The foundations of the VOC were laid when the Dutch began to challenge the Portuguese monopoly in East Asia in the 1590s. These ventures were quite successful. Some ships returned a 400% profit, and investors wanted more. Before the establishment of the VOC in 1602, individual ships were funded by merchants as limited partnerships that ceased to exist when the ships returned. Merchants would invest in several ships at a time so that if one failed to return, they weren’t wiped out. The establishment of the VOC allowed hundreds of ships to be funded simultaneously by hundreds of investors to minimize risk. The English founded the East India Company in 1600, and the Dutch followed in 1602 by founding the Vereenigde Oost-Indische Compagnie. The charter of the new company empowered it to build forts, maintain armies, and conclude treaties with Asian rulers. The VOC was the original military-industrial complex. The VOC quickly spread throughout Asia. Not only did the VOC establish itself in Jakarta and the rest of the Dutch East Indies (now Indonesia), but it established itself near Japan, being the only foreign company allowed to trade there, along the Malabar Cost in India, removing the Portuguese, in Sri Lanka, at the Cape of Good Hope in South Africa, and throughout Asia. The company was highly successful until the 1670s when the VOC lost their post in Taiwan, and faced more competition from the English and other colonial powers. Profits continued, but the VOC had to switch to traded goods with lower margins, but they were able to do this because interest rates had fallen during the 1600s. Lower interest rates enabled the VOC to finance more trade through debt. The company paid high dividends, sometimes funded by borrowing, which reduced the amount of capital reinvested. Given the high level of overhead it took to maintain the VOC outposts throughout Asia, the borrowing and lack of capital ultimately undermined the VOC. Nevertheless, until the 1780s, the VOC remained a huge multinational corporation that stretched throughout Asia. The Fourth Anglo-Dutch War of 1780-1784 left the company a financial wreck. The French Revolution began in 1789, leading to the occupation of Amsterdam in 1795. The VOC was nationalized on March 1, 1796 by the new Batavian Republic, and its charter was allowed to expire on December 31, 1799. Most of the VOC’s Asian possessions were ceded to the British after the Napoleonic Wars were finished, and the English East India Company took over the VOC’s infrastructure. The VOC transformed financial capitalism forever in ways few people understand. Although shares had been issued in corporations before the VOC was founded, the VOC introduced limited liability for its shareholders which enabled the firm to fund large scale operations. Limited liability was needed since the collapse of the company would have destroyed even the largest investor in the company, much less the smaller investors. Although this innovation changed capitalism forever, there were ways in which the VOC failed to transform itself, which led to its downfall. The company’s capital remained virtually the same during its 200 year existence, staying around 6.4 million florins (about $2.3 million). Instead of issuing new shares to raise additional capital, the company relied on reinvested capital. The VOC’s dividend policy left little capital for reinvestment, so the company turned to debt. The company first issued debt in the 1630s, increasing its debt/equity ratio to two. The ratio stayed at two until the 1730s, rising to around four in the 1760s, then increased dramatically in the 1780s to around 18, ultimately bankrupting the company, and leading to its nationalization and demise. In the 1600s and 1700s, the Dutch had the lowest cost of capital in the world. This was because of an innovative idea: if you pay back your loans, your creditors will reward you with a lower interest rate. This wasn’t the way Spain, France, and other kings looked at borrowing money, and their interest rates remained high. As a result of Dutch fiscal rectitude, the yield on Dutch government bonds fell from 20% in 1517 to 8.5% by 1600 and to 4% by 1700. Not only did the Dutch have the lowest interest rates in the world at that time, but they had the lowest interest rates in history. This pushed the Dutch to invest not only in joint-stock companies, such as the VOC, but in foreign government debt, helping to fund the American Revolution. Another interesting aspect of the VOC was its dividend policy. Some of the dividends were paid in kind, rather than in money, and the dividends varied widely. The company paid dividends of 15% of capital in 1605, 75% in 1606, 40% in 1607, 20% in 1608, 25% in 1609 in money, then an average of 71% in produce for the next seven years, the next 5 years in money at 19%, the next three years in cloves at 41%, 44% in spices in 1638, in 1640 two dividends of 20% each, 5% in money and 15% in cloves, 1641, 40% in cloves, 1642, 50% in money, 1643, 15% in cloves, from 1644 to 1672, an average of 21.25% per annum, all but one paid in money, in 1673, bonds for 33.5% were given, payable by the province of Holland, from 1676 to 1682, 4% bonds averaging 19.5% of par per year, from 1683 to 1689, money averaging 20%, from 1690 to 1698, bonds paying 3.5% payable in 1740 on average of 21.875% per annum, from 1698 to 1728, money was paid, averaging 28.125% per annum. The dividend averaged around 18% of capital over the course of the company’s 200-year existence, but no dividends were paid after 1782. The VOC provided a high return to investors, but not always in the way shareholders wanted. The VOC basically unloaded their inventories on shareholders in some years, providing them with produce, cloves, spices or bonds. Some shareholders refused to accept them. Obviously, shareholders want money, not goods, and the three British companies, Bank of England, East India Company and South Sea Company, learned from this and only paid cash dividends during the 1700s. The average dividends of 20-30% of capital were high, but since the price of shares traded around 400 during most of the company’s existence, as the chart below shows, the actual dividend yield was around 5-7%, better than Dutch bonds, but less than bonds from “emerging market” countries, such as Russia or Sweden. The VOC also transformed the Amsterdam Stock Exchange, causing a number of innovations to be introduced, such as futures contracts, options, short selling, and even the first bear raid. Isaac le Maire was the largest shareholder of the VOC in its early years, and he initiated the first bear raid in stock history, selling shares of VOC short in order to buy them back at a profit and buy additional shares. These actions also led to the first government regulation of stock markets, attempting to ban short selling in 1621, 1623, 1624, 1630 and 1632 as well as options and other forms of financial wizardry. The fact that these laws had to be passed so many times shows the regulations were not that effective. One problem for the long-term success of the Amsterdam Stock Exchange was that the VOC and the West Indies Company (WIC) were the only shares of importance that traded on the Amsterdam Stock Exchange. Between 1600 and 1800, no new large companies listed in Amsterdam. Although Dutch fiscal rectitude kept debt and interest rates low, it also helped stifle the growth of the Amsterdam Stock Exchange because government bonds never became a prominent part of the trading on the exchange. Due to the decentralized political nature of the Netherlands, government debt was held locally. There was no centralized national debt as in France and England, and ultimately, this inhibited the growth of the Amsterdam Stock Exchange. The Netherlands was as decentralized as France was centralized. Because the VOC and WIC so dominated the share market, the company didn’t issue new shares to raise capital, and Dutch debt was so small and diversified among its cities, that the Dutch invested in foreign debt to find an outlet for their capital. Dutch newspapers of the 1700s often list the prices of French debt in Paris as well as British Consols, Bank of England Stock, British East India Company and South Sea Company stock in London, but no other debt or equity from Amsterdam is listed. With the exception of colonial trade, until the 1800s no capitalist enterprise required the levels of capital of the VOC and WIC. So the Dutch capital that was available went into debt, not equity. America went to Amsterdam to raise capital, as did Sweden, France, England, Russia, Saxony, Denmark, Austria and other countries. This provided Dutch investors with higher returns, but didn’t develop the Dutch economy in the way it could have. Another factor that may have held the Amsterdam Exchange from expanding was the fact that shares could only be registered on a monthly or quarterly basis. The situation was different in London. Not only could British shares and debt be registered daily, but all of the shares were available for transfer. On the other hand, many VOC shares weren’t traded at all. The amount of British and French debt grew throughout the 1600s and 1700s, requiring new investors on a regular basis. Not only did the VOC’s capital remain constant, but centralized Dutch government debt didn’t exist until the Netherlands became a kingdom under Napoleon. Amsterdam failed to provide its investors new opportunities. Before the Industrial Revolution, companies were simply too small to require sufficient capital to be traded on exchanges. Shipping had long been a high-risk venture, providing high returns and high losses, and investors diversified their risk by putting their money in a number of different ships. The colonial trading companies of the 1600s and 1700s took financial capital to a different level, allowing thousands of people to invest in thousands of shipping ventures and diversifying risk. After the Napoleonic Wars, the center of global finance shifted from Amsterdam to London. Although this process was spread out over several decades, it is amazing that the center of global finance could so easily switch from Amsterdam to London so quickly and easily. There were some things, mostly political, which Amsterdam had little control over, such as the Napoleonic Wars, their occupation by the French, and the loss of its colonies after the war. In retrospect, there were things the Dutch could have done to increase the likelihood that Amsterdam would have stayed at the center of global finance after 1815, though they probably could not have foreseen that the center would shift to London. The Dutch failed to diversify away from VOC and WIC shares and allow other companies to take advantage of capital markets; they failed to sufficiently develop the bond side of the market because was no centralized government debt; they failed to expand the capital of the VOC, but instead chose to borrow, adding to the debt load which led to the bankruptcy of the VOC and WIC; the VOC and WIC did not sufficiently reinvest dividends for growth, and they failed to offer a large number of securities that would encourage trading as in London. The company failed to raise additional capital when necessary, to limit borrowing, or to fund capital expenditures through cutting its dividend. Since the Netherlands lacked a centralized debt issuer, as the French, British and Russians did, the Amsterdam Stock Exchange faded in importance after the VOC and WIC collapsed. Foreign government bonds became more prominent in Amsterdam, but even the foreign government bond trading moved to London in the 1820s where capital was more readily available. It is doubtful whether Amsterdam could have foreseen all the changes that happened, and perhaps they couldn’t have prevented the switch from Amsterdam to London that occurred after 1815, but it was a lesson London should have learned. London became the engine of global capitalism for the nineteenth century, only to lose its place to New York after World War I. The US should understand this lesson as well. The global center of finance must grow, innovate and be as open as possible. Otherwise, the center will move to someplace that is.

The historical data for the DJIA is a combination of four separate indices. On February 16, 1885 an index of 12 railroads and 2 industrial stocks was first calculated (Dow Jones 14 Stocks) by Charles Dow and Edward Davis Jones, the originators of the Dow Jones Averages. On January 2, 1886, this index was replaced by an index of 10 railroads and 2 industrial stocks (Dow Jones 12 Stocks). On May 26, 1896, the index was revised to include 12 industrial stocks, but no railroad stocks (DJIA 12 stocks). This index was calculated until September 30, 1916, when a new index was introduced that included 20 industrial stocks (DJIA 20/30 Stocks). This index was calculated back to December 14, 1914, the day the NYSE reopened after closing in August 1914 because of World War I. The index of 20 industrials was expanded to include 30 stocks on October 1, 1928 and has remained at 30 industrials since then. The DJIA is an Average and not a capitalization-weighted index. The reason for this is that in the 1800s, stocks were not quoted at their cash price as they are today, but were quoted as a percentage of their par value. Most stocks had a par value of $100, but some had par values of $50, $25 or even $5. In Germany in the 1800s, several versions of a stock, each with a different par value (500 Marks, 200 marks, 100 Marks), traded side by side. If a stock were quoted as a percentage of par, then you would simply multiply the percentage quote times the par value to get the cost of the stock. This practice was discontinued in 1913 when the NYSE began quoting all stocks in Dollars. Because stocks were quoted as a percentage of par, calculating an index was relatively easy. You simply added up the quote for each stock and divided by the number of stocks in the index. The result was an equal-weighted index of stocks. This also made the process of substituting one stock for another stock simple because you didn’t have to worry about the impact on the index of replacing a stock quoted at $25 with one quoted at $250 or vice versa, since all stocks were quoted as a percentage of par rather than at their cash value. Even if a stock split or paid a stock dividend, it continued to be quoted as a percentage of par, so no adjustments to the divisor for the index were ever needed. When stocks started to be quoted in cash prices in 1913, this created problems because a stock split or dividend meant that the quoted price for a stock fell, so on October 1, 1928, when the DJIA expanded to 30 stocks, Dow Jones also introduced a divisor as a way of adjusting for changes in the price of stocks due to stock splits, dividends, distributions, recapitalizations or substitutions. The divisor, which stood at 16.67 when it was introduced on October 1, 1928, was equal to 0.132129493 in March 2011, implying that the DJIA had “split” 756 times since it was introduced in 1885. Calculating the adjustment in 1914 was easier because Dow Jones provides data for both the DJIA 12 Stock Average and the DJIA 20 Stock Average between December 1914 and September 1916. Unfortunately, this has led to an oft-repeated error. Many alternate sources use the 12 Stock Average through July 30, 1914 and the 20 Stock Average from December 12, 1914 on, not realizing that they are using different indices that are not comparable. The DJIA 12 Stock Average closed at 71.42 on July 30 and at 74.56 on December 12, 1914, meaning that stocks actually rose in price during the closure of the NYSE. The new DJIA 20 Stock Average closed at 54.63 on December 12, 1914. Sources that combine the 12 and 20 Stock Averages show that the DJIA declined by 23.5% from 71.42 to 54.63 during the closure of the exchange when in fact, the DJIA increased in value while the NYSE was closed. Global Financial Data has provided another unique feature to the DJIA. Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange. GFD has gone back and collected this stock data during the closure of the NYSE to recreate the DJIA during part of the time that the NYSE was closed. We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices on these 20 stocks from October 14, 1914 to December 12, 1914. This enabled us to determine that the 1914 bottom for stocks occurred on November 2, 1914 when the DJIA hit 49.07, a level the DJIA wouldn’t revisit until the Great Depression in 1932. Few people realize that stocks in the US had already bottomed out and were heading into a new bull market even before the NYSE reopened on December 14, 1914. Any research on the historical performance of the DJIA should include an analysis of the individual stocks that make up the Dow Jones Industrial Average. Global Financial Data is the only company that has data on every security that has been a component of the Dow Jones Averages from their beginning in 1885 until today. GFD also provides a full history of the components of the DJIA so users can recreate the DJIA on any day over the past 125 years. The only stock that was in the DJIA in 1896 and is currently a part of the DJIA is General Electric whose complete history is illustrated below. US stocks started moving higher a month before the NYSE was reopened. Finally, Global Financial Data provides historical data on every security that has been in the Dow Jones Industrial Average (as well as the Dow Jones Transport Average and Dow Jones Utility Average) since 1885. Although the DJIA includes only 30 stocks, because of its unique history, it remains an important benchmark for the US Stock Market 125 years after it was introduced.

The Company of Proprietors of the Grand Junction Canal was incorporated by Special Act of Parliament on April 30, 1793 to build a canal from Braunston to the River Thames. The stock for the canal went through three bubbles, in the 1790s, the 1810s and the 1820s, before settling down once the railroads were built, providing competition to the canal. Unfortunately, there is almost no data for the Canal Mania of the 1790s. The number of canals authorized by Act of Parliament in 1790 was one, but by 1793 twenty were authorized. The capital authorized in 1790 was £90,000, but had risen to £2,824,700 by 1793. Most of the canals raised their money locally, mainly in the Midlands, and there were few transactions in the stocks as a result. Though a stock exchange was established in Liverpool to trade shares, actual values are hard to come by and must be tracked down through newspapers. Nevertheless, some of the stock increases were impressive. The Birmingham and Fazeley showed the greatest increase, trading at a premium of £1170 in 1793. The first bubble occurred in 1792 and 1793 and we only have two prices for Grand Junction Canal Shares, one at £472.75 in October 1792, a premium of 355 guineas, even before the company had started to dig the canal or gotten approval from Parliament! Talk about a speculative bubble. Shares had fallen to £441 by the time the approval was provided by Parliament, and the prices collapsed after 1795 when shares returned to their par level of around 100. The London Stock Exchange wasn’t formally established until 1801, so until then the opportunity to trade canal stocks and keep track of the price fluctuations was limited. Even once the London Stock Exchange was established in 1801, most of the prices we have from the Gentlemen’s Magazine and other sources. The data are bid and ask quotes rather than actual prices since the shares still traded infrequently. Nevertheless, these data are sufficient to outline the three bubbles in shares of the Grand Junction Canal. The next price we have for Grand Junction Canal shares after 1793 is of £94 in April 1806. The bubble began in May 1808 when the shares still traded at £96, but the price steadily rose to £313.5 by June 1808, whence they declined to £179 by August 1811, stabilized around 200 until 1815 when the Napoleonic War ended, then fell to £103 by September 1816. The second Canal Mania of the 1810s was not as wild as the one of the 1790s, since share prices tripled rather than quadrupled, but the difference was that the Canal Mania of the 1810s was not limited to the Midlands. Shareholders in London also participated as a result of the establishment of the Stock Exchange. The next move up in the shares began soon after the post-war plummet. Shares moved up steadily from September 1816 to hit £200 by the end of 1817, stabilized around £200 through the end of 1820, then hit £383 by April 1824. The canal stocks shared in the bubble of the 1820s even though that bubble mainly revolved around South American stocks and the mining companies that were established following the independence of the South American countries. Unfortunately, Grand Junction Canal shares did not benefit from the railway mania of the 1840s since the railways were in direct competition with the canals and shareholders sold their canal shares to invest in railways. Shares traded steadily between £200 and £300 between 1825 and 1845, but fell along with the Railway Mania crash, with shares falling to £51 by 1853. Shares generally rose for the rest of the nineteenth century, hitting £150 in 1897 before declining until the 1920s bull market. The Regent’s Canal bought the Grand Junction Canal and the three Warwick canals, and from January 1, 1929 they became part of the (new) Grand Union Canal. The Grand Junction Canal took the proceeds and became a REIT which was renamed the Grand Junction Co., Ltd. The company was acquired by the Amalgamated Investment & Property Co. Ltd. in 1971. Between 1793 and 1818, the UK government debt rose from £243 million to £843 million in 1818. The brief hiatus in the increase in debt between 1808 and 1812 could help to explain the canal mania of 1810-1812 as the Continental Blockade forced investors to put their money to work internally, but once Napoleon invaded Russia, the source of funding dried up. 1819 was when the UK government debt peaked at £844 million, declining from there in absolute terms, much less as a share of GDP, until 1914. It should be remembered that more than anything else, Napoleon made London the financial center of the world. The French Revolution both destroyed the rich in France through driving wealthy financiers out of Paris and to London, and through inflation, which destroyed the value of the assets the rich had held. The other financial center in the eighteenth century in Europe was Amsterdam, but it never really recovered from the occupation of French troops in 1795. Both financial expertise and capital flowed to London as a result of the French Revolution and the wars that followed, and the laissez-faire approach England took to markets ensured that London would be the financial center of the world until World War I. As capital flowed into London during and after the Napoleonic Wars, and investors were allowed to trade freely, stocks benefited. Anyone who questions the impact of the government on the price of financial assets, both positively and negatively, need only look at the Grand Junction Canal’s history as well as that of the London stock exchange to see the impact the government can have.