Summer School 3: The first stock and perpetual life

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0:24Welcome back, everyone, to Planet Money Summer School, economic history of the world. Oh, I should put some echo on that. Here's my coffee mug. Economic history of the world. Thousands of years of learning squeezed into eight simple lessons. In each show, we will tackle the biggest questions in economics by going back to the moment when we first started asking them. I'm Robert Smith, and this is Lesson 3, The Birth of Finance. Every Wednesday till Labor Day, we are going to take you on a chronological journey to meet the geniuses and near-to-wells that created the economy as we know it. By the end, you'll at least know who to blame.

1:03Today, we tackle finance. It's more than stocks and bonds and bros high-fiving in fleece vests, although it is that. It's also a sophisticated system for moving money through time and space, channeling resources in theory to just the right person and project to make ideas into reality. And yeah, also make people rich. It's a system that's evolved over centuries. Once upon a time, every business was a small business. It was run by the owner and the spouse and maybe the kids. They borrowed money from friends and relatives, but there was only so big that business could get. Then came what can only be described as the big bang of economics.

1:42Over the span of just a few decades, people figured out a way for businesses to sell slices of ownership, we call them stocks, and let people trade those stocks, those shares. Businesses became companies with directors and dividends. There was suddenly money to buy machines and expand. Companies could take risks and share the risks and the rewards with thousands of strangers and then take bigger risks, bigger rewards. All of this happened, amazingly enough, in a tiny little place, the Netherlands, around the year 1600. To help us tell this story is our professor for the day, economic historian Anne Carlos from the University of Colorado.

2:22Hey, Anne. It's a pleasure. Okay, so the year is 1600 in the Netherlands, and already the Dutch are known for their ships and being explorers and trade. And there was this incredible opportunity for the Dutch. It eventually led to them doing some truly awful things and colonizing countries at this enormous human cost. But there were also these forces which pushed the Dutch to invent modern finance. What were they? The forces that are pushing us have won the opportunity. So there is this great opportunity to open up sea routes to South Asia, India, Indonesia. Huge business opportunity at the time.

3:01It's a huge business opportunity. There's spices, which everybody in Europe wants. There's assorted other commodities that are coming back, silks and Chinaware. So suddenly you have this opportunity, but you need money to buy ships, to hire crews, and they need that money for somewhere. Was there excess money just floating around? I sort of think about riches at that time as gold candlesticks, you know, and land, which doesn't lend itself to financing ships traveling around the world. The reality is that, yes, it may be the king has some money, but often he's broke. It may be the aristocracy has money, but it's all tied up in land.

3:43The mercantile classes had been growing for centuries, and they are extremely wealthy. And so there is money out there to be had, and they are looking for opportunities to invest that money in ways that is relatively safe, that will give them a return, that is also liquid. Meaning money that you can easily get back. They want their money back when they need it. So what we know from today, whenever there is a huge business opportunity and a large pool of money that wants to invest in it, what arises are essentially middlemen. And that really is what finance is at first, this middleman between this huge need and this huge opportunity.

4:28That's exactly right. When we think about middlemen, we're thinking about this institutional form that suddenly provides the way to bring together these two sides of the market. And when we say bring together in the 1600s, that meant literally bringing people together in one place to give a sort of high five to each other on a bridge in Amsterdam. Yeah. It's the very first stock market, and we're going to visit it after the break.

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5:44Capital One, What's in your wallet? Terms apply. Details at CapitalOne.com. This message comes from NPR sponsor Veeam. AI promised intelligence, but it also exposed everything people couldn't see. Veeam and Security AI bring protection, governance, and AI trust together to accelerate safe AI at scale. Learn more at Veeam.com. All right, students, take your seats and buckle up. We're going back 400 years for a first case study, the birth of the stock market. Today, there are many famous investors, sure. But back in the early 1600s, there was really just one guy, Isaac Lemaire. There was one company, one kind of stock to trade, and Isaac was the biggest shareholder until the company turned against him.

6:32In 2015, David Keston, Mom, and I told the story of Isaac Lemaire. He lived about 400 years ago. And his story survives because he lived in the Netherlands, in Amsterdam. And the Dutch, the Dutch wrote a lot of stuff down. Now, we don't speak Dutch. Definitely not old 17th century Dutch. But we got some help. My name is Lodwijk Petram. I'm an economist and historian from the Netherlands. Lodwijk told us there are really only barely enough scraps to piece this whole story together. But from what survives, Isaac Lemaire seems to have been a guy who, when he did something, he went all the way. He went really big.

7:08For instance, he had 22 children. which is, well, quite something special. He obviously was very wealthy. I mean, if you can support 22 children, well, you have to have a lot of money. No portraits of Le Maire survive, but Lodwijk says in his mind, he always imagines a trim guy dressed in the style of the day. Wool clothes, maybe a cape, and a very big, wide collar. That's what I imagine him wearing, but what his face looked like, well, we'll never know, I'm afraid. No references to a giant mustache or anything. No, sorry. So that's the man. Now for the stock. Back in those days, there were not a lot of choices.

7:49At the beginning of the 17th century, there was only one stock. It was the first stock, you know, so it's obvious that there was only one. The company is one that you may remember from high school history class, the Dutch East India Company. Think big wooden boats, pirate ship-like things with big sails, making very, very dangerous trips across rough seas to about as far as you can go from the Netherlands all the way to what today is Indonesia. And remember, this is the 1600s, 400 years ago. People died at sea all the time. Many ships didn't return. And what were they risking their lives for to bring back?

8:25Spices, pepper, also nutmeg, maize. Now, when we say that this is the first company, we mean the first company that resembles what we have today, a company that issues stock, so that anyone, not just, you know, rich guys who built up a company, but anyone could own a small piece of the company. If you owned one of these shares, you owned a part of the Dutch East India Company. If those ships made it back with holds filled with nutmeg and pepper and mace, a part of the profits were yours. The legal details of what it meant to own one of these shares were laid out in this giant book called the Capital Subscription Book, with the names of all the first shareholders.

9:01And we asked Ludwig to read the very first sentence. Okay.

9:12I'm going to skip ahead a full 30 seconds here.

9:21But this is not even one sentence. I thought, well, maybe this is enough. I recognize the word commerci in there. Yeah, commerce. And Esperanza, hope? Yeah, that's the Cape of Good Hope. Ah. This book contains this little line, which seems almost like it was an afterthought. It says, shares, shares of stock in the Dutch East India Company may be transferred from one person to another. And this sentence, this sentence is the beginning of four centuries of craziness. It is the birth of what we now call a stock market. At first, only a few shares trade hands, but then it catches on. And the first stock exchange just kind of naturally forms.

10:02Not in a building. It happens on a bridge. And it's this bridge in Amsterdam where merchants gather to do their business. They sell grain, wine, beer, timber. And all of a sudden, there was this new thing that they could sell. And so people gravitated to this marketplace. And they start selling this abstract item that no one had ever seen before. A stock. Ownership shares in a company. There is a description from a little later in history of how the trading might have actually gone. It's from a book called Confusion of Confusions, which was a kind of drama written about the stock market. To negotiate a price, one guy would put his hands out, palms up, and shout out an offer.

10:38And then someone would shout out a counteroffer. And then they'd do something which I don't know if you see today in a stock market anywhere. You would then slap the guy's hands. So there was this hand slapping, you know, so people shouting prices and another man coming in between and shouting another price. And this just went on until they got to an agreement. So it's like an elaborate game of patty cake. It'd be like, they'd shout something, shout something, shout something, shout something, shout something, and then they'd shake and it'd be done. That's it. Ludwig says the traders would stand around while they're doing this and they would talk about the news of the day.

11:10Oh, I hear England's building more ships. And that might push the share price down. It's kind of like CNBC today, except imagine at the bottom of the screen a very short stock ticker. Because there's only one stock. There's only one stock. So back to Isaac Lemaire. He began as an insider. In fact, he was one of the directors of the Dutch East India Company, one of the founders. And he became embroiled in some sort of dispute with the Dutch East India Company. The details are unclear. Some surviving documents make it look like it might have been over expense receipts. We just don't know. But we do know that he was, how do you say, he was forced out of the Dutch East India Company.

11:46And he was also forced to sign a document which said that he would, he promised that he would never again be involved in any kind of trade with the East Indies. So this must have been upsetting for him. Basically, the Dutch East India Company is calling into question his business ethics, his churches excluding him. That's right. So that was about all he had, right? Plus it's a small town and everyone knows. Everyone knows. Everyone knew Isaac Lemaire back then. I mean, he was one of the directors of the Dutch East India Company. There must have been gossip in all the inns of Amsterdam about what had happened and what is he going to do now.

12:23What he was going to do would make history. And not in a good way. Le Maire plotted his revenge. He hatched a plan to take down the Dutch East India Company. And even better, make money for himself at the same time. By placing a bet that the stock price would go down. He would become the world's first person to short a stock. The bet itself, the short, was actually fairly easy to do. Amazingly, Amsterdam back then had a kind of rudimentary futures market for things like grain. If you wanted to bet that the price of grain was going to go down in the future, you could do that. So that is basically what Isaac Lemaire did.

12:58Not with grain, but with shares of the Dutch East India Company. For finance nerds out there, here is exactly what he did. He sold futures contracts, guaranteeing that he could sell the stock at the current price at a time in the future. If the stock dropped in value before then, he could buy it cheap, sell it at the price agreed to in the futures contract, and make money. Is it fair to call this the first short of a stock? Oh, sure. Yeah, yeah, certainly. Now, Le Maire couldn't step out on the bridge and do this himself. I mean, remember, he was a former director of the company. People might figure out what he was up to.

13:32So he had a bunch of what Lodwick calls henchmen go out and do it for him. And betting against something was fine. People didn't have a problem with that. It was what he did next that really got him in trouble. His henchmen started spreading rumors, trying to drive the stock price down. They said things like, oh, we heard a ship sunk somewhere off the coast of Cape of Good Hope or something. Or we heard that there's a ship with a load of pepper off the coast of Portugal right now. But there's some leakage in the ship, you know, so the pepper is of really bad quality. The stock price began to drop.

14:07The Dutch East Indy Company knew it had to do something. It needed a show of strength. It needed to reassure investors somehow that things were fine. So it did what any company today might do. The Dutch East India Company said to every one of its shareholders, we are doing so well, we are going to give you a special bonus. They instantly announced a dividend. It was the first dividend of the Dutch East India Company. And what happened, I mean, it wasn't really a great dividend. The shareholders of the Dutch East India Company were allowed to collect a certain quantity of maize at one of the Dutch East India houses in the Netherlands.

14:41Oh, the dividend wasn't money. It was like, here, you can come have some of the spices we brought home. Yeah, yeah, yeah. Yeah, bring your own bucket. Yeah, you bring your own bucket. They hadn't any cash at the time. And they must have thought, what can we distribute to our shareholders? And, oh, we have a bunch of maize here. Let's say that they can collect a quantity of maize from us. The company also, as companies today will do when they are upset with short sellers, argues for a ban on short selling. The Dutch East India Company writes a letter to the government saying short selling was hurting society's most vulnerable people.

15:15Widows and orphans. And their reasoning is that there was a large number of widows and orphans who had invested all their money in the Dutch East India Company. Is that true? Well, there were maybe a few widows and orphans. So they were fighting back with the same sort of weapons. They were fighting back with rumors and innuendo. Yeah. Yeah. Love it. That's right. The Dutch government did issue a partial ban on short selling. And Isaac Lemaire was barred from accessing any of his shares. His plan to short the company was a total failure. According to one historian, Lemaire and his henchmen lost what today would be$10 or$20 million.

15:53Lemaire eventually left town, basically went into exile. And he took up residence in this small village near the ocean. Ludwig has been there. He says, it's pretty, but for Isaac Lemaire, it must have seemed dreadfully dull. And he dies there in this little town. The writing on his tombstone kind of sums it all up.

16:17Here lies Isaac Lemaire, a merchant for more than 30 years, blessed by the Lord. He gained a lot of money and lost it all, except for his honor. The sad thing, of course, is that he was probably the only one who was convinced that he actually kept his honor because all other people, well, found him a disrespectful man. Quite a thing to put on your tombstone. It certainly is. And as for his big bet that the Dutch East India Company would fail, Isaac turned out to be right, just way too early. The company lasted almost 200 years. But near the end, it struggled for new competition on those sea routes.

17:03And eventually it collapsed under the weight of debt and corruption. This idea of short selling, betting against a company, that lives on to this day. Modern day short sellers are sometimes vilified, as Isaac was. Elon Musk loves to complain about people shorting Tesla. But now we know that having people in the market who are looking for the downside and skeptical of company claims is actually a useful thing. It can slow down bubbles forming and help the market find fair prices. Although if you try to spread rumors, badmouthing the pepper and the nutmeg, we do have laws against that now. Coming up after the break, we will be rejoined by our economic history professor and talk about how the stock market made the world less risky for some and more risky for others.

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18:27All that's left to take care of is your peace of mind. With ADT's professionally installed home security systems, you get protection that helps you feel safe. So you can focus on the pie you forgot to bake. When every second counts, count on ADT. Visit ADT.com. It's Planet Money Summer School, and we're back with our economic history professor for the day, Ann Carlos from the University of Colorado. Hey, Ann. It's a pleasure to be here, and it's a pleasure to be back. Here at Summer School, we have a lot of stories about geniuses who try something new, they change the world forever, and basically go too far.

19:03They become greedy and end their lives in misery. Is there something about finance that encourages this? Exuberance is a story that's told over and over again in finance because we like to say, and maybe it comes out of some ethic, that if you get too greedy and want too much too fast, you're going to end up in a sorry state like Le Maire. But we forget that there are lots and lots of people in there who aren't being overly exuberant, who are being, in some sense, responsible, if that's a word you can use, but are looking at the opportunities and not trying to get too much too fast. And in those cases, the markets work for very long periods of time and works well for a lot of people.

19:53Exuberance gives you stock market booms, gives you busts, but those are the exceptions to the future long history we will have of capital markets. And indeed, many of the elements we heard in this story of Isaac Lemaire are with us today. Shares of stock, dividends, capital gains, which is money you make when you sell the stock. Why do we still do what the Dutch did on a bridge 400 years ago? What the Dutch started to do on a bridge 400 years ago was to show us it could be done. And we have replicated that same model in England very shortly thereafter, in other countries. But that market is scalable.

20:39And I think that's what this episode, if you like, of long distance sea trade showed, is you could scale up and allow that trade to grow and then allow the form to grow and develop. It is interesting how the basic Dutch form expanded from this one company to thousands of companies and works for small firms and giant trillion-dollar behemoths. I think it's this idea that you sell off shares in the risk you're taking, and people can trade those shares freely, depending on how much risk they want to take, and then a market determines the price. And then more investors want in. The share idea is scalable.

21:22The other innovation that I wanted to talk about from the Dutch East India Company is that these shareholders didn't risk their entire livelihood with the fate of the company. If the ship sank, sure, you could lose the money you put in, the money you put in the stocks, but you couldn't be hauled into court and forced to pay to replace the entire ship or pay the families that were lost. This was the birth of the Limited Liability Corporation, the LLC. So why did this end up being so important? Most companies prior to 1600 were in fact full liability companies. They were joint partnerships. A joint partnership meant that if you, if the company went bankrupt, you were all equally liable for all the debts in that company.

22:07So that means you might have had to sell your home. You might have been poor. You might have been thrown in jail. You could be sent out of the town. You could be declared bankrupt. and being declared bankrupt was not a good thing because then you could never go back into business again in many of these countries. So you had to be very sure that what you were getting involved in didn't leave you liable for a sum of money that way exceeded anything you ever had. So when we talk about limited liability, what we're really talking about is limited risk, that I can take a risk with a small portion of my money, my extra money, and protect my home and my family and the money I need to eat?

22:51Limited liability is exactly about limited risk. What you put in is what you can lose. So you are protecting all your other assets. And that's what people wanted. They wanted to know what their downside risk was. People are excited about the upside risk, but the downside risk can leave them in a very perilous state. This desire for predictability leads us to our next case study. What would happen if you could create financial contracts that lived forever? Perpetual life, at least in the financial sense. Brittany Cronin and Waylon Wong from The Indicator brought us the story last year of the world's oldest living bond.

23:38Back in September, Robin Wigglesworth got to serve as master of ceremonies at this fancy Wall Street gala. I was in there, luckily not a tux, but I was kind of sutured and booted, as we say, in the UK. Robin is an editor at the Financial Times, and when he showed up at the dinner, he was pretty excited because he had requested a special plus one in exchange for emceeing the event. I said, look, I'll do it if I can invite a guest of honor. That guest of honor? A 400-year-old piece of parchment made of goatskin and covered in handwritten ancient Dutch. It is a bond, a document that was issued when someone borrowed money and promised to pay it back with interest.

24:17But this is not just any old bond. It is a bond that still pays out interest every single year. That makes it the world's oldest living bond. This bond, which Robin really wanted to see for himself, is currently owned by the New York Stock Exchange. He got the exchange to bring it to the dinner to be his guest of honor. In my world, I don't care about Kim Kardashian or Brad Pitt, but a 400-year-old bond, that really rocks my world. We are going to start our story in a region of the Netherlands called Utrecht, about 25 miles south of Amsterdam. It is January of 1624, and there is a disaster unfolding.