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06/03/2015

Book Review: Lodewijk Petram's The World’s First Stock Exchange


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If you have the common, errant idea of the Dutch as universally meticulous, arrogant and deadly boring people, you will not be disappointed by L. Petram’s book, The World’s First Stock Exchange.  Happily of a “European” size—i.e. less than 300 pages—it might though bore you to death. What might have been the fascinating tale of colorful Conraad von Beuningen, a follower of Spinoza sent on ambassadorial missions to both France and England, and eventually Mayor of Amsterdam who went mad after losing his fortune in short selling, is reduced to the technicalities of how he avoided prohibition against short selling. Yet, it is necessary reading and a valuable reference source for scholars with a serious interest in markets, exchanges and financial history.

Concerning perceived arrogance, popular sources usually mention Antwerp’s stock exchange as the world’s first, yet Antwerp’s market is not even mentioned in the book.  The case for Amsterdam’s can be bolstered by qualifications such as  “continuously functioning.”  For a number of years the Amsterdam stock exchange traded in a single stock, namely, the stock of the Company of East Indies (VOC). Yet, VOC operated enormous fleets all over the globe, but also warehouses, trading stations, etc. and was a giant enterprise. Its profits, according to the author, reached more than 2 million guilders per year. Furthermore, VOC was a precursor for all joint-stock companies in the world. Unlike the previous joint-stock companies, which dissolved after dividing profits, VOC was an experiment in “going concern”, first authorized for twenty years but then constituted to run for an indefinite period. For the era, its shares were reasonably liquid and easily tradable. The seller and the buyer had to go to the notary for the sale to be entered in a special ledger. These records constitute the  “Who’s Who” of 17th century Dutch society.  

As already mentioned, short selling was prohibited, but market operators initiated forward trading in stocks and then almost immediately in stock options, which allowed speculation on downward price movement without formally shorting the underlying. Soon, traders in VOC shares were speculating by using option combinations such as straddles (documented in the book). Finally, a kind-of repo market developed, permitting borrowing against securities in a stock portfolio.

One interesting consequence of the religious tolerance – though limited – of Dutch society of the era was the emergence of a propertied Jewish merchant class, mostly of Iberian origin.  Illustrative of that, the first stock-trading manual, written in a Baroque style, was authored by a Spanish Jew.  The illuminating tale Lodewijk Petram told about Joseph Penso de la Vega and his 1688 volume, Confusion des confusions is one of the more lively passages in the book.

It could be claimed that the modern commercial methods of western society were invented by the 17th century Dutch.  The Golden Age ushered in by their short-lived naval dominance of the United Provinces is recorded in a renaissance of painting, cartography, astronomy, optics and book publishing. Most titans of the Dutch Golden Age were also stock speculators of variable success. Donations by wealthy bankers and merchants supported building of large and austere Reformist churches and much smaller, but lavishly adorned synagogues.

The Dutch republic’s prosperity was frequently threatened by rapacious neighbors: the Sun King of France and Oliver Cromwell of England. Many bankruptcies resulted from the sharp stock downturn in 1672 when Dutch Republic had to withstand a combined attack of two habitually mortal enemies: France and England. Because of enhanced used of repos, sharp loss in stock value resulted in commercial credit being frozen and massive defaults on debt. 

All in all, one marvels how close seemed the concerns of the Dutch of the Golden Age to our own, just as one marvels that a topic as fascinating as that taken up by The World’s First Stock Exchange, can be reduced to its mere technicalities.

-Dr. Peter Lerner (@PeterLerner18) is a semi-retired finance researcher who lives in Ithaca.

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