Weekend in Amsterdam, the Holly Place of Capitalism, and the World First IPO

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As you get into Schiphol Airport, get the 4 Euro ticket, and take the train to the Central Station. The train runs every 10 minutes, and it takes less than 15 minutes to cover the distance to Amsterdam’s main train station.

central-stationThe instant you step out of the Victorian style Central Station, you step in the tourist mayhem. Canal barges are ready to give you a tour of Amsterdam, together with a spoken tour in six languages. Postcard and key chain stands, Middle Eastern food, casinos and  beer outlets, bus tour vendors all invade your senses. You proceed with caution in this wreck of a tourist trap. Welcome to Amsterdam! Your first reaction is to get into a tram, or run to the Reik museum, in search of some understanding of what Amsterdam spirit is.  Because for sure it’s not what’s in front of the Central Station. But wait!

Look closely. This Square is the birth of Capitalism. In your sight: A House that hosted the First World IPO. The Bridge that was the first Stock Market.

As messy as this place is, there are two places that are so important to the History of Capitalism, that I ask you to look. The first one if the house of a gentleman named Dirck van Os, and is the house of the first capitalst IPO. It’s the place where the first shares of the Dutch East India Company were sold. It’s true that shares were bought before in ventures.

Dirk van Os invested in another venture just a few years before, together with another nine merchants, in a venture cheekily named Company for Faraway Lands, which raised 290,000 guldens for the first ever Dutch spike seeking exploration of Asia. The ventures were much created for one business opportunity, and then disbanded once that transaction occurred.

What was different with the Dutch East Asia Company was that the investment was, for first time ever, shares in a permanent business. The Company was created more as a necessity in face of the issues that the Dutch created for themselves, and it was a result of their success that soon transformed into a huge challenge.

The issue of over-production hit Amsterdam.

East India Dutch Company Ship Replica at Rijksmuseum

East India Dutch Company Ship Replica at Rijksmuseum

Less than five years before the Dutch East Asia Company was formed, a fleet came back after a year long expedition to East India. Inside the ships were over a million pounds of pepper and nutmeg, spices that were well valued in Europe. The investors on that venture saw a 400% return on their investment.

What happen next is a flurry of investment on spice seeking expeditions to Asia. Over sixty ships made the journey to Asia in the next three years, and completely took by storm the Portuguese, who had the monopoly of the spice commerce with Europe. The issue with these influx of ships seeking spices in Asia and bringing that much back to Europe had a twofold effect. The price of spices, mostly traded by merchants based in Java, almost doubled. And back in Europe, the influx of spices, and the high competitions between merchants, plummeted the prices. It was a great example of market forces at play.

Go Big or Go Home – The Dutch East India Company raises 1 billion dollars on one piece of paper from the new Dutch government 

East Dutch India Company Ship replica

East Dutch India Company Ship replica

So, it’s August 1602. The investment on spice expeditions to East Asia is in big trouble, with increase acquisition costs and plummeting prices, and it looks as a lot of trouble and risk for little return. This is where the genius of Amsterdam comes into place – the combination of liberalism and individual entrepreneurship comes with a solution that leverages just enough of the government for the private enterprise to take of.

For the next two centuries, the Dutch East India Company (or VOC, in Dutch) will dominate the commerce with Asia. Some quick facts about VOC:

  1. It sent a million Europeans to Asia.
  2. It moved 2.5 million tons of Asian goods, five times more than what the British East India Company moved.
  3. It had almost 5,000 ships criss-crossing the Asian waters.
  4. It paid an average of 18% dividend for 200 years.
  5. It’s archives, based in Cape Town, Jakarta. Colombo and Chenai, are measured in miles.
  6. This mighty Company closed the books once a decade (take that, accountants and auditors) for the first three decades of its existence.
Figure adorning the bow of a VOC frigate - Rijksmuseum

Figure adorning the bow of a VOC frigate – Rijksmuseum

The beginning of this mighty entreprise is right here, in front of the Central Station.

And this is the two punch knockout of the Middle Ages, and the Capitalism going around the ring with the fists thrown up in victory:

  1. First, Dirk van Os got the young Dutch government, based in Hague, to give his Company a whole monopoly in the trade with Asia. It allowed VOC to build forts, maintain armies, and sign treaties on behalf of the Dutch government with Asian kings. This is a Company that still had to raise funds, and do an IPO.
  2. Second, with the Dutch government endorsement, Dirck proceeded to IPO. Dirk van Os sold shares equal to 3.6 million guldens, out of his house in this very square, and close the IPO on August 31st 1602. To give you a perspective – 100 guldens was the yearly rent of a house in Amsterdam in 1602.

In today’s money, what he raised is about 1 billion dollars. That’s a lot of money for 1602. And it’s all based on one piece of paper, from a newly established Dutch government. And this is Europe, where changing borders and governments is as usual as my daughters changing blue jeans brands. For Dirck to be able to raise that kind of money, he had to go outside Amsterdam, and bring in the money from Antwerp and Bruges.

US Capitalism vs. Dutch Capitalism

If we can also stop for a second and think about two systems at play here, and contrast the Dutch Capitalism to the US Capitalism.

In US, the situation that the local merchants were in (increased prices, decreased revenues) will be left at the device of the market forces. Adam Smith theories of non-government intervention will typically prevail. Over time, some merchants will falter, others will succeed, and in a long while, one will establish them selves as a market leader.When you have 4 million square miles of territory (Holland has a bit over 10,000 square miles, or 0.25% of the US territory – the area between Cincinnati and Dayton), and an endless supply of capital and people, that works well. It’s not better, it’s different, and is inherent on the resources that are available to that economy.

The Dutch learned a lot from their centuries of common fight against the water, and building the dikes. When your resources are so limited, and time is of the essence, the government needs to intervene. So the Dutch pulled a page from the not yet written Keynesian economics (Keynes’s General Theory will appear 330 years later) , that says that the government should intervene in a  down cycle, and  established the basis for the Dutch East India Company.  It was not an easy decree to establish one player only for the Asia trade. In retrospect it was the right one because of the way was executed – a shared Board or Directors, with public shares available for sale and trade. And in the process, it became a model for how global enterprises are managed.

The First World Financial Stock Market

Amsterdam Centraal - World First IPO Place

Amsterdam Centraal – World First IPO Place

If you’re looking for an imposing building in the market, the Stock Exchange or the Bourse, look no more. You see that bridge in front of you? The first Stock Exchange in the world is right there.

As I said, the genius of the VOC establishment was that this was a permanent Company, versus a one trip venture backed investment. The shares were sold to 1,143 individuals, who bought 57% of the Company stock. The VOC dealings were public knowledge. When news that the first convoy was on its way back from Asia the share prices went up by 15%, then 40%, and then doubled.

How do we know that thee share price doubled? Because two Dutch gentlemen will meet on this very bridge in front of you, agree what is the right price of the day, and then walk to the Dutch east India Company headquarter, pay the 2 gulden tax and have the Company bookkeeper register the transaction.

And with that simple transaction, the East Asia travel challenges went their way, while the more manly world of financial transactions was created. A world as wild and adventuroues as the 5,000 ships on the South Seas.

Nearly any financial instrument that is practice today – call and sell options, futures contracts, short selling, you name it – was created on this bridge in front of you. From a notary book from 1607, we know of the first futures trading of shares contract signed here on the New Bridge.

So, before you jump on the canal boat and take the 90 minute six language trip, take it all in. A man who raised one billion dollars on a piece of paper in the wild 17th century Europe, and then created the basis of the financial markets.

If this is not the Holly Place of Capitalism, I don’t know what is.