What Can We Learn for Today from 300-Year-Old Writings about Stock Markets?

In this article I catalog how historical analysis using a variety of writings on stock markets from around the early eighteenth century can help inform our understanding of financial market institutions and behavior. In so doing, I hope to suggest how the history of economic thinking can have direct value for today's financial economist. Old writings, of course, are a trove of interesting vignettes. For example, the term bear to describe a stock-market pessimist derives from the seventeenth-century slang for short-sellers, a reference to risk-addled speculators who dared to sell the bear's skin before catching the bear; John Burr Williams, who is frequently credited with inventing the dividend discount model in his Theory of Investment Value (1938), was nonetheless writing well over 200 years after the widespread use of such valuation techniques; and the explosion in the use of put and call options in the 1970s occurred nearly 300 years after their use swept the Amsterdam and then London stock exchanges in the late 1600s. But more importantly, the historical record is also a source of institutional detail and substance. For instance, that record reveals how investors relied on a trader's reputation to honor contracts that prohibitory regulations would make legally unenforceable, how sophisticated investors valued and traded equity shares, and how options were used as portfolio insurance and to reduce transactions costs.

This historical analysis helps us learn about the functioning of markets, the evolution of financial contracts, the impact of and motivation for regulatory interventions, and the impetus for the introduction of "new" financial instruments. We learn about economic behavior, including the actions of investors, the determinants of price formation, the motives for trading certain instruments and derivatives, and the formation of market irregularities such as bubbles. We learn how and why institutions evolve over time and about the interaction between social and economic institutions. We learn about the effects of certain institutional changes, or certain institutional differences, on economic outcomes.

The article summarizes these contributions with specific historical examples, only detouring first to provide a brief description of the data—the so-called old writings. It concludes with a discussion that focuses on how the written evidence can inform our understanding of economic history. This discussion emphasizes the contribution that the history of ideas can make—not only in the specific examples summarized here but also in general—to our understanding of economic institutions and argues that this research program fits closely with the new institutional focus of economic history, following leads provided by Douglass North (1981).

1. The Seventeenth- and Eighteenth-Century Stock Market Pamphlet Press

Most of the old writings considered here are part of a vigorous pamphlet press focusing on the stock markets that sprang up in both London and Amsterdam in the late 1600s and early 1700s, peaking around the time of the South Sea Bubble in 1720. Equity shares date back to the incorporation of the Dutch East India Company in 1602, and by 1700 shares were actively traded and the exchange an important institution in both Amsterdam and London. These writings were the primary source of contemporary economic analysis, debate, investment advice, and spin about the stock exchange and the trade in shares. These pamphlets, tracts, books, and broadsides were mostly written with the aim of influencing government regulatory policy toward the stock market and tended to be critical of the trade in shares and of the "jobbers" (as traders were called). While the criticism had moral and social dimensions, much of it was economic, and much engendered detailed analytical rebuttal, providing rich insight into the workings of the stock exchange.

2. Evidence about the Stock Markets of the Seventeenth and Eighteenth Centuries

Taken together, the early writings about the stock exchange are an excellent source of evidence about trading activity on the exchange, the institutional features...