Carlos A., Key J. and Dupree J. (1998) Early finance’s learning curve

Carlos, Ann M., Jennifer Key and Jill L. Dupree (1998) “Learning and the Creation of Stock-Market Institutions: Evidence from the Royal African and Hudson’s Bay Companies, 1670-1700”, The Journal of Economic History, 58/2: 318-344.

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Disclaimer: this summary is written by the blog and not by the authors of the article. Any mistake is Manuel’s fault.


“England’s emergence as an international trading nation in the seventeenth century can be linked to the growth of trading arrangements that allowed for a longer life of capital either […] as a joint-stock trading company” (p.318).

According to North and Weingast’s famous thesis this emergence was made possible by the reforms brought by the 1688 Glorious Revolution. However the authors underline the fact that markets don’t grow instantaneously and it takes some times for the actors to learn how to use the market (p.319).

Sources and method

The authors use the stock transfer patterns of the Royal African Company (RAC) and the Hudson Bay Company (HBC) to document this initial learning curve (p.320).

Joint-Stock companies needed to keep good records on stock ownership since the management needed to know who to pay the dividends and who could vote during shareholders meetings. However these books do not include the prices paid for the stocks (p.321).

The RAC had 1,111 shares initially offered at £100. By 1697 its capital stock reached £1,101,050. The HBC had only initially 105 £100 shares and in 1690 had a nominal capital of £31,500. The RAC was an enormous company, second only to the East India Company; on the other hand the HBC was a mid-size corporation representative of the type of ventures that suddenly became common during the 1690s corporate boom (p.323).

The Royal African Company

From 1670 to 1700, the numbers of the RAC’s shareholders grew from 192 to 237. But more importantly, during these “three decades, there were 4,424 transactions among 1,200 different people”. The number of yearly transactions grew from 40 on average in the 1670s to 72 in the next decade and to 340 in the following 10 years. Noticeably, only a small share of these transactions can be linked to death and inheritance. These figures support the hypothesis of a gradual accumulation of know-how by the investors and intermediaries before the Glorious Revolution (p.325). The few surviving price data also support the “existence of a growing, albeit small, market” in the 1670s and 1680s “that grew into a bull market in the 1690s” (p.328).

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Graph. p.327

It seems at first paradoxical that the most active actors on this market seldom possessed more than £300 in shares, which prevented them from accessing any control or management position within the company. The authors identify these players as professional brokers (p.329). Many of them were also involved in other aspects of the London financial market (the RAC market being too small to support specialization); for instance, William Sheppard the most active among them was a goldsmith banker who also acted as an agent for Dutch Jewish investors (p.330). Their activity suggests “an active and transparent capital market prior to the Glorious Revolution” (p.333).

The authors further indicate that clients and providers of the RAC only represented a small percentage of the company, making it unlikely that they tried a vertical integration to control the trade and increase unduly their profit. Similarly the institution of coffee houses allowed the widespread diffusion of information regarding the company’s activity making insider trade unprofitable and guaranteeing a transparent market (p.334).

Graph. p.336

Graph. p.336

The Hudson Bay Company

The smaller HBC followed a very similar path to that of the RAC (p.336).  Interestingly William Sheppard was also active in the trade of the HBC’s shares.


“The key is learning. Individual investors learned how to make (and lose) money in ways that did not directly involve productive processes. They learned how to share risk in commercial and financial endeavors; how to buy and sell, and where to buy and sell. They learned about the financial rewards and losses they could incur. Concomitant with this was the learning by specialized brokers who managed the trade during these early years. The goldsmith bankers increased their expertise in the equity section of the market.”

It is that knowledge accumulated during two decades that allowed the London capital market to quickly take advantage of the opportunity offered by the Glorious Revolution. This experience and the market it created was pivotal in Britain rise the prime mercantile power (p.342). These lessons were not lost either to those who constructed the London market for government securities (p.343).

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