Deflation Made Simple (Part I)

A falsely vilified phenomenon (Image 032)

Surely you have heard the saying, “Food is medicine”. It is no idle phrase; certainly one that today’s pharmaceutical industry would like us to ignore. Like sound money its truth has been known for thousands of years. Indeed, it was the primary reason that gold and silver were discovered by the Spanish in South and Central America!

Until Vasco da Gama, the Portuguese explorer-trader, crossed from the Atlantic into the Indian Ocean around the Cape of Good Hope at the southern tip of Africa in 1499, the South Asian spice trade passed through the narrow Strait of Hormuz into the Persian Gulf or the Bab al Mandab (Gate of Tears) into the Red Sea and then overland to the Mediterranean Sea before it could reach the Italian ports of Venice and Genoa from where the spices were then sold and distributed throughout Europe. These ancient Arabic land routes were now under the control of the Ottoman Turks, a declared enemy of the Holy Roman Empire! Bypassing the Ottomans was the primary motivator for early European exploration.

A full century of Portuguese and Spanish trade with the East Indies had already passed before the Dutch came on the scene in 1595. The success of the Portuguese and Spanish had encouraged Dutch traders to do the same. Trading houses scattered among the port cities of Middelburg, Enkhuizen, Hoorn, Rotterdam, and, of course, Amsterdam took up the baton. Even Delft, an inland town located close to Rotterdam was involved. Ships were costly to build, man, and supply, and each voyage brought with it substantial risk — to say nothing of the time required to make a round trip. It took six months to travel from Lisbon, Portugal to Goa, India. The return trip was equally long. Even after a fleet of ships was built, manned, and supplied, one could not know the fate of one’s investment for an entire year. Fortunately, the timing of the journeys was fairly regular. Indeed, the time of travel was determined by the rotation of the earth around the sun and the seasons and trade winds associated with each completed rotation. Alas, climate change was just as important then as it is today.

Resources invested in trade were resources that could not be invested in manufacturing production. There was an important opportunity cost that needed to be rewarded.

Alas, the sea was large, but good ports were less plentiful, and the best were already occupied by friendly or less friendly competition. No one could stock enough supplies to last for an entire journey, and everyone was compelled to make stops along the way. What is more, these ports of call had to be maintained and supplied by local inhabitants — each with its own local political rivalries, unique economic base, language, and culture. There was no one-size-fits-all, government non-solution. Fortunately, humans are more cooperative than they are belligerent, and most differences could be overcome through negotiation. Still, each journey was perilous, and it made good sense to travel in large numbers.

In an effort to compete more efficiently with the established sea powers — namely, Portugal and Spain — the States General, the ruling body of the newly formed Dutch Republic, assembled and drafted a charter for an all-Dutch trading house that would merge the existent Dutch trading houses already engaged in trade with Asia into a single company. This new company would be given the exclusive right to conduct Dutch trade with Asia — an obviously important incentive to merge. Further, the company would be divided into six administrative branches (chambers) thus providing representation across the aforementioned six Dutch-Asian trade centers.

For our understanding of the history of free-market enterprise, sound money, and capital formation the most important provision of this new trade monopoly was the public offer to raise and pool money to get this new business enterprise off the ground.

The VOC would be a publicly administered, privately managed company open to the general public for investment. So, from the month of March 1602 when the charter was first agreed until August of the same year Dutch investors from all of the Dutch provinces were invited to invest in the company. The size of individual investment ranged anywhere from 50 to 85,000 Dutch guilders!

In August the doors were closed, and the pledged capital was tallied — 3,674,945 guilders with 1,143 investors for an average investment of 3,215 guilders per new member. The VOC had become a reality. What happened next is a matter worthy of our continued attention.

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