Today, we take it for granted that you can pick up your phone and invest in a company. But that – along with most aspects of modern investing – is a relatively recent invention.
Who was the first person to invest? What’s the history of investing? Will the fundamentals of investing change at any point in the future? Today, we’re taking you on a trip through the history of investing.
Investing in Ancient Mesopotamia
Most investing history books start in Europe in the 16th century. However, we like to start way earlier. We believe the history of investing can be traced back to the famous Code of Hammurabi, written around 1700 BCE.
That code provided the framework for a lot of civilization’s most crucial laws. Most importantly for this article, it gave us a legal framework for investment. Essentially, the law established a way to pledge collateral in exchange for investing in a project. In the Code of Hammurabi, land was required to be pledged as collateral. Anyone who broke their obligation as debtor/creditor was punished.
When we talk about investing, however, we’re typically talking about the modern investment structure of stock trading, securities trading, and banking. In that case, let’s jump ahead to the 17th century.
1602 and the Amsterdam Stock Exchange
When you look online for information about the first stock market, you’ll pretty much always be told that it’s the Amsterdam Stock Exchange. That’s generally accepted as fact, although there were a number of similar institutions that sprung up around Europe around this time (Antwerp had a financial exchange system in the 16th century, for example).
The Amsterdam Stock Exchange worked much like other stock exchanges: it connected potential investors with investment opportunities while simultaneously allowing businessmen to connect with willing investors. The market offered liquidity, publicized value, broadcast availability, and lowered transaction costs. In short, it made investing easier and more standardized.
The ASE was established by the Dutch East India Company, known for being the world’s first multinational corporation.
Soon after the successful experiment of the Amsterdam Stock Exchange, other stock markets began to appear throughout the rest of Europe.
Where There Stock Exchanges Before Amsterdam?
For years, it was accepted as fact that the Amsterdam Stock Exchange was the world’s first stock market.
However, many historians disagree, stating that stock markets could be found in various forms throughout Europe during the Medieval and Renaissance ages.
In Fernand Braudel’s 1983 text, “The Wheels of Commerce”, for example, he claims that the roots of stock markets could more accurately be traced back to the Mediterranean.
Stock markets date back to before 1328 in Florence, for example, and may have appeared even earlier in Venice. Genoa also had an active stock market throughout the Medieval Period.
Outside of Italy, evidence of stock markets and stock market-like structures could be seen in German towns and French cities, for example. German towns sold shares in local mines at the fairs in Leipzig, while French cities sold municipal stocks.
Braudel concludes by stating that “All evidence points to the Mediterranean as the cradle of the stock market”.
However, he goes on to praise the Amsterdam Stock Exchange by admitting it “…was the volume, the fluidity of the market and publicity it received, and the speculative freedom of transactions” that made the Amsterdam Stock Exchange the most notable way for individuals to invest (Source).
Generally speaking, investing is as old as human civilization. However, the stock markets of Medieval, Renaissance, and Enlightenment-era Europe all brought investing to the forefront of civilization in a more organized and standardized way than we had ever seen before.
The First Modern Pension Fund is Established in 1759
One of the biggest financial products on the market today is a pension fund. Have you ever wondered where pension funds originated?
In fact, pension funds can be traced all the way back to the Presbyterian Ministers’ Fund in 1759, which was created by the First Presbyterian Church in Philadelphia.
The fund was the first modern-style pension fund. Throughout the following centuries, companies and organizations began to realize the value of a good pension fund – including how a pension fund could change the global investment landscape. We owe that system to a church in Philadelphia.
The Industrial Revolution Introduces the Idea of Investing your Economic Surplus
The Industrial Revolution hit Europe in the mid-18th century. Typically, historians date it to between 1760 and 1840.
This period had a profound impact on the history of investing. For the first time in history, the general population began to share in economic surplus. People started to have savings from their jobs.
This enormous change in history also encouraged the development of the banking industry. People needed a place to store their money.
Soon after the end of the first industrial revolution, the Second Industrial Revolution took place (1860 to 1914). This period included the development of the internal combustion engine, flight, the radio, and electric power.
Historians throughout both of these periods talk a lot about rough working conditions and child labor. However, ignoring those uncomfortable facts, the First and Second Industrial Revolution were responsible for introducing investing and banking to an enormous portion of the population.
Instead of spending everything they owned on things like food and shelter, people had extra money they could save for the future.
1800s and the Rise of Modern Banking and Investing
Up above, we talked about how the First and Second Industrial Revolutions played a crucial role in the development of modern banking and investing.
It’s true: during this time period, some of the world’s largest financial institutions and banking firms (many of which still operate today) were developed.
Those firms include JP Morgan, Goldman Sachs, Lehman Brothers, and others, all of which were founded throughout the 1800s.
Starting in the 1850s, merchant bankers in London and Paris began to finance industrial expansions throughout the United States, leading to successful investment projects like the Transcontinental Railroad.
A decade later, those same financial institutions sold millions of dollars’ worth of bonds to help the federal government finance the American Civil War. Banks provided an easy way for investors – including everyone from major backers to individual investors – to back projects like this, regardless of where the projects were taking place around the world.
The idea of international investing began to blossom. Financial institutions began to realize the power (and potential returns) of investing in colonies. During the colonial period, enormous amounts of capital flowed from European financial institutions to colonies all over the world.
This was also the period when stock indexes started to emerge, which we’ll talk about next.
The Emergence of Stock Indexes
We take for granted today that you can check the Dow Jones or NASDAQ and get a gauge of how the market is performing.
But back in the 1800s, when modern banking and investing were in their early stages of infancy, that wasn’t the case.
Instead, men like Charles H. Dow, a finance journalist, invented these indexes to help investors – and the general public – measure market performance.
Charles. H. Dow unveiled something he called the Railroad Average, which would later be called the Dow Jones Transportation Average and Dow Jones Industrial Average – the world’s first stock index. Dow averaged the top 12 stocks in the market from a variety of crucial industrial sectors (which consisted at the time of railroads, steel mills, mining companies, etc.).
Today, the Dow Jones Industrial Average continues to play a crucial role in investing. It measures 30 companies from a much wider variety of industries, including companies like DuPont and Coca-Cola.
The Standard & Poor traces its roots back even further than the Dow Jones. In 1860, Henry Varnum Poor published a book called “History of the Railroads and Canals of the United States”. But instead of talking about where the canals were dug or why the railroads were built, Poor wrote about the financial history of the companies involved in these infrastructure projects.
Poor’s publications sold out, encouraging other companies – including Standard Statistics and Moody’s Manual Co. – to broaden their own operations beyond just railroad stocks. Between 1913 and 1941, these three firms would merge into one.
The end result was an index of 90 stocks (narrowed down from the original number of over 200) that acted as a market-weighted average (not price-based like the Dow).
When an index is market-weighted, it means the biggest companies don’t sway the entire 90 quite as much as the biggest companies do in the DJIA. This is thought to be a more accurate measure of the overall performance of the stock market.
The invention of the computer would later expand the Standard & Poor 90 Index from 90 stocks to 500. Prior to that, they were limited to just 90 stocks because no computer could handle a number higher than that.
Recessions and Depressions
Recessions are as old as civilization itself. However, they didn’t take on formal meaning until modern times. Most definitions of a recession are a period of two quarters (3 month periods) of contraction. By most counts, America has gone through 47 recessions since being founded in 1774.
For the first 150 years of its history, these recessions were mostly mild. There were a few hiccups involving wars, but for the most part, the American economy kept chugging along.
That changed in 1929 with the stock market crash and the ensuing Great Depression. We could write an entire article about the history of the Great Depression, but suffice to say that it led to some enormous changes in how Americans – and the world – invested their money.
One of the biggest changes came in the “radical” (at the time) idea that governments could spend their way out of a recession. Franklin Delano Roosevelt’s New Deal exemplified that attitude, promising enormous government spending across the country to get America out of the Great Depression. We have roads, dams, bridges, tunnels, and other enormous infrastructure projects across America as a result of that New Deal.
Suddenly, people were investing in America again. Around the world, other countries employed similar tactics to spend their way out of their own depressions.
Of course, some argue that the Great Depression wasn’t fully over until the start of World War II. Regardless, the stock market crash of 1929 and the Great Depression permanently changed the course of the world’s investing history.
The Securities Exchange Act of 1934
Aside from the New Deal, another big change to investing from the Great Depression was the Securities Exchange Act, which established the Securities and Exchange Commission (SEC). Interestingly, the SEC publishes the full text (in PDF) of the Securities Exchange Act of 1934 at their website here.
The Securities Exchange Act of 1934 changed the course of investing history as we know it. It organized laws governing the secondary trading market (previously, the primary trading market was governed by laws established in the 1933 Securities Act).
Thanks to this act and its wide-ranging legislation, exchanges across America could more easily trade in secondary markets – including stocks, bonds, and debentures.
Modern Investment Theory Continues to Develop Between the 1950s and 1990s
Between the 1950s and 1990s, the global economy went through a period of sustained growth and economic activity. All of that growth meant that we needed new investment vehicles and investment products.
That’s why Alfred Winslow Jones invented the hedge fund in 1949, or why the American Research and Development Corporation popularized the idea of private equity in 1946.
Real estate investment trusts (REITs) and the first Silicon Valley IPO (in 1956) also took place during this period. Harry Markowitz introduced the world to modern portfolio theory in the 1950s, while Edward Lorenz talked about chaos theory in 1960.
The 1980s, 90s, and the Rise of the Internet
As you can imagine, the internet and other modern communication platforms have had a profound impact on the history of investing.
Starting in 1985, the NASDAQ introduced its own index to compete with the S&P. The NASDAQ 100 was designed as a new index for a new era of investing: it was a market-weighted index with more technology sector companies – a region of the market that was surprisingly ignored by the more traditional indexes.
Of course, the rise in the popularity of the NASDAQ was a mixed bag, as the world would learn. The NASDAQ grew in popularity throughout the 1980s and 1990s, and all that increased exposure led to investors inflating the tech bubble in the late 1990s – a bubble that eventually burst.
Modern Investing Around the World
Today, countries around the world have their own stock markets, giving citizens an easy way to invest their money. Meanwhile, international brokers make it easier than ever to invest around the world.
We’ve seen the rise of interesting new investment vehicles – including everything from mutual funds to ETFs. We’ve seen the rise and fall of mortgage-backed securities, culminating in the financial crisis of 2007-2008.
Not interested in the stock market? Modern investors can invest in commodities and futures on commodities exchanges. Others invest in foreign currencies through forex markets. Some invest in real estate.
Today, investing is easier and more accessible than it has ever been in the past. The internet has made it easy for online brokers to do business, offering cheaper commission and trading fees than traditional banks and brokers.
The history of investing is as old as human civilization itself. Unless there’s a profound change in the way human civilization works in the near future, the history of investing writes a new chapter every day.