Complex Made Simple

A brief history of commodity trading

A look back in time highlights how the commodities markets first evolved, with many parallels between now and their origins, after the Dutch first invented what we today call a 'share'.

The opening of the sea route to India (once the name given to all of Indonesia, Malaya and the rest of south-east Asia) by the mariner Dom Vasco da Gama in 1499 established the colonial power of Portugal in the Indian Ocean.

During the following 100 years, some 200 voyages were made around the Cape of Good Hope to the east.

The spice trade was the main motivation at first, but around 1,600 other commodities were discovered and these then took a more prominent role.

But only around half of all the ships sent out by the Portuguese and the Dutch ever came back. That risk has been eliminated, although transport is still a bottleneck.

The expeditions were constantly at risk from other nations and pirates, who blocked access to the eastern Mediterranean area. They were also the cause of subsequent alliances and East India Companies.

The first cartel

In 1580 the two great sea-faring nations, Spain and Portugal united. This combination ensured that the sea route to Asia remained closed to other European nations (today, this abuse of market power would be known as a cartel).

Trade in Asian spices, and above all pepper, was subject to contracts set up by the crown with fixed prices that had to be followed by the traders (‘contradores’).

They then sold on the goods to retailers such as the Dutch trading house Cunertorf & Snel in Lisbon, which in turn supplied the north European market through trading agencies in Antwerp.

The price volatility we see in markets today is nothing new. The term ‘tulip mania’ originally came from a period in Dutch history when demand for tulip bulbs reached such a peak that enormous prices were charged for a single bulb. At one point, people paid more for a single tulip bulb than for a house in the centre of Amsterdam. Today the phrase is a synonym for speculation in the financial markets.

Towards the end of the 16th century, Dutch traders from various towns decided to take charge of spice imports from Asia. In order to finance the ships and equipment, companies were formed, which in turn merged. Within a few years these companies had equipped 65 ships spread across 15 fleets, of which around 50 returned packed with goods.

National merger

They fought the Portuguese, the English and each other. The result was a dramatic fall in the price of spices. Thus it was largely economic motives that forced the Dutch merchants to co-operate and organise a national merger.

The new company, VOC, received a state charter which granted it sovereign rights, and this would be of great significance for its future development (the contemporary equivalent would be some of the national oil companies).

VOC was the first, and soon became the largest, worldwide company to dominate trading. It displayed the basic attributes of a modern joint-stock company and initiated future economic and financial history.

The original paid up share capital was 6,424,588 guilders. The key to success in raising capital was the decision taken by the owners to open up access to the public and accept ‘shareholders’ as part-owners. The shares sold rapidly and were tradable, as any Dutchman could buy and sell them.

Importantly, the share price was not set by the government, but by an independent joint-stock corporation interested in profit. The company shareholders (the term came into use in around 1606) had to produce the subscribed capital in four part payments that were called up by the VOC between 1603 and 1606.

The shareholder received a receipt (Part) for the payment to the nominal value of the share. A share certificate documenting payment and ownership such as we know today was not issued but was instead entered in the company’s share register. Not so dissimilar to the way things are undertaken today.