What Financial History Can Teach Us About Blue Finance

The Dutch East India Company was chartered by the States General on March 20, 1602, and asked its subscribers for something unusual. They were to put in money for ten years, on voyages to a part of the world from which ships did not reliably return. They signed up anyway, for roughly 6.4 million guilders across six chambers. The Amsterdam chamber alone took 3.7 million from 1,143 people. Isaac Le Maire, a Flemish merchant who had settled in Amsterdam, put in 85,000 guilders and became the largest individual investor in the company and one of its directors.

As the ten years approached, it became clear that the directors intended to roll the first accounting into the second and deny subscribers their withdrawal. On January 24, 1609, Le Maire sent a remonstrance to Johan van Oldenbarnevelt saying so. In 1612 the state sided with the directors, and the capital stayed in the company permanently.

The subscribers never got their money back. What existed instead was a transfer procedure. The company issued no share certificates, so its account books were the only evidence that anyone owned anything. A sale required the seller to appear before one or two directors of his chamber while the bookkeeper moved the holding into the buyer’s name. Shares were changing hands before subscribers had finished paying their instalments.

Once that route existed, an investor who wanted out no longer needed the venture to end. He needed a buyer, and Amsterdam supplied one. By 1610 Le Maire was running a bear raid against the company he had helped found, and the States of Holland responded with a ban on short selling that did not work. By 1688 Joseph de la Vega could publish a book about that market describing short selling and option trading with the weariness of a man who had lost money at both.

Pooling money was not the new part. Italian merchants had been splitting voyages between a travelling partner and a sitting investor for centuries, and English ships were owned in sixty-fourths. What changed was the relationship between the life of an enterprise and the patience of the people funding it. After 1612 the VOC could keep ships at sea for decades while its owners turned over every few years.

The first written trace of Lloyd’s coffee house is an advertisement in the London Gazette of February 21, 1688, offering a reward for information about five stolen watches, to be left with Edward Lloyd on Tower Street. He moved to Lombard Street at the end of 1691, installed a pulpit in the new room so auction prices and shipping news could be read out, and kept a corner for captains. He tried publishing a paper called Lloyd’s News in 1696 and abandoned it within months after his printer’s additions attracted a libel action.

What people came for was information: which ships had sailed, which had arrived, what had been lost, what cargo was worth. Underwriting grew up inside a room already organized around knowing where the ships were. The men who wrote their names under the terms of a risk, which is where the word underwriter comes from, were pricing on the strength of that information and backing the judgment with their own estates.

Classification came much later. In 1760 customers of the coffee house formed a Register Society, and in 1764 it printed the first Register of Ships, grading hulls on a lettered scale and fittings on a numbered one. A ship in the best condition with first-class equipment was A1, a designation that first appeared in the 1775 to 1776 edition and has been in the language ever since.

That is roughly seventy-five years between the earliest record of the coffee house and a published grade for the thing being insured. Standardized measurement did not create the market. Information and judgment came first, and classification arrived once the market was large enough that inconsistent judgment was expensive.

The grade itself soon became something to fight over. From 1799 into the 1830s, two rival registers backed by different groups of shipowners, merchants and underwriters were classifying many of the same vessels. Owners wanted their ships to survey well. Insurers wanted the surveys to be severe. The dispute ran for more than thirty years and brought both societies close to bankruptcy before they were brought together in 1834.

Chicago faced a different problem. The Board of Trade was founded in 1848, when wheat still travelled in sacks. Your sack stayed yours from the farm to the buyer, and the buyer could open it. Then steam elevators arrived. Grain moved in bulk, and bulk meant mixing. Once your wheat went into a bin with everyone else’s, it stopped being identifiable as yours.

The response was grading. In 1856 the Board wrote the first grain grading rules in the United States, dividing wheat into three categories, and opened a grading office with inspectors the following year. What a farmer delivered stopped being his wheat and became a quantity of a grade.

Everything else could be built on top of that. A warehouse receipt attached to a grade instead of to a particular lot, so it could be sold without anyone going to see the grain. Grain that had not yet arrived could be sold for delivery later. The Illinois legislature chartered the Board in 1859 with authority over grades and inspectors, and in October 1865 the Board introduced formal rules covering margin and delivery, close to the futures market we would recognize today.

Counterparty credit took much longer. A voluntary clearing arrangement appeared in 1883, and complete clearing arrived only in 1925, when the Board of Trade Clearing Corporation began standing between buyers and sellers so that the identity of the person on the other side of the trade mattered less.

The grade itself was judgment wearing a number. Inspectors worked with language such as reasonably dry and reasonably sound. Test-weight standards moved from year to year, and disputes were constant. The 1859 charter had given the Board the power to appoint inspectors whose decisions bound its members, which meant that the men buying the wheat also controlled its classification. Illinois created the first state grain inspection department in the country in 1871 and took the function away from them. Farmers and the exchange had spent a decade and a half fighting over adjectives. They were arguing about the grade because the grade decided the price.

Amsterdam, Lloyd’s and Chicago solved different problems. What they share is a claim that somebody else is willing to accept without inspecting the underlying thing. A buyer in Amsterdam could own part of a company whose ships he would never see. An underwriter in Lombard Street could take a risk on a vessel sitting somewhere else. A trader in Chicago could buy wheat still standing in a field in Iowa.

In each case, the underlying thing became legible enough to trade at a distance. Sometimes that happened through records, sometimes through information and reputation, sometimes through a formal grade. The sequence was different, but eventually somebody had to decide what the claim meant and stand behind it.

Mortgage securitization shows why that last part matters. When Ginnie Mae issued the first mortgage-backed security in 1970, pooling solved a funding problem and the federal guarantee largely settled the central credit question for the investor. An external rating did not have to do the work it later would in the private market.

The private market followed. Salomon Brothers put together a residential mortgage deal for Bank of America in 1977 without a government guarantee, and Freddie Mac’s first collateralized mortgage obligation in 1983 added the practice of dividing a pool into tranches of different seniority. Ratings became increasingly important because investors were being asked to buy claims on pools of mortgages they would never examine individually.

By 2006 subprime lending accounted for about a fifth of the American mortgage market and roughly three quarters of it was securitized. Institutional investors buying rated mortgage securities generally were not reading the underlying loan files. That was much of the value the rating supplied.

The system worked as long as the grade meant what investors thought it meant. When it did not, they discovered how far the claim sat from the mortgages underneath it. A standard nobody questions can function well for years, and that is part of what makes it dangerous when the judgment embedded inside it is wrong.

Blue finance sits at an earlier point in that process. A blue bond is financeable now because the issuer’s credit is financeable. The investor buys a sovereign, a bank or a utility with a use-of-proceeds commitment attached. Allocation reporting is real. External reviewers do check whether money was directed where the framework said it would go. Impact reporting exists too, with issuers publishing indicators such as hectares of habitat under improved management or volumes of wastewater treated.

Measurement is not the missing piece. The measures are selected by the issuer, they are difficult to compare between issuers, and verification usually focuses on whether the reported figure was compiled properly, rather than independently establishing whether the ocean outcome occurred⁠. More importantly, the ecological result has no effect on the financial contract. A grain inspector’s classification moved money immediately. A disappointing blue-bond indicator does not, because what the instrument guarantees is repayment⁠.

Sustainability-linked structures are different, since a missed target can change the coupon or another term of the financing. They show what it looks like when the environmental measure enters the contract. Blue issuance has developed along the use-of-proceeds route instead.

That leaves the same question that sat behind the competing ship registers in London and the fights over grain inspection in Illinois. Somebody gets to define the unit⁠. In 1859 that authority went to the Chicago Board of Trade. In 1871 Illinois took it back. Both decisions affected who got paid and how much.

The equivalent work in blue finance is happening now, in taxonomy committees, verification standards and processes such as Canada’s sustainable investment taxonomy. Most of it attracts little attention outside the institutions involved. Once the definitions are settled and built into contracts, disclosure rules and investment processes, they will read as description rather than as choices, and reopening one will be difficult. Illinois needed a legislature. That interval, while a definition is still visibly a choice, is where blue finance sits at the moment.