Stock markets
By Kenneth V. Nelson and Brett K. Nelson
Duke University – Olli Class
Roman Stock markets – 2nd century

Wealth Accumulated in Rome

Romans had well established laws, and transferrable property rights

Credit was available.

A class of citizens willing to take risk to earn a potential return.
Roman Stock Market – 2nd Century

The Roman Republic contracted out many functions including tax collection
and Temple building.

Publicani were legal entities whose ownership was dividend into partes or
shares.

The Publicani were managed by Executive teams.

The Executive teams published financial statements called Tabulae

The shareholders met regularly and reviewed the financial performance
presented by the executive team.

Some of the Publicani were large organizations that employed tens of
thousands of employees including slaves. These large organizations often
operated over very large geographic regions.
Roman Stock Market – 2nd Century

Trading occurred at The Forum near the Temple of Castor

“Crowds of men bought and sold shares and bonds of tax
farming companies, various goods for cash and on credit,
farms and estates in Italy and the provinces, houses and
shops in Rome and elsewhere, ships and storehouses,
slaves and cattle”. Historian Mikhael Rostovtzeff

Another historian wrote, “The Forum, with it’s immense
basilicae, may be regarded as an immense stock
exchange where money speculation of every kind was
going on”.

Cicero stated that buying shares in public companies was
seen as a gamble that conservative men avoided.
Italian City States – Government Bond
Trading

Italian city states borrowed funds and issues bonds. These bonds were negotiable,
they were freely transferrable.

In Venice, government bonds were traded at the Rialto.

Government regulations were passed in the mid 14th century to protect bond
market participants.

In 1351, Venice passed a law banning the circulation of false rumors intended to
depress government bond prices.

In 1390, 1404, and 1410, laws were passed that attempted to restrict speculation
in the government bond market, by prohibiting transactions with delayed
settlement.

The Ducal Council forbid trading on inside information.

By the 15th century, trading in Government Bonds also flourished in Florence,
Genoa, Verona, and Pisa.
Italian Trading expands to stocks

Most Italian City states outsourced tax collection to organizations called
monti (similar to the Roman publicani). The ownership of the Monte was
divided into shares called luoghi.

In the 15th century Italian city states, trading in luoghi occurred alongside
trading in government bonds.
The Annuity

The Hapsburg regime of Charles V created a new financial instrument called
the Annuity.

The most common Annuity form allowed the owner to receive a fixed
payment for the life of the owner.

A second type of Annuity paid in perpetuity and was passed on to the heirs of
the original annuitant.

The government usually reserved the right to call in the annuity at any time
by paying back the principal.
Trade Fairs and Festivals

Large trade fairs and festivals had been held in Western Europe since the 11th
century. Big fairs drew traders and merchants from far away. Fairs generally
were granted special exemptions exempting them from taxes, and tariffs that
were usually assessed on transactions.

The fairs traded local goods, expensive luxury goods, bonds and shares.

In the 15th century at the Leipzig fairs, shares in German mines traded.

At the St.-Germain fairs outside of Paris, government bonds, IOU’s, and
lottery tickets were traded.

Lottery tickets in the middle ages were a type of government bond that paid
interest and also the chance to win a large prize.
Antwerp

Antwerp, with it’s lengthy spring and fall fairs and yearlong tax exemption was
called a continuous fair. Foreign merchants often established offices in Antwerp
to take advantage of the tax exemption.

By the mid 16th century, Antwerp with it’s “continuous fair’ became a leading
financial center.

Antwerp became home to the oldest permanent stock exchange, or bourse, named
after the Hotel des Bourses in nearby Bruges. The Hotel des Bourses was build by
a nobleman from an aristocratic family, the Van der Bourse. Over the entrance to
the hotel, was the Van der Bourse coat of arms, which included 3 purses (bourses).
(The hotel and coat of arms still exist.)

Bourse soon became synonymous with stock exchange. In the 17th century, write
Samuel Ricard , author of The New Businessman, defined the term Bourse as a
stock exchange that was a meeting place of bankers, merchants, and businessmen,
currency dealers, bankers agents, and brokers.
Amsterdam
In 1585, Antwerp was sacked by Spanish troops leading to a permanent decline of
the Antwerp bourse.
Protestant and Jewish refugees fled Antwerp to Amsterdam to avoid the Spanish
Inquisition.
In 1609, the Amsterdam Wisselbank was founded. The bank issued bank money
called Banco. Unlike later banks, the bank only issued notes that it could fully
back up in gold and silver held in its vaults.
In 1609, a new type of entity was created the Joint Stock company.
Types of Shipping Merchant Groups

Merchant Shipping partnerships were used to finance shipping and spread the
risk among multiple participants.

Partnerships were divided into investors who stayed on land and those who
went with the ships.

Societas Maris – Voyagers put up one third of the capital and received half of
the profits.

Commenda – Voyagers risked no capital (just their lives) and received onefourth of the profits.
Early Joint Stock companies

The first Joint Stock companies created in England in the 16th century had
temporary charters from the government. In some cases the charters were
only for one voyage.

For example, the Muscovy Charter in 1533 was for trade with Russia, another
charter that same year was for the Guinea adventurers.
Does anyone know the
st
name of the 1 permanent
Joint Stock Company?
The Dutch East India Company

In 1609, the 1st joint stock company, the Dutch East India company was
created.

The joint stock company allowed limited liability to each shareholder. Prior
to the joint stock company owners had unlimited liability for the businesses
that they ran.

This facilitated international trade.

Prior to the Joint stock company, small merchants groups would pool their
resources to fund a single voyage. These voyages were often very expensive
and long. Merchant groups would change periodically.
Dutch East India Company

Capital from all over Europe flowed into Holland to be invested in the Dutch
east India company.

After the early years, the company was consistently profitable. One French
author wrote “there are few years wherein 9the company’s investors0 got less
than 30 percent’.

In 1610, a “New Exchange” was opened in 1610 to accommodate all the
increased trading volume. Braudel described the different assets that were
traded, ‘Commodities, current exchange, stockholdings, maritime
insurance,… a money market, a finance market, a stock market.”

Future contracts (called actions)o on shares of the Dutch East India Company
traded as was the financing of those shares (margin).

These financial practices became known as “Dutch finance.”
Dutch finance spreads to England

The Glorious Revolution brought Protestant William of Orange to the throne in
1688. This transition of power occurred during a period of prosperity.
Attitudes towards money and finance in society were changing. “Moneyed
men” grew in prominence and prestige in London. One century before Adam
Smith, the notion of actively pursuing personal profit benefitted society took
hold.

In 1688, Parliament passed new financial laws creating a Financial Revolution
in England.

A Promissory Notes Act passed that made all debts negotiable and thus
transferrable. Prior to the Promissory Notes Act, there was no real distinction
between short and long term government debt. Creditors demanding
payment were often given land (or executed).
Dutch Finance spreads to England

In 1693, the 1st annuities appeared in England. These annuities were single
life annuities.

In 1694, A privately owned central bank, the Bank of England, was
established. The Bank of England issued banknotes that became a widely
accepted and trusted medium of exchange.

Following the Financial reforms of 1688, an active Financial market emerged
in London. The stock market included government bonds and annuities.
Government bonds were called government stock.
New English words

The word stock is derived from the wooden tallies or stocks that were
commonly used to represent government debt, with notches cut into the
wooden tallies as each interest payment was made.

New terms emerged in the Financial sector: Stockjobber, director,
subscription, underwriting, puts, refusals (calls) became common words in the
Financial sector.

Brokers now referred to the stock market. Previously they brokered different
services.

What was the previous meaning of Broker?
Before 1690, What was the previous
meaning of the word Broker?
PIMP
1690’s trading in London

The number of joint stock companies traded in London grew dramatically
from just 10 in the beginning of the decade to 150 by 1696. Companies
included The British East India Company, Hudson Bay Company, and Bank of
England.

In 1696, the stock market crashed. Concerns over military defeats, and the
governments plan to replace old coins with new ones (debase the currency)
caused investors to panic.

By 1697, 70% of the joint stock companies had gone bankrupt!
Stock Market Regulation

In 1697, laws were passed to regulate the stock market.

Brokers had to be licensed and their numbers were capped at 100.

Government bond brokers needed the expressed consent of the government

Commissions were limited to 1/8th of 1%

The 1697 Act was widely ignored. No more than 1/3 of brokers registered
after the law passed

The market recovered in 1698.
Next Time: Market Bubbles
A Non-Partisan Analysis of Economic growth
and the size of Federal Growth from George
Washington to Barack Obama

Break presidents into 4 quintiles:

The Presidents in the top 25% of economic growth averaged 7.56%, They
spent an average of 3.08% of GDP on the Federal Govt.

The second 25% averaged 4.42% of annual GDP growth and spent 4.34% on
Federal Government.

The 3rd 25% averaged 3.28% economic growth and spent an average of 10.32%
on Federal Government.

The bottom 25% of Presidents averaged 1.44% economic growth and spent an
average of 19.55% on the Federal Government.
Democrat Presidents

Democrats: Obama + Jimmy Carter vs Clinton + John F. Kennedy: Who is right?

15 Democrat presidents. 8 increased government spending + 8 cut
government spending (Grover Cleveland did both!)

Of the 8 Democrats who increased govt spending as a % of GDP, the economy
grew at a 2.24%.

Of the 8 who cut government spending the economy grew at a 3.56% rate.

Democrats who cut government spending as a % of GDP: Bill Clinton, John F.
Kennedy, Harry Truman, Grover Cleveland 1, Andrew Johnson, James
Buchanan, Martin Van Buren, Andrew Jackson.

Democrats who grew government as a % of GDP: Barack Obama, Jimmy
Carter, Lyndon Johnson, Franklin Roosevelt, Woodrow Wilson, Franklin Pierce,
James K. Polk.
Republican Presidents

Republicans: Both Bush's, Gerald Ford, Herbert Hoover vs Ronald Reagan,
Richard Nixon and Dwight Eisenhower. Who is right?

7 Republicans grew government as a % of GDP. The economy grew 1.86%
under those 7 Presidents.

11 Republican Presidents cut government as a % of GDP. The average GDP
growth rate under those 11 Republican Presidents: 4.12% (more than double)

Republican Presidents who grew government as a % of GDP: George W. Bush,
George H.W. Bush, Gerald Ford, Herbert Hoover, William McKinley, Benjamin
Harrison, Abraham Lincoln.

Republican Presidents who shrank government as a % of GDP: Ronald Reagan,
Richard Nixon, Dwight Eisenhower, Calvin Coolidge, Warren Harding, William
Howard Taft, Teddy Roosevelt, Chester Arthur, James Garfield, Rutherford B.
Hayes, Ulysses S. Grant.
Whig Presidents

All who grew government averaged 4.34% growth (just one)

Whigs who shrank government averaged 5.45% growth. Whigs who increased
govt: William Henry Harrison.

Whigs who cut government: John Tyler, Zachary Taylor, Millard Fillmore.
Democrat-Republican Presidents (before
the parties split)

All the Democrat-Republicans who grew government performed worse than
the ones who cut government.

James Madison grew government by 151.54% and the economy grew at a
2.56%. James Madison is the only Democrat-Republican to grow government.

The 3 Democrat-Republicans who cut government averaged 4.42%
growth. Thomas Jefferson, James Monroe, and John Quincy Adams grew GDP
by 4.47%, 4.39%, and 4.42% annually (inflation adjusted).
Federalist Presidents

John Adams cut government by 13.93%. The economy grew at a 3.93% rate
(not inflation adjusted – no inflation data).
Independent Presidents

George Washington was our only President not affiliated with a political party.

He cut spending by 46% from his first year to his last year. The economy
averaged 16.84% annually, but this is not adjusted for inflation and is
misleading since we had high inflation during his Presidency. Precise inflation
data is not available.
Highest rates of economic growth

Of our 20 Presidents with the highest rates of economic growth, 18 of them
spent less than 4% of GDP on the Federal Government.
What
President spent the smallest
% on the Federal Government?

Thomas Jefferson at 1.85% of GDP.

GDP growth 4.47%
Top 5 smallest spenders on Federal
government:

#1 Thomas Jefferson 1.85%,

#2 Franklin Pierce 1.88%,

#3 James K. Polk 1.92%,

#4 + #5 tie Andrew Jackson: 1.96%, James Buchanan: 1.96%.

Average GDP growth for these 5 small spenders? 5.20% inflation adjusted GDP
growth.

Top 5 Biggest spenders spent 21.98% and averaged 1.26% GDP growth.
Recent Presidents

Barack Obama – grew government – economic growth 0.29%. (1st term)

George W. Bush grew government – econ growth 1.86%

Bill Clinton – cut government – econ growth 3.15%

George H.W. Bush grew government – econ growth 1.26%

Ronald Reagan – cut government – econ growth – 3.23%

Jimmy Carter – Grew govt – econ growth 1.44%

Gerald Ford – grew govt – econ growth – 2.17%

Richard Nixon – shrank government – econ growth 3.72%

3 of these Presidents shrank government, they rank 1 Nixon, 2 Reagan, and 3 Clinton in
economic growth since 1970.

The other Presidents all grew government and ranked 4. Ford 2.17%, 5. George W. Bush
1.86%, 6. Jimmy Carter 1.44%, 7. George H.W. Bush 1.26%, and 8. Barack Obama 0.29%.