How Dutch herring fishing helped give rise to stocks

Investors’ demand to be responsible only for the amount they put in helped shape the modern concept of stocks, Choi Go-min-su said in a lecture published on the YouTube channel Study King Real Genius Hong Jin-kyung. He traced the idea to the Dutch East India Company and the risks of early maritime trade.

Investors sought to limit their responsibility

Maritime trade required large sums of capital and carried substantial risks. Under a system of joint liability, if a ship sank or a voyage failed, all investors could be left with the debt. For example, if a voyage costing 10 million won failed and one investor had borrowed money to take part, the other investors would have to repay that debt in full.

The arrangement was seen as unfair to investors. They wanted to be liable only for what they had invested. As the principle took hold, investors received dividends in proportion to their stakes and were responsible for losses only up to the amount invested, forming a core principle of the stock company and the modern concept of stocks.

Herring wealth and banking supported trade

The Netherlands’ economic circumstances helped the stock market develop. At a time when religious traditions in medieval Europe restricted meat consumption, the Netherlands accumulated wealth through herring fishing. By operating around the clock, the country increased productivity, and Amsterdam rose rapidly as a trading center around its port.

As trade expanded, fraud involving gold and silver used for payments became frequent. To address the problem, Amsterdam City Council established the Bank of Amsterdam. Confidence in the currency issued by the bank grew, and lending rates fell to the 2% range. With access to this cheaper funding, the Netherlands built more ships and undertook long-distance voyages through the Dutch East India Company.

Trading in Dutch East India Company shares

The Dutch East India Company distributed profits from spices brought back by its ships to investors as dividends. But investors who wanted to recover their money could not simply get it back from the company. They instead transferred their shares to other people. The value of shares took shape as investors bought and sold them for more than the amount originally invested.

Trading took place mainly around the shopping streets where ships arrived. In a process similar to today’s quote-based trading, people called out prices and recorded completed transactions in ledgers. Amsterdam City Council established an institutional exchange to bring order to this activity. It is recorded as the world’s first stock exchange, appearing in the 1600s. The Netherlands’ herring industry and the financial system that supported it helped form the foundations of today’s stock market.

Source: original video (YouTube)