All Market History
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
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
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
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
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
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
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
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.”
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”.