This week, CapX will be publishing a series of excerpts from America Inc: The 400-year history of American capitalism by Bhu Srinivasan. The book discusses the economic development of the United States through the lens of various trends, products and events. In this extract, Srinivasan looks at how the Pilgrims funded their trip to the New World.
Lost in the American mythology of the Mayflower is a central question: How did a group of disenfranchised religious separatists finance a large ship, pay an experienced crew, and provision for a year’s worth of supplies on the way to the New World? Even for sovereign authorities of the early seventeenth century, outfitting a transatlantic voyage was no small financial undertaking. Certainly, impoverished political refugees of today, when crossing oceans, do not do so in chartered transportation or arrive with any capacity for financial sustenance. The financial story behind this journey points to a parallel narrative, one in which the exalted sentiments of religious liberty found themselves subordinated to economic considerations and motivations.
In 1616 the group that history would later call the Pilgrims was an exiled community of religious separatists living in Holland. The original members of this community had fled England in 1608, first settling in Amsterdam for a few years before making their way inland to the city of Leyden. In William Bradford’s firsthand account of their time in Leyden, while considering it a “fair and beautiful city,” the separatists were largely limited to employment that required “hard and continual labour,” many in the cloth-making trades.
While the full and open practice of its brand of Christianity was prohibited in England, the congregation was relatively free of persecution in Holland. Indeed, one account held that local Dutch merchants viewed their piety as a mark of creditworthiness, despite their relatively low economic standing. After twelve years of living in Holland, while some observed potential risks to religious freedom, the congregation began searching for alternatives primarily to improve their economic condition.
For the congregation, the initial impetus for leaving England for Holland had been to settle well and attract additional members of the church to join them. But the hard toil and “great labour” of the pioneers in Leyden proved a sufficient deterrent to these potential émigrés. To Bradford it was clear that “some preferred and chose the prisons in England rather than this liberty in Holland with these afflictions.” In addition, the older members were beginning to die, with this fate often coming earlier due to the gruelling work. At the same time, the congregants’ children, “to bear part of their parents’ burden,” were forced to work in conditions similar to their elders. If all this weren’t bad enough, the “manifold temptations” of Holland had drawn the older children as they entered adulthood into “extravagant” courses, away from the church, with the degenerating behaviour risking “dishonour to God.” It became clear to the community elders that without growth of the congregation, the experiment would likely dissipate within a generation into secular Dutch society and end quietly. In all, it seemed that challenging economic circumstances more than persecution presented the greatest danger to their religious fundamentalism.
Again the solution seemed to be relocation. Early thoughts veered to the “vast and unpeopled countries of America.” The idea sparked considerable internal debate, primarily focused on the speculative dangers of climate, savages, disease, famine, and “nakedness” of the natives. After these, another risk needed mitigation: The prospect of living in any proximity to Spanish holdings in the Americas was eliminated with the view that the Catholic “Spaniards might prove as cruel as the savages in America.” As most of the rest of America had been declared largely by England and to a far lesser extent by Holland, this left two choices. Either possibility required negotiations and permission.
The English possibility, of course, had a special irony: The group that had once fled England was now contemplating overtures to the same sovereignty that had once persecuted them. But this path was a circuitous one.
Dating back to 1606, England had granted a charter to a private venture known as the Virginia Company of London. While the internal operations of the New World venture were left in the commercial hands of the company, there remained an element of oversight and governance in the King’s hands, exercised through his Council for Virginia. Like most new ventures, overseas or otherwise, the Virginia Company had a less than auspicious start. In its first decade, it had lost all of its money several times and needed to be refinanced each time. Worse, the vast majority of the settlers sent overseas had met miserable deaths.
A decade in, the Virginia Company was in a beleaguered state of affairs. When the Leyden congregation dispatched two men to London to explore the possibility of settling within its holdings, the company greeted them with the enthusiasm of a lonely merchant meeting the day’s only customers. The profitability of Virginia as a commercial enterprise depended on viable settlements — settlements needed people willing to risk life and limb. The desperation of the men from Holland coincided with that of the company. There remained an obstacle, however. The congregation wanted explicit permission to practice their religion. The commercially motivated men of the Virginia Company, optimistic in the face of opportunity, assured them in turn that the King’s blessing for this minor provision would be perfunctory. It wasn’t. The process dragged on. The council’s position held that an official endorsement of the congregation’s practices overseas would undermine His Majesty’s ability to prohibit aspects of their practice in England. With the company serving as a conduit, a compromise was reached: The King’s Council for Virginia would neither endorse nor prohibit their practices overseas, provided that the Leyden congregants acknowledged obedience to the King.
With this intentional bit of ambiguity settled as a middle ground between the proxies of government and church, the Virginia Company granted a “patent” to the church in Leyden to settle in the New World. Indeed, far from needing escape from the King’s persecution, as the traditional story holds, the Pilgrims voluntarily entered the business of carrying His Majesty’s sovereignty overseas.
With permission in hand, church leaders in Holland now shifted to the equally complicated matters of money. While the Virginia Company had the capacity to grant permission, it no longer had any capacity to finance an overseas voyage. The congregants needed to raise capital. For prudent and conservative men of wealth, the considerable expenses of a ship, crew, and supplies were far too risky to merit investment, especially as overseas ventures proved especially prone to complete loss. The solution, then, seemed to be to find men of means given to speculation — men driven by appetites for glorious gains, who were willing to overlook the possibility of loss on a venture or two.
Just then, a rival Dutch offer seemed to emerge. Hearing of the negotiations with the Virginia Company, the Dutch group made efforts to get the Leyden congregation to venture to their own settlements in North America. But with the Virginia Company patent in hand, the role would rest with English financiers. Namely, one particular promoter named Thomas Weston, a representative of the Merchant Adventurers of London, had made his way to Leyden to ingratiate himself with the church pastor, John Robinson. With the pastor convinced that Weston was the man to “induce his friends to venture,” formal terms were drawn up. In contemporary terms, this was the equivalent of a letter of intent or term sheet, an outline upon which the financing would take place subject to final negotiations. As any modern entrepreneur can readily attest, the time between the stated intentions and closing is one fraught with increasing levels of anxiety and tests of will, often heightening all the way to the final moments. The 1620 financing of the Mayflower’s voyage was not immune to these trials of temperament.
Adventure capital was a phenomenon that had taken hold long before the 1600s. One group, the Fellowship of the Merchants Adventurers of England, had been formally recognised as far back as 1505. Rather than act as a formal pool of money or resources, the adventurers had always been a loosely affiliated guild in which individual members participated in the ventures of their choosing. As the century progressed, the capital requirements of overseas ventures had coincided with and propelled development of the joint- stock company —“ joint- stock” implying shareholders with transferable interests as opposed to the more intimate, closed nature of partnerships.
In addition to transferability of shares, this ongoing legal evolution allowed for limiting the personal liability of any adventurer — the investor couldn’t lose any more than his initial investment. The idea of limited liability, a legal invention that does not exist automatically or organically in free markets, allowed investors to have unlimited upside potential while limiting the downside, thereby making speculation in exploratory voyages more attractive. Not all concerned settlements. Sovereignties often granted exclusive fishing rights, exploration rights, and trade routes to be exploited by private entities. Governments, by granting the charters, hoped to create internal economic benefits by encouraging private capital to be deployed in risky ventures overseas.
For all of these purposes, limited liability was vital to encourage investment. By the nature of the business, investors in England were often absent from exercising any voice in the affairs of remote ships and trading missions months or years away. This strengthened the need for the corporate form in that passive investors could be assured of not being liable for unknown debts. At the same time, their distance and duration meant that such enterprises required ample levels of capital, far beyond the risk appetite of any one investor, no matter how wealthy. The joint-stock company allowed multiple investors to buy in to a venture and hold the interest. The final push to the English joint-stock company occurred in 1553 with the Russia Company, in which adventurers committed £6,000 at £25 per share, marking the first use of the corporate form for overseas ventures.
Starting then, even English privateers, state-sanctioned pirate ships looking to confiscate cargo, began using the joint- stock form to raise capital from adventurers. Privateers had another reason to spread the risk. For individual operators, the risk of being charged criminally if the political winds turned, even when sanctioned, was diffused when sufficient numbers of prominent investors were also involved. These English privateering syndicates were anything but swashbuckling men with parrots and eye patches; the accounting statements of individual ventures made careful note of ship tonnage, capital invested, men involved, and number of ships in each operation—from which Sir Francis Drake’s twenty-one ships and 1,932 men stood out with invested capital of £57,000. In his thorough examination of the era’s joint- stock companies, W R Scott suggested that the flexibility of the corporate structure lent itself to the virtues of diversification and spreading risk, particularly in matters of piracy. From privateering’s tolerance for large losses emerged the basic principle of modern venture capital.
Suppose, for instance, a capitalist was prepared to adventure 2000 Pounds in privateering, he could only fit out one ship of about 200 tons or two smaller ones. His expedition might be too weak to make any captures of importance. If on the other hand, he joined in several larger expeditions, even if one of these was a total failure, he had every prospect of obtaining handsome profits from his shares in the others.
Handsome, indeed: Drake’s operation provided a return of 4,700 per cent — forty-seven times the capital invested. Such anomalous returns were the glimmer in the eye of every adventurer in evaluating opportunity. Staid London bankers they weren’t.
At the turn of the century, after a particularly painful era of war had concluded and economic depression had taken its toll in England, opportunities for fortune seemed better everywhere but home. The East India Company was formed in 1600, the Virginia Company of London a few years later. Soon after, pamphlets were printed to entice prospective adventurers to invest. Virginia’s literature managed to refrain from calling attention to any distressing factors. On the dangers of Indians: “They are generally very loving and gentle, and do entertain and relieve our people with great kindness.” It detailed the varieties of trees available as lumber for bringing back to England, hills and mountains full of treasure “never yet searched,” and soil that seemed immense in “lusty” potential. This was followed by a general call to one’s English patriotism, proclaiming the need for “Navigation into all parts and corners of the world, to furnish our own wants, and to supply from one kingdom to another.” It then pointed to the misery of the unemployed at home, the “swarms of idle persons” that such a venture could send abroad.
The pamphlet then got down to the business at hand: A single share in the Virginia Company was available for an investment of twelve pounds ten shillings to adventurers who wished to remain in England. Each planter, the men actually willing to go to Virginia, received one share at no cost, provided they work for the company for seven years in building the settlement. In addition, the company was tasked with providing the money for food, materials, and maintenance of the settlement. The company would own everything and have a monopoly on all economic activity in Virginia. At the end of the seventh year, the assets of the company, including the settled land, were to be distributed among the shareholders. For many impoverished, struggling young men, the prospect of owning land in the New World in exchange for merely providing one’s labour proved enticing, especially as they saw well-heeled investors pay over twelve pounds for the same share.
Any dreams of ease were quickly dashed. The Virginia Company turned out to be a disaster. The first waves of men were struck by disease, famine, freezing cold, or Indians. Subsequent waves of supply ships, with new groups of planters, were then horrified by the appearance of the famished countrymen who had preceded them. One early group simply fled to live with the Indians. After successive iterations of failure, the company sought new investors when the old ones refused to throw good money after bad, restructuring itself multiple times in the process. As the financial circumstances became acutely desperate for private interests by 1614, and with the settlement in shambles, sentiment grew to revoke the company’s patent and turn it over to the Crown. Fighting this, the Virginia Company’s lawyer, Richard Martin, was left pleading with the House of Commons for financial relief, a bailout, from His Majesty’s Treasury.
So when the group from Holland inquired about settling in the New World, the Virginia Company was open to any and all willing to risk death and endure misery.