Saturday, June 29, 2019

So You Are Well Versed In South Sea Bubble Lore, Know Law and the Mississippi Madness But Do You Recall....

...The Dutch 'Wind-trade', which also popped and dropped during those memorable months of 1719 - 1720?
From Professor (Erasmus U., Rotterdam) David Smant's personal website:

DUTCH MIRROR OF FOLLY, Windhandel 1720
 .....Published by various connoisseurs, in order to taunt this despicable and deceiving trade, by which in this year, several families and persons of high and low standing were ruined, and depraved of their resources, and the real trade halted, in France, England and the Netherlands. 

As long as the greedy person, Has money and goods,
The swindler will get his way,
Because the greedy and feeble-minded will always supply him.
[The Great Picture of Folly, 1720]
The scene is set. This is the text on the cover page of one of the main sources of information about what has become known as the Dutch 'windhandel' (wind trade) of 1720. Hardly a strong recommendation for objective and serious analysis of this episode in Dutch share trading. The Great Picture of Folly consists of a collection of cartoons, comedies and satires, poems and a few texts depicting the short-lived boom in Dutch joint-stock companies. Approximately 40+ joint-stock companies were proposed and founded in the period June-October 1720. Most of these companies were designed to follow the recent English example for joint-stock assurance companies (aiming to replace the existing private, individual insurance underwriting) although their plans also included various combinations of commercial (e.g. shipping and trade) and financial (loans and lotteries) activities. Besides the fact that the proposed joint-stock companies required an official charter, their planning and organization included a close cooperation with the Dutch city governments (today that would be called public-private partnership).

The following table presents a survey of most of the Dutch companies and the available information on key features with respect to date, nominal capital and nominal share value. Eight of the proposed companies were stopped at an early stage, mostly because official consent was not obtained. All the projects followed each other within a very short time frame from June to October 1720. The most important feature was perhaps that the proposals with respect to share capital included a large maximum share capital that in most cases was not at all intended to be called on short notice. Most initial calls of share capital were between 1 and 15 percent. The maximum share capital seems to have functioned as an upper limit on shareholder liability (particularly in the case of the insurance companies) and as a shareholder commitment to supply future funds (something we today would compare to loan commitments or credit lines offered by banks). The effective nominal value of shares should be adjusted accordingly; only the percentage called or paid-in capital amount is relevant. As is clear from the final rows in the table, from the enormous amount of 363 mln guilder capital (more than 800 mln guilder incl. the stopped projects) only 41 mln gld of capital was actually called to start company operations. Still a large amount of money, but of course of a different order than the exaggerated 363 or 800 million that others like to emphasize when commenting on this episode.
[Note: The table is constructed using information from various sources. Information published is not always reliable and frequently confusing because the situation was constantly changing with many companies adjusting their subscription conditions during 1720 and later. Pct. capital called refers to the total, not merely the first installment that is reported in some sources. The Societeit Berbice is treated separately because although founded in the same period, its origin was not related to the other assurance and commerce projects. A few other proposals may have circulated at the time, informally with little information or simply unknown to us today. A unique printed price list for the daily prices on the Amsterdam exchange, dated 25Sep1720, lists 26 domestic compagnies, and includes companies in Schoonhoven and Staveren but these two companies' shares had no prices. Embden is located in Germany but right on the border with the Netherlands.]

Joint-stock (marine) insurance companies

As mentioned before, half or more of the proposed Dutch joint-stock companies mentioned assurance as one of their important activities. At the time, the joint-stock insurance activities could perhaps be viewed as an attractive major new business opportunity. The share prices of some of the important assurance compagnies (Stad Rotterdam, Middelburg Assurantie, and also Delft, Gouda) do suggest they contain a premium over the other compagnies (see the graph of share prices below). The proposed other, frequently somewhat unfocused, commercial activities must probably be viewed as essentially serious attempts of public-private partnerships to accumulate funds of capital that were needed or desired to stimulate the various local economies; the Dutch economy was (probably) experiencing a somewhat difficult conjuncture period that had started approx. a year earlier (1719).
The importance and subsequent experience of the joint-stock insurance companies is perhaps aptly described by the following text [adapted from Kingston (2007, JEH): Marine insurance in Britain and America, 1720-1844: A comparative institutional analysis] 

At the start of the 18th century, marine insurance in Britain was carried out entirely by private individuals. Many underwriters were merchants who wrote insurance on the side, but any wealthy individual could underwrite a policy. A merchant (or a broker acting on his behalf) wishing to purchase insurance drew up a policy and presented it to private underwriters for their signature. Risks were usually shared among several underwriters. The parties negotiated a premium, and the underwriter wrote on the policy the amount he was willing to insure. 
In 1717 several groups of merchants and speculators began petitioning to obtain charters for joint-stock marine insurance corporations. The promoters argued that the proposed corporations would provide cheaper and more secure insurance than the existing system of private underwriters. Their underwriting would be backed by a large capital fund, and in the event of a claim, it would be easier for a merchant to recover losses from a corporation than from many individual underwriters separately. Corporations also expanded the pool of available capital by enabling those without specialist knowledge of marine risks, or with relatively modest amounts of capital, to act as insurers by entrusting their underwriting decisions to experts. The proposed charters were opposed by merchants and private underwriters in London and Bristol, who claimed that the existing system was adequate, and that a monopoly would harm trade. Both sides in the debate, however, shared the expectation that if charters were granted, the proposed corporations would drive private underwriters out of the market. The argument was settled when the two main groups of promoters offered the King £600,000 (to pay off the debt on the Civil List) in exchange for charters. 
Two joint stock corporations (the Royal Exchange Assurance and the London Assurance) were subsequently incorporated as part of what later became known as the “Bubble Act” of 1720. The Bubble Act made it illegal for joint-stock companies to operate without a corporate charter. 
In all industries except marine insurance, however, other kinds of unincorporated companies, including partnerships and trusts, were still allowed, and businessmen were later able to use these devices to create (highly imperfect) substitutes for the joint-stock business corporation (Harris, 2000)....

Professor Smant's homepage.

See also the Rijksmuseum