In 1494, the “Father of Accounting”, Luca Pacioli, published the first ever book on double-entry bookkeeping: Summa de Arithmetica, Geometria, Proportioni et Proportionalita. Luca Pacioli is credited (pun intended) with saying the phrase: “‘a person should not go to sleep at night until the debits equal the credits.”
The double-entry system requires that each financial transaction be recorded in at least two accounts, with equal debits and credits, which helps to ensure the accuracy of the financial records. This innovation laid the foundation for modern accounting practices and is still widely used today.
The Royal Exchange in London, established by Sir Thomas Gresham in 1571, was the first purpose-built center for merchants to trade commodities in England. Gresham’s vision was to create a central trading hub that would rival the Bourse in Antwerp. The Royal Exchange became a gathering place for traders dealing in various commodities, such as spices, textiles, and metals.
As the center of commerce in London, the Royal Exchange contributed to the growth of the city as a global financial center. It facilitated not only trade but also the exchange of information and ideas among merchants, laying the groundwork for the modern commodities markets. The Royal Exchange has been rebuilt twice after fires destroyed the original building in 1666 and 1838.
The Dutch East India Company formally announced its IPO in the corporation’s founding charter on March 20, 1602. The company invited all Dutchmen to invest when shares became available for purchase in August 1602. The general public’s ability to invest in this share offering was what made this first “IPO” so unique, as previously companies raised capital from small groups of wealthy investors. When the IPO subscription period ended on August 31, some 1,100 investors had purchased shares in the IPO.
Read More: The World’s First IPO
Isaac Le Maire was originally on the Dutch East India Co. (VOC) board of directors, but stepped down in 1605 amid controversy. To exact revenge on the VOC, he began a short-selling campaign (i.e. “bear raid”) designed to bring down the company’s share price. Some historians consider this an early form of shareholder activism, as Le Maire felt the company was making decisions against the interest of shareholders, and felt the only way to gain their attention was through shorting the stock. Eventually, the VOC convinced the Dutch government to put a ban on naked short selling, which ruined Le Maire’s campaign.
Read More: Power Grab: Activists, Shorts & The Masses
The Dutch East India Company’s (VOC) paid its first dividend to shareholders in 1610. While the company was formed in 1602 and benefitted from an incredible monopoly on trade, it was only after incessant demands from shareholders like Isaac Le Maire that the VOC finally agreed to pay a dividend eight years after its IPO. However, this first dividend was paid in spices. Shareholders received “mace at a value of 75% of the nominal capital”. The VOC’s first cash dividend was not paid out until 1612.
Read More: Dividends: A 400-Year-Old Practice
The roots of modern stock markets can be traced to early 17th century Amsterdam, where investors in the Dutch East India Company needed a forum for trading shares on the secondary market. The Amsterdam Stock Exchange opened its doors for trading in August 1611.
Read More: The World’s First Stock Exchange
Sveriges Riksbank, a.k.a. The Bank of Sweden, was established in 1668 and is considered the world’s first central bank. The bank was founded by Johan Palmstruch, who had also founded Stockholms Banco, the first bank to issue banknotes in Europe.
According to the bank’s website: “one of the Riksbank’s tasks was to maintain price stability. Between 1668 and 1897, the law included a clause on price stability. The Riksbank was to “maintain the domestic coinage at its right and fair value”.
Read More: Sveriges Riksbank
Joseph de la Vega wrote the first ever behavioral finance book in 17th century Holland. His book, Confusion de Confusiones, is a conversation between an Investor, Philosopher and Merchant in which the Investor explains how the stock market functions. This excerpt offers just one of the brilliant descriptions of markets:
“This business of mine [investing] is a mysterious affair, and that, even as it was the most fair and noble in all of Europe, so it was also the falsest and most infamous business in the world. The truth of this paradox becomes comprehensible, when one appreciates that this business has necessarily been converted into a game, and merchants [concerned in it] have become speculators…“
Read More: Psychology, Behavior & Markets
The Bank of England was founded by a parliamentary act in 1694 to generate funds for England’s war efforts against France. Granted a royal charter, the bank functioned as a joint-stock bank with limited liability, and until 1826, no other joint-stock banks were permitted in England and Wales. This unique position, along with being the government’s banker, provided the bank with substantial competitive advantages.
The bank moved to its permanent address on Threadneedle Street in the 1730s, and by that point it had become England’s largest and most prestigious financial institution. Consequently, the Bank of England also served as a banker for other banks, enabling them to settle debts among themselves by maintaining balances with it. Although the economic turbulence surrounding the French Revolution and Napoleonic Wars threatened the bank, its actions in raising funds for Britain’s involvement in these conflicts also significantly bolstered its standing.
The bank remained privately owned until 1946, when it was finally nationalized.
Read More: J. Lawrence Broz
In 1687, treasure hunter William Phips returned back from his very successful expedition in search of a sunken ship rumored to be full of diamonds and silver. The ship did have treasure, 32 tons of it. The investors that funded Phips’ journey received a 10,000% return on investment, setting off a wave of excitement in London’s investment community. There was an explosion in new “sea diving engine” companies that claimed to help treasure hunters stay under water for longer periods of time, theoretically making it easier to find treasure.
Almost all of these companies were fraudulent, and none ever replicated Phips’ original success. There was also an explosion in IPOs for non-diving related companies, such as the White Paper Company (which rose 3x in 4 years), the Linen Company, and other companies developing “technology” for strange things like “lights used to catch fish.” The crash in 1696 was epic in proportions. In 1693 there were 140 English & Scottish companies listed on the exchange. During the 1696 crash, 70% of those companies were wiped out.
Read More: Speculation & Innovation
The Dojima Rice Exchange, established in 1697 in Osaka, Japan, is considered the world’s first futures market. The exchange was initially created to standardize and regulate the trade of rice, which was a vital commodity in Japan. In fact, rice accounted for 90% of government revenues in 1716!
The government paid “bannermen” (Samurais working in civil & military administration) with a fixed amount of rice that they then sold on the market for cash. Thus, their income was directly tied to the price of rice, which was very volatile.
To accommodate their needs, merchants developed the concept of rice warehouse receipts, which later evolved into rice futures contracts. Trading in rice contracts began in Osaka, Japan at the Dojima Rice Exchange in the 17th century. These contracts allowed buyers and sellers to agree on a predetermined price for rice to be delivered at a future date. This innovative market mechanism helped reduce the price volatility of rice and laid the foundation for modern futures markets.
Read More: Derivatives: Past, Present & Future
Dutch broker Abraham van Ketwich launched the first “mutual fund” in 1774. The fund was named “Eendragt Maakt Magt”, which translates to “Unity Creates Strength”. van Ketwich launched the fund shortly after the financial crisis of 1772, in which Dutch banks were brought to the brink of collapse due to concentrated bets on British East India Company stock, which had tanked that summer. This proved a valuable lesson on the merits of diversification.
The fund consisted of 50 bonds that were equally weighted and diversified across 10 different categories/sectors (banks, turnpikes, etc.). The fund also had a low expense ratio of 0.20%.
Read More: Innovations in Asset Management
While Treasury Inflation-Protected Securities (TIPS) were first auctioned in 1997, the concept of inflation indexed bonds dates back to the founding of America itself. The Commonwealth of Massachusetts issued the first known inflation-indexed bonds in 1780, during the Revolutionary War. At the time they were issued, the spirits of American troops were low due to a lack of food, clothing, and pay. Robert Shiller wrote:
“There was real concern in 1779 that it would be impossible to keep an army if something were not done to address the loss of value of their pay. The invention of indexed bonds came in response to this very real and dangerous crisis.”
The inflation-indexed bonds were issued to soldiers as a method of “deferred compensation” for their service. To protect against a loss of purchasing power via inflation, the bond payments were tied to a consumer price index.
Read More: Inflated Fears
When Alexander Hamilton became the first Treasury Secretary in 1789, the nascent United States faced financial turmoil. With no tax revenue until 1789, the government was in default on most domestic debts, and there was no national currency, banking system, or securities market. Not great.
Hamilton’s “Report on a National Bank” (1790) outlined the need for a national bank to stabilize the economy. After heated debate, Congress approved the “Bank of the United States” (BUS) in 1791, with a $10 million capitalization, 80% privately owned and 20% government-owned. Amazingly, the IPO was on… July 4, 1791.
The BUS IPO had unique features: investors paid 25% of the share price in specie and 75% in US debt securities (Hamilton’s ‘Sixes’). This strategy increased demand for government debt.
Chartered for 20 years, the BUS was not renewed in 1811.
Read More: Panic Series (Pt. I): 1792
America’s first financial panic in 1792 is primarily known for the duplicitous actions of one William Duer. Up until 1791, Duer had been a respected individual that had signed the Articles of Confederation, member of Continental Congress, and most importantly secretary to the Board of the Treasury.
However, with his role at the Treasury providing intimate knowledge of government finances, Duer resigned from his post and began speculating on government debt, the Bank of the United States stock and Bank of New York stock (the first ever traded in Wall Street). Duer and his associates attempted to corner the market in these securities, while borrowing heavily from friends and family in the process. Duer used his friendship with Alexander Hamilton and former Treasury position to convince people he could offer guaranteed returns. Eventually the scheme blew up and Duer died in debtor’s prison in 1799.
Read More: The Panic of 1792
The New York Stock Exchange (NYSE) was officially founded on March 8, 1817, some 25 years after the Buttonwood Agreement was signed by 24 brokers under a buttonwood tree on Wall Street (1792). The Buttonwood Agreement, a two-sentence contract, marked the beginning of organized securities trading in the United States. Early trading occurred outdoors, under a buttonwood tree on Wall Street, before moving to a rented room at 40 Wall Street in 1817.
Initially named the New York Stock & Exchange Board, the NYSE provided a centralized location for brokers to trade stocks and bonds, fostering liquidity, price transparency, and market efficiency. The first listed company on the NYSE was the Bank of New York, and only five securities traded in the early days. Over time, the NYSE grew to become the largest and most influential stock exchange globally, significantly impacting the financial landscape.
If 1792 was the nation’s first financial panic, the Panic of 1819 is considered America’s first Depression. Before every bust there must be a boom, and in this case it was not equities at the heart of the boom, but real estate. This was largely driven by the America government’s need to pay off the heavy debts it incurred to finance the War of 1812 against Britain. The government raised funds by selling western land grants to settlers, and eventually speculators. Individuals were able to buy land on credit due to earlier legislation, and an influx of state banks were formed to provide cheap credit to those that wanted it.
Eventually a sudden decline for American crops in Europe triggered knock on effects that would tank America’s economy. The impact of the 1819 Panic was severe, and marked America’s first true “depression”. In Virginia, the number of merchant licenses issued between 1818-1819 dropped 40%. In Philadelphia, the number of people employed across 30 industries dropped 78% between 1816-1819:
Read More: The Panic of 1819
Gregor MacGregor was deemed the ‘King of Con-Men’ by The Economist for pulling off the ‘greatest confidence trick of all time’. MacGregor earned this title by finding an uninhabited piece of land on the coast of Honduras, creating a fictitious country called Poyais, and selling over a billion dollars worth of ‘Poyais bonds’ in London by misleading investors with lies about how Poyais was a developed society. MacGregor claimed that Poyais was home to beautiful architecture, an opera house, parliamentary building, cathedral, and more. In reality, it was an uninhabited jungle.
MacGregor appointed himself the “Grand Cacique of Poyais”, and traveled to London to start his scheme. He heavily marketed Poyais to British investors, and as there was already speculative enthusiasm for Latin American bonds at the time, he had no problem finding investors. Offices were opened in London and Edinburgh to sell Poyais land grants at 4 shillings an acre, and in 1822 he issued $200,000 in bonds offering a 6% yield (billions in modern money).
Worst of all, many Scottish retirees relocated to Poyais based on MacGregor’s promises of paradise. In total, seven ships sailed to Poyais, but only 60 of the 240 settlers that arrived survived.
Read More: Troubles in Paradise
1825 was a year filled with bubbles and manias stemming from low interest rates and cheap credit. This low-rate environment resulted from the government’s interest in keeping rates low following a very expensive period of conflict (the Napoleonic Wars). Lower rates meant lower debt payments. However, this impacted investors relying upon consols (government bond equivalents) for income, as lower yields reduced their income from interest payments. Similar to today, these investors were forced into riskier and higher-yielding assets in a “reach for yield” scenario.
At the same time, many Latin America and South American countries were gaining independence from Spain, and beginning to issue high-yielding sovereign debt (sometimes as high as 15%). British investors starved for income from low consol yields rushed into these Emerging Market bonds. This speculative fervor eventually expanded into Latin American mining stocks and new UK joint-stock companies. The period was riddled with fraudulent schemes and startups launched to take advantage of speculator’s enthusiasm. One example was the Resurrection Metal Company, “which intended to salvage underwater cannonballs that had been used at Trafalgar and other naval battles”.
The craze ended as rates were raised, money markets tightened, and a wave of bank failures brought the party to a halt.
Read More: The Panic of 1825: In Quest of Aztec Gold
In 1841, in the bustling heart of New York City, entrepreneur Lewis Tappan laid the groundwork for the first credit rating agency: The Mercantile Agency.
In the early 19th century, American business was conducted locally, where merchants and businessmen knew each other well. As a result, when a merchant wanted to buy on credit, the businessman would assess their creditworthiness based on the merchant’s local reputation. Railroads changed everything. With thousands of miles of track connected far-flung regions of America, business transactions shifted from a local to national scope. Merchants transacted with customers they had not met from towns they had not visited.
Over time, The Mercantile Agency evolved into the renowned R.G. Dun & Co., which, in a twist of fate, merged with its primary competitor, the Bradstreet Company, in 1933. This merger marked the birth of the modern credit rating powerhouse we now know as Dun & Bradstreet.
The first telegraph line was introduced in the United States in 1844, connecting Washington, D.C., and Baltimore, Maryland. The first message sent via telegraph was “What hath God wrought,” an ominous quote from the Bible. The invention of the telegraph, credited to Samuel Morse, revolutionized long-distance communication and had a significant impact on the financial industry. One contemporary proclaimed that “distance and time have been annihilated”.
It allowed for faster transmission of information, including stock prices and financial news, which was essential for the functioning of the growing financial markets. The success of the initial telegraph line led to the rapid expansion of the telegraph network, connecting cities and countries around the world, and transforming the way financial markets operated. The Ticker, for example, was made possible by the telegraph.
As railways and canals connected vast regions of America, cities like Chicago emerged as crucial trading hubs due to their strategic locations. The completion of the Erie Canal in 1825, for instance, transformed Chicago from a small city into a thriving commercial center connecting the Midwest and the Atlantic Ocean. In 1857, the Madeira Pet ship directly reached Chicago from England, utilizing the expanding canal network, marking the first oceanic arrival in the city.
Chicago swiftly became the heart of America’s grain trade. Merchants purchased grain from farmers, stored it during fall/winter, and sold it in spring. However, this involved risks and costs, as merchants had to pay for the grain, transportation, and storage while being exposed to price volatility. To hedge this risk, merchants entered into contracts for future grain deliveries at prevailing prices.
The first such “time contract” was written on March 13, 1851, for 3,000 bushels of corn to be delivered in June, priced $0.01 below the cash price on the contract’s date. This innovative idea rapidly gained traction.
On April 3, 1848, the Chicago Board of Trade (CBOT) was founded with 82 members, initially promoting trade among them, functioning as a meeting place to resolve disputes and discuss commercial matters. In 1858 and 1859, two critical developments changed the CBOT’s trajectory. In 1858, a new department for classifying and certifying grain grades boosted buyer confidence and market development. In 1859, the CBOT became a state-chartered private association, empowering it to implement trading rules among members and regulate grain trading and inspection.
In May 1865, the CBOT started converting actively traded, homogenous forward contracts into futures contracts. Today, the Chicago Board of Trade remains one of the world’s oldest futures exchanges.
In 1867, Edward A. Calahan, an employee of the American Telegraph Company, invented the stock ticker. This machine revolutionized the way stock market information was disseminated to investors by enabling almost real-time reporting of stock prices and transactions.
The ticker technology democratized access to market information. Prior to its invention, only those physically present at the stock exchange – or very close by – were privy to real-time market prices. Everyone else received their data at a substantial lag, often to the point where it was no longer useful.
The ticker, however, changed everything. Using telegraph cables, the ticker distributed real-time prices across America. Proximity to the NYSE was no longer a barrier to accessing market data. By 1905, 23,000 offices paid for ticker services in the United States.
A fascinating aspect of the ticker tape’s history is Thomas Edison’s involvement. Edison worked on improving the ticker tape machine in the early 1870s, leading to the development of the Universal Stock Ticker. This invention, which improved the speed and efficiency of the original design, was Edison’s first commercially successful product and provided him with the financial resources to establish his own laboratory.
The Foreign and Colonial Government Trust (FCGT) was established in London in 1868. Launched in a period of historically low yields, like today, investors were forced to “hunt for yield” in riskier investments. True to its name, the firm focused on loans to foreign governments both within, and outside her majesty’s realm. The FCGT is also the world’s oldest closed-end fund still in operation today.
While yields on government consol bonds were just 3.2%, the lowest and highest yielding holdings listed in FCGT’s first prospectus were 5.1% (New South Wales) and 15.43% (Turkey), respectively. This higher yield was very attractive for British investors, and the popularity of FCGT soared. A wave of new trusts were launched in response to this newfound popularity, and by 1890 there were 100 trusts in operation.
Read More: The Yield of an Empire
The second iteration of London’s “Royal Exchange” (1871), The London Metal Exchange (LME), was founded in 1877 above a hat shop in Lombard Court. The exchange was established to provide a centralized marketplace for trading copper, tin and pig iron.
The impetus for founding the LME stemmed from overcrowding at the Royal Exchange, which forced the overflowing mob of traders to congregate at the nearby “Jerusalem Coffee House”. According to Reuters, this is where the tradition of “ring and kerb” was established:
“When a dealer wished to trade he would draw a ring on the floor of the coffee shop and shout ‘Change’. The expression ‘kerb’ trade developed when the coffee houses closed at the end of the day forcing traders onto the street to trade on the kerb of the road.”
Britain’s “Bicycle Mania” in the 1890s witnessed an astonishing 671 bicycle companies go public in a span of 2.5 years. 671 bicycle companies. The explosion in interest and demand for bicycles followed a number of technological innovations that transformed the existing penny-farthing (the old cycles with massive front tires / small back tires) into more modern looking bicycles we’d recognize today.
“The ‘safety’ design, diamond frame, and pneumatic tire made for a much more comfortable ride, and the use of ball bearings and new processes for producing weldless steel tubes substantially increased British productive capacity. The widespread adoption of the pneumatic tire in 1895 resulted in a rapid increase in demand for bicycles, which existing producers struggled to meet.
There was thus a rapid increase in the number of registered cycle manufacturers in Britain: Harrison reports a fourfold increase between 1889 and 1897… at the height of the boom in 1896, 750,000 bicycles were produced per year, and 1.5 million people cycled, at a time when the population of Britain was around 35 million.”
Charles Dow and Edward Jones created the Dow Jones Industrial Average (DJIA) on May 26, 1896. The index initially included 12 of the most prominent industrial companies in the United States, such as General Electric and American Cotton Oil. Dow was a financial journalist who wanted to make market performance easily understandable for the average person. He devised the DJIA to provide investors with a simple, representative snapshot of market performance. The DJIA has since evolved to include 30 large, publicly traded companies from various industries.
Charles Dow’s other major contribution to financial analysis is “Dow Theory,” a pioneering framework for understanding market trends and price movements. Dow Theory, derived from Dow’s editorials in The Wall Street Journal, remains relevant today and forms the basis for modern technical analysis.
Despite its limitations, the Dow remains one of the most widely recognized and cited stock market indices in the world.
America’s central bank was founded through the Federal Reserve Act of 1913, which was largely a reaction to the Panic of 1907 that caused inflation-adjusted GNP to fall 12% (twice as bad as the fall during the 2008 crisis).
“After the panic ended, there was a broad sense that reform was needed, although consensus on the exact nature of that reform was elusive. Some called for an institution similar in structure to the Bank of England at the time, with centralized power, owned and operated by the banking system. Some wanted control to be lodged with the federal government in Washington instead… The resulting institution was a compromise, created by the Federal Reserve Act in 1913… a more federated system was created, establishing the Federal Reserve Board in Washington and the 12 Reserve Banks located around the country.”
On October 3, 1933, Dow Jones announced a new index of commodity futures prices. The index was comprised of “eleven actively traded commodity futures”, would be “calculated hourly”, and also be published on the Dow Jones news ticker. Between 1933 and 1998 the index “earned a risk premium of 3.7% annually”.