A Splendid Exchange: How Trade Shaped the World

by William J. Bernstein

Fractional shares not only made it easier for merchants to bear prudent risks, but also allowed investors to increase their margin of safety by blunting the damage done by the loss of an individual ship or an unsuccessful commercial outcome. This in turn increased the willingness of investors to provide capital, which further lowered interest rates. Another Dutch financial innovation that served to decrease risk (at least when used properly) was the futures market—the “buying of herrings before they be catched.”18 Essentially, such markets assigned prices to given amounts of commodities at some point in the future—say for a thousand pounds of herring one year hence. These financial instruments could then be bought and sold just like the actual item. The Dutch did not invent this concept—it was well known in both southern Europe and the Muslim world—but they refined and institutionalized it to a degree never before seen.