8/12/2019 Book Reviews Dyman Associates Publishing Inc: The Worlds First Stock Exchange

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Book Reviews Dyman Associates Publishing Inc: The Worlds First Stock

Exchange

In his famous book Confusin de confusions Joseph Penso de la Vega wrote: If one were to

lead a stranger through the streets of Amsterdam and ask him where he was, he

would answer among speculators, for there is no corner where one does not talk

shares. And, Lodewijk Petram adds, the people of Amsterdam were talking about

options, too, and forward selling, quotations and prices, risk and speculationall

relating to the trade in the shares of the Dutch East India Company (the Vereenigde

Oost-Indische Compagnie, VOC), which had been established in 1602. Fortunes

were made and lost, and the men who engaged in this trade were wholly in thrall to

it.

Petram did extensive archival research, including mining the records of active traders, to shed

new light on de la Vegas account of the Amsterdam stock market. The Dutch edition of his

book appeared in 2011. Columbia Business School Publishing/Columbia University Press has just

released the English edition, The Worlds First Stock Exchange, skillfully translated by Lynne

Richards. Its an engrossing tale.

Traders in Amsterdam occasionally used questionable strategies--strategies that have endured,

in both legal and illegal manifestations. They engaged in short selling through forward

contracts, spreading rumors, buying even more shares. These vile practices were decried in

petitions to the government by the directors of VOC, who argued that they were very

disadvantageous to the investors and particularly the many widows and orphans. Petram notes

that the number of widows and orphans who were dependent on an investment in the

Company would have been very small indeed, but playing on their painful situation pricked the

puritanical conscience of the authorities. In February 1610 the government issued an edict

banning naked short selling, a ban that share dealers blithely ignored.

Large numbers of VOC investors had no direct experience in trading. If these shareholders

wanted to sell their shares they had to [travel to Amsterdam and] brave the bear

pit of the exchange,where they were complete novices.(p. 102) By 1633, however,

they were offered an alternativeto do business with a market maker (initially, the Raphoen

brothers) who would make a small margin on every deal because they always offered

a little under the market price when buying and asked for slightly more when

selling.

The Raphoen brothers also played a major role in standardizing the VOC share at 3,000

guilders, a huge sum at the time. And as the share price rose, the amount that actually had to

be paid for a share became even larger. In the 1640s the price of a Company share stood

almost continuously at above 400, which meant that over 12,000 guilders had to be paid for a

share with a nominal value of 3,000 guilders. To put this in perspective, in 1645 the substantial

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8/12/2019 Book Reviews Dyman Associates Publishing Inc: The Worlds First Stock Exchange

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and prestigious canal-side mansion (with a rear annex) at 105 Herengracht was sold for 5,100

guilders. The always shrewd Raphoen brothers bought up odd lots of VOC stock and combined

them into 3,000-guilder shares, which could be sold for a better price.

In his famousbookConfusin de confusions Joseph Penso de la Vega wrote: If one were to

lead a stranger through the streets of Amsterdam and ask him where he was, he would answeramong speculators, for there is no corner where one does not talk shares. And, Lodewijk

Petram adds, the people of Amsterdam were talking about options, too, and forward

selling, quotations and prices, risk and speculationall relating to the trade in the

shares of the Dutch East India Company (the Vereenigde Oost-Indische Compagnie,

VOC), which had been established in 1602. Fortunes were made and lost, and the

men who engaged in this trade were wholly in thrall to it.

Petram did extensive archival research, including mining the records of active traders, to shed

new light on de la Vegas account of the Amsterdam stock market. The Dutch edition of his

book appeared in 2011. Columbia Business School Publishing/Columbia University Press has justreleased the English edition, The Worlds First Stock Exchange, skillfully translated by Lynne

Richards. Its an engrossing tale.

Traders in Amsterdam occasionally used questionable strategies--strategies that have endured,

in both legal and illegal manifestations. They engaged in short selling through forward

contracts, spreading rumors, buying even more shares. These vile practices were

decried in petitions to the government by the directors of VOC, who argued that they were

very disadvantageous to the investors and particularly the many widows and

orphans. Petram notes that the number of widows and orphans who were

dependent on an investment in the Company would have been very small indeed,but playing on their painful situation pricked the puritanical conscience of the

authorities.In February 1610 the government issued an edict banning naked short selling, a

ban that share dealers blithely ignored.

Large numbers of VOC investors had no direct experience in trading. If these shareholders

wanted to sell their shares they had to [travel to Amsterdam and] brave the bear

pit of the exchange, where they were complete novices.By 1633, however, they were

offered an alternativeto do business with a market maker (initially, the Raphoen brothers)

who would make a small margin on every deal because they always offered a little

under the market price when buying and asked for slightly more when selling.

The Raphoen brothers also played a major role in standardizing the VOC share at 3,000

guilders, a huge sum at the time. And as the share price rose, the amount that actually

had to be paid for a share became even larger. In the 1640s the price of a Company

share stood almost continuously at above 400, which meant that over 12,000

guilders had to be paid for a share with a nominal value of 3,000 guilders. To put

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this in perspective, in 1645 the substantial and prestigious canal-side mansion (with

a rear annex) at 105 Herengracht was sold for 5,100 guilders. The always shrewd

Raphoen brothers bought up odd lots of VOC stock and combined them into 3,000-guilder

shares, which could be sold for a better price.

VOC paid a dividendsomewhat sporadically in the first twenty years and then, starting in1623, every two years, and finally, from 1635 on, every year or every six months. The

dividend was still often paid in kind, primarily in the form of cloves, but the higher

frequency and above all the regularity with which the payments were made caused

the share dealers to change their forecasts about the Companys profitability. The

future now looked very bright.

The Netherlands was experiencing a golden age in the first half of the seventeenth century and

peoples purchasing power was rising. VOC shares also rose in price, as (more famously) did the

price of tulip bulbs. Petram notes that tulip mania has always attracted a great deal of

attention because so much money was offered for something as commonplace andperishable as a bulb, but the scale of the trade in tulip bulbs should certainly not be

exaggerated. There were some 285 people actively involved in bulb trading in

Haarlem, with an estimated sixty traders in Amsterdam. By way of comparison, in

1639 in Amsterdam 264 people carried out one or more share transfers. The total

number of active share dealers would have been around 350. Amsterdams bulb

trade was thus nothing more than a peripheral phenomenon compared with the

dealing in shares.

Ive recounted bits and pieces of only about half of the story that Petram tells. He describes the

domination of Jewish traders in the share market in the second half of the seventeenth century,the rise of information networks, and the split between the princes and the gamblers or

players. The gamblers/speculators did not have significant capital in their VOC account but

traded in derivatives on a grand scale (p. 164) in trading clubs. They played fast.Petram

also recounts the events of the disaster yearof 1672 when the VOC share price sank like a

stone as well as the crash of 1688.