A worn-out phrase in American classrooms everywhere is ‘joint-stock company.’ The concept first came into existence to describe companies that were made up of European businessmen seeking fortunes in the New World, but the phrase is generally presented to students without any sort of context. Placed in the context of financial history, joint-stock companies are just companies with buyable and tradable stock, the same as stocks you find listed on markets today.
The history of joint-stock companies begins with the rise of complex banking systems, which traces back to biblical times when debt instruments like loans and repayment systems were created. The needs of empires and kingdoms for standardized taxation systems called for the minting of coins. Coins held value capable of replacing physical objects, allowing rulers to collect stand-ins for physical objects, rather than physical objects themselves.
In the same way that coins acted as a replacement for cumbersome physical objects, stock acted as a replacement for ownership. Instead of a company being owned by a single person, inherently limiting the funding and growth of the company to that person, raising stock allowed for more than one person to increase funds, with earnings being divvied out proportionally at the end. This profitable system allowing for multiple investors, all investing jointly, created the backbone for modern stocks.
The first well-known iteration of a joint-stock company existed in England, with the Company of Merchant Adventurers to New Lands. Another, more interesting name of the company chartered was “The Mystery, Company, and Fellowship of Merchant Adventurers for the Discovery of Regions, Dominions, Islands, and Places Unknown.” This company was made up of “adventurers,” which provides the etymological basis of “venture” capitalism.
The company pooled together the funds of wealthy English investors, and with the signature of the Crown in 1553, set off to invest globally in trade. Eventually the company would change its name to the Muscovy Company, as that was where most of their business went, proving to the world that the model of the state-sponsored joint-stock enterprise was worth mimicking and reinventing.
From there, the model was recreated first in Britain and then in other nations during the Age of Exploration. In terms of large-scale government-sponsored ventures, the Dutch, Danish, and English all formed their own East India Companies, and the English expanded further into other trading areas to allow for centralized competition against other merchants, seen in such ventures as the Levant Company and Morocco Company, among multitudes of others.
The Dutch East India Company, unlike the others, was the first to be traded openly on a stock exchange, showing the type of competition and innovation taking place between the jostling nations within early markets that all had varying benefits and pitfalls.
The common standard between these companies was the merging of the wealth of citizens and the power of governments, as governments were willing to give up their authority in exchange for the competency and capital of those willing to invest. For that reason, the Dutch and English reigned supreme, leveraging their expertise in free enterprise with the personal worth of their citizenry.
Although the method of raising money was effective, the viability of the joint-stock company had many issues, the largest of which was that trade was also extremely centralized. In premodern Europe, the barrier to entry for a company to compete in international marketplaces was the guarantee of a powerful government.
If the Crown were to endorse your voyage, you would receive both the positive aspects of the relationship such as increased security and international safety, but also the negative aspects which often equivocated tying assets to wars and privateering operations against the Crown.
In addition, in a world before Adam Smith, nations ruthlessly competed with one another in winner-take-all struggles, which could easily and frequently edge on profit margins. For the most successful players, the Dutch and British, capital being raised outside of the centralized treasury meant less risk was taken on by the monarch, and instead spread amongst the citizenry.
The other critical issue was that in an age where maps were still being drawn and areas were still being explored, the amount of information on hand, even for the savviest investor, was extremely limited and any sort of operation could lose the entire investment in a matter of years due to unforeseen issues.
A notable example is the Scottish Darien Company, which drew capital from both wealthy and poor investors within the Kingdom of Scotland, with the Crown looking to invest its way to glory in the face of the ever-expanding English. In a matter of two years, the company, which was focused on placing a colony in Panama to facilitate trade in both the Atlantic and Pacific, failed miserably. Upwards of 50 percent of all liquid capital in the Kingdom of Scotland at the time had been lost in the venture, triggering the kingdom’s economic collapse. The calamitous adventure led Scotland to sign the Act of Union with England only a few years later, forfeiting its independence.
Because of these issues, many of these companies tended to fail. Some never received pledged starting capital, many were outcompeted by other state-backed groups, and a few had poor plans of action that doomed the venture from the start. But with time, companies began to thrive, such as the British East India Company, which grew into such a beast that it conquered almost the entire Indian subcontinent.
With the advanced financial mechanisms only seen on the European continent, empires were able to fund large-scale ventures that instigated and fed the industrial revolution, and the waves of colonialism that followed.
Technological, cultural, and imperial innovation all begin with however much money is at disposal. To understand how the beast of Europe was able to expand into the rest of the world, people should first look to how they financed their growth.