The history of financial trading is a history of bubbles.
The ancient principle, which still stands to this day, is buy when Commodities, Currencies or shares are cheap, and sell before the bubble bursts. Not surprisingly, the sluggish flow of information before the advent of the telegraph in the 19th century repeatedly led to the formation of bubbles. Several cases of irrational speculative behavior leading to spectacular price hikes followed by a sudden crash are documented in history, ever since the first incident, the Dutch tulip mania, ended in financial disaster in 1637.
However, the history of financial speculation starts even earlier. Prior to the first well documented speculative bubble, the tulip crisis in the 17th century, investors lost and profited from booms in the Currency market. In ancient Rome, the Forum Romanum was used as an exchange place for Currencies, bonds and investments with little normative regulation and security. This kind of unfettered Currency speculation frequently led to Currency crises, increasingly so towards the collapse of the empire.
The first broker-like activity was the trading activity practiced by moneylenders in Venice in the 14th century. In addition to the interest loans made infamous by Shakespeare’s The Merchant of Venice, these proto-brokers traded government debts as well as individual loans and kept track of their activities on slates.
The first early form of stock exchange was set up in Antwerp, Belgium, in 1531. Moneylenders met regularly to trade promissory notes and bonds, as stocks had not been invented yet. The first stock was offered by the Dutch East India Company in 1602. British and French governments followed Holland’s lead and started to issue stock for their East India Companies. Dividends were paid and the lucrative East India companies paved the way for many other IPOs. The brokers did most of their trading in the coffee shops that were supplied of course by the coffee and chocolate trade from the East India companies themselves.
Tulip mania
After the introduction of the first tulip in Europe in 1554, the colorful flower began to spread from Vienna to other European countries. By the end of the 16th century serious cultivation of the tulip had been started in the Netherlands. The flower became more and more popular and a striped variety called the “non pareil” tulip became a status symbol. The flamboyant petals were created by an accidental virus and this made the Commodity harder to produce than other tulip varieties. Due to its scarcity, the off-color tulip’s price rose.
To trade tulip bulbs, the Dutch had established an early predecessor of futures contracts. While actual bulbs could be traded on a spot market from June to September when the plant lies dormant, the tulip traders signed futures contracts to purchase bulbs at the end of the flowering season. Short selling had been introduced in the Netherlands before, but was banned at the time of the tulip mania. In 1634, speculators appeared on the market. In 1636, the futures market was formalized to some degree, and in November of that year, the price of the common tulip also began to increase. Prices skyrocketed all the way until February 1637, and then collapsed just as quickly. Speculators refused to show up at routine trading sessions, and many of the deliveries for the futures contracts were never made. Payments couldn’t be enforced because the courts regarded futures trading as gambling.
To relieve the situation, the guild of Dutch florists, with later backing from the Dutch Parliament, converted all futures contracts for tulips issued after November 30, 1636, into option contracts. The futures buyers were thereby relieved of the obligation to actually buy the future bulbs, in return for compensating the sellers with a fixed percentage of the original contract price.
The Mississippi Bubble
The term speculator was first used in 1720 at the time of the Mississippi bubble. A large amount of paper money was first issued in France at this time. John Law, treasury secretary in France set up a private bank that issued more banknotes than it could cover in coins. John Law introduced a company, the “Mississippi-Company” which issued shares and held a business monopoly in French colonies like Louisiana.
Louisiana was promoted by exaggerating its wealth and share prices skyrocketed. Within months, speculators became rich and the term “millionaire” appeared for the first time in history in order to describe them. 160 trading kiosks were set up at the Place Vendome in Paris to satisfy the frenzy. Guards had to keep traders from investing at night. At the height of the mania, 500-livre-shares were traded for 10,000 at the spot market and 15,000 in futures contracts. Then, in February it became apparent that the colonies in Louisiana would never live up to John Law’s promises. A quick crash followed.
South Sea bubble
Many of the speculators who had just lost money in France were looking for new trade ideas and found them in another bubble, across the Channel in Great Britain, where the South Sea bubble was in rapid development. Founded in 1711, the South Sea Company was a British joint-stock company that was created to reduce national debt. It was granted a monopoly on trade with Latin America which was deemed to be lucrative not only because of the rich natural resources but also because the company was supposed to engage in slave trading.
To enhance its business model, the South Sea Company also bought up public debt piece by piece and continued to issue more and more stock. The company’s stock prices rose sharply in the first half of 1720 from £120 in January to £950 in July. The company’s management team in the meantime took stock of their general mismanagement and realized their personal shares were severely overvalued, which led them to sell their stocks in the summer of 1720. Knowledge of the South Sea Company management’s decision spread like wildfire, and the share prices came crashing down, leaving multitudes ruined in its wake.
British railway boom
The history of financial speculation is also a history of scams. According to an account of Economist journalist Edward Chancellor, a Scotsman posed as a Latin American in London in the 1820s and sold bonds to raise money to explore his country’s resources. This took place in the middle of a mania to invest in Gold and Silver exploitation in Latin American countries. George Hudson, a major investor in Midland Railway, made a huge amount of money with fraudulent speculations on railways around 1850. One of his deceitful practices was to pay dividends from capital. He was only exposed after the bubble ended and died penniless. By the 1840s rail construction was the all the rage in speculative ventures. At its height in 1846, 272 companies were set up over the course of a year. They were to construct 9,500 miles of new railway. One third of the tracks were never built because of poor financial planning.
What happened was that the government first lowered interest rates, drawing money away from government bonds and into railway stock. Later, the Bank of England put up interest rates again, money moved out of the train stocks. The price of the stock declined rapidly. Many middle income families lost their entire savings in the railway mania.
The New York Stock Exchange
After the first modern stock exchange was established in London in 1773, the NYSE officially opened its doors on Wall Street in 1792.
In 1867 the stock ticker machine was invented and traders did not have to be physically present in the trading room any more. As a consequence, the number of traders exploded dramatically.
I hope you found this article both informative and enjoyable! Stay tuned for Part II of this series: A History of Trading – The 20th Century.
In the meantime, tell us what you thought of this article. Perhaps you’ve heard of other incidents in the early history of trading? Don’t be shy, share them in the comments!
The ancient principle, which still stands to this day, is buy when Commodities, Currencies or shares are cheap, and sell before the bubble bursts. Not surprisingly, the sluggish flow of information before the advent of the telegraph in the 19th century repeatedly led to the formation of bubbles. Several cases of irrational speculative behavior leading to spectacular price hikes followed by a sudden crash are documented in history, ever since the first incident, the Dutch tulip mania, ended in financial disaster in 1637.
However, the history of financial speculation starts even earlier. Prior to the first well documented speculative bubble, the tulip crisis in the 17th century, investors lost and profited from booms in the Currency market. In ancient Rome, the Forum Romanum was used as an exchange place for Currencies, bonds and investments with little normative regulation and security. This kind of unfettered Currency speculation frequently led to Currency crises, increasingly so towards the collapse of the empire.
The first broker-like activity was the trading activity practiced by moneylenders in Venice in the 14th century. In addition to the interest loans made infamous by Shakespeare’s The Merchant of Venice, these proto-brokers traded government debts as well as individual loans and kept track of their activities on slates.
The first early form of stock exchange was set up in Antwerp, Belgium, in 1531. Moneylenders met regularly to trade promissory notes and bonds, as stocks had not been invented yet. The first stock was offered by the Dutch East India Company in 1602. British and French governments followed Holland’s lead and started to issue stock for their East India Companies. Dividends were paid and the lucrative East India companies paved the way for many other IPOs. The brokers did most of their trading in the coffee shops that were supplied of course by the coffee and chocolate trade from the East India companies themselves.
Tulip mania
After the introduction of the first tulip in Europe in 1554, the colorful flower began to spread from Vienna to other European countries. By the end of the 16th century serious cultivation of the tulip had been started in the Netherlands. The flower became more and more popular and a striped variety called the “non pareil” tulip became a status symbol. The flamboyant petals were created by an accidental virus and this made the Commodity harder to produce than other tulip varieties. Due to its scarcity, the off-color tulip’s price rose.
To trade tulip bulbs, the Dutch had established an early predecessor of futures contracts. While actual bulbs could be traded on a spot market from June to September when the plant lies dormant, the tulip traders signed futures contracts to purchase bulbs at the end of the flowering season. Short selling had been introduced in the Netherlands before, but was banned at the time of the tulip mania. In 1634, speculators appeared on the market. In 1636, the futures market was formalized to some degree, and in November of that year, the price of the common tulip also began to increase. Prices skyrocketed all the way until February 1637, and then collapsed just as quickly. Speculators refused to show up at routine trading sessions, and many of the deliveries for the futures contracts were never made. Payments couldn’t be enforced because the courts regarded futures trading as gambling.
To relieve the situation, the guild of Dutch florists, with later backing from the Dutch Parliament, converted all futures contracts for tulips issued after November 30, 1636, into option contracts. The futures buyers were thereby relieved of the obligation to actually buy the future bulbs, in return for compensating the sellers with a fixed percentage of the original contract price.
The Mississippi Bubble
The term speculator was first used in 1720 at the time of the Mississippi bubble. A large amount of paper money was first issued in France at this time. John Law, treasury secretary in France set up a private bank that issued more banknotes than it could cover in coins. John Law introduced a company, the “Mississippi-Company” which issued shares and held a business monopoly in French colonies like Louisiana.
Louisiana was promoted by exaggerating its wealth and share prices skyrocketed. Within months, speculators became rich and the term “millionaire” appeared for the first time in history in order to describe them. 160 trading kiosks were set up at the Place Vendome in Paris to satisfy the frenzy. Guards had to keep traders from investing at night. At the height of the mania, 500-livre-shares were traded for 10,000 at the spot market and 15,000 in futures contracts. Then, in February it became apparent that the colonies in Louisiana would never live up to John Law’s promises. A quick crash followed.
South Sea bubble
Many of the speculators who had just lost money in France were looking for new trade ideas and found them in another bubble, across the Channel in Great Britain, where the South Sea bubble was in rapid development. Founded in 1711, the South Sea Company was a British joint-stock company that was created to reduce national debt. It was granted a monopoly on trade with Latin America which was deemed to be lucrative not only because of the rich natural resources but also because the company was supposed to engage in slave trading.
To enhance its business model, the South Sea Company also bought up public debt piece by piece and continued to issue more and more stock. The company’s stock prices rose sharply in the first half of 1720 from £120 in January to £950 in July. The company’s management team in the meantime took stock of their general mismanagement and realized their personal shares were severely overvalued, which led them to sell their stocks in the summer of 1720. Knowledge of the South Sea Company management’s decision spread like wildfire, and the share prices came crashing down, leaving multitudes ruined in its wake.
British railway boom
The history of financial speculation is also a history of scams. According to an account of Economist journalist Edward Chancellor, a Scotsman posed as a Latin American in London in the 1820s and sold bonds to raise money to explore his country’s resources. This took place in the middle of a mania to invest in Gold and Silver exploitation in Latin American countries. George Hudson, a major investor in Midland Railway, made a huge amount of money with fraudulent speculations on railways around 1850. One of his deceitful practices was to pay dividends from capital. He was only exposed after the bubble ended and died penniless. By the 1840s rail construction was the all the rage in speculative ventures. At its height in 1846, 272 companies were set up over the course of a year. They were to construct 9,500 miles of new railway. One third of the tracks were never built because of poor financial planning.
What happened was that the government first lowered interest rates, drawing money away from government bonds and into railway stock. Later, the Bank of England put up interest rates again, money moved out of the train stocks. The price of the stock declined rapidly. Many middle income families lost their entire savings in the railway mania.
The New York Stock Exchange
After the first modern stock exchange was established in London in 1773, the NYSE officially opened its doors on Wall Street in 1792.
In 1867 the stock ticker machine was invented and traders did not have to be physically present in the trading room any more. As a consequence, the number of traders exploded dramatically.
I hope you found this article both informative and enjoyable! Stay tuned for Part II of this series: A History of Trading – The 20th Century.
In the meantime, tell us what you thought of this article. Perhaps you’ve heard of other incidents in the early history of trading? Don’t be shy, share them in the comments!
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