peace time that followed. Loans could be obtained on a personal basis from those well connected with the State, could be arranged through intermediaries such as corporations (guilds, cities, etc.) or banks, or through the market. We shall see that the demand for market-based government loans was created in the Dutch Republic in the last quarter of the 16th century. In England, it was created in the last decade of the 17th century. We will consider the possibility that in England, demand was created in earlier periods as well, but was not supplied.
Demand for a market in corporate shares emerges when the cost of doing business increases; for example, when economies of scale provide more advantages or when entry barriers become higher or when risks are greater. This demand can be met internally. It can be met externally on a personal basis. It can be met by intermediaries. But when these are unavailable, the market could be used for raising impersonal external finance. We shall see that both in the Dutch Republic and in England, impersonal external finance was sought with the beginning of the oceanic trade with Asia in the closing years of the 16th century.
The focus of this article is on the founding of the EIC (1600) and the VOC (1602), and the relationship between their organization and the formation of stock markets in England and the Dutch Republic. The two companies were larger by an order of magnitude, in terms of capital and number of shareholders, than any earlier merchant company in existence in England and the Dutch Republic. They were the largest business corporations in Europe for the next two centuries and served as the basis for the formation of the British and Dutch Empires.5 As widely held public corporations, their development could be linked to the development of a primary and a secondary market in shares. But here they diverge. The VOC relied on a pre-existing market in government bonds and its formation marked the origin of the Dutch share market. The EIC did not rely on a preexisting bond market and did not contribute to the formation of a share market in England.
The EIC and the VOC are usually viewed in the literature as similar joint-stock companies – the forerunners of the modern public corporation. They differ from older forms of organizing Eurasian trade, the Silk Road caravans, the medieval merchant ship partnerships of the Asians, and the State-owned enterprises of the Iberians. A main purpose of this article is to identify and analyze the major institutional differences between the companies. It will explain these differences by dissimilarities in the political, legal and stock market environments in which the two companies were formed.
The present article will also connect the growing literature on the role of law, the government and institutions in the development of stock markets with the crucial historical juncture in which these first large corporations were formed in the two soon-to-be-leading economies in Europe. The purpose of this connection is to gain insight from the literature and to challenge it through this pivotal historical case study. The challenge is not posed here by systematic, large scale econometric empirical testing. Such tests have been performed elsewhere
5 The article deals only with the first decade in the history of the companies. It focuses on finance and governance aspects, touches only indirectly upon trade and does not deal at all with colonial and military consequences of the activities of the two companies.