Everything Everywhere Daily: History, Science, Geography & More - The History of Stocks and Stock Exchanges

Episode Date: March 16, 2024

A little over 400 years ago, a group of Dutch investors had a revolutionary idea.  They were embarking on an incredibly risky endeavor, and to spread the risk, they were going to share ownership of the new venture.  Even better, each part of the ownership in this venture could be bought and sold to other investors. Their innovation is one of the most powerful economic forces in the world today. Learn more about stocks and stock exchanges, how they were formed, and how they work on this episode of Everything Everywhere Daily. Sponsors Available nationally, look for a bottle of Heaven Hill Bottled-in-Bond at your local store. Find out more at heavenhilldistillery.com/hh-bottled-in-bond.php Sign up today at butcherbox.com/daily and use code daily to choose your free offer and get $20 off. Visit BetterHelp.com/everywhere today to get 10% off your first month. Use the code EverythingEverywhere for a 20% discount on a subscription at Newspapers.com. Subscribe to the podcast!  https://link.chtbl.com/EverythingEverywhere?sid=ShowNotes -------------------------------- Executive Producer: Charles Daniel Associate Producers: Benji Long & Cameron Kieffer   Become a supporter on Patreon: https://www.patreon.com/everythingeverywhere Update your podcast app at newpodcastapps.com Discord Server: https://discord.gg/UkRUJFh Instagram: https://www.instagram.com/everythingeverywhere/ Facebook Group: https://www.facebook.com/groups/everythingeverywheredaily Twitter: https://twitter.com/everywheretrip Website: https://everything-everywhere.com/ Learn more about your ad choices. Visit megaphone.fm/adchoices

A little over 400 years ago, a group of Dutch investors had a revolutionary idea. They were embarking on an incredibly risky endeavor, and to spread the risk, they were going to share ownership of the new venture. Even better, each part of the ownership in this venture could be bought and sold to other investors. Their innovation is one of the most powerful forces in the economic world today. Learn more about stocks and stock exchanges, how they were formed, and how they work, on this episode of Everything Everywhere Daily.

What if your perceptions about the past were wrong? ThruLine is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed. It effectively turned day into night. And how it shaped the world now. Time travel with us every week on the ThruLine podcast from NPR. Most of you are familiar at some level with stocks and stock exchanges. I'd bet that most of you own stock in some corporation, whether directly, via a mutual fund,

retirement account, or maybe a small business where you are the sole proprietor. Stocks and shares are actually different, but very closely related concepts. Stock is the ownership of the company. When a company sells stock, they are selling partial ownership. An individual or another company can then buy shares of stock. So technically you don't buy stock, just the shares of the stock. These shares, depending on the company and the country, can be bought and sold depending upon the market price. The place where these shares of stock are bought and sold is known as a stock exchange.

To understand the origin of stocks, we first need to understand the origin of corporations. Corporations, as we know them today, are actually relatively modern concepts. The origin of the corporation dates back to ancient Rome. However, it was nothing like the modern corporation. The word corporation derives from the Latin word corpus, which means body, and in particular in this case, to a body of people. There were several different terms for organizing groups in Rome, including universitas, corpus, or collegium. These could represent a wide variety of groups, including burial groups, religious groups, social groups, and merchant guilds. Some collegia during the end of the Republican period actually turned into violent gangs, and during the reign of Julius Sieger,

collegia had to be approved by the Senate to give them legal authority. Similar to modern corporations, these collegia had their own legal rights. They could own property, have their own treasury, and could enter contracts. Where they differed was in their ownership structure. Because they covered such a wide range of types of organizations, they were more akin to co-ops or non-profits. The idea of an organization that could act with its own rights was revived in the Middle Ages. The idea of a corporation at this time was not necessarily about making money or even commerce.

Many municipalities and churches became incorporated. The idea was to create an organization that would survive its members. In other words, the organization would survive in perpetuity. It wasn't an issue of ownership or profit, so much as it was just creating a legal framework and a set of rules for a group of people. These corporations also didn't necessarily even issue shares of stock. For example, the City of London Corporation was established in the 12th century. One of the oldest corporations in the world is the Stora-Copperberg Copper Mine in Falloon, Sweden, which was established in 1347. There are companies in Japan that date back even much earlier than this, but they were family-run institutions, not corporations, with a separate legal existence.

For example, the Congo Gumi Construction Company in Japan actually dates back to the year 578. There were types of corporations in the Tong and Song dynasties in China, known as a Heben. These proto companies had multiple investors, all of whom received a share of the enterprise profits. Around the same time that institutions were incorporating in Europe in the Middle Ages, something else was happening. Markets began to develop for the buying and selling of debt. The idea of debt, which will definitely be a future episode, dates back as far as writing. Hamarabi's Code deals with debt. These debt markets were established in Venice in the 14th century.

Brokers with a list of all the debts available would try to match buyers and sellers. And they also eventually got into the business of buying and selling government debt. These people were the first brokers, men who brokered deals between buyers and sellers. The real innovation in crafting modern corporations and stock ownership took place in the Netherlands in 1602. The Dutch government granted a charter to the Dutch East India Company. The charter granted the company a 21-year monopoly on all trade to Asia. The charter and the monopoly on trade were not the groundbreaking aspects of this company. What was game-changing was that the Dutch East India Company was founded with a special type of joint stock corporation.

The company was not a partnership or a cooperative. Shares of ownership in the company could be purchased by, any citizen of the Dutch Republic and then sold on a secondary market. Ownership in the company and the distribution of profits was proportional to the number of shares that someone held. The company had two different classes of stock, the participatin, who were the non-managers of the company, and then the 76 Bevinthabers, who were the managers. All of the shareholders, including the Bevint-Hobbers, had their liability limited to only what they paid. Previously in any such commercial venture, the Bevint-Hubbers would have had

unlimited liability and were liable to lose everything they owned. Also, the Dutch East India Company was an ongoing affair. Previously, investors would come together for a single voyage, from which they would then share the profits and risk. The issuing of shares of stock in the Dutch East India Company also quickly led to the establishment of the Amsterdam Stock Exchange just a few months later. It was the world's first stock exchange. To be sure, it wasn't much of a stock exchange, insofar as there was only one stock that was traded, but it was the first time that shares of a corporation were openly traded in a public market. The organization of the Dutch East India Company proved to be a huge success, and it was soon copied

in other countries. Other joint stock companies, such as the British East India Company, eventually had their shares publicly traded as well. One area where ventures were perceived to be risky was North America. Many of the early colonies that were established were set up as joint stock companies. As such, these joint stock companies were quite natural to the people who lived in the American colonies. In particular, the Dutch West India Company, which founded New York City, was another company organized on principles similar to those of the Dutch East India Company. By the 18th century, trading shares of stocks had become commonplace in New York City. However, it was still highly informal. Traders would often meet at a buttonwood tree in the city where they

could meet each other to buy and sell. In March of 1792, they meant to address the problem that stock trading had become too disorderly and chaotic. After weeks of negotiation on May 17, 1792, they signed what became known as the Buttonwood Agreement. The main part of the agreement reads as follows, quote, We the subscribers, brokers for the purchase of sale of the public stock do hereby solemnly promise and pledge ourselves to each other that we will not buy or sell from this day for any person whatsoever, any kind of public stock at a rate less than one quarter percent commission on the species value, and that we will give preference to each other in our negotiations.

In testimony thereof, we have set our hands on this 17th day of May at New York 1792, end quote. This agreement is the basis of the New York Stock Exchange. The 19th century saw an increase in the need to raise large sums of capital, Railways, mining, and manufacturing were all far larger enterprises than those that came before it. They required the amount of capital that could only be raised in public markets. In the UK, the Limited Liability Act of 1855 and the Joint Stock Companies Act of 1856 laid the legal foundation for how publicly traded companies would be structured. The New York Stock Exchange was trading over 300 different stocks and bonds by the end of the Civil War, and it moved to its current location in 1865.

Over time, the stock exchanges became larger and busier. More stocks were being traded, which meant more traders. The physical act of training stocks became extremely frantic, loud, and specialized. The exchanges were open floors with hundreds of traders shouting at each other trying to buy and sell thousands of different stocks. Hand signals, color-coated jackets, and a host of other systems were developed to make trades happen in the middle of all this chaos. A major moment in the history of stocks and stock training took place on October 24th, 1929, a day known as Black Thursday, when the New York Stock Exchange lost half its value in a single day. The collapse of the American stock market precipitated declines in stock markets all over the world. In the U.S. it also resulted in major regulatory reforms, including the U.S. Securities Act of 1933 and the Security Exchange Act of 1934. stock trading is fundamentally about information. Throughout the 20th century, information technology

continued to improve, and these technologies were incorporated into stock trading. In the 1970s, video monitors showing stock data were added to the floor of the New York Stock Exchange for the very first time. Perhaps more importantly, in 1971, the National Association of Securities Dealers opened up a new electronic stock exchange known as the National Association of security dealers' automatic quotations. Or NASDAQ. Nasdaq had no hectic trading floor. Everything was done on computer terminals. For years, NASDAQ was a very small exchange. However, in the 1980s and 90s, many technology firms that had become publicly traded opted to list their stocks on NASDAQ because it was cheaper than the New York Stock Exchange. It's now grown to a point where NASDAQ now rivals the

New York Stock Exchange for the value of its listed stocks. The New York Stock Exchange has computerized most of its systems, but still has a trading floor even though it really isn't necessary. In 2020, during the pandemic, they actually switched to complete electronic trading for several weeks. With the rise in popularity of the Internet, stock trading moved from exclusively brokers to consumers. Average investors were now able to place stock trades directly from their computers and

even their smartphones. In addition to technical changes, there have also been changes to the products that are available to traders. In addition to individual stocks, it became possible to buy mutual funds, which were collections of stocks purchased by a fund manager, index funds, which are reflections of an index like the Dow Jones Industrial Average, Exchange traded funds or ETFs, which are bundles of assets that can be traded like a stock, and derivatives which are financial contracts that derive their value from underlying assets or groups of assets. I should note that as stocks go up in price, companies will sometimes split their stock to make

prices more reasonable. Someone holding one share of stock would now get two shares, but the price would be half as much, but the total value would be the same. So the average stock will usually sell in the range of few tens or hundreds of dollars per share. However, some companies have never split their stock, resulting in extreme prices for just a single share. As of the day I'm recording this, the record for the price of a single share of stock is for Berkshire Hathaway Class A, which is currently selling for $618,133.66 per share. Stocks and the exchanges that they're traded on have become integral parts of the global economy. Not only are they vital sources of capital for companies,

but they're the pillar of investments and retirement funds for millions of people. And it all started with Dutch stock traders trading a single stock over 400 years ago in Amsterdam. The executive producer of Everything Everywhere Daily is Charles Daniel. The associate producers are Benji Long and Cameron Kiefer. Today's review comes from listener D&D Goblin over on Spotify. They write, Hello, just finished listening to all the episodes. Hopefully I'll be the first Estonian member of the Completionist Club.

Could you also make an episode or two on the Baltics? Hopefully you'll read this, Jasper. Thanks, Jasper. There will certainly be episodes on the Baltics in the future. I had the pleasure of visiting all three Baltic countries just a few years ago, and I got to visit Sarama and Tallinn in Estonia. Remember, if you leave a review or send me a boostogram, you two can have it read on the show.