In the last week’s piece, I wrote about how family businesses may benefit from accessing public money and list their companies in the stock market. As a feedback, some readers requested that we cover the basics: what are shares, why we opine that it is beneficial for privately owned companies to sell shares to the public and why does that relate to listing in the stock market. Today we will cover just that, putting the historical context of stock markets to enlighten us on how far the world of stock markets have come and how fast we have to run in order to catch up with the whole concept of stock market in financing our enterprises, economic growth and development.
The historical context; so, back in the 16th to 18th century, slave trade was not fully controlled by states. It was rather an economic enterprise organized and financed by investors using stock markets in line with the ideas of free markets, private enterprises, private property, etc as aligned to laws of demand and supply. Private slave trading companies sold shares in Amsterdam, London or Paris stock markets to finance slave trade enterprises. Thus, middle class European looking for better investment returns bought shares of such enterprises. Having mobilized funds, companies bought ships, hired sailors and soldiers, purchased slaves from Africa transported them to the Americas. They then sold these slaves to plantation owners, using proceeds from such trade to purchase plantation products i.e. sugar, cocoa, coffee, tobacco, cotton, rums, etc. They returned to Europe with such merchandise, sold them for higher prices and sailed again to Africa to begin another round. As we can imagine, shareholders were very pleased with such arrangements. History records that, throughout the 18th century the yield on slave trade investment was about 6 percent a year. So, during that time and age, humanitarian organisation became business enterprises whose real aim was growth and profits financed by stock markets (and of course bank credits).
This wasn’t only related to Africa and its slave history — and so when in 1821 the Greeks rebelled against the Ottoman Empire, the uprising aroused great sympathy in liberal circles in Britain and other European cities. The London financier saw an opportunity on this as well — they proposed to the Greek Rebel leaders the issue of tradable Greek Rebellion Bonds on the London Stock Exchange. The Greeks would promise to repay the bonds, plus interest, if and when they won their independence. Private investors bought bonds largely motivated by the argue to make a profit, even though there may be some who bought these bonds out of sympathy for the Greek cause. The value of Greek Rebellion Bonds rose and fell on the London Stock Exchange in tempo with military successes and failures on the battlefields. In a way this war turned out to be a financial commodity listed in the stock market — fought, partly in the interest of investors.
In another development, one of the largest financial crises of the 18th century was the Mississippi Bubble. In 1717 the Mississippi Company, chartered in France, set out to colonize the lower Mississippi valley, establishing the city of New Orleans in process. To finance its ambitious plans, the company, which was in good connections at the court of King Louis XV, sold shares to the public and listed on the Paris Stock Exchange. John Law, the company director, who was also the governor of the central bank of France spread tales of the significant riches and unlimited opportunities in the Americas. French businessmen and members of the urban class fell of these promises and the Mississippi company share prices skyrocketed to almost 10 times within a month of its listing. This euphoria swept the streets of Paris, people sold all their possessions and took loans in order to buy the Mississippi Company shares, believing they had discovered the easy way to riches. A few days later, the panic begun, some speculators realized that the share prices were totally unrealistic and unsustainable. Investors started selling these shares, as the supply of shares rose — mainly caused by everyone wanted to get out quickly — their prices declined, setting off an avalanche. In order to stabilize prices, the central bank of France — at the direction of its governor, John Law — bought up Mississippi Company shares, but could not help either, the price of Mississippi shares plummeted and then collapsed completely.
The Mississippi Bubble was one of the history’s most spectacular financial crashes, the Mississippi Company that was financed by the selling of shares to the public and listed in the stock exchange that partly contributed to the fall of overseas French Empire into the British hands, when this company crashed and facilitated the crisis in the France’s financial crisis, the British could still access public money via issuance of shares and borrowing money easily by issuance of bonds and at low interest rates to finance some of their overseas business enterprises and its empire. That’s how powerful joint-stock companies and stock markets have been and can be. Some of us probably have heard other seventeenth century companies which were financed via joint-stock and listed on stock markets.
Companies such as the London Company, Plymouth Company, the Massachusetts Company, the British East India Company or the famous Dutch joint-stock company Vereenigde Oostindische Compagne, or VOC for short that was chartered in 1602. VOC raised money from selling shares to build ships, send them to Asia, and bring back Chinese, India and Indonesian goods. It also financed military actions taken by the company ships against competitors and pirates. Eventually VOC money financed the conquest of Indonesia by the Dutch. So, the concept and idea of stock market and what it is capable of doing to people, companies, institutions, societies, ideologies and values and economies is as big and old as some of these historical moments indicates.
Admittedly, for us, as individuals and collectively, as private sector or public sector have not given this idea the necessary attention it requires. Because of our hesitant to embrace it, at family and private related businesses to public and state-owned-enterprises, resulted into most of our economic institutions being not inclusive. GDP has been at been growing at an average of 7 per cent p.a in these past few decades but does not correlate well with the efforts of poverty reduction. Economists would say this better, but for me — lack of inclusive ownership in companies operating in sectors that contributes largely to GDP growth may be one of the factors. We will continue…