Planet Money - Summer School 3: The first stock and perpetual life

Episode Date: July 26, 2024

Episodes each Wednesday through labor day. Find all the episodes from this season here. And past seasons here. And follow along on TikTok here for video Summer School. Once upon a time, every business was a small business. It was run by the owner, maybe the spouse and the kids. Maybe they borrowed money from friends and relatives, but there was only so big it could get. Then came what can only be described as the big bang of economics. Over the span of a few decades, people figured out a way for businesses to sell ownership shares – otherwise known as stocks – and let people trade those shares. There was suddenly money to buy machines and expand. Today, we head to the Netherlands around the year 1600. First, we'll visit the bridge in Amsterdam where some of the first stock trading took place. Then we track down the Dutch water company that's the source of the oldest "living" bond. It's the origin of stocks and bonds and the stock market and it leads directly to many of the financial innovations that we still have today. This series is hosted by Robert Smith and produced by Audrey Dilling. Our project manager is Devin Mellor. This episode was edited by Planet Money Executive Producer Alex Goldmark and fact-checked by Sofia Shchukina. Help support Planet Money and hear our bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

New, from the Embedded Podcast. Elite female runners are being told they can't compete because of their biology. Not only can you not compete, you're not actually female. Hear about the 100-year history of sex testing in women's sports, and the hard choices these athletes are facing now. Listen to Tested, a new series from CBC and NPR's Embedded Podcast. This is Planet Money from NPR. Welcome 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 ne'er-do-wells that created the economy as we know it. By the end, you'll at least know who to blame. Today, 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. Over 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. Hey 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 in 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. Pete H 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. The mercantile classes have 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. That'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.

It's the very first stock market and we're going to visit it after the break. Alright, students, the Olympics takes center stage this summer, this time in Paris. The one a podcast dives into topics beyond the headlines with our series rings and things. Take a look at what it takes to prepare for an event like the Olympics from designing uniforms to new sports making their debut this year. Join us for Olympics coverage this summer with the 1A podcast from WAMU and NPR. On Wait Wait, we ask very well known people about things that people don't know about them. Like what was Malala Yousafzai doing when she heard she'd won the Nobel Peace Prize? I went to my physics class. I said, I have to finish my school day because when you get the Nobel Peace Prize for education, you have to finish your school day.

I'm Peter Zegel for the real secrets of the rich and famous. Listen to the Wait, Wait, Don't Tell Me podcast from NPR. Let's take your seats and buckle up. We're going back 400 years for our 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 Le Maire. There was one company, one kind of stock to trade,

and Isaac was the biggest shareholder until the company turned against him. In 2015, David Kestenbaum and I told the story of Isaac Le Maire. 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 Lodweke Petram. I'm an economist and historian from the Netherlands. Lodewijk 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. For 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 Lodwik 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. At 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? Spices. 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 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.

And we asked Ludwig to read the very first sentence. Okay. I'm gonna skip ahead a full 30 seconds here. But this is not even one sentence. I thought, well, maybe this is enough. I recognize the word, I recognize the word, commercial 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. Not 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's 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 and then someone would shout out a counter offer and then they 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 his 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 could be like it's out something shout something shout something shout something shout something 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 Oh, 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 Lemayre. 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. And 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 Le Maire back then. I mean, he was one of the directors of the Dutch East India Company. There must have been gossip in all the ins of Amsterdam about what had happened and what is he going to do now? What 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 Le Maire did. Not with grain, but with shares of the Dutch East India Company. For finance nerds out there, here's 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, LaMare 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. So he had a bunch of what Ludwig 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, so the pepper is of really bad quality. The stock price began to drop. The Dutch East India 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.

Oh, the dividend wasn't money. It was like, hey, you can come have some of the spices we brought home. Yeah. Oh, bring your own bucket. Yeah. Yeah, bring your own bucket. Really. 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, widows 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 was, there were maybe, 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 Le Maire was barred from accessing any of his shares. His plan to short the company was a total failure. According to one historian, Le Maire and his henchmen lost what today would be $10 or $20 million.

Le Maire eventually left town, basically went into exile, and he took up residence in this small village near the ocean. Lodewijk 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.

Here lies Begraven, Isaac Lema 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 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, Izaak turned out to be right. Just way too early.

The company lasted almost 200 years, but near the end it struggled from new competition on those sea routes, and 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, bad mouthing 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. Here at Shortwave Space Camp, we escape our everyday lives to explore the mysteries and quirks of the universe. We find weird, fun, interesting stories that explain how the cosmos is partying all around us. From stars to dwarf planets to black holes and beyond, we've got you. Listen now to the Shortwave podcast from NPR.

Do you want in on a secret? Like why bro culture is making a comeback or why a makeup fat is suddenly sweeping your feed? On the It's Been A Minute podcast, we know these things don't happen by accident. So join me as we go beyond the trends and find out the why. Follow the It's Been A Minute podcast from NPR. The Bullseye podcast is, according to one journalist, the quote, kind of show people listen to in a more perfect world. So make your world more perfect. Every week, Bullseye puts the pop in culture,

interviewing brilliant authors, musicians, actors, and novelists to keep you on your pop culture target. Listen to the Bullseye podcast only from NPR and Maximum Fun. It's Planet Money Summer School and we're back with our economic history professor for the day, Anne Carlos from the University of Colorado. Hey, Anne. 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.

They 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. Exuberance 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 Lamar 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? What the Dutch started to do on a bridge 400 years ago was to show us it could be done. We have replicated that same model in England very shortly thereafter, in other countries,

but that market is scalable. I think that's what this episode, if you like, of long distance C-Trade showed is you could scale up and allow that trade to grow and then allow the forum to grow and develop. Yeah, it is interesting how the basic Dutch forum 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 it. The share idea is scalable. The 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. So that means you might've had to sell your home.

You might've been poor. You might've 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. Limited 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 want, 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? 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. Back in September, Robin Wigglesworth got to serve as master of ceremonies at this fancy Wall Street gala. I was in a, luckily not a tux, but I was kind of suited to booters 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 goat skin 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. But 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 Kit 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.

Drifting ice has broken through a dike on an offshoot of the Rhine River. This results in a major flood. Jeroen Han chairs the board of the Dutch water utility that oversees Utrecht today. When the flood appears, it almost reached Amsterdam and Rotterdam, which is about 40 kilometers away. So the whole dike had to be replaced afterwards. And then this required a lot of money. There was actually a local water authority back in the 1600s and they needed funds to replace the dike. So it decided to sell bonds. The utility borrowed money from the people who purchased the bonds and in exchange, it agreed to pay those bondholders interest. And this is still the way bonds work today.

Robin Wigglesworth at the Financial Times says the Dutch were the ones who figured out this structure. Really, the bond and its modern shape, I'd say, was probably born in the Netherlands around the 1600s, in the Dutch Goldeneye. And the Dutch really kind of invented modern capitalism as we think of it today. Bonds became a way to fund all kinds of human activity, from public infrastructure to private factories to cataclysmic wars. And Robin says over half of the debt in today's global economy is in the form of bonds. Building the skyscrapers of New York that was largely financed by bonds, railways, canals, electricity, Tesla's cars, what we watch on Netflix is all financed by bonds.

Robbins says one important characteristic of a bond is that it is tradable. Whoever initially buys a bond can sell it or give it to someone else. And then the new owner of that bond gets to collect interest on it until the bond expires. But there is a twist when it comes to the bond that this Dutch Water Authority issued in 1624.

It didn't have an expiration date, so it's what's called a perpetual bond. The interest? It pays out forever. And back in the 1600s, the water authority issued a bunch of these bonds to come up with the cash it needed. Perpetual bonds are still issued today. Some governments like them because they technically don't ever have to repay the upfront amount they borrowed. They just continue to make interest payments. What's remarkable about these Dutch perpetual bonds from the 1600s is that a very small number of them, like fewer than 10, are still around today in their physical form. They didn't disintegrate or get thrown out or eaten by a farm animal. As we heard earlier,

the New York Stock Exchange got the oldest one, that one from 1624. A slightly younger bond from 1648 was acquired by Yale University for its rare book and manuscript library. And here's the story of how that 1624 perpetual bond traveled from the Netherlands to the United States. The original buyer of the bond was a woman in Amsterdam. Later on, the bond came into the possession of the Amsterdam Stock Exchange. And then fast forward all the way to 1938.

There was a meeting between the Amsterdam Stock Exchange Board and the New York Stock Exchange Board. Pete Ash is the chief historian of the New York Stock Exchange. He says the bond was a gift from the Amsterdam Exchange. One of their board members brought the bond with them from Holland. And so that's how it ended up with us. It's about 13 inches by 24 inches. It's a pretty big piece of paper to stick in your pocket, but at the same time, not a giant piece

to have 400 years of history on it. Pete says the New York Stock Exchange usually keeps the 1624 perpetual bond in its archives in New Jersey. But Pete brought it out just for us and Brittany you got to see it in the flesh! I did! Literally it is made out of animal skin. Ooh what'd it look like? Well it's kind of brown and like every inch of it is covered with handwriting.

So Pete says there's all this official legal language written in Old Dutch that I did not understand but apparently lays out the terms of the bond. There's this spot in the middle where there used to be a seal that's fallen off by now. And then the rest of it is covered in this kind of gorgeous penmanship. It has a bunch of handwritten dates recording each time interest was paid out. I love how your Duolingo classes didn't cover the ancient Dutch you needed to read the legal terms of this bond. Not yet. Growth mindset, Waylon. We're working towards it. I love it. That owl's like, you can do it. I wish I could say that back in Dutch.

In Dutch. Yeah. Today, that interest is paid by the present-day Regional Water Authority. As the chair, Jeroen Han sets aside the money every year. For the 1624 bond, the annual interest works out to 13 euros and 61 euros since. We still have to pay and it's a great story. One catch is that per the terms of this bond, the owner has to physically present the document in order to get the money. And Piet says a representative from the New York Stock Exchange

used to visit the Netherlands every five or ten years to collect the accrued interest. That money then got donated to Dutch financial literacy programs. It's now been about a decade since anyone's gone, but an archivist that Pete knows at a Dutch organization that has its own perpetual bonds made the trip more recently. He sent me a picture of him basically getting like the big check you would imagine you'd get for winning a golf tournament. Over in the Netherlands, Jeroen Haan says that in the four years he's been at his job at the water utility, no one has come around to collect their interest. But he would love to give someone a big novelty check.

Everyone who has a bond, I would really invite them to collect their money. And Jeroen says for him, these perpetual bonds link him to his predecessors, all of the people who came before him who took on the responsibility of safeguarding the country's water infrastructure. With the sea level rising, with the climate change, with the more extreme weather, the possibility of flooding is getting bigger. So to explain why people have to pay the checks to the water boards, that's a beautiful story. It's the age old story of the water boards, which preserves the dikes and protects us against the floods.

In December of 2024, the world's oldest living bond will celebrate its 400th anniversary. Pete at the New York Stock Exchange says there's been some discussion about traveling to the Netherlands or maybe just having a little shindig. We thought about making a celebration out of it. We do like to celebrate things here, but cake and a 400-year-old bond don't quite mix that well. What about a 400-year-old cake? No, a 400-year-old cake, and we also don't want cake anywhere near the bond.

Brittany Cronin and Weylin Wang from The Indicator in 2023. After the break, what could possibly go wrong with a financial system that was invented 400 years ago? New from the Embedded Podcast. Female athletes have always needed grit and talent. But for decades they've also needed a certificate. There was chit chat about, is that really a woman? And even now they're still being checked and questioned. Their story is the newest series from CBC and NPR's Embedded. It's called Tested. Listen wherever you get your podcasts.

NPRs embedded. It's called Tested. Listen wherever you get your podcasts. I would like to remind the summer school class that all of this will be on the test. And I'm serious about that. At the end of the summer, there will be an online test about the historical ideas we've been talking about. And if you pass, you will get a diploma, which I am not legally allowed to call a diploma. So listen carefully as we are rejoined by our professor, Anne Carlos from the University of Colorado.

Hey, Anne. Let's do it. You know, we've been talking about this as a turning point in financial and economic history, but it just occurred to me that this is also sort of a revolution in trust, that you had people making arrangements that would outlive them, whether it be stocks

that they could pass on or these perpetual life bonds. This required really just like a belief in your society and laws that we might not have seen before this time. There is huge amounts of trust involved. I don't know if people have done a lot of work on how trust in this big picture sense, just trust between you and me. Pete It's a little woo-woo, yeah. Anna No, I don't think, I think it's fundamental.

There's nothing woo-woo about this. This is absolutely fundamental. If you don't trust that there's stability, you are not going to lend at all. If you think there's a war coming, if you think the government's going to be toppled, if you think there's going to be a coup that someone's going to march over your borders, you're not lending and companies are not investing. So this is capturing this both stability in the markets

and stability and perception of the future. But it does seem to me like somewhere inside this whole system is something that also encourages a little bit of instability. If you have the freedom to resell stock shares at any price, sometimes investors, you know, they become irrational, they become excited, they start bidding. Sometimes investors, you know, they become irrational. They become excited.

They start bidding up the price. You get bubbles and then the stock market goes to the moon and then it plummets back down. Can you stop that part of the system from going crazy? If you want people to buy stocks, you do have to give them the freedom to resell those stocks at any price you want. If you put rules on that market and say you can't sell them,

then the market doesn't exist. So what we get is we get the good side of the market, we get firms getting capital, we get economic growth, we get people getting more wealth, we get the bad side of the market, which is sometimes things go too far and you get a readjustment. You get panics, you get stock market crashes. The big lesson is that institutional forms do evolve. We do take the pieces we need and want and create new forms. Those new forms might be spectacular and also those new forms might fail abysmally. But the one that we got in the stock market led to tremendous growth over 400 years,

which I don't think any of us would want to hand back. Anne Carlos is an emeritus professor at the University of Colorado. Thank you so much, Anne, for coming in and teaching us today. It was wonderful to be able to talk about something that I get so much joy out of. For those of you taking notes, there are a lot of big concepts to review in this episode. We had, of course, the definition of stocks and bonds, but also this idea of liquidity. That's when you can get money easily out of an investment. You can easily resell it.

This is what helped grow the number of people willing to invest their spare cash. But that easy selling and reselling sometimes leads to bubbles and panics and crashes. We also talked about the concept of limited liability. That's when companies can go bankrupt, but all the investors can lose is the money they put in. Limited liability allows people to take limited risks with their excess money. And our final concept? Ah, LeMare's favorite, short selling. Having a mechanism in place to bet against companies if you think that company is not

going to succeed. The fact that the very first stock was also the very first short shows you how the two are intertwined. Next week on Summer School, we will arrive at the birth of the United States of America, a chance to finally create a new nation that gets economics right. And we'll tell you the story of how we proceeded to screw it up. If you like looking at moving pictures, we do have those for you. The Planet Money TikTok is putting out their own unique spin on the history of the world and presenting a new concept from summer school each and every week. You can find them on TikTok and Instagram.

Search Planet Money. Planet Money Summer School is produced by Audrey Dilling. Our project manager is Devin Miller. This episode was fact-checked by Sophia Shukenet and edited by Planet Money executive producer, Alex Goldmark. I'm Robert Smith. This is NPR. Thanks for listening.

["Wild Card"] On this week's episode of Wild Card, poet Nikki Giovanni says you can choose your family. I recommend dogs. But they're faithful, they're intelligent, and they always love you. I'm Rachel Martin. Join us for NPR's Wild Card podcast, the game where cards control the conversation. On this week's episode of Wild Card, actor and Reading Rainbow host LeVar Burton says he knows people see him in a certain way. It is hard to imagine you getting really angry about something.

Oh my God, you could not be more wrong. I'm Rachel Martin. Join us for NPR's Wild Card Podcast, the game where cards control the conversation.