Of Trade and War: Tale of the First Multinational Corporate
Imagine this: A potential candidate for the MDH Masala company walks in for their interview. Instead of their usual interview clothes, they are clad in a military training suit. The interview takes place in an open field instead of the closed quarters of an office. The candidate is expected to complete commando courses in record time as opposed to answering trick questions in interviews.
Seems unlikely, doesn’t it?
Well, recruiters at Vereenigde Oost-Indische Compagnie (VOC, for the benefit of the writer) would disagree for I believe the aforementioned scenario is exactly how the recruitment process would have looked like for the world’s first formally listed trading company. Alternatively known as the Dutch East India Company, it is considered to be the prototype for the business model that all limited liability companies of today function on.
An Origin Story
In the late 1590s, The Company for Far Lands, an investment syndicate in Amsterdam was established, rife with the ambition of penetrating the trading system of the far, far South-East Asian lands, which back then, was dominated by the Portugese. The company was primarily interested in the spice trade, therefore it went as far as the East Indies, stopping at India and Ceylon for pepper, cardamom and cinnamon only. From 1598 to 1600, the Dutch traders completed their first successful expedition to East Indies and back, and returned a profit of over 400% to the investors.
Given the profitability of the initial expeditions, an increasing number of competing merchants sent their ships to the East. As more and more ships started returning with sizable wares, given the inelastic demand and an elastic supply, the prices of the spices (that rhymes!) took a hit. To curb the issue of falling prices, the States-Generals (governing body of Netherlands), met in Hague in 1602 and convinced all provinces to accept the formation of a company that would have monopoly over spice trade. The company formed was the VOC.
VOC worked like a “state within a state” (Bown), possessing powers akin to that of countries. Other than trade, the company could build forts, enter into treaties, maintain armies and wage wars. Thus began a military-industrial complex that would go on to change the course of financial capitalism, seize lands, commit massacres and in the midst of it, trade spices and other fineries for almost 200 years.
The Expansion
What started as a venture to trade fairly with foreign nations quickly turned into a conquest for control over the most lucrative trading posts and South East Asian lands. The Dutch were able to defeat the Portugese, owing to their superior seamanship, resources and support from their government, and displaced the Portugese from the thriving trade network of the area, thus eliminating major competition.
The Dutch quickly realised that if they had to monopolise the spice trade, simply playing merchant won’t help. They had to control the means of production as well. Through deceptive trade deals and sheer force, the Dutch set camp on the Banda Islands. They were successful in veering off the British as well, the most notable act of acquisition being the Amboina Massacre, where the Dutch took hold of the English trading post and executed their traders.
At the helm of the VOC’s efforts to outgrow their role as traders and take over the production of spices was Jan Pieterszoon Coen, an accountant by training and a military mastermind. He spearheaded the conquest of the Indonesian Islands and was the driving force behind making Batavia (formerly Jacatra, now Jakarta) the most prosperous trading port in the eastern oceans in the middle of the 17th century. He best captured the essence of the VOC’s trading methods in a letter to the governments of Netherlands in a bid to secure their financial support for basing the acquisition of the South East Asian markets based on military force, in which he wrote and I paraphrase, that there is no trade without war and no war without trade. On a side note, nothing has captured the essence of modern day capitalism more precisely.
By the middle of the 17th century, VOC had complete monopoly over the trade of nutmeg, clove and mace. It also became the sole foreign entity to be trading in Japan and enjoyed that status for a long while.
Business Practices: The Financial Acumen of the Dutch
As a prototype for the limited-liability companies of today, the VOC hedged the risk of its shareholders by allowing them to invest in parts of a whole rather than the whole itself. For example, the shareholders could invest in part in 10 ships rather than invest all the funds in one ship. The VOC also traded a lot in the futures market and contributed to the development of the Amsterdam Stock Exchange.
Another major contributor to the flourishing trade of the VOC were the low interest rates. At just 4%, the rate at which businesses could borrow in Netherlands was significantly lower than that in France and England. However, lower interest rates also meant lower bond yields, therefore, later on investors turned to buying foreign debt and in fact, helped in funding other nations.
The VOC was also notorious in paying the dividends to their shareholders in kind partly, which of course, didn’t sit well with the investors. Sensing the dissatisfaction of the investors from such an arrangement, the British took to the practice of paying their shareholders almost exclusively in cash.
The Downfall
Despite the flourishing trade of the company, towards the end of the 17th century, their business was declining. Trading with Japan decreased and the Third Anglo-Dutch War was a major reason behind disrupting the trade with Europe. To add on to that, the popularity of the goods traded by the Dutch decreased in Europe. Nutmeg was replaced by sugar and the woollens supplied by the Dutch were displaced by an affinity for cotton.
A resurgence in power followed, but it was short-lived, with another war emerging and leaving the company battered. Yet, the Dutch government continued to support the VOC, however, its powers were considerably reduced, until eventually it lost most of its colonies and went out of business.
The rise and fall of the Dutch East India Company presents an insightful case study on the dynamics of one of the earliest examples of public-private partnerships, on financial markets and its origin, on monopolies and bloodshed. However, most importantly, I believe it is a cautionary tale, which underlines the inherent ties between trade and war.
Further reads:
Merchant Kings - Stephen R. Brown
Capitalism and the Dutch East India Company - Crash Course (YouTube)
Britanica Encyclopaedia Introduction to Dutch East India Company for reader - friendly introduction
Comments