For some years I had been intending to post a 20-page monograph entitled: "The First Bubble. Silvermining in the Saxon Erzgebirge, c. 1470-1540" by Stuart Jenks. So today, when I finally get around to it I discovered that due to either OCR problems or formatting gibberish the copy I have is close to unreadable. See after the jump.
Fortunately Daniel DeMatos, CFA wrote his own version of the story which we'll use as a jumping-off point until I can get tech support to tell me to try turning the PDF server off and on. From Mr. DeMatos' LinkedIn, May 27, 2024:
Mining can be a very capital-intensive business. Prospecting for gold by panning in a river may not be, but digging mine shafts and building any accompanying infrastructure to extract metal from deeper reserves most certainly is. So, to develop a mine, new companies with little history raise money by issuing shares to a large group of investors, many of them small investors interested in speculative investments. From the 15th century, Germany saw issuance and trading in mining shares that funded the creation of new silver mines, primarily in Saxony and the Harz mountain regions. These shares were very speculative investments.
Silver
In early modern Europe, silver and gold from the Americas expanded the money supply but there was also growth in the production of precious metals in Europe. A few regions of Germany became important centers for silver mining. One of these was the Erzgebirge, or ‘Ore Mountains’, in Saxony. Silver mining here began with a discovery of silver ore in Freiberg in 1168. The Erzgebirge would have one hundred and forty working mines in the mid-18th century.
Another key mining region was the area of the Harz mountains in central Germany. This became the most important silver mining region of Germany starting from the end of the Thirty Years War in 1648. In 1670, there was a large increase in the number of mines in the Harz region. The boom in new mining operations continued through 1740 here.
However, mining was a particularly uncertain venture because the metal was found in individual pockets of varying size. Therefore, the location and amount of the metal was not easy to determine even considering information that can be gleamed from other finds nearby. Water seepage also required constant attention and a combination of labor and infrastructure to address; together these factors meant mining required steady investments of capital.
Shares
With the permission of the territory’s prince, a mining company could be formed. Ownership in mining companies would be divided into 128 shares and these could in turn be further divided into fractional shares. These shares would be issued to raise money to develop the mine and fund losses until it was profitable, if it ever got profitable. To raise money despite the odds, some mining companies were given reassuring names. Examples included 15th century mines called 'Hope' (Hoffnung), 'Certainty' (Gewißheit), 'Rich Mine' (Reiche Zeche), and 'Rich Treasure' (Reicher Schatz).
Shares in mining companies were called Kuxe. They could be divided, mortgaged, and sold freely. Shareholders received a share of any profits but, this being a time before widespread limited liability was common for companies, they were also personally responsible to cover the company’s losses periodically. However, it seems it was common for shareholders to be less-than-forthcoming with the money to cover losses. If an investor could not make the payment, the share was supposed to revert to the other investors in the firm who could take it on themselves or sell it to a new investor. It was probably the case that unable or unwilling investors tried to sell their shares themselves first.
Shareholders were passive investors as management would be left in the hands of others. These were not only private managers. A state mining official representing the prince of that territory held substantial power over mines. Among carrying out other responsibilities, it was these officials who would organize the companies, giving one Kuxe to the landowner on whose land the minerals were found. Indeed, under Saxon law at least, landowners were not given full mineral rights over land they owned. Mining companies could open mines on other’s land without seeking permission from anyone other than the prince.
On behalf of the prince, state officials supervised the mines. Though the investors would elect a committee of between two to four people who would appoint a manager, these managers would need to be approved by the state. The investors would also pick a local representative, who lived in the vicinity of the mine, to manage requests for capital from investors and distributions of any profits. Of any profits, the officials would ensure that the state would take one-tenth of the production of Saxon mines for itself. The state also had the option to buy the silver produced at a price below market value.
Trading
Kuxe could be freely traded without requiring the consent of other investors in the same company. The exchange of shares with a sale contract would be followed by an update to the register listing the owners. Annual turnover in shares could be high. Shares in mines would trade at the trade fairs of Leipzig, held a few times each year. At the Leipzig trade fairs, trading in mining shares began in 1472. At this fair, distributions to investors were also made, so they were critical to the sort of financial structure devised for the mines. Besides Leipzig, shares also traded in Frankfurt.
At these fairs, stockbrokers specializing in Kuxe were called Kuxkrenzler. Some also traded for their own account and insider trading and market manipulation were common. They were known for spreading misleading information about mines. Kuxkrenzler would show prospective investors ore samples from locations different than the mines being considered for investment. Discerning buyers protected themselves with clauses that required sellers to make good on capital calls to cover loses on the buyer’s behalf for a period of time after the trade. Also, some contracts allowed the buyer to back out of the trade after the fact, subject to paying a modest fee.
Investors
Perhaps because of a secondary market for the Kuxe, investors were quite a diverse set. Records show that they included people active in the metals trade but also journeymen, clergy, nobility, and university faculty. Institutions like the town councils of Leipzig, Zwickau, and Chemnitz as well as artisan guilds also invested in mines. Some stayed away, like Martin Luther who in 1544 said ‘'I don't want to have anything to do with mining shares! They are play money, and play money does not increase in value”....
....MUCH MORE
Here is a bit of the Stuart Jenks piece. As you can see it's a mess.
There were two university-hosted versions of the 20 page paper but they have not only disappeared but are un-Googleable and unavailable at the Internet Archive.
Additionally Academia.edu hosts a version but I would counsel against giving them your information, they are at minimum very spammy and who knows what else.
Right off the bat Jenks attacks Prof. Shiller's contention that you need mass media to spread the bubble and he might be right, though coincidentally the printing press was invented 30 years before the start of Jenks' period under review.
If the Jenks paper gives you a headache, here's story about a guy who ended up with a lot of Kuxe and a lot of metal, enough to make him the richest person in Europe and one of the richest ever in world history: Goldenballs: Not For Nothing Was Jacob Fugger Known as “Jacob the Rich”
Jenks:
The First Bubble. Silvermining in the Saxon Erzgebirge, c. 1470-1540
Abstract Since the trade in shares (Kuxe) in Saxon silver mines in Schneeberg, Annaberg and Marienberg from c. I47O onwards shows essentialcharacteristics of a speculative bubble, it can be designated as the first bubble whose existence can be demonstrated from the sources.The paper sketchesthe relevant structuresof the Saxon mining industry at the cusp of the 15th century, sets out the criteria the literature regardsas being crucial for demonstrating the existence of a speculative bubble and judges how well the tradein shares in Saxonsilver mines fits the definition.
The history of speculative bubblesbeginsroughly with the advent of newspapers ... Although the news media ... present themselves as detached obseffers of market events, they are themselvesan integral part of those events" (Shiller (2005)85)
It is my contention that Shiller is wrong. Speculative bubblesoccurred long beforethe advent of newspapers or published financial reporting, whose roots reach no farther back thanthe late 17th century (Neal (1988)). Since the tradein shares (Kuxe)in Saxon silver mines in Schneeberg, Axnaberg and Marienberg from c. 7470 onwardsshows essential characteristics of a speculative bubble,it can be designated as the first bubble whoseexistence can be demonstrated from the sources. In order to prove that this is so, I will first sketch the relevantstructures of the Saxonmining industry at the cusp of the 15th century, then set out the criteria the literature regards as being crucial for demonstrating the existence of a speculative bubble' and (3) determinehow well the tradein shares in Saxonsilver mines fits the dehnition of a bubble' THeSnxoNMtNtNcINpusrnY
The historyof silver mining in Saxony begins with the discovery of enormous deposits of silver ore in Freiberg in 1168 (Schirmer(2000) 7-8 with references to the older literature). Huge amounts of silverwere extracted in the late l2tl' and 13th centuries,but by the 1390s the boom was over. However, Freiberg generated the legal framework for silver mining in Schneeberg, Annaberg-Buchholz and Marienberg,where massive silver depositswere discovered in 1470, 1492 and l5I9 respectively (Laube (1974) 22-37). Over the next 80 years the.amount of silver produced(Graph i) constituted - togetherwith the production of yet more silver by meansof thesaigerprocess(Graph 2)-the centralcauseof thePriceRevolutionatthe beginning of the early modern era (Munro (2003)).
I I might as well state at the outset that I am not convinced by the Efficient Markets Hypothesis.
SrRucrunn oF THE SaxoN MINING INDUSTRy The structure of the Saxonmining industry was determined by two peculiarities. The first of these was geological.The geology of the Erzgebirge is extremely complex. As the result of volcanic eruptions and the cooling processes of magma, silver ore was found in individual pockets of varying size located in the cracks and pores of the bedrock (Laube (1914),21-2with references to the geological literature). Hence, no one could foresee where silver deposits might be found or estimate how large they might be once they had been found. Finding and extracting the ore thus dependedupon a continuous stream of working capital.Worse yet, once the surfacedeposits (down to a depth of 50 meters) had been exhausted, water seepage became a serious problem. There were two solutions to this problem: the ground water was either lifted out in leather buckets attached to a paternosterchain driven by animal or water power (Ludwig, Schmidtchen (1997) 70-5,219-24), or it was drained out by driving a tunnel into the mountain underneaththe deepestpit. Both solutions, of course, required technical expertise and significantamounts of capital. The solution the Saxon mining industry found to the problem of providing a continuous stream of working capital was one of the most wide-reaching financial innovations in European history. In dividing the ownershipof eachpit (which was an SruanrJsNrs independent corporation) into a numberof shares, calledKuxe'- at first, therewere four per pit, but the number quickly roseto 32 andfinally 128 and fractions thereofas capital requirementsexploded - the Saxon mining industry invented the public lending corporation.The owner of a Kux was entitled to Ill2Sth of all profits of the pit ('Ausbeute'),but was also liable for Ill2Sth of all running costs.s Since it was impossible to say in advance what costsmight be incurred, Kuxe had no par value, but they could be bought and sold on the openmarketwithout inforrning the other investors or obtaining their approval (Dietrich(1958)170). Moreover, since there was no limit on the number of pits whose Kuxe one could buy, an investor could spreadhis risks amongst a number of mines and continuously reconstitute his portfolio, dependent upon his own risk assessment and degree of risk aversion (Westermann (1997) 58). This capital structure had two important advantages for the Saxon mining industry as a whole. On the one hand, it provided a continuous stream of working capital for individual pits, as insolvent investors were replaced by those who could meetcalls.On the other,it allowed investors to spread their risks and optimize their portfolios. This is not to say that every investorgot rich quick. In fact, most lost money,sincethe success of their investments depended upon the sheergood luck of discovering(large) deposits of silver ore. Most mines just chewed up working capital without producing any profits. The Nuremberghumanist Sebaldus Schreyer, for instance, invested 272 fl. in 15 shares in 11 pits rn 1477,but had to meet calls for 85 to 95 fl. during the next eleven years, after which he sold all of his....
