People Have Been Manipulating Stock Prices For Over 400 Years | Planet Money | NPR


Four hundred years ago, Isaac Le Maire bet
that the price of a stock would go down. Today this happens all the time. You’ve probably heard of it — it’s called
short selling. But 400 years ago the stock market consisted
of one stock, and the price of that stock almost always went up. This is the story of why Le Maire bet against
it and more or less invented short selling. The story starts at the Dutch East India Company. Le Maire was one of the founding directors. He seems to have been a guy who, when he did
something, he went all the way. He had 22 children, and he could afford them because the Dutch East India Company was wildly successful. You might remember hearing about them in middle
school. They made a ton of money in the spice trade. Back then they’d go out in their wooden
ships and bring back spices. People at the time loved spices. Pepper, mace, nutmeg — anything they could
get really. Spices were such a phenomenon that rich people
would use way too much just to show that they could afford it. Spices were a good business to be in. One of the remarkable things about the Dutch
East India Company was it was the first business to ever issue stock in the modern sense. Anyone could own a small piece of the company. Not only that; you could transfer your shares
to somebody else. That idea four centuries ago was the birth
of what we now call a stock market. Shareholders would gather on a bridge in Amsterdam
to exchange stock. To negotiate a price, one guy would put his
hand out, palm up, and shout an offer, and then someone would make a counteroffer. They’d slap their hands and then slap them
again and again. Someone at the time said their hands would
redden from the blows. Meanwhile, the traders would stand around
talking about the news of the day. You know — “Oh, I hear England’s building
some more ships.” “Huh, that’s, like, more competition for the
Dutch East India Company.” These sort of conversations played a big role
in the price of the stock. Le Maire would eventually use this to his
advantage. The story of the first short sale really starts
in 1605, when Le Maire was kicked out of the Dutch East India Company. It’s not totally clear what the issue was, but it seems like it had something to do with expense reports. Seems like he might have filed for
a bit more than he was owed. In any case, he was forced out. He had to promise that he would never again
be involve in any kind of trade with the East Indies. This was a big deal back then. Word of the scandal spread and affected every
aspect of his life. He was ruined. So, he set his mind to the only thing he had
left: Revenge. He hatched a plan to knock the Dutch East
India Company down a peg — and to make a fortune for himself. His plan had three steps. Step one: Find and hire some henchmen. Step two: Le Maire told the henchmen to make a bet that the price of the stock would go down. That was it — the order for the world’s
first short sale. If the concept is still a little hazy, here’s
exactly what a short sale is. Short selling is when an investor, predicting
that the price of a stock will go down, borrows shares and sells them today and buys them
back in the future, pocketing the difference. Once his henchmen understood, he had them
take it one step further. He directed them to go out and purposely manipulate
the stock price by spreading rumors about the Dutch East India Company. They’d say things like, “Oh, we heard
a ship sunk off the Cape of Good Hope, or something.” And it worked. The prices started to go down. When the Dutch East India Company heard about
this, they knew they had to do something. They needed a show of strength. So, they announced the company’s first dividend. Basically, they decided to share some profits
with their shareholders. But not in the form of money. They said to every one of their investors,
“We are doing so well, you can go out to our storage and get some corn. Bring your own bucket.” And then the company went to the government
and argued that short selling should be banned. They said it was “hurting society’s most
vulnerable people, widows and orphans who had invested all their money in the company
stock.” It worked. The government sided with the Dutch East India
Company. Word finally came through to Le Maire. Not only had the government issued a partial
ban on short selling — Le Maire was barred from accessing any of his shares. His plan to short the company was a complete
failure. According to one historian, he lost what today
would be $10 million or $20 million. Once again, he was ruined. Le Maire spent the rest of his life in exile
in this seaside town. He dedicated himself to trying to break the
trade monopoly of the Dutch East India Company. But he never did. He eventually died in 1624, and the writing
on his headstone kind of sums it all up: “Here lies Isaac Le Maire, a merchant for
more than 30 years, blessed by the Lord. He gained a lot of money and lost it all,
except for his honor.” The part about his honor seems kind of questionable.

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