The World’s First Corporations

The world’s first real corporations — the Dutch and English East India Companies, West India Companies and so on — were hardly the first big business partnerships, but they were new in several ways.

They were anonymous, meaning that the partners did not all have to know each other. And they separated ownership from control: elected directors made decisions, while most investors had only the choice of accepting those decisions — or selling their shares. They were permanent: if one or more partners did want out, there was no need to renegotiate the whole arrangement. Finally, they were legal entities separate from any one owner, and thus had an unlimited lifespan.

In contrast, the big trading partnerships of the 16th century and earlier were created with a planned date of dissolution — sometimes at the end of one voyage, sometimes after a set number of years — at which point all the firm’s holdings would be liquidated and divided among the partners. The new firms, like modem corporations, were not designed to self-liquidate. Rather, they built up their capital over the years instead of distributing it back to its separate owners.

Clever innovations, to be sure — but how many people at the time needed them? Very few. Over the next 200 years, almost no corporations of this type were created for either manufacturing or intra-European trade. The capital needs of virtually all production at this time were small enough that people could raise the funds they needed without taking the risks of dealing with strangers.

It was not until the post-1830 railway boom that there was finally an industry that required so much capital — and so long a wait before the profits started to roll in — that the corporate form became really essential.

And yet, where lots of patient capital was needed, even in the 1600s, was for economic activities that ranged beyond Europe. A round trip voyage to East Asia could take three years to complete, and if a partnership wished to spread its risks over several voyages, the partners would have to wait still longer for the final payout. But even this did not require that the corporation have permanent life.

As a result, the Dutch East India Company was originally chartered with a long, but finite life — it was to be liquidated in 21 years — and with compulsory high dividends. At the same time, Asian merchants who handled trade over distances almost as long apparently had no need of the corporate form. This is all the more impressive as they often continued to outcompete the Europeans on routes between the Middle East, India, Southeast Asia, Japan and China all the way through the eighteenth century —

So what made the turn to permanent life of a corporation necessary? In a word, violence. The East India Companies were not just licensed to do trade, but to make war. Their primary target was the Portuguese, who had created fortified colonies and used their navy to claim a monopoly on trade from Asia.

And, in the Americas, the West India Companies faced similar Spanish and Portuguese claims (and much stronger colonies). To compete, the Northern Europeans reasoned, they would need to play the same game. That meant seizing and fortifying territory, as well as arming ships to patrol the waters. But this required enormous amounts of fixed capital in forts and ships, and for working capital, such as provisions.

Thus, because they needed so much capital to fend each other off, overseas ventures could not possibly be organized without bringing in many unrelated partners. And because they needed so much fixed capital, only a very large trading volume would generate enough profit to make these ventures worthwhile.

A very large trading volume, in turn, meant that very large amounts of working capital had to be tied up in inventories held overseas, awaiting the right moment to exchange them for goods that would sell back in Europe. Indeed, the founder of the Dutch East India Company’s empire in Asia, Jan Pieterszon Coen, waged an almost constant battle with Amsterdam for more capital.

To make the forts pay off, whole new lines of trade needed to be developed and others greatly expanded — and that required even more capital and more patience. After years of conflict, and many revolts by shareholders who wanted the company to wind down rather than grow, Coen and his successors won.

The company was rechartered rather than liquidated after 21 years, the directors got the flexibility to lower dividends when they needed to build up capital, and Dutch investors learned to operate like shareholders today.

The idea of companies that took care of their own protection costs did not last, of course. As the costs of war-making soared in the 18th century, both the English and Dutch companies staggered under the burden. When they tried to earn back these costs on goods they monopolized, they found themselves very unpopular — and often undercut by smugglers. (The English East India Company’s problems with tea sales in America are only the most famous example.)

By the 1830s, all these companies had collapsed. Their colonies had been taken over by their home governments. And a new era of capital-intensive industry was about to create more productive uses for the corporate form that they had pioneered.