The Gallery of Economic History

1. The Gallery of Economic History • Institutions and individuals shape how resource decisions are made • How institutions manage risk is central to the efficient allocation of resources

2. Exploration as Venture Capital • Christopher Columbus(1451-1506), a native of Genoa, Italy, tried for over ten years to secure funding for a voyage to discover a short-cut to the spice trade in the Indies • No one would grant him funding, partly because financial institutions had evolved a capacity to manage risk, even as he traveled to the Canaries, the North Sea, and Africa • When Ferdinand and Isabella of Spain finally authorized funding for his expedition of 1492, all the risk was concentrated in the hands of the Spanish monarchy, and then only on condition that he serve as religious missionary to the crown. • When Spanish conquistadors began transporting large quantities of silver back home, it provoked a massive wave of inflation that led to the eclipse of Spain’s early lead in exploration, just as it did for neighboring Portugal.

3. Creating Institutions to Manage Risk • One key tool for managing risk was the creation of the modern limited liability stock corporation, an innovation first pioneered by the Dutch, themselves once a Spanish colony that became an independent republic in the seventeenth century.

4. Types of Risk Management Instruments • The modern corporation involves the separation of management and ownership. This represents one step in risk management, namely, the diversification of risk. Shares in the VOC, the Dutch East Indies Company, were issued with this separation made clear, and made possible the construction of a merchant fleet that rivaled that of Spain, a country with five times its population.

5. Bonds and Stocks as Risk Management Instruments • Firms can raise investment funds through a variety of instruments. In addition to equity shareholding, they also rely on debt. Debt can be secured through bank loans, or in the issuance of direct bond certificates. While loans and the use of compound interest date back as far as the Sumerians, the Dutch combined the Chinese use of paper instruments with the issuance of debt and equity instruments to increase the level of investment funds.

6. Contract Variation Adds to Economic Efficiency • Dutch financial markets involved not just equity and debt instruments, but also forward and option contracts, even though the exact pricing of these instruments was not as precise as they have since become. Dutch success in the development of these contracts spread to England, the United States, and to other countries over time to produce today’s global capital markets.

7. The Spread of Financial Institutions • Building on the Antwerp exchange of 1531, Amsterdam became the home of the first modern stock exchange in 1602, it was soon followed by the English Royal Exchange in 1698, and then the New York Stock Exchange in 1792. Since then stock exchanges have dominated the expansion of global capitalism, checked only by periodic crises such as the Great Depression of 1929.

8. Instruments to Manage Risk Expedite the Introduction of New Technologies • Petroleum use dates as far back as the ancient Babylonians. Its modern use emerged with the application of drilling technology for exploration and extraction. When Edwin Drake drilled the first commercial oil well in Titusville, Pennsylvania in 1859, petroleum was still limited primarily to applications for lubricants and medicine. Only with the invention of the internal combustion engine in the 1880s did the oil age begin.

9. Globalization Depends on the Modern Corporation • John D. Rockefeller (1839-1938) created the Standard Oil Company in 1870 as one of the first vertically integrated modern corporations in the world. A billionaire by the year 1900 (when the dollar was worth far more than it is today), the Standard Oil Company then became subject to a rising tide of antitrust lawsuits. Much of the opposition to Standard Oil came from the 1904 publication of Ida M. Tarbell’s book, A History of the Standard Oil Company, in which she charged that the practices of Standard Oil were ruthless, unethical, and inconsistent with common notions of fairness, an echo heard many times over the years in the context of IBM, AT&T, and more recently, Global Crossings, Worldcom, and Enron, as these latter firms faced financial ruin through economic mismanagement.

10. Antitrust is One Tool to Govern Modern Corporations • Antitrust is the nineteenth century term that refers to actions against monopoly industries. Ohio Senator John Sherman (1820-1900), brother of Civil War Union general William Tecumseh Sherman (1820-1890), authored the first modern antitrust act in the United States. The Sherman Act, which is still used in antitrust actions today, prohibits any action that results in the restraint of trade, the penalty for which is a misdemeanor. As innocent as it sounded at the time, the Sherman Act was used by the U. S. Supreme Court to dissolve the Standard Oil Company in 1911, dividing its assets by proportionate shares of assets among the various states in which it was operating.

11. Legacy of the U.S. Supreme Court Antitrust Decision of 1911 • The Standard Oil Company at the time of the U.S. Supreme Court decision of 1911

12. Standard Oil Companies in 1941

13. Standard Oil Companies in 1961

14. Standard Oil Companies in 1999

15. AT&T Succession and Mergers

16. Thomas Edison and His Legacy • Thomas Alva Edison (1847-1931) was a prolific inventor who spent the greater part of his life in New Jersey. Inventor of the incandescent light bulb, the movie studio, the phonograph, and the electric generating station, many of his inventions became economic innovations through the vehicle of companies he created, the most notable of which was the forerunner of the General Electric Corporation.

17. References Internet Links  • La Bibliohèque virtuelle de l'Université de Paris I (France) • Documents for the History of Economics (Melbourne, Australia) • The History of Economic Thought Website (The New School) • McMaster University History of Economic Thought Archive (Canada) • University of Cambridge Faculty History Electronic Texts (UC, U.K.) • Economic History Services File Server (U.S.-U.K.) • Westfall's List of Mathematicians (U.K.) Selected Bibliography • Bell, John Fred. A History of Economic Thought, second edition.. (New York: The Ronald Press, 1967) • Bernstein, Peter. Against the Gods: The Remarkable Story of Risk. (New York: John Wiley and Sons, 1996, 1998). • Blaug, Mark. Economic Theory in Retrospect, fifth edition. (New York: Cambridge University Press, 1997). • Federal Reserve Board of San Francisco Schools of Economic Thought Website • Oser, Jacob and William C. Blanchfield. The Evolution of Economic Thought, third edition. (New York: Harcourt Brace, 1975) • Porter, Theodore M. The Rise of Statistical Thinking,1820-1900. (Princeton: Princeton University Press, 1986) • Rima, Ingrid Hahne. Development of Economic Analysis, third edition. (Homewood, Illinois: Richard D. Irwin, 1978) • Robbins, Lionel. A History of Economic Thought, edited by Steven G. Medema and Warren J. Samuels. (Princeton: Princeton University Press, 1998). • Roll, Eric. A History of Economic Thought, fourth edition. (London: Faber Publishers,1973) • Stigler, Stephen M. The History of Statistics. (Cambridge: Harvard University Press, 1986).