The First and the Greatest: The Rise and Fall of the United East India Company

The Vereenigde Oost-Indische Compagnie (VOC), or the United East India Company, was not only the first multinational corporation to exist, but also probably the largest corporation in size in history. The company existed for almost 200 years, from its founding in 1602, when the States-General of the Netherlands granted it a 21-year monopoly over Dutch operations in Asia, until its demise in 1796. During those two centuries, the VOC sent almost a million people to Asia, more than the rest of Europe combined. It commanded almost 5,000 ships and enjoyed huge profits from its spice trade. The VOC was larger than some countries. In part, because of the VOC, Amsterdam remained the financial center of capitalism for two centuries. Not only did the VOC transform the world, but it transformed financial markets as well.  

The United East India Company Takes Over Asian Trade

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 percent 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 in Japan, being the only foreign company allowed to trade in Japan. The company traded along the Malabar Coast in India, removing the Portuguese, traded 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 its 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. They were able to do this because interest rates had fallen during the 1600s. 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 in the future. This wasn’t the way Spain, France, and other kings looked at borrowing money. They often defaulted, and their interest rates remained high. As a result of Dutch fiscal rectitude, the yield on Dutch government bonds fell from 20 percent in 1517 to 8.5 percent by 1600 and to 4 percent by 1700. The Dutch had the lowest interest rates in the world at that time. 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 as the table below indicates. The dividend averaged around 18 percent 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 its surplus 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 percent of capital were high, but since the price of shares traded around 400 during most of the company’s existence, as the figure below shows the actual dividend yield was around 3-6 percent, better than Dutch bonds, but less than bonds from “emerging market” countries, such as Russia or Sweden.  

Dutch East India Stock Dividend Yield, 1650 to 1795

  As the chart below shows, shares started at 100 in 1602, moved up to 200 by 1607, suffered a bear raid in 1609, moved up to the 400 range in the 1630s, fluctuated as the fortune of the company changed from year to year, participated in the bubble of the 1720s when shares exceeded 1,000, fell back to 600, rallied to 800 in the 1730s, then slowly declined from there. Perhaps no better indicator of the Dutch economy, or the global economy, prior to 1800 exists.  

The Impact on the Amsterdam Stock Exchange

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. 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 banning options and other forms of financial wizardry. The fact that these laws had to be passed so many times shows that these 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 large 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. 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 listed the prices of French debt in Paris as well as British Consols, Bank of England stock, the British East India Company and South Sea Company stock in London, but no other debt or equity from Amsterdam was 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. Unfortunately, the profitability of the Dutch East India Company was highly erratic as the chart below shows (there were 2.5 Guilder to 1 U.S. Dollar). Although there were many years when the VOC was profitable, there were also numerous years when the company lost money, and yet it still paid a dividend in most years, draining the capital of the company and forcing the VOC to take on more and more debt. The death knell of the company came in the 1770s and 1780s when the Fourth Anglo-Dutch War of 1780-1784 devastated the company’s finance.  The company never recovered and it suffered losses for the rest of its life.  The Netherlands were conquered by the French during the Napoleonic Wars and the company’s assets were seized by the British.  The VOC ceased to exist in 1796. 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 late 1700s. Amsterdam failed to provide its investors with new opportunities.  

The Financial Capital of the World Shifts to London

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 hundreds of shipping ventures, diversifying their 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 move from Amsterdam to London so quickly and so 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 keep Amsterdam at the center of global finance after 1815, but the trend was inevitable. The Dutch failed to diversify away from VOC and WIC shares and allow other companies to take advantage of local capital markets; they failed to sufficiently develop the bond side of the market because there was no centralized government debt until the late 1700s; 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 encouraged trading as in London. The company failed to raise additional capital when necessary, to limit borrowing, or to fund capital expenditures by 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 move of the world’s financial capital 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 19th 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.