The Dutch East India Company

The phrase “too big to fail” is getting thrown around a lot these days. Its been fun and terrifying to sit on the sidelines and watch our nation’s greatest comanies implode. Bankrupcies of this magnitude are by no means limited to this century. In fact, just as the fledgeling United States was spreading her wings or some bird metaphor, the Vereenigde Oost-Indische Compagnie (the Dutch name for the corporation, we’ll call it the VOC) was being taken over by the government, a move that would cripple the country with debt well into the next century. Perhaps there is a lesson to be learned? Probably not, we know what we’re doing.

A bond from the VOC

A bond from the VOC

The economic climate in the late 16th century was not advantageous to the Dutch. Portugal had exclusive control over the spice trade, and had no real relations with the Dutch.  Despite this, the Portuguese were unable to cope with the rising demand for pepper in Europe. In addition, the Portuguese, due to an alliance with Spain, were technically at war with the Dutch, and were getting spanked. Many Dutch had served on Portuguese vessels, and knew the trade routes very well. So, starting in 1598, enterprising Dutch all over the Republic would slap together a fleet, sail to the East Indies, and would come back, often to profits of 400%. This was however, not without its price. The Portuguese were obviously going to defend their trade routes, and some fleets would lose half their men in a single journey. When each fleet would return, they would liquidate their holdings, and would then do it all over again.

 Within 4 years their trade volume exceeded that of Portugal’s. It didn’t take long before the central hubs of trade in the Netherlands realized that it was to their benefit to pool their rescources. It meant that they could even out the risk and pool their rescources in defending their ships. It also meant that they would have greater control over supply and demand, again evening out the market. Finally, it meant that economy of scale would work in their favor, and they could outcompete anybody else. In 1602, the Dutch government allowed a 21 year charter for the VOC, giving them a monopoly over the trade, and also gave them the authority to wage war on their behalf. The company was run by elected governors from each of the six trading hubs in the Republic, I’ll call them the G17 (standing for the Gentlemen 17, as they were known).

 The VOC proceeded to dominate, both in terms of trade, and in terms of blowing stuff up. They set up their main center in the Asia in what is now Jakarta, the current capitol of Indonesia. One major problem was that the Asians really only wanted to trade their spices for gold and silver, of which there is a notable lack in the Netherlands. They had two options: 1. Create a trade surplus with other nations so they could get gold which was lame because it meant dealing with the people they had just screwed over, and it is a giant hassle, or 2: Create a separate trade network within Asia, and using the profits from that to fund their operation. They went with 2 beacause it is an awesome idea. By 1669, they had a force of 150 merchant ships, 40 warships, 50,000 employees, and a private army of 10,000 soldiers. If you had invested with the initial charter, you would have earned an annual dividend of 40%. In fact, over the history of the corporation, you could expect an average dividend of 18%. No joke.


VOC HQ in Amsterdam.

VOC HQ in Amsterdam.

1670 presented the first major obstacle of the VOC. First off, the Japanese sealed themselves off from the Western world. This meant that the VOC could no longer count on them for silver and gold. They made do, though it was just a major shakeup. The second thing is that there was a war with England, which drove the price of pepper up, and the English tried to get in on that action. The VOC did what they always did and flooded the market with more pepper and waited it out. This worked, but they eventually ceded significant parts of their empire to other corporations. In addition, the tastes of Europe at the time were changing, and it meant that the VOC had to diversify, which meant significantly lower profit margins. The vast profits they had enjoyed due to high margin spices and silks was no longer sustainable.

This marked the beginning of the end for the VOC. There were some major shakeups in Asia, which meant that the intra-Asian trading network they had developed fell apart. It also turned out that working for the VOC was not very good for you. Ship travel at the time was not distinctly unhealthy, especially during wartime, and this lead to a high mortality rate. The bookeeping of the VOC was also decentralized. As you may recall the corporation was made up of a confederation of 6 trading hubs, who each kept their own records. Because of this, it was difficult for them to balance dividends with revenue, as the cirrency was different in each city. In the later years, they ended up paying more in dividends than they brought back in revenue, a difference which they made up by borrowing money backed by future revenue, which was slowly declining. The icing on the cake was that the English got their act together and sank nearly half the ships in the VOC’s armada.

In 1796, the Dutch government took over the VOC and tried to float it, but by the turn of the century the corporation dissolved. The holdings were mostly taken over by the English and the Danes, and the Dutch government was stuck with their debt. One of the major failings of the VOC was thei inflexibility. To be fair, they were the first to ever have to a multinational corporation; however, their only stock offering was at the conception of the corporation, and they never changed up their Modus Operundi. Their bookkeeping method didn’t change for 200 years. Imagine if we still notated our doings on paper. They were also staunchly unable to drop Jakarta as a central hub, meaning all goods flowed through that port. This became extremely inefficient in the later years. There are many analogies to our current situation, and I will not be explicit about them, but for sure, we can take this as a cautionary tale.

Published in: on July 22, 2009 at 7:27 pm  Leave a Comment  
Tags: , , , , , ,

The URI to TrackBack this entry is:

RSS feed for comments on this post.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: