This week’s book learning is part 6 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5)
The concept of a public company originated from the Dutch East India company or VOC. Instead of raising money for expeditions to the East from royalty, they offered parts of their company to the public (=shares). The initial promise was that the company would be dissolved in 21 years. But, their success led to other advancements. Instead of dissolving it, they started paying “dividends,” allowed their shareholders to trade shares, elected a board of directors, among others.
(The company took its profit making duties a tad too seriously though. It made more money from destroying ships and looting other European expeditions than by any other means.)
The stock market owes its origins to a shrewd Scottish gambler by name John Law. He tested the stock market idea in France (the only country that allowed him to do so) by taking ownership of the French territory of Louisiana. Interestingly, John Law went onto establish the French central bank (the first of its kind) and centralized all of the government’s in flow and out flow. But, over time, he gained such a stronghold that he became equivalent to the head of the federal reserve, reserve bank, and treasury all at once.
Then, in his attempts to enlarge the central bank, he issues shares of the bank at crazy prices, leading to people selling shares to get more paper money from the bank in return to buy more shares of the bank!
Sketch by EB
In essence, John Law was the French economy and he caused a massive bubble by issuing irrational decrees. Eventually, the bubble burst resulting in catastrophic consequences for the French; the economy never recovered leading to the French Revolution.
In contrast, the Dutch and British companies did much better thanks to consistent returns on investments of shareholders and they took a lesson from John Law to set up regulated stock markets.
A Learning a Day 