscription book can be found in: J.G. van Dillen,
`Het oudste aandeelhoudersregister van de Kamer Amsterdam der Oost-Indische Compagnie (The Hague 1958) 105-6.
`8 Gelderblom and Jonker, ‘Completing’.
`
`2
`
`
`
`

`
`granted. Again, no intermediate liquidation took place. Consequently, the capital
`stock* of the VOC became de facto fixed.9 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 Voorcompag-
`nieën, the predecessors of the VOC 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.10 Likewise, it took until the end of
`the seventeenth century before a secondary market for shares emerged in England.11
`Before that time, there were no joint-stock companies with a sufficiently large fixed
`capital to get the development of a securities market going.12 The capital stock of the
`English East India Company (EIC, founded 1600), for example, only became fixed in
`1657. 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 EIC.13
`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
`
`9 Den Heijer, De geoctrooieerde compagnie, 59, 63.
`10 Oscar Gelderblom, Abe de Jong and Joost Jonker, ‘‘An Admiralty for Asia. Isaac le Maire and con-
`flicting conceptions about the corporate governance of the VOC’, in: Jonathan G.S. Koppell (ed.), The
`origins of shareholder advocacy (Basingstoke, forthcoming 2011).
`11 Anne L. Murphy, The origins of English financial markets. Investment and speculation before the South Sea Bubble
`(Cambridge 2009).
`12 Ron Harris, Industrializing English law: entrepreneurship and business organization, 1720-1844 (New York
`2000) 117-8, 120-1, 127.
`13 The fixed capital stock of the EIC in 1657 amounted to £793,782. W.R. Scott, The constitution and
`finance of English, Scottish and Irish joint-stock companies to 1720 II Companies for foreign trade, colonization, fishing
`and mining (Cambridge 1912) 129, 192. Michiel de Jongh, ‘De ontwikkeling van zeggenschapsrechten
`van aandeelhouders in de 17e en 18e eeuw’, Working paper (2009). At the exchange rate of 1654 (the 1657
`rate is unavailable), £793,782 equaled approximately ƒ8,250,000: N.W. Posthumus, Nederlandsche prijsge-
`schiedenis I: Goederenprijzen op de beurs van Amsterdam 1585-1914. Wisselkoersen te Amsterdam 1609-1914 (Ley-
`den 1943) 592.
`
`
`
`3
`
`

`
`states to consolidate their public debt – a revolution in public finance, because it eased
`the process of underwriting new debt issues.14 Venice, for example, consolidated all its
`outstanding debt in a so-called monte in 1262. The original obligations were converted
`into shares in the monte 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. Moreo-
`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.15 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.16 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 1720s.17
`This short overview has identified the factors that led to the emergence of a
`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 Gelderblom 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.18 Apart from these
`
`
`14 See, particularly: Reinhold C. Mueller, The Venetian money market: banks, panics, and the public debt, 1200-
`1500 (Baltimore 1997).
`15 Julius Kirshner, ‘Encumbering private claims to public debt in renaissance Florence’, in: Vito Pier-
`giovanni (ed.), The growth of the bank as institution and the development of money-business law (Berlin 1993) 19-76.
`Meir Kohn, ‘The capital market before 1600’, Dartmouth College working paper nr. 99-06 (1999) 10-11.
`16 James D. Tracy, A financial revolution in the Habsburg Netherlands: Renten and renteniers in the county of Holland,
`1515-1565 (Berkeley 1985). Oscar Gelderblom and Joost Jonker, ‘A conditional miracle. The market
`forces that shaped Holland’s public debt management’, Working paper (2010) 21, 24-7.
`17 Larry Neal, The rise of financial capitalism: international capital markets in the Age of Reason (Cambridge 1990)
`10.
`18 M.F.J. Smith, Tijd-affaires in effecten aan de Amsterdamsche beurs (The Hague 1919). Oscar Gelderblom
`and Joost Jonker, ‘Amsterdam as the cradle of modern futures and options trading, 1550-1650’, in:
`William N. Goetzmann and K. Geert Rouwenhorst (eds.), The origins of value: the financial innovations that
`created modern capital markets (Oxford 2005) 189-205. The article ‘Completing’, by the same authors, has
`been mentioned above. This article focused on the funding of East India trade in the Dutch Republic
`
`4
`
`
`
`

`
`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 Confusión de confusiones, the famous account of the share market
`dating from 168819, as a starting point for their work.20 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.’21 Braudel’s in-
`terpretation of the financial developments in Amsterdam was that ‘ce qui est nouveau
`à Amsterdam, c’est le volume, la fluidité, la publicité, la liberté speculative des transac-
`tions. Le jeu s’y mêle de façon frénétique, le jeu pour le jeu.’22 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
`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.’23 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 of a secondary market for shares completed the financial revolution of
`the sixteenth century, as has been advanced by James D. Tracy: Tracy, A financial revolution.
`19 Dutch translation of De la Vega’s work, with a good introduction by M.F.J. Smith: Josseph Penso de
`la Vega, Confusión de confusiones (1688), M.F.J. Smith (ed.) (The Hague 1939). The best English (abridged)
`edition: Josseph Penso de la Vega, Confusion de confusiones by Joseph de la Vega 1688. Portions descriptive of the
`Amsterdam Stock Exchange (1688) Hermann Kellenbenz ed. (Cambridge 1957).
`20 Jonathan Israel, amongst others, relies heavily on De la Vega, for example in: Jonathan I. Israel,
`‘Jews and the stock exchange: the Amsterdam financial crash of 1688’, in: idem (ed.), Diasporas within a
`diaspora: Jews, Crypto-Jews and the world maritime empires (1540-1740) (Leyden 2002) 449-87. Also: Charles
`Wilson, Anglo-Dutch commerce and finance in the eighteenth century (Cambridge 1941, reprinted in 1966). Geof-
`frey Poitras, The early history of financial economics, 1478-1776: from commercial arithmetic to life annuities and
`joint stocks (Cheltenham 2000) 315, 385-7.
`21 Violet Barbour, Capitalism in Amsterdam in the seventeenth century (Baltimore 1950) 142.
`22 Fernand Braudel, Les jeux de l'échange. Civilisation matérielle, économie et capitalisme, XVe-XVIIIe siècle II (Paris
`1979) 81-2.
`23 Douglass C. North, Institutions, institutional change and economic performance (Cambridge 1990) 3.
`
`
`
`5
`
`

`
`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 at the lowest transaction costs possible.24 Acemoglu, Johnson and
`Robinson divide transactions costs into three categories: ‘1) those that increased the
`mobility of capital; 2) those that lowered information costs; and 3) those that spread
`risk.’25 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-
`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 counterparty’s creditworthiness. Furthermore, as a result of
`the high trading activity, the share price was constantly updated to the beliefs of the
`trading populations.26 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.
`
`Scope and structure
`The scope of this book is limited to the seventeenth-century Amsterdam market for
`VOC 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
`
`
`24 Sheilagh Ogilvie, ‘“Whatever is, is right”? Economic institutions in pre-industrial Europe’, Economic
`history review 60 (2007) 649-684, there 656.
`25 North, Institutions, 125. Daron Acemoglu, Simon Johnson and James A. Robinson, ‘Institutions as a
`fundamental cause of long-run growth’, in: Philippe Aghion and Steven N. Durlauf (eds.), Handbook of
`economic growth (Amsterdam 2005) 385-472.
`26 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 evidence’, in: Philippe Aghion and
`Steven N. Durlauf (eds.), Handbook of economic growth (Amsterdam 2005) 865-934, there 872.
`
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`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 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.27 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 VOC, with six semi-independent chambers,
`resulted in the emergence of six separate markets. However, due to the smaller capital
`stock of the Middelburg, Enkhuizen, 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.28 I will also pay some attention to
`Middelburg, however. The Middelburg chamber of the VOC 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 available on the Amsterdam market for transactions on the Middelburg market
`and vice versa.29 Finally, shares in the Dutch West India Company (WIC, founded
`1623) were also traded on the secondary market. However, investors generally kept
`away from these shares. The disproportionately large government interference in the
`
`
`27 Murphy, The origins of English financial markets, 5.
`28 The development of the markets in equity of the smallest chambers stalled soon after the subscription
`of 1602. See chapter 2, section Divergent developments: Amsterdam and peripheral markets on page
`68 ff.
`29 Cf. page 169 ff.
`
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`WIC made investors afraid that the company management would behave too opportu-
`nistically. Moreover, investors were well aware that the WIC was a financial disaster. I
`will therefore focus on the trade in VOC shares only.
`
`My analysis of the development of the secondary market for VOC shares into
`the first modern securities market is structured in two parts. Part I treats the seven-
`teenth-century history of the market in general. Part II 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 VOC 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
`VOC 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 II 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 which transactions
`were unenforceable by law. This awareness was key to the good functioning of the
`market: the traders recognized 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 principal purpose of investors in modern fi-
`nancial markets. T