The Tariff Which Shook History

Tariff Rate Act Morrill Tax
Morrill Tariff

As has been noted previously, substantive changes in tax policy are often closely tied to big changes in the social order. And the tie is not unidirectional, resulting solely from a tendency for tax measures to provoke heated reaction from a population. Sometimes a social change – such as a war – can massively alter the tax policy of a state. In the historical process, tax policy is both an active agent and a reactive agent, both a cause and an effect.

In most cases, it is not too difficult to determine the impact which a change in tax policy has had on society. The assessment of most changes is rather straightforward. The Morrill Tariff of 1861 – named after its sponsor, Vermont politician Justin S. Morrill – stands out among tax law because it defies this trend: although there can be no argument against its general importance, there is considerable controversy as to its specific role in history. Historians are divided as to what role the tariff act played in furthering the secessionist sentiment among Southern states: was the tariff a point of only minor irritation for Southern states? Or was it a matter of major frustration which caused Southern states to view secession as a necessary solution rather than a possibility?

The thing which is certain about the Morrill Tariff is that it raised rates substantially. In the years just preceding the Morrill act, American tariff rates had been unusually low by global standards. Between 1857 and 1860, the U.S. had average rates of approximately 17 percent overall and 21 percent on dutiable items. By 1865, the Morrill Tariff had increased these rates to 38 percent and 48 percent, respectively. Aside from bringing U.S. rates closer to global averages, the Morrill act also provided means to ameliorate the financial woes plaguing the U.S. Treasury.

Support for the Morrill act tended to vary according to political and sectional affiliation. The vast majority of Republicans voted in favor of the act and the clear majority of Democrats opposed it; there was an unmistakable sectional division as well, with every lawmaker from the Southern states except one voting against the act.

Historians who believe that the Morrill Tariff played only a minor role in furthering sectional hostility emphasize the element of time in the adoption of the act. The development of the tariff had begun well before any state had seceded from the union, but not until several states had withdrawn was the tariff act able to succeed in Congress. Historians point to this fact and infer that the tariff had only minimal significance given that a number of states had already decided to secede.

However, on the other side of the issue, historians emphasize that tariff revision had been a heated topic of discussion well before any state declared secession. The South had a clear interest in embracing free trade given the nature of its economy; Southerners also generally felt that they lacked the proper representation in the federal government which was necessary to ensure an equitable outcome. What’s more, the Morrill Tariff was mentioned specifically as a source of displeasure by the conventions of both Georgia and South Carolina; the tariff was even discussed in South Carolina’s secession ordinance.

The precise role of the tariff in promoting secession (and ultimately the War Between the States) will likely be debated for many years to come. Both sides of the matter have facts on which to rest their case; about which there can be no debate, however, is the fact that the tariff must be regarded among the most consequential in U.S. history.

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Taxation in the Confederacy

Confederate Tax Act Revenue Taxation
Taxation in the Confederacy

Taxation in the Confederate States of America is a subject not often studied by either professional academics or laypeople. This is not at all surprising: there is a natural tendency to avoid giving deep attention to things considered deplorable, and since the legacy of the Confederacy is construed as wretched by so many people, it follows that a great many are ignorant of the details of Confederate society. Today, we will go against natural tendency and take a look at the tax acts passed by the rebel government in its attempt to raise revenue for the war.

Revenue derived from taxation made up only a very small part of the war fund for the South. In total, taxes constituted roughly 8.2 percent of the war account; this is less than half of the percentage contributed by taxes for the Union. Compared to the North, the Confederacy was slow to impose a “direct” tax on its population in large part because of its strong commitment to state’s rights and opposition to centralized government. As we will explore in detail below, the Confederate Congress passed two tax measures during the course of the war; neither of these measures generated sufficient income, and by the end of the war it was evident that financial trouble had played a substantial role in the demise of the South.

War Tax of 1861

At the beginning of the war, the Confederate government relied on tax revenue derived from international trade (i.e. tariffs and taxes on exports) and financial contributions from private citizens. These sources of funding started off well, but by the close of 1861 both had dried up almost entirely. The collapse of these sources prompted the Confederacy to impose a “War Tax” which was passed in August of 1861. The War Tax consisted of taxes on a number of items identified by the Treasury and a tax on real property greater than $500 in value.

In its first year (1862) of operation, the War Tax contributed a measly 5 percent of total war revenue. Not only was the tax relatively gentle in its basic terms, collection proved to be much more difficult than Confederate lawmakers had anticipated.

Agricultural Produce Tax of 1863

In response to the lackluster performance of the tax act of 1861, the Confederate Congress passed the Tithe Act – otherwise known as the Tax-in-Kind – in April of 1863. On top of the taxes imposed by the War Tax, the Tithe Act placed a tax of 10 percent on agricultural produce. The Tithe Act was referred to as the “tax-in-kind” because it was not paid in currency but with physical goods; under this act, 10 percent of the actual produce of plantation owners was handed over directly to the government, not 10 percent of their profits. Though it was plagued by implementation difficulties of its own, the produce tax was relatively successful and contributed a substantial portion of overall tax revenue in the remaining years of the conflict.

Controversy surrounded the tax-in-kind because it was interpreted as a direct tax by the Confederate Congress. Though they were in rebellion against the Union, the lawmakers of the Confederate Congress still adhered to the constitutional principle of apportionment for direct taxes and so many felt the Tithe Act unacceptable on this principle. The financial condition of the South ultimately tipped the scales and the act was passed out of sheer necessity.

References

Richard Burdekin and Farrokh Langdana, “War Finance in the Southern Confederacy, 1861-1865,” Explorations in Economic History, Vol. 30, No. 3, July 1993.

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A Quick Look at the Tea Act of 1773

British Tea Act Parliament America Company
The Tea Act of 1773

It has been noted before on Huddleston Tax Weekly that there is a strong tendency in contemporary society to associate taxes with things which are mundane, dull and boring. We’ve also noted that these associations are based on the conditions of our society at the present moment and would make little sense if based on conditions from previous eras. Throughout the bulk of recorded history, taxes have been closely tied to a host of exciting and oftentimes frightening things. With few exceptions, substantive changes in tax policy have accompanied sweeping changes to the existing social order, and the Tea Act of 1773 does not stray from this general rule.

As we will see, the significance of the Tea Act of 1773 stems mostly from the way it was received by the American colonists of the British Empire. The purpose of the act was not simply to generate revenue, but to provide confirmation of the power of the British Parliament to directly tax the American colonies. The act not only failed to achieve its intended goals but also sparked a reaction which ultimately altered the entire course of world history.

Historical Setting

The passing of the Tea Act was surrounded by a number of important political and business phenomena. One of the most pressing concerns of the British Parliament during this (pre-revolutionary) era was to have its power to tax the American colonies fully accepted by American colonists. This concern was among the driving forces behind the so-called Townshend Acts. The Townshend Acts consisted of a series of measures which dealt with a variety of issues relating to the administration of the American colonies. The first of these acts – the Revenue Act of 1767, also referred to simply as the Townshend Act – imposed a tax on tea (and several other items) imported to the colonies. The act forbade the colonists to purchase tea from any supplier other than Great Britain.

The Revenue Act was met with serious opposition from the American colonists who swiftly condemned the measure as a piece of blatant tyranny. Thenceforth the aim to legitimize the taxing power of the British Parliament over its colonies intensified.

Before the Tea Act, the British East India Company had been directed to sell its tea exclusively in London. Tea from the company which did make it to North America did so only through outside merchants who specialized in international sales. By the time the tea reached the market for American consumers, markups and the tax imposed by the Revenue Act made the tea an unattractive buy. As a consequence of these policies, an underground market developed in which foreign (Dutch) tea was smuggled into the colonies and sold at much lower prices. In addition to legitimizing the Parliament’s taxing power, the Tea Act was also passed with the aim of improving the financial condition of the East India Company and shutting down the flow of smuggled foreign tea.

The act contained these terms: the East India Company had the ability to ship its tea directly to North America; the company was no longer bound to sell its tea exclusively in London; duties on tea charged in Britain which were shipped out for international sale would either be refunded when exiting the country or not imposed; and finally, those receiving the company’s tea were required to pay a deposit up front following delivery.

Colonial Reaction

The British lawmakers in the Parliament had reason to believe that the Tea Act would produce favorable results: the tea sold by the East India Company was of higher quality than Dutch tea, and since its price had been lowered, the lawmakers could sensibly infer that the smuggled Dutch tea would lose its competitive advantage. Unfortunately for the British lawmakers, the act would be opposed not only by those colonists who continued to reject Parliament’s ability to lay the tax of the Revenue Act, but also by colonial merchants and underground businessmen who had a financial interest in preventing the ascendancy of the East India Company.

After the act was passed, the East India Company sent a number of ships to America in the hope of unloading its tea on the market; none of these ships was to unload its cargo successfully. Most famously, the ships which arrived at the ports in Boston were raided by irate colonists who tossed the company’s tea into the harbor. This incident came to be known as the “Boston Tea Party,” though it was referred to as the “Destruction of the Tea” in its own time. The colonial stance on the Parliament’s ability to impose taxes was clear, and the stage was set for the massive insurrection which was to eventually give birth to the sovereignty of the States.

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How War Shaped Modern U.S. Taxation

War Taxes Taxation United States Tax Policy Income
War & Taxes

The idea that war has in some sense impacted tax policy throughout our nation’s history should strike no one as being controversial. War and taxes have always had a close relationship, not only within the United States but across the whole globe. In fact, it is probably the case that taxes have played a role in just about every military conflict in history, though the role may not have always been overt and openly recognized. War is essentially a dispute over power, and since money is often a source of power it should surprise nobody that taxes are frequently looming in the background of such disputes.

What fewer people realize, however, is that war has arguably been the single greatest engine behind the development of U.S. tax structure since the outbreak of the War Between the States. As we will see, without war, our tax structure would likely be radically dissimilar from what it is today. The federal income tax may not have been established, and certainly the size of our government would be much smaller by comparison to what we have now.

The Birth of the Income Tax

The founders of the U.S. wished to limit the taxing power of their government and the Constitution was drafted in a fashion consistent with this desire. Up to 1861, the government of the United States had only collected excise taxes and taxes on foreign imports (tariffs); there was no controversy surrounding the income tax because no such tax had yet been imposed. This state of affairs, a state which had carried on stably for over seven decades after the writing of the Constitution, was disrupted by the War Between the States. Soon after the war broke out the Revenue Act of 1861 was passed and the first income tax was implemented on the American population. Two additional acts were passed subsequent to the act of 1861 which made modifications to the rate structure of the tax.

Though they were (supposedly) only intended as strictly wartime measures, the acts passed during the war produced an indelible precedent, and by 1894 the income tax had reemerged as part of the Wilson-Gorman Tariff Act. Whether the income tax would have been created in the absence of the War Between the States is a matter open to speculation. What is certain is that the war had a tremendous impact on the course of U.S. tax policy.

The First World War

The income tax provision of the Wilson-Gorman Tariff Act of 1894 was ruled unconstitutional by the Supreme Court with its decision in Pollock v. Farmers’ Loan & Trust Co. (1895). That ruling marked the beginning of a near two decade long hiatus during which the income tax disappeared. The income tax made its reappearance with the Revenue Act of 1913 which was developed after the taxing powers of the Congress were expanded through the sixteenth amendment.

Now, it may be untrue that the income tax itself did not reemerge as a direct consequence of the First World War; but there can be no questions of any sort that this war provided the impetus for the massive increases made to the rate structure of the income tax when it did return. When the U.S. entered the war the top rate of the income tax was changed from seven percent to an astounding sixty-seven percent; by the close of the war the top rate had been further increased to seventy-seven percent. Tax rates for individuals fluctuated after the war during the 1920s; by the end of the 1920s the top rate for individuals reached a low of 25 percent.

Rates for individuals were increased following the Great Depression and they would continue to remain high both during and long after the conclusion of the Second World War. The top rate for individuals would not fall below 30 percent until the late 1980s.

Again, we can only speculate about how U.S. tax policy would have developed without war. Was a federal income tax a historical inevitability? Would the rate structure of the income tax look dramatically different if war had not caused us to lean heavily on our wealthiest citizens and corporations? These questions can never be answered given how events have unfolded. One thing which is not open to speculation, however, is that our tax policy looks unrecognizably different than the way it looked at the time of the founding.

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The Rise of the Progressive Federal Income Tax System

Income Tax Federal Progressive Revenue
Progressive Federal Income Tax

Before we dive into the details of the Revenue Act of 1913 and the progressive tax system, let’s briefly go over what we’ve learned about the history of the income tax. During the War Between the States, the U.S. government imposed the first income tax in order to fund the Union army. This tax – which was brought about through the Revenue Act of 1861 – was conceived as an emergency measure and was not intended to continue after the war. Following the surrender at Appomattox, the income tax lingered around until about 1872, but it then disappeared for over twenty years. The income tax made its reappearance with the Wilson-Gorman Tariff Act of 1894, but the tax provision of this act was quickly struck down with the opinion stated in the case of Pollock v. Farmers’ Loan & Trust Co. (1895). This second hiatus was interrupted by the sixteenth amendment to the U.S. Constitution which consolidated the taxing power of the Congress by eliminating the rule of apportionment which had applied to direct taxes.

With the sixteenth amendment, the Congress was transformed into a monstrously powerful entity, a taxing giant free of traditional legalistic constraints. When historians of the future assess the relative importance of the many amendments to the Constitution, their assessment can be said to be accurate only if it includes the sixteenth amendment near the very top of the list.

On October 3, 1913, President Woodrow Wilson signed the Revenue Act of 1913 into law. Along with reducing tariff rates, the act instituted a progressive tax structure in which higher earning individuals had a greater tax liability. Just as the sixteenth amendment allowed, the tax could be collected on income derived from any source, no matter whether it be direct or indirect, without any requirement to apportion among the states according to population.

Original Tax Table

By current standards, the tax table created by the act of 1913 was remarkably gentle. Single filers who earned less than $3,000 were exempt, as were married filers who earned $4,000; adjusted for inflation, in 2016 these amounts would translate to approximately $73,100 for single filers and $97,500 for married filers. Single filers were required to pay one percent on earnings above $3,000 ($4,000 for married filers); income above $20,000 but below $50,000 was taxed at a rate of two percent; income above $50,000 but below $75,000 was taxed at a rate of three percent; income above $75,000 but below $100,000 was taxed at a rate of four percent; income above $100,000 but below $250,000 was taxed at a rate of five percent; income above $250,000 but below $500,000 was taxed at a rate of six percent; and all incomes above $500,000 were taxed at a rate of seven percent.

Subsequent Tax Acts

This tax table created by the Revenue Act of 1913 only lasted for three years. It was replaced by a new table contained in the Revenue Act of 1916. The tax table of the act of 1916 (which can be viewed in full here) doubled the lowest income tax rate from one percent to two percent, and it increased the highest tax rate to fifteen percent. The 1916 tax table lasted for only a single year as it was replaced by the War Revenue Act of 1917. Prompted by America’s entry into World War I, the act of 1917 greatly increased tax rates across all income levels in order to support the war effort. The 1917 act imposed a top rate of sixty-seven percent on income above $2,000,000.

The act of 1917 was superseded by the Revenue Act of 1918. This act saw a top rate of seventy-seven percent and this applied to all incomes above $1,000,000. The revenue derived from these wartime acts contributed approximately one-third of the total fund for World War I; eye-catching of itself, this fact is made all the more impressive considering that only about five percent of the population paid income taxes in 1918.

After the Great War, the Congress continued to make revisions to the tax structure. In the 1920s, four different tax acts were passed – the acts were passed in 1921, 1924, 1926 and 1928. The act of 1921 was noteworthy as it implemented a tax on corporate income of ten percent. This rate on corporate income was likewise revised and by the 1928 act the rate was increased to twelve percent. Though the scourge of war formed the basis for the transformation of the income tax, little interest was shown by the politicians in Washington in reducing the tax to pre-war rates.  And the decades following the 1920s would see a steady increase in the share of Americans filing tax returns. The federal income tax was firmly in place, supported by our nation’s political leaders and fully backed by constitutional law.

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The Birth & Growth of the Income Tax in the United States

Income Tax Congress Revenue Act
Income Tax

Most people are oblivious of the fact that the United States has not always consistently imposed an income tax. Most people assume that the Internal Revenue Service has existed in its current form forever. Though it is false, this assumption is not without reason: national governments have a well-earned reputation of being tax hungry entities. In reality, however, the U.S. has only consistently collected a tax on income since the passing of the sixteenth amendment in 1913. But though the U.S. has only regularly collected an income tax since after the sixteenth amendment, this does not mean that the U.S. government never collected such a tax earlier.

After the eruption of the Civil War, President Lincoln and the Congress passed the Revenue Act of 1861, and this act allowed the government to impose a tax on income to fund the war effort for the Union. The Revenue Act gave birth to a federal office in charge of collecting the tax, and this office was the embryonic form of the IRS.

The Revenue Act of 1861 grew out of necessity. The Union army needed additional funds in its struggle against the Confederacy. The 1861 act first put forth a rate of 3 percent on income above $800. This rate was subsequently discarded when the Revenue Act of 1862 was passed. The act of 1862 imposed a rate of 3 percent on income between $600 and $10,000, and 5 percent on income over $10,000. These rates were also later discarded and in 1864 a new act (the Revenue Act of 1864) imposed rates of 5 percent on income between $600 and $5,000, 7.5 percent on income between $5,000 and $10,000 and 10 percent on income above $10,000. These multiple acts provided the Union with a large source of its revenue: approximately 21 percent of Union funds were raised from income taxes.

Though it was only intended as a temporary measure during wartime, the income tax lingered for a bit after the Union declared victory. The various public projects associated with the Reconstruction era required funding, and so an income tax was collected until roughly 1872. But even though the tax expired around this time, a precedent was established, and in 1894 a peacetime income tax was included as a provision of the so-called Wilson-Gorman Tariff Act. The Wilson-Gorman act reduced the tariff rates set by a previous act, and proposed a 2 percent tax on income above $4,000 in order to cover the deficit. The income tax provision of the Wilson-Gorman measure was ruled unconstitutional by the Supreme Court in its opinion of Pollock v. Farmers’ Loan & Trust Co. in 1895, but the income tax eventually made its return with the sixteenth amendment.

To this day, opponents of the income tax continue to make arguments against its constitutionality, but none of these arguments have passed legal scrutiny. No matter what your position on the income tax, it is important to remember that even if this tax disappeared tomorrow we can be certain another one would take its place in double quick time.

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Scutage: The Knight’s Tax of Feudal England

Medieval Feudal England Tax Knight
Feudal England

As has been discussed in an earlier installment of Huddleston Tax Weekly, taxes have not always been associated with calculators, receipts and refund checks. In point of fact, the history of tax is replete with all sorts of high-powered phenomena – armed rebellions, popular revolts and regime transformations. Here at HTC, we think it is pretty clear that taxation has evolved for the better; but, though this may be the case, we also think it is important to occasionally take a glance at the old tax practices of the past. By examining the history of tax we can be certain to avoid past mistakes; we can also get a sense of where some of our tax terminology comes from.

Beginnings

Like the geld, scutage was a medieval tax issued and collected principally in England. Scutage originally developed as a payment made by possessors of knight’s fees to opt out of military service. Feudal law enabled knights to acquire “fees” (sections of land) in exchange for military service. Knights who wished to avoid military service began offering sums of money to tenants-in-chief as a means of “buying out” of their obligation.

Scutage existed in this form as early as 1100 (the beginning of the reign of Henry I). Payments made by knights were useful to the crown in part because mercenaries became common during this era.

Decline

Though scutage initially developed as a straightforward transaction between knights and their tenants-in-chief, the English crown gradually began to extend scutage beyond this original purpose. The crown started to levy the tax on specific areas and at various points in time; importantly, the tax ceased its function as a monetary payment in exchange for release of military service. The king began to demand excessive sums from the population and as a consequence a rebellion broke out in 1215. This rebellion eventually led to the proclamation of the Magna Carta. Among other things, the Magna Carta attempted to prohibit the English crown from demanding oppressive sums in the form of scutage.

Scutage endured up to the reign of Edward III (ruled from 1327-1377). By that time, it had become common practice for scutage to be imposed by tenants-in-chief on their under-tenants. Under feudal law, the practice of subinfeudation allowed tenants-in-chief to give portions of their land to others in exchange for services (or payments). By the reign of Edward III, subinfeudation was so widespread and so rampant that assigning liability for scutage among the various under-tenants of a fee became a near impossible task. Under-tenants had already been absorbing the costs of scutage for centuries, but an excess number of under-tenants per fee made it difficult for this process to continue.

Though scutage gradually fell by the wayside, the English crown was not dismayed by its disappearance: the king simply used other tools to collect funds from his subjects.

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A Snapshot of the Swiss Banking Law of 1934

Swiss National Bank
Swiss Bank

Switzerland is well-known around the world for a number of things. Swiss watches are routinely regarded as being among the best in the global market. Swiss chocolate garners a fair amount of international attention. And the tradition of Swiss neutrality also contributes toward the country’s public identity. However, if there is a single thing which most colors foreign perception of Switzerland it is probably the Swiss banking industry. Swiss banking – with its long history, its commitment to secrecy, and its association with nefarious characters of all sorts and kinds – has gathered an almost legendary reputation in the minds of foreign observers. As we will see in this article, the long history of bank secrecy in Switzerland was formally codified by the Federal Act on Banks and Savings Banks (also referred to as the Banking Law of 1934) and this act was then amended after the infamous UBS tax scandal of 2007.

Legally Enforced Privacy

Under the banking act of 1934, the established tradition of bank secrecy in Switzerland was officially etched in law. Under this act, revealing the name of an account holder became a criminal offense. Swiss banks were barred from sharing information about an account with third parties – including tax authorities, foreign governments and even Swiss authorities – except when served with a subpoena by a Swiss judge. Account information could only be shared in cases involving severe criminal acts, such as terrorism or tax fraud. The Swiss Banking Law of 1934 statutorily reinforced the status of Switzerland as the premier tax haven for foreigners.

The law was passed shortly after the Nazi Party had created a dictatorship in Germany. Contrary to what many have assumed, the bank secrecy codified by the Swiss law of 1934 failed to give protection to Jewish account holders attempting to protect their wealth from Nazi authorities. In theory, the law should have granted Jews adequate protection; in reality, however, Swiss banks colluded with Nazi authorities and over $100 billion in Jewish wealth was stolen.

Revision Following Tax Evasion Scandal

In 2007, whistleblower Bradley Birkenfeld revealed information which led to tax evasion charges against Swiss bank UBS. This tax scandal eventually prompted Swiss lawmakers to amend the banking act in 2009. Even with the revisions, banks in Switzerland still maintain considerable secrecy, but the revisions permit banks to share information more easily with foreign governments seeking to investigate criminal behavior.

Given their commitment to privacy, it seems likely that Swiss banks will continue to occupy a special place in the global imagination for many years to come. Despite amendments to the 1934 law, lots of loot of questionable origin will still find its way into Swiss bank vaults.

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Tulip Mania: An Old Presage of Modern Economic Bubbles

Tulip Mania Modern Economic Bubble
Tulip Mania

The term “tulip mania” refers to the period during the Dutch Golden Age when the Netherlands saw an incredible rise in the popularity and sale of tulips. Tulips were first introduced to Europe when they were brought from the Ottoman Empire in 1554. They were initially brought to Vienna but made their way to the Netherlands soon thereafter. The increase in popularity of the tulip in the Netherlands is generally thought to have occurred around 1593; this increase coincides with the establishment of the “hortus academicus” by the Flemish botanist Carolus Clusius at the University of Leiden.

The high popularity of the tulip was due to its beauty and rarity. Tulips take a substantial amount of time to produce – daughter offsets usually take 1-3 years to become flowing bulbs – and so even at the height of its popularity the tulip was in short supply. These factors, coupled with the spectacular economic development of the Netherlands during this era, combined to transform the tulip into a status symbol which was highly coveted throughout Dutch society.

By the early 1600s tulips were a thriving commodity. Tulips became extremely expensive during this time. A number of varieties of the flower were developed and certain varieties commanded far higher prices than others. One variety, the Viceroy, was allegedly traded for goods equaling roughly 2500 florins in 1636; a skilled craftsman typically earned 300 florins per year.

Since tulips only bloom during a short window every year (in the Northern Hemisphere), futures contracts were made by tulip traders so that tulips could be bought in advance. By 1636, a formal futures market was created in which contracts to buy bulbs could be bought and sold. By that time, tulips had come to play a massive part in the Dutch economy: by 1636 the tulip became the fourth leading export of the Netherlands.

Fascinatingly, in February of 1637, the tulip bulb market crashed in the Netherlands. Tulip prices plummeted and trading abruptly ceased. A number of theories have been advanced but so far an explanation for the collapse of the tulip market which is universally satisfactory has yet to be uncovered. For various reasons, the demand for tulips fell sharply in 1637 and as a consequence many individuals lost considerable sums of money on tulip contracts. Many modern economists point to tulip mania as one early example of an economic bubble; others contend that the phenomenon should not be considered an economic bubble by modern standards. However it is classified, tulip mania remains an exceptionally interesting example of market volatility and price fluctuation.

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The Beginning and End of the Amsterdam Stock Exchange

City of Amsterdam
Amsterdam

Long before the New York Stock Exchange was even a dim possibility, the Amsterdam Stock Exchange reigned as the world’s leading market for the trading of securities. Though stock transactions took place elsewhere prior to its creation, the Amsterdam Stock Exchange was the first financial institution established specifically for the purpose of buying and selling securities.

The Amsterdam Stock Exchange was created in 1602 by the Dutch East India Company (the Verenigde Oostindische Compagnie or VOC in Dutch). In its time, the VOC was an extraordinarily powerful corporate entity. In 1602, the States General of the Netherlands granted the VOC a special charter over trade affairs in Asia; this charter gave the VOC quasi-governmental authority and expanded its influence many times over. The stock exchange in Amsterdam was created in order to encourage investment in the activities of the VOC. Before 1602, the market which eventually became the Amsterdam Stock Exchange had only dealt in commodities.

The creation of the stock exchange proved to be an incredibly successful mechanism to stimulate investment in the VOC. Interested parties flocked to the exchange and paid considerable sums for a stake in the company’s endeavors. Dividends were periodically paid out to shareholders in order to incentivize future investment. Investors were given the option of selling their shares to a third party. As a result of this option a secondary market rapidly developed in which investors sold shares to outside third parties. These third party transactions were recorded by an official bookkeeper. This “official” secondary market allowed securities trading to flourish and the stock exchange gained an increased level of importance.

In 1623, the first charter granted by the States General of the Netherlands expired and a second charter was promptly implemented. This charter enabled the stock exchange to flourish still further. The success of the stock exchange ultimately led to the development of “trading clubs” and other such sub-markets in which securities were bought and sold. Potential investors began to seek out information from experienced traders in order to maximize their investment opportunities. Hence, the market in Amsterdam during this era came to resemble modern stock markets in many respects.

In 2000, the Amsterdam Stock Exchange formally merged with the stock exchanges of Brussels and Paris to form Euronext. The market in Amsterdam is now known as Euronext Amsterdam.

Though we are far removed from the days when the Amsterdam Stock Exchange reigned supreme, it is important to occasionally glance back and remember where our modern stock markets come from. If you were an ambitious businessperson four hundred years ago, in many ways it would’ve been helpful to learn Dutch!

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