How did a spice-trading company create the modern stock exchange?

The modern stock exchange grew out of a spice company. In 1602 the Dutch created the VOC, the Dutch East India Company. Before that, a trading company was usually funded for one voyage only and wound up when the fleet came home. Those voyages were a very high-risk investment, because of piracy, disease and shipwreck. The VOC did something different: its capital was permanent, for the lifetime of the company.

That created a puzzle. If your money is locked in the company forever, how do you ever get it back? The answer was to sell your share to somebody else. Shares in the VOC could be bought by any citizen of the Dutch Republic and were traded in open-air markets, one of which became the Amsterdam Stock Exchange. The minimum investment was 3,000 guilders, within the means of many merchants, and in the Amsterdam chamber alone 1,143 investors subscribed. Spreading a voyage's risk across many people meant each of them suffered only a fraction of the loss if a ship went down. Amsterdam was not the very first place where such paper changed hands: state loans had been traded much earlier in Venice, Florence and Genoa. What was new was the volume, the fluidity and the freedom to speculate.

The shares were worth holding. The VOC paid annual dividends averaging about 18% of its capital for almost 200 years, and it grew into the richest private company the world had seen, with its own warships and a private army. It was also given quasi-governmental powers: it could wage war, negotiate treaties, strike its own coins and found colonies.

That power had a dark side. As the monopoly buyer of spices, the VOC forced down the prices it paid local producers, and the local economy of the Spice Islands was destroyed.

Even in these early days, shareholders argued with managers. In 1622 VOC investors held what is called the first recorded shareholder revolt, complaining that the accounts were "smeared with bacon" so that they might be "eaten by dogs".