Early Capital Markets

Capital markets before 1750 created enduring ways to fund risky, long-term, large-scale investments. Demand for capital was driven by the expansion of long-distance trade and by conflict between fiscal states. Supply responded with experimentation in political structures, in legal environments, in how firms initially raised funds, and in how investors resold securities. Improvements in these structures allowed investors to better protect their claims against the information and incentive problems inherent in long-term commitments. As a result, more investors could and did participate. Notable innovations such as the Dutch and English East India Companies and the British national debt had a strong influence on the subsequent era of industrialization by demonstrating how to arrange deep secondary markets for equities and bonds.