Deflation Made Simple (Part I)

A falsely vilified phenomenon (Image 033)

The VOC was a publicly administered, privately owned and managed firm. It was the first of its sort.

Neither was the VOC a sovereign who pooled the fruit of his subjects’ labor to invest in the sovereign’s project, nor was it a banker who pooled the voluntarily offered time-deposits of others for use by still others whom the bank screened on behalf of itself and its depositors. Neither was it an informal agreement between several merchants and a wealthy landowner in search of investment opportunity. No, the VOC was an entirely new way of pooling the savings of others to undertake a large investment.

Yes, the VOC did depend on the States-General, the government of the Dutch Republic, to insure its monopoly status within the Republic. In this capacity the States-General served as a constraint on others, not the VOC. Indeed, once the institutional arrangements agreed by the States-General were put into place, the VOC was free to manage its own affairs. In effect, the VOC was a privately owned, publicly chartered company constrained only by law. It was the world’s first modern corporation whose success or failure depended solely on the will of its members and the decisions of its own management team. No, the concept of limited liability did not yet exist.

The VOC was important for another reason, as well. For, out of the VOC developed something akin to the world’s first stock market. Even before the company’s capital was fully pledged and paid, its membership began competing for ownership of the company.

Initially, between the months of March and August 1602 one merely pledged an amount, after which the door was closed and each potential member-owner had several opportunities to make good on his or her pledge. Yes, there were female members; the VOC was not an all-male club! Although no one received a certificate of ownership, one did receive a receipt for his completed pledge. Only those who fulfilled their commitment were retained in the company register as member-owners.

To insure that the originally pledged pool of savings would not be diminished by those unable or unwilling to honor their pledge, member-owners who had made good on their own commitment were permitted to compete for the uncompleted pledges of others. Already the competition had begun. These transactions typically amounted to a change in a book entry and a personal side payment.

For example, If you were the one selling your pledge or some portion thereof, you and the buyer would report to the company’s bookkeeper, whereupon the buyer would satisfy that portion of your outstanding pledge to which you agreed, and pay you whatever you required for him to do so. In the company’s register your pledge or the agreed portion thereof would be transferred to the buyer. Whereupon the buyer’s stake in the company would increase, and your stake would diminish or disappear altogether depending on the portion of your pledge that you transferred on the one hand, and the portion that you finally paid on the other hand.

Such transactions were not possible to non-members, but once the notion of membership transfer caught on, these sort of transactions became an in-house market in which the company’s owners gambled among themselves about the future of their own venture. It is this in-house trading out of which the world’s first stock exchange arose.

But, it gets better. See you next time!

In liberty, or not at all,
Roddy A. Stegemann