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Chapter 1: What major event in the stock market does this episode focus on?
Welcome to Search Engine, I'm PJ Vogt. This month, SpaceX, Elon Musk's rocket ship company, which also owns Starlink, his satellite internet company, and x.com and XAI, went public. History made on Wall Street today, SpaceX going public, the biggest IPO ever launched.
SpaceX stock blasted off in its debut, soaring more than 19% on the NASDAQ. At the closing bell, SpaceX is now worth over $2 trillion, turning SpaceX employees into millionaires and its CEO into a trillionaire.
The largest initial public offering in all of human history. The company raised over $85 billion. And that's been driven in an unprecedented way by retail investors.
I just bought 50 shares of SpaceX at $172 per share. And I'm never selling. Let's see what happens, babies.
According to the New York Times, in the week after SpaceX first began selling to the public, retail investors have purchased a net of $370 million worth of stock. More, the Times said, than the net retail buying of NVIDIA, Microsoft, Alphabet, Meta, and Amazon combined over the same period.
Today, SpaceX briefly became the fourth largest company in the world by market cap, surpassing Amazon and Microsoft.
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Chapter 2: How did the stock market originate and evolve over time?
How do you begin to think about something like this? That the social forces that pushed GameStop, a store that sells physical copies of video games, up the leaderboards, that those same forces are now aimed at something much larger. at Elon Musk's promise that the future of AI sits with him, with him using rocket ships to launch data centers into orbit. What's actually going to happen?
When the future confounds me, as it usually does, I look at the present. When the present confounds me, as it usually does, I look at the past. This week we are doing an extreme version of that. We're going to go all the way back. We're going to go back to the creation of the stock market, an accidental invention over 400 years ago.
we're going to understand how and why that happened, how a tool for funding sea voyages has evolved into something somewhat different today. And by the time we're done, the present will make a little more sense to you, the future will make a little more sense to you, and the Netherlands will make a little more sense to you. Strap in, buckle up. This week at Search Engine, we're time traveling.
My name is Lodewijk Peetram. I'm a historian and economist from the Netherlands. And why did you decide that you wanted to study the history of the stock market? Oh, that's interesting. So I was a student of economics here in Amsterdam. And then I told my thesis supervisor, this is many years ago, of course, I was also a student of history, early modern history.
Chapter 3: What role did the Dutch East India Company play in stock market history?
And he said, well, yeah, are you aware of the special situation that you're in the Netherlands, that there's so much financial history in the Netherlands, in Amsterdam? So I'm currently right in the center of Amsterdam.
And when I look out the window here, I see what is called East India House in Amsterdam, which is the original headquarters of a company that was founded in the early 17th century, the Dutch East India Company, which from modern eyes was a really terrible company. I mean, it did so many hideous things in Asia.
But back then, so more than 400 years ago, people in Amsterdam, they were really about making money, trading stuff, from place A to place B, out competing the English, the Spanish, the Portuguese. People were still exploring the world, and as they were exploring the world, they were also trying to control the world.
The Dutch at the time, in a cutthroat competition with all these powers, fighting to win the spice race. Not space, spice. Spices, like nutmeg, for instance, just extremely valuable back then. Historian Giles Milton, in his book about this era, Nathaniel's Nutmeg, writes about how if you could get a ship to the Banda Islands, you could buy 10 pounds of nutmeg for less than an English penny.
If you could get that ship back to Europe, you could sell the spice at a markup of something like 60,000%. Assuming your ship didn't wreck. Assuming all your men didn't die. The risk of a failed voyage was that it could ruin the person who funded it. Ludwig explained to me that businesses until the 1600s were pretty much all funded either by one single person or a single person plus their family.
That's how things had been. But because shipping was so expensive and risky, this had begun to change. In some Italian city-states, people were founding these shipping companies. You'd raise money from a lot of people, not just your family, to fund a boat voyage.
And this is working, but there's this funny inefficiency in the way they organize these companies, a limitation that people at the time cannot see. And that is that they founded these shipping companies always for the duration of just one expedition.
So what they did was they founded a company, asked investors to invest some money, then they would buy a ship or have a fleet built somewhere, I don't know.
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Chapter 4: How did the American stock market develop after the Revolution?
They would send out those ships to a foreign destination, and when they got back, they would liquidate the company again. And this was a way for them to quickly pay out the proceeds to the investors and just be done with everything. So every shipping company was dissolved at the end of every voyage.
You buy shares, but it's shares in a project, not shares in an ongoing business, the way we'd understand that today, which seems normal to everybody involved. Here's how that begins to change.
In 1602, the Dutch government, which remember, wants to beat its rivals in the trade wars, decides what if instead of having all these little Dutch shipping companies competing with each other, we just had one enormous one, the Dutch East India Company.
They said, okay, we are going to find a company that's not just sending ships there once, but that's going to send ships there multiple times and also build fortresses and wage war. And so that's when they went from the system of, you know, founding a company for just one expedition to one that would exist for a much longer period of time.
The government gives this new shipping company a monopoly on trade essentially throughout Asia. It's going to be an enormous venture. And it wants this new company to run multiple voyages, not just one, which raises a question. When will the investors get paid back? It is decided investors will be paid back after 21 years.
Anybody in the Netherlands can buy a share of this new 21-year shipping company. And a couple decades later, they'll get their portion of all the money the Dutch East India Company has made from its many voyages. What is the very beginning of that look like? Like, who's allowed to put money into this? How are they finding people?
Like, what does an IPO look like hundreds and hundreds of years ago? Yeah, yeah. So what the Dutchie Senior Company did was they organized a public subscription to the initial capital of the company. There was no limits or restriction of any kind, so anyone could subscribe some money to the company.
And when that actually happened in August 1602, so there's this one month, August, when the subscription books were opened, and that took place in Amsterdam and also in five other cities in the Netherlands. And what happened in Amsterdam, I always find it a somewhat peculiar story. is that because the Dutchie Senior Company was a newly founded company, it didn't have an office building yet.
And there was also no investment bank involved in it. There were no investment banks back then. So one of the founding directors of the Dutchie Senior Company, he opened his house for this initial capital subscription, which came to be an IPO. So during this one month, people could pay a visit to his house.
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Chapter 5: What were the impacts of the 1929 crash on modern stock markets?
Like, I guess one of these are trying to understand is like, if this didn't exist before. Yeah. Like, I don't have faith that if I personally put money into the stock market, I'll make the money back. But I have a faith in the stock market as a thing that basically functions in a way where, you know, I didn't have faith in like cryptocurrency in 2021. Yeah.
The people who were putting their guilders into the Dutch East India Company, would they have felt like they were buying crypto? Would they have felt like they were giving a wealthy friend they trusted money for a business venture? Like, how much faith did they have in the enterprise they were creating as they were creating it?
So they knew the persons who were involved in founding this new company. And I think that was very important. So all the founding directors, they had been involved. well-known merchants. So people would know them because they were, you know, a well-known figure in Amsterdam, successful. They had all been involved in earlier companies that had sent ships to East Asia to trade spices.
And many of those companies had been very successful and very profitable. So I guess people were laying their faith in those aspects, right? So because of this personal touch and I think the sense that people were indeed giving their money to someone who they expected to do well with, that was very important.
So across six cities in the Netherlands, the Dutch East India Company goes out and offers these shares. It raises what is at the time an unfathomable sum, the equivalent of, in today's US dollars, about 200 million bucks. The Dutch East India Company makes one final fateful choice, which seems to have almost been an afterthought.
Somebody reasons that 21 years is a long time for these shareholders to have their money locked up in a single investment. And since the company wants to make investing as attractive as possible, somebody makes up this rule.
If you're a shareholder and you don't want to wait all that time to get your money back, you can come back to the bookkeeper and just sell someone else your share at any time. They put a tiny little clause in the official document. It was just a very simple line, by the way, which said something like, any shares in this company can be transferred from one person to another.
Oh, so that's where they accidentally invent stock trading. Yes. But they weren't imagining, you don't think, at that point, oh, this is going to create a market and speculation. It was more, there's going to be some people who are like, hey, I need some way to back my money out of this earlier because 21 years is a huge amount of time. So we'll just give this as an option.
But they did not understand the feature would become kind of the whole game. No.
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Chapter 6: How did SpaceX's approach to funding differ from traditional methods?
They couldn't imagine us. They were thinking about their boats. What are people starting to do now that they have these shares out there? What are the people, I forgot that there's a word, which is shareholders. What are the shareholders doing over these decades with their shares? Is their behavior with these shares starting to resemble modern stock market behavior? What's happening?
Yeah, so there's a few stages. So after the IPO was done in 1602, first there was a couple of months of nothing, basically, because people had not actually paid up their investment when they went to this house of one of the founding directors. They had just written down their names and an amount of money that they wanted to invest in the company.
But only after a couple of months, the first installment of that money was called up. So only then people actually had to pay up the first bit of money. And interestingly, immediately after that moment, you see the first share transactions appeared. Ludwig says that very quickly, this primitive Dutch stock market starts to somewhat resemble ours.
There's derivatives trading, including what they call forward transactions, which look a lot like our trading futures. The thing we do where we don't simply just buy and sell shares in companies, we also make complicated bets about the future price of those shares as we have selling and buying insurance.
That's already happening on a bridge in Amsterdam, a hundred years before the invention of the piano.
But I guess what I don't understand is you had described how if I wanted to buy or transfer a share, I would have to go to the local office of the Dutch East India Trading Company, and they would have a big book, and I would say, I'm PJ Vogt, and I want to transfer this to Garrett Graham, and that would happen.
Once they're entering into this quick period of, honestly, modern-sounding financial innovation, I mean, they're not logging onto their E-Trade accounts. How are you buying an option or whatever? Like, what's the rumor that happens? What's the place? Who's the person? That all happened on the exchange locations in Amsterdam.
So if you've ever been to Amsterdam, you probably arrived in the city by train. So if you would nowadays exit Central Station, the very first thing you see in Amsterdam is a bridge, which is called Nieuw Bridge. And that is actually the location where in the early 17th century, it was the exchange location of Amsterdam. So there on the bridge, open air,
is where merchants and other commercial people would come together on a daily basis to hear the latest news, gossip a little bit, and do transactions. So it was very strongly trust-based The persons who were entering into a forward transaction with each other, they had to trust each other because there was no down payment.
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Chapter 7: What challenges did SpaceX face before its first successful launch?
The British East India Company, England's version of this enterprise, would make even more money and spill even more blood, colonizing most of the Indian subcontinent, sparking a famine in Bengal that would kill around 10 million people. It's a long list. It's a long story. That, however, is a different story than the one we're here to tell today.
We were here because we were trying to understand SpaceX, Elon Musk's company, which he founded with promises to colonize Mars. There are no indigenous people on Mars, as far as we know. There are also no spices. But SpaceX did raise an unfathomable sum of money using the same tool invented in the Netherlands 400 years ago, an IPO.
Or maybe more accurately, SpaceX used an evolved version of that tool. Because, of course, our stock market would be both familiar and alien to a Dutch person wandering in from the 1600s. We're going to take a short break, and then we're going to try to understand that evolution, how we Americans adapted this tool we inherited, made it better, made it worse.
After these ads, we're going to hop in our DeLorean and set the clock a few hundred years forward, leave old Amsterdam for new Amsterdam. We will head to American shores. In 1653, early Dutch settlers on the southern tip of Manhattan built a big wall. The street that runs alongside that wall eventually takes its name, Wall Street. And later, a financial market will emerge there.
The story of that market, the American stock market, is a long, complicated story to be told a lot of different ways. This week, we're going to do the quickish one. You've got places to be. So America starts actually by trading bonds before we trade stocks. After the Revolution, all the individual American states are in debt because of the war.
Alexander Hamilton, the rapping Treasury Secretary, comes up with the idea that the federal government will take on that debt and issue bonds in exchange. Meaning Americans can buy a bond, knowing that the federal government will one day pay them back with interest. This creates our first speculative market. There's not a ton of rules.
We have to make them later when things begin to go wrong and people lose their shirts. Some Americans are buying and trading shares, mainly of banks and insurance companies, but it's not a huge part of the economy or a huge part of most people's lives. Things take off, the first time, in the 1830s because of the railroads.
It's funny, in a way, our construction of the railroads, it's like a mega version of the Dutch and their ships. Building a railroad system in America is this hugely expensive, hugely risky project with enormous upside if it works. And so the barons turn to the people and make the request every market ultimately relies on. Trust me? Many Americans do.
It's not a project where everybody's investing. It's not like your moving guy owning crypto. The people buying into the railroads are mostly already wealthy, elites. It works out very well for some of them, terribly for others. Many railroad projects go bust. The investors get destroyed. There's also a ton of overbuilding, three big financial crises.
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Chapter 8: How is Elon Musk's vision for SpaceX connected to the future of AI?
Exactly right. And his work would have been responsible for making sure that he gets paid in retirement. So, you're making an assumption that the company you work for will always exist. And that was problematic. Yeah. And that broke down, right? Because Packard ended up going bankrupt. And like, we're on the hook for all this stuff. And there's an insurance bailout.
And so people are like, well, maybe that's not right. So let's go a different way. And that different way is we had a revolution in the way pensions work in the United States, which is beginning in the early 1980s. We had a massive shift in this country from defined benefit plans to what's called defined contributions. So what does that mean?
Just to explain a little more slowly, the shift that happened here, in our grandparents' era, a lot of people had worked for companies that for the first time offered retirement plans. The companies, not the workers, were responsible for funding these plans. And they did this by making very safe investments, often bonds, so they could write retirees checks when the time came.
That was the defined benefit plan. Defined contribution, which we shifted to, that includes something like a 401k. And it's different in a very specific way. Now, not just the company, but also you, the employee, are contributing money directly into an investment account. And employees are now deciding directly where to invest their retirement money.
And that is really fundamentally different in the way you think about the world. Now you're an investor. What happens when you retire? The company's gone. They wash their hands of you. But you have this like nest egg. Well, what the heck are you going to do with that nest egg? Now you have to decide what to do with that nest egg.
And you have to decide what to do with that nest egg all the time while you were earning. And that would be like my dad. Like my dad was born in 1955. He's in the workforce in the 80s. And at this point, the company where he works is not securing his future. They are supplementing his investments in the stock market.
And my dad would be like the first person in the lineage of my family who like has strong opinions about stocks. Exactly right. And, you know, and investments more generally. By the way, the whole thing that's happening all along here, PJ, just to be clear, is we're all getting richer. Right?
So I don't know the specifics of your family, but your father is probably earning more than your grandfather, and your grandfather is earning more than your great-grandfather. And so we're getting richer. So what does it mean when you get richer? Well, more and more of your income is going to be available for savings.
Let me just say, everyone in America keeps getting richer is not actually a story most people feel like they're living in. But Mihir is talking about a relatively long timescale. 150 years ago, many Americans were still living in a cash-poor farm economy. They weren't earning a steady wage and setting cash aside. They were mostly just consuming what they produced.
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