Deflation Made Simple (Part I)
A falsely vilified phenomenon (Image 073)
The broker wanted to insure that his client would leave Amsterdam with a feeling that he had obtained the best possible price. It was also important that the investor be pleased with his purchase. Both the investor and Hendrik represented future sources of brokered trading and additional brokerage fees for the broker. Indeed, the broker’s fairness in the trade would benefit everyone.
So, the broker began with the bond’s par value. If the bond were to sell at a higher price, then Hendrik would think the broker to be an excellent trader. If the bond sold at a lower price, then Hendrik would at least understand why.
When the broker stated to the investor that Hendrik would like to sell at par value, the investor understood that the broker was trading on behalf of Hendrik, and replied to the broker that it would not be possible. Where upon the investor proposed a price even below what the broker believed to be his lowest boundary. The broker replied immediately and told the investor that he was asking for even more than what a VOC share was worth, and reminded the investor that he was unable to purchase one.
The investor quickly understood that the broker had done his homework, and learned thereby that he would not be able to purchase the bond at a price lower than 4,950 Guilders. The broker noticed that the investor understood and moved the negotiation in the opposite direction. With a smile he proposed the going deposit rate of a highly reputed investment bank in Amsterdam and stated the equivalent bond price — namely, 5,050 Guilders. Hendrik’s eyes lit up, and the investor smiled.
After some thought the investor suggested that the investment bank would be a better option at 5,050 Guilders, as a deposit at the investment bank would be more reliable than a loan to the provincial government. Dutch businessmen understood that the investment bank could be taken to court, but that one could not sue a sovereign stadtholder. The broker lowered his offer to 5,020 Guilders, as he was expecting a brokerage fee of 30 Guilders. He did not say why he proposed the amount, but the investor understood that his message had gotten through on the one hand, and that there was still plenty of room for negotiation at the other hand. So, he replied 4,970 Guilder.
The negotiation had yet to reach a tit-for-tat barter; the investor’s offer was 30 Guilders below the initial offer, and the broker’s was only 20 Guilders above.
“Why was the investor so insistent?”, the broker wondered. So, the broker reminded the investor that he might be in need of someone to purchase a new bond when the current one had reached maturity. Not knowing that this was the first time that the broker had attempted to sell a bond, and having learned only two days before that bond trading was even possible, the investor smiled and paused. The broker turned quickly to Hendrik, smiled, and turned back to the investor, whereupon he asked the investor how long it would be before he had enough to invest in a VOC share.
The investor understood and raised his offer to 4,980 Guilders. The broker was elated and asked the investor, if he would be willing to split the brokerage fee with his client. It would be 15 Guilders each. The investor agreed, whereupon the broker took out a piece of paper and writing utensil, made two quick calculations, circled the amounts of 4,970 Guilders and handed it to Hendrik.
-30 Guilders (full brokerage fee)
-15 Guilders (halved brokerage fee)
So, the broker turned to the investor and stated that his client could agree to 4,985 Guilders — five Guilders above the investor’s last offer.
The investor offered his hand to Hendrik, and Hendrik readily shook. Whereupon the broker signaled the waiter, and asked if his clients would like another round of oude jenever. As it would be a full day’s ride back to the estate, and he would spend the night in Amsterdam, Hendrik assented. As the investor was very satisfied that he had found a good broker, he also agreed. The broker ordered a second round for both his clients and completed the paper work while they chatted about Hendrik’s estate, the investor’s business, and the affairs of Holland and the United Provinces.
While they were speaking the broker had them sign.
Alas, the Dutch social fabric was now a little more tightly woven between the business community of Amsterdam and the landed nobility of Holland’s countryside. This tight social network would make it much easier to defend Holland against the invading army of Louis XIV in 1672 several years later.
As Hendrik did not have an account at the Wisselbank, the broker and the investor would complete the investor’s end of the transaction without him. Hendrik would appear at the broker’s house early the next morning to receive his money.
Hendrik surrendered his bond, and they parted.
In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104