Stock marketsBy Kenneth V. Nelson and Brett K. Nelson

Duke University – Olli Class

Roman Stock markets – 2nd century

Wealth Accumulated in Rome Romans had well established laws, and transferrable property rights Credit was available. A class of citizens willing to take risk to earn a potential return.

Roman Stock Market – 2nd Century

The Roman Republic contracted out many functions including tax collection and Temple building.

Publicani were legal entities whose ownership was dividend into partes or shares.

The Publicani were managed by Executive teams. The Executive teams published financial statements called Tabulae The shareholders met regularly and reviewed the financial

performance presented by the executive team. Some of the Publicani were large organizations that employed tens of

thousands of employees including slaves. These large organizations often operated over very large geographic regions.

Roman Stock Market – 2nd Century

Trading occurred at The Forum near the Temple of Castor “Crowds of men bought and sold shares and bonds of tax

farming companies, various goods for cash and on credit, farms and estates in Italy and the provinces, houses and shops in Rome and elsewhere, ships and storehouses, slaves and cattle”. Historian Mikhael Rostovtzeff

Another historian wrote, “The Forum, with it’s immense basilicae, may be regarded as an immense stock exchange where money speculation of every kind was going on”.

Cicero stated that buying shares in public companies was seen as a gamble that conservative men avoided.

Italian City States – Government Bond Trading Italian city states borrowed funds and issues bonds. These bonds were

negotiable, they were freely transferrable. In Venice, government bonds were traded at the Rialto. Government regulations were passed in the mid 14th century to protect bond

market participants. In 1351, Venice passed a law banning the circulation of false rumors intended to

depress government bond prices. In 1390, 1404, and 1410, laws were passed that attempted to restrict

speculation in the government bond market, by prohibiting transactions with delayed settlement.

The Ducal Council forbid trading on inside information. By the 15th century, trading in Government Bonds also flourished in Florence,

Genoa, Verona, and Pisa.

Italian Trading expands to stocks

Most Italian City states outsourced tax collection to organizations called monti (similar to the Roman publicani). The ownership of the Monte was divided into shares called luoghi.

In the 15th century Italian city states, trading in luoghi occurred alongside trading in government bonds.

The Annuity

The Hapsburg regime of Charles V created a new financial instrument called the Annuity.

The most common Annuity form allowed the owner to receive a fixed payment for the life of the owner.

A second type of Annuity paid in perpetuity and was passed on to the heirs of the original annuitant.

The government usually reserved the right to call in the annuity at any time by paying back the principal.

Trade Fairs and Festivals

Large trade fairs and festivals had been held in Western Europe since the 11th century. Big fairs drew traders and merchants from far away. Fairs generally were granted special exemptions exempting them from taxes, and tariffs that were usually assessed on transactions.

The fairs traded local goods, expensive luxury goods, bonds and shares.

In the 15th century at the Leipzig fairs, shares in German mines traded. At the St.-Germain fairs outside of Paris, government bonds, IOU’s, and

lottery tickets were traded. Lottery tickets in the middle ages were a type of government bond

that paid interest and also the chance to win a large prize.

Antwerp

Antwerp, with it’s lengthy spring and fall fairs and yearlong tax exemption was called a continuous fair. Foreign merchants often established offices in Antwerp to take advantage of the tax exemption.

By the mid 16th century, Antwerp with it’s “continuous fair’ became a leading financial center.

Antwerp became home to the oldest permanent stock exchange, or bourse, named after the Hotel des Bourses in nearby Bruges. The Hotel des Bourses was build by a nobleman from an aristocratic family, the Van der Bourse. Over the entrance to the hotel, was the Van der Bourse coat of arms, which included 3 purses (bourses). (The hotel and coat of arms still exist.)

Bourse soon became synonymous with stock exchange. In the 17 th century, write Samuel Ricard , author of The New Businessman, defined the term Bourse as a stock exchange that was a meeting place of bankers, merchants, and businessmen, currency dealers, bankers agents, and brokers.

AmsterdamIn 1585, Antwerp was sacked by Spanish troops leading to a permanent decline of the Antwerp bourse.Protestant and Jewish refugees fled Antwerp to Amsterdam to avoid the Spanish Inquisition.In 1609, the Amsterdam Wisselbank was founded. The bank issued bank money called Banco. Unlike later banks, the bank only issued notes that it could fully back up in gold and silver held in its vaults.In 1609, a new type of entity was created the Joint Stock company.

Types of Shipping Merchant Groups

Merchant Shipping partnerships were used to finance shipping and spread the risk among multiple participants.

Partnerships were divided into investors who stayed on land and those who went with the ships.

Societas Maris – Voyagers put up one third of the capital and received half of the profits.

Commenda – Voyagers risked no capital (just their lives) and received one-fourth of the profits.

Early Joint Stock companies

The first Joint Stock companies created in England in the 16th century had temporary charters from the government. In some cases the charters were only for one voyage.

For example, the Muscovy Charter in 1533 was for trade with Russia, another charter that same year was for the Guinea adventurers.

Does anyone know the name of the 1st permanent Joint Stock

Company?

The Dutch East India Company

In 1609, the 1st joint stock company, the Dutch East India company was created.

The joint stock company allowed limited liability to each shareholder. Prior to the joint stock company owners had unlimited liability for the businesses that they ran.

This facilitated international trade. Prior to the Joint stock company, small merchants groups would pool

their resources to fund a single voyage. These voyages were often very expensive and long. Merchant groups would change periodically.

Dutch East India Company

Capital from all over Europe flowed into Holland to be invested in the Dutch east India company.

After the early years, the company was consistently profitable. One French author wrote “there are few years wherein 9the company’s investors0 got less than 30 percent’.

In 1610, a “New Exchange” was opened in 1610 to accommodate all the increased trading volume. Braudel described the different assets that were traded, ‘Commodities, current exchange, stockholdings, maritime insurance,… a money market, a finance market, a stock market.”

Future contracts (called actions)o on shares of the Dutch East India Company traded as was the financing of those shares (margin).

These financial practices became known as “Dutch finance.”

Dutch finance spreads to England

The Glorious Revolution brought Protestant William of Orange to the throne in 1688. This transition of power occurred during a period of prosperity. Attitudes towards money and finance in society were changing. “Moneyed men” grew in prominence and prestige in London. One century before Adam Smith, the notion of actively pursuing personal profit benefitted society took hold.

In 1688, Parliament passed new financial laws creating a Financial Revolution in England.

A Promissory Notes Act passed that made all debts negotiable and thus transferrable. Prior to the Promissory Notes Act, there was no real distinction between short and long term government debt. Creditors demanding payment were often given land (or executed).

Dutch Finance spreads to England

In 1693, the 1st annuities appeared in England. These annuities were single life annuities.

In 1694, A privately owned central bank, the Bank of England, was established. The Bank of England issued banknotes that became a widely accepted and trusted medium of exchange.

Following the Financial reforms of 1688, an active Financial market emerged in London. The stock market included government bonds and annuities. Government bonds were called government stock.

New English words

The word stock is derived from the wooden tallies or stocks that were commonly used to represent government debt, with notches cut into the wooden tallies as each interest payment was made.

New terms emerged in the Financial sector: Stockjobber, director, subscription, underwriting, puts, refusals (calls) became common words in the Financial sector.

Brokers now referred to the stock market. Previously they brokered different services.

What was the previous meaning of Broker?

Before 1690, What was the previous meaning of the word Broker?

PIMP

1690’s trading in London

The number of joint stock companies traded in London grew dramatically from just 10 in the beginning of the decade to 150 by 1696. Companies included The British East India Company, Hudson Bay Company, and Bank of England.

In 1696, the stock market crashed. Concerns over military defeats, and the governments plan to replace old coins with new ones (debase the currency) caused investors to panic.

By 1697, 70% of the joint stock companies had gone bankrupt!

Stock Market Regulation

In 1697, laws were passed to regulate the stock market. Brokers had to be licensed and their numbers were capped at 100. Government bond brokers needed the expressed consent of the

government Commissions were limited to 1/8th of 1% The 1697 Act was widely ignored. No more than 1/3 of brokers

registered after the law passed The market recovered in 1698.

Next Time: Market Bubbles

A Non-Partisan Analysis of Economic growth and the size of Federal Growth from George Washington to Barack Obama Break presidents into 4 quintiles:  The Presidents in the top 25% of economic growth averaged 7.56%,

They spent an average of 3.08% of GDP on the Federal Govt.  The second 25% averaged 4.42% of annual GDP growth and spent

4.34% on Federal Government.  The 3rd 25% averaged 3.28% economic growth and spent an average

of 10.32% on Federal Government.  The bottom 25% of Presidents averaged 1.44% economic growth and

spent an average of 19.55% on the Federal Government.

Democrat Presidents

Democrats: Obama + Jimmy Carter vs Clinton + John F. Kennedy: Who is right?

15 Democrat presidents.  8 increased government spending + 8 cut government spending (Grover Cleveland did both!) 

Of the 8 Democrats who increased govt spending as a % of GDP, the economy grew at a 2.24%. 

Of the 8 who cut government spending the economy grew at a 3.56% rate. Democrats who cut government spending as a % of GDP: Bill Clinton, John F.

Kennedy, Harry Truman, Grover Cleveland 1, Andrew Johnson, James Buchanan, Martin Van Buren, Andrew Jackson. 

Democrats who grew government as a % of GDP: Barack Obama, Jimmy Carter, Lyndon Johnson, Franklin Roosevelt, Woodrow Wilson, Franklin Pierce, James K. Polk.

Republican Presidents

Republicans: Both Bush's, Gerald Ford, Herbert Hoover vs Ronald Reagan, Richard Nixon and Dwight Eisenhower.  Who is right? 

7 Republicans grew government as a % of GDP.  The economy grew 1.86% under those 7 Presidents. 

11 Republican Presidents cut government as a % of GDP.  The average GDP growth rate under those 11 Republican Presidents: 4.12% (more than double) 

Republican Presidents who grew government as a % of GDP: George W. Bush, George H.W. Bush, Gerald Ford, Herbert Hoover, William McKinley, Benjamin Harrison, Abraham Lincoln. 

Republican Presidents who shrank government as a % of GDP: Ronald Reagan, Richard Nixon, Dwight Eisenhower, Calvin Coolidge, Warren Harding, William Howard Taft, Teddy Roosevelt, Chester Arthur, James Garfield, Rutherford B. Hayes, Ulysses S. Grant.

Whig Presidents

All who grew government averaged 4.34% growth (just one) Whigs who shrank government averaged 5.45% growth.  Whigs who

increased govt: William Henry Harrison.  Whigs who cut government: John Tyler, Zachary Taylor, Millard

Fillmore.

Democrat-Republican Presidents (before the parties split) All the Democrat-Republicans who grew government performed worse

than the ones who cut government.   James Madison grew government by 151.54% and the economy

grew at a 2.56%.  James Madison is the only Democrat-Republican to grow government. 

The 3 Democrat-Republicans who cut government averaged 4.42% growth.  Thomas Jefferson, James Monroe, and John Quincy Adams grew GDP by 4.47%, 4.39%, and 4.42% annually (inflation adjusted).

Federalist Presidents

John Adams cut government by 13.93%.  The economy grew at a 3.93% rate (not inflation adjusted – no inflation data).

Independent Presidents

George Washington was our only President not affiliated with a political party.

He cut spending by 46% from his first year to his last year.  The economy averaged 16.84% annually, but this is not adjusted for inflation and is misleading since we had high inflation during his Presidency. Precise inflation data is not available.

Highest rates of economic growth

Of our 20 Presidents with the highest rates of economic growth, 18 of them spent less than 4% of GDP on the Federal Government.  

What President spent the smallest % on the Federal Government?

Thomas Jefferson at 1.85% of GDP. 

GDP growth 4.47%

Top 5 smallest spenders on Federal government: #1 Thomas Jefferson 1.85%, #2 Franklin Pierce 1.88%, #3 James K. Polk 1.92%, #4 + #5 tie Andrew Jackson: 1.96%, James Buchanan: 1.96%. Average GDP growth for these 5 small spenders? 5.20% inflation

adjusted GDP growth. Top 5 Biggest spenders spent 21.98% and averaged 1.26% GDP

growth.

Recent Presidents

Barack Obama – grew government – economic growth 0.29%. (1st term) George W. Bush grew government – econ growth 1.86% Bill Clinton – cut government – econ growth 3.15% George H.W. Bush grew government – econ growth 1.26% Ronald Reagan – cut government – econ growth – 3.23% Jimmy Carter – Grew govt – econ growth 1.44% Gerald Ford – grew govt – econ growth – 2.17% Richard Nixon – shrank government – econ growth 3.72% 3 of these Presidents shrank government, they rank 1 Nixon, 2 Reagan, and 3 Clinton

in economic growth since 1970.  The other  Presidents all grew government and ranked 4. Ford 2.17%, 5. George W.

Bush 1.86%, 6. Jimmy Carter 1.44%, 7. George H.W. Bush 1.26%, and 8. Barack Obama 0.29%.