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ECON 2720
B Ferguson

Lecture 21 March 3, 2014 10:30 AM England - England didn't have a stable banking system until the Glorious Revolution in the seventeenth century - King James I was the leader of England, which was pretty much bankrupt - Wool was still the main export of the English - Cocaine suggested to the King that wool should be processed in England and then export the finished product which is a high value added product - King James bans the export of unprocessed wool and grants a monopoly to Cocaine and his business partners - Up to this point the Dutch processed all the wool, and they were much better at it then the English - English cloth was a very low quality product and no one wanted to buy it - The Dutch entered into contracts with other suppliers and began selling high quality cloth again, without any need for English wool - When England reverses the ban the Dutch were still angry with them so they refuse to buy English wool, and they have nothing to export anymore - It took a decade after 1617 for the wool industry to recover, as well as the economy - The English economy went into a long term depression for about a decade - At this time towns and universities were known as corporations, for example "The Corporation of the City of London" - Cities operated much in the same as corporations, because a city council operated much in the same as a board of directors - Ten companies controlled trade in the Netherlands, and these ten companies were combined to form the Dutch East Indian company - It tried to own as little physical companies as possible, and rented ships and warehouses only when they were needed instead of actually owning them - It took an extremely long time for ships to get to and from India, and transpiration was dependent on the winds over the ocean, and if a window was missed traders and ships would be stuck there for a year - Financing voyages like the Italian Super-companies didn't work for the Dutch - Captains didn't know how long they would be stuck in India so they charged extremely high rents for every journey - Soon the Dutch East Indian Company decided to build their own fleet of trading ships, as well as a navy to protect these ships travelling great distances - It was no longer efficient to rent warehouses because there was so much uncertainty to when the ship would return, and it would return without any warning - If there wasn't enough warehouse space and many ships coming at the same time, the companies only option was to sell, and this drove the price down - When partners in the company left the partnership agreement they should be paid for their share of ownership, but the company didn’t have much cash - The company got the law changed so partners could sell their share of the company in the open market - Amsterdam had extremely organized and advanced financial markets for its time - This is essentially the first modern corporation that operated the same as corporations today Lecture 22 March 5, 2014 10:33 AM The Netherlands - Buys that entered into futures contracts in the Netherlands, the buyer could buy out of his side of the contract if he pays a penalty - This is very similar to an option type contract and short selling - Shadow banking is raising money for a business venture through the markets instead of getting financed through a bank - The formal banking sector in the Netherlands was not the main place ventures got funds, they usually got it through the market - A joint stock company is a company's whose shares are sold in an open market - A bear raid is a coordinated effort to bring the price of a stock down - When the Dutch East Indian Company refused to offer dividends a group, led by Isaac La Maire coordinated to bring the price of the stock down - They used classic short selling to sell more shares than they had all at once to dramatically bring the price down - Then in theory they could sell the short back at a lower prices - This didn't actually work because the stock of the Dutch East India Company actually increased and many of these investors went bankrupt - It however convinced the managers that they should pay a dividend - But the dividend wasn't paid in coins, it was paid in goods that were imported, like pepper - The Dutch East India Company was the first modern corporation, and it was a massive company that had tons of shares trading - Buying government bonds were extremely risky in this era in Europe, because often Kings would refuse to pay it back or use the money to go to war - Government bonds sold through the markets in Amsterdam were much safer investments, but they paid much lower interest rates - Because the Dutch paid such low interest rates on debt, the government became very stable and successful - A financial bubble is a situation where a financial assets price rises much higher than it is actually worth, and the bubble bursts and the price drops - Tulip mania was the first recorded financial bubble, and it happened in the Netherlands - Tulips weren't originally native to the Netherlands, they came from Turkey - Tulip mania tulips were flowers that had dramatic colours and patterns of colours - It was seen as amazing at the tim
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