Financial History 141 Spring 2022 - Page 32

French millers formed Société des Moulins de Bazacle . The mill owners who shared a perpetual lease on the river arranged a profit-sharing plan . A few years later , one of the millers was a decade late in a debt repayment to a merchant , and the resolution to the subsequent lawsuit resulted in a new corporate structure that included the now common innovation of an elected board of directors to protect shareholders . The company was considered a distinct legal entity apart from the shareholders . The Société des Moulins de Bazacle survived floods that destroyed the dam , ice floes , famine , plagues and a revolution while still paying out 100 % of its profits in dividends . Shares were transferable , and in some years , there was turnover of about 20 % of the shares . There was one noteworthy constraint on share turnover : in addition to paying a large notary fee , new shareholders had to host a dinner for the entire board of directors .
The first “ modern ” joint-stock companies were the British East India Company ( EIC ), founded in 1600 , and the Dutch East India Company , also known as the Vereenigte Ost-Indische Compagnie ( VOC ), founded in 1602 . The EIC was formed as a monopoly to trade in India and later China , while the VOC was a governmentdirected amalgamation of several Dutch companies that were granted a monopoly on trade in India . In 1609 , the VOC was the first modern joint-stock company to raise a large amount of capital by issuing dividend-paying shares . For over a century , the shares paid dividends of an incredible 22 %. Of course , these rewards were associated with tremendous risks : the dangers associated with long-distance trading and the uncertainty surrounding the new corporate form itself . An active secondary market developed for the shares . While the original plan called for the liquidation of its shares in 10 years , the company wasn ’ t formally dissolved until 1796 .
The benefits to diversification appear to have been grasped by the late 18th century . The finance minister to Louis XVI wanted to permit the French to take part in the American War of Independence without burdening French taxpayers . He organized a large number of loans from private investors , with repayment in the form of life annuities , with a twist : the lender could determine the person on whose life the annuity was issued . It didn ’ t take long for clever Swiss bankers to figure out how to game the system .
In 1771 , an investment scheme referred to as “ Trente demoiselles de Geneve ” was born . This involved a number of Genevan banks developing investment trusts that represented pools of life annuities issued by the French government . The banks created a list of young Genevan girls , typically aged five to 10 , who were carefully selected and , after surviving smallpox , were named as the contingent lives . Most of the annuity pools involved 30 young girls , hence the name “ Trente demoiselles .” The girls , also known as “ the immortals ,” became like rock stars in their communities because so much wealth was riding on their lives . Genevans from all walks of life invested in the scheme , and an estimated 90 % of Geneva ’ s wealth was invested in these annuities , as was money from abroad . Banks resold fractions of these pools to individual investors , just like the modern securitization of mortgages , a major cause of the 2007 – 2009 financial crisis . Everything was going well until the unexpected bankruptcy of the French treasury , when annuity payments slowed and thousands of investors lost money .
When we think of a diversified security today , we often think of a mutual
Dutch East India Company bond , 1622 .
fund . The first mutual fund , Eendragt Maakt Magt , was created in 1774 , by an Amsterdam broker named Abraham van Ketwich . Funds were invested in foreign government bonds , bank bonds and loans to plantations in the West Indies . The fund promised a dividend of 4 %, with a planned liquidation and return of proceeds after 25 years . The offering of 2,000 subscriptions sold out , and a secondary market developed for those wishing to sell their subscription . This investment vehicle was similar to today ’ s closed-end mutual funds . Like a modern mutual fund , one of the articles in the prospectus listed the categories of potential investments . The articles also specified that the fund needed to be diversified at all times with 20 classes of investments , each of which consisted of at least 20 to 25 securities .
After its initial success , in 1779 van Ketwich introduced a second mutual fund , named Concordia Res Parvae Crescunt . While similar to the first fund , a major difference in this fund was that its investment policy was more liberal , only specifying that the fund invest in “ solid securities and those based on decline in their prices would merit speculation and
30 FINANCIAL HISTORY | Spring 2022 | www . MoAF . org