Commercial Revolution
By 1600, many important changes had taken place in the world economy. Spain and Portugal had become important because of the overseas empires they had staked out but were not equipped for active participation in European trade; the Italian cities were well located for trade through the Mediterranean but not for ocean traffic; Holland, England and France were well placed for combining European and transoceanic commerce; and the Dutch were already started on the road to becoming the world’s leading carrier and middleman. Finally, the late 15th century saw Antwerp almost complete its rise to the position of being the commercial metropolis of Europe.
Economic Effects of the Maritime Discoveries: The maritime discoveries produced several long-run economic consequences. 1) Greatly increased quantities of known produce and supplies of new commodities were drawn from the outer continents. 2) European goods, especially manufactured articles, found wider markets. 3) Europeans emigrated and settled in relatively large numbers in America, supplementing their own labour by drawing slaves in from Africa. In crowded tropical Asia there was room for only a few European traders or officials, and in Africa the soil and climate attracted few settlers. 4) Trade and settlement offered new fields for the investment of capital. 5) Ocean transportation and intercontinental commerce opened new avenues for profit in building and operating ships, as well as in processing the colobial raw materials. 6) Administrative posts at home or overseas in the employ of governments or trading companies provided jobs ranging from the lowliest to the most lofty lucrative. It was however a long time before all these effects was full-grown.
Growth of Commerce and the “Commercial Revolution”
With all the changes in agriculture and industry which occurred in the sixteenth century, clearly that branch of economic activity which experienced greatest growth was commerce. Whatever the growth of European commerce may have been, it is clear that the greatest expansion was realized along the Atlantic littoral from Gibraltar to Hamburg. Here were to be found the colonizing nations which were putting royal treasure and income from taxes into overseas explorations and colonial expansion. Here were the places where colonial goods from the far corners of the world were marketed. And here, too, were the best ports of Europe, conveniently located for using the new routes around Africa and across the Atlantic. Under the circumstances it is not surprising that places Cadiz, Lisbon, Bordeaux, Antwerp, Amsterdam, Bristol and London grew by leaps and bounds.
So drastic was the shift in the center of international commerce from the Mediterranean to the Atlantic and especially to the North Sea ports that it has traditionally been called in the annals of European history the “Commercial Revolution of the 16th century”. Important as this commercial revolution was, the impression should not be left that commerce elsewhere completely disappeared. All the leading commercial states of the seventeenth century—the Dutch, the English and the French—had trading companies that exploited the possibilities of the Levant, and for a time they did considerably well.
The failure of the Mediterranean trade to grow at the same rate as that of the coastal areas of the English Channel and the North Sea meant that those regions whose economy was based on commercial intercourse with the Mediterranean tended to stagnate; this was particularly true of south German cities and the Baltic Sea area. Here the Dutch began to supplant Mediterranean suppliers of spices and other Eastern products and to take the place of Hanseatic traders in bringing to the West both grain from Danzig and shipbuilding timber from Scandinavia. Then the herring, which for centuries had spawned in the Baltic, for some strange reason shifted their grounds to the North Sea during the 16th century. This was an important loss to the economy of the Baltic and a real gain for the Dutch.
Expansion and Business Organization
With the growth of commerce and of industry stimulated by the expansion of Europe overseas, business was confronted with problems of entirely new magnitudes. First and foremost, it was faced with raising amounts of capital which seldom if ever had been amassed for completely new undertakings. Secondly, it was obvious that the newly proffered business opportunities, lucrative as they might be if they succeeded, entailed far more risk than the usual entrepreneurial venture.
In the case of Portugal, the pioneer in the new trade, problems of financing and risk taking were partly met by declaring trade with the Indies a monopoly of the royal houses for the monarch’s revenues were supposedly adequate to provide capital and to sustain temporary losses. In the long run, however, this solution was not successful, for Portuguese kings proved to be inept businessmen. They made the great mistake of not organizing the distribution of spices within Western Europe for their own profit; they gave too great concessions in return for loans.
The Spaniards endeavoured to meet the exigencies of the new situation by erecting a mixed system of government and private enterprise. This system seems to have worked well until Spain became so weakened by foreign wars that the government could not keep up its part of the arrangements. In the end, foreigners were able to break into the trade monopoly through smuggling. The English, Dutch and French worked out still other arrangements to exploit the possibilities of overseas trade. Here royal houses played but minor roles.
From the Mediterranean, enterprises had the example of multiple partnerships, in which all the partners were active in management; of the commenda, in which some of the partners were merely investors and hence were known as sleeping partners; of loans secured by cargo or ship, that is, the respondentia loan and bottomry contract, respectively; and of sea loans in which the lender advanced money to a shipper with the understanding that he would get a relatively large return if the voyage succeeded.
It was clear that capital requirements for the new commercial enterprises could be provided in two way: either by bringing capitalists together in the same enterprise as active operators or by bringing them together in undertakings in which they were strictly investors with no managerial responsibilities. When recourse was had to the former arrangement, the resulting form of business organization was the regulated company, in which merchants got monopoly rights to trade in certain areas; they pooled their resources to buy or hire ships, and they elected officials who laid down the main lines of every programme. But merchants in these companies actually traded on their own, as in the Spanish case.
The regulated company had its drawbacks, for competition among members for business abroad was keen and the allocation of blame if a voyage failed led inevitably to animosities, recriminations, and dissolutions. Therefore, from the beginning of the seventeenth century, the alternative form of organization—combining the capital of investors rather than combining active tradesmen—became more common. Here the practice as for an entrepreneur to issue shares in stock and to offer them to the investing public at a given price. What investors had then was part of the ownership of a tangible business—of the actual property that the money might be spent for.
This joint stock arrangement was one of the most important inventions in business organization of all time. Its greatest advantage was that it could tap the savings of very large numbers who had liquid capital at their disposal and thus could bring together the sums that were needed for large enterprise. It limited investors’ liability, and it permitted the stockholder to get cash when needed by the simple expedient of selling some or all of his holdings. Lastly, the joint form of business organization had the advantage of not coming to an end upon the death of any one of the owners, as did individually owned businesses. Those who inherited the shares of the deceased owners simply became the new owners. This allowed very long-range planning and gave continuity to policies.
The first joint-stock ventures of which we know were attempted by the English for overseas trade in the middle of the 16th century. But not until the establishment and success of the English East India Company, in 1600, did this form of business actually come its own. Almost as old as the English East India Company was the Dutch East India Company, chartered in 1602. Like its English counterpart, this concern grew out of multiple partnerships organized, much like the English regulated companies, and out of temporary joint-stock companies, created for individual voyages to open routes to the source of spices in the East.
Similar however as they were in origin and charter, they differed fundamentally in structure and administration. Whereas the management of the English Company was controlled by stockholders, the Dutch concern was run by political appointees.
With the excellent profits records made by both the English and Dutch East India Companies in their early years, it seems strange that the French did not rush immediately into competition with him. Not until 1664 however, did the French East India Company come into being. Unlike its predecessors the French Company did not have at first a good record of earnings.
In any case, the three great East India Companies thoroughly established the joint-stock form of business organization for colonial enterprise. As joint-stock companies grew in number and in capital, the floating of issues of stock and the trading of existing shares became big business, so big, in fact, that a new occupation came into being—that of stock-broking. The London Stock Exchange was set up in 1773, and it was here that the business of stock trading gradually took form, including the practice of speculating on rises or falls in the price of stock.