From the Publisher
Expanding on themes first raised in his tour de force, Running Money, Andy Kessler unpacks the entire history of Silicone Valley and Wall Street, from the Industrial Revolution to computers, communications, money, gold and stock markets. These stories cut (by an unscrupulous editor) from the original manuscript were intended as a primer on the ways in which new technologies develop from unprofitable curiosities to essential investments. Indeed, How We Got Here is the book Kessler wishes someone had handed him on his first day as a freshman engineering student at Cornell or on the day he started on Wall Street. This book connects the dots through history to how we got to where we are today.
Synopsis
Kessler presents an accessibly written history of breakthrough technologies and the markets that funded them. Expanding on themes raised in his previous book, Running Money, he explains how technologies such as the steam engine, the telephone, and the Global Positioning System developed from unprofitable curiosities into essential investments. Kessler is a former electrical engineer and Wall Street analyst. Annotation ©2006 Book News, Inc., Portland, OR
Excerpts
I learned over time to live by five simple creeds:
1. Lower prices drive wealth
2. Intelligence moves out to the edge of the network
3. Horizontal beats vertical
4. Capital sloshes around seeking its highest return
5. The military drives commerce and vice versa
On 17th century England
Since many in Parliament, especially the Whigs, were property owners, one of the key rights they pushed for was property rights.
In 1694, a Royal Charter created the Bank of England, a joint stock company with secret owners.
This relief of not having to be stuck with government debt created a liquid market the enabled the government to borrow capital over long periods of time.
Value comes from the liquidity, r the ability to sell on demand. Until then, wealth was held in land and animals an equipment that were, and still are, hard to dispose of.
Spain had lots of gold, but not much else. The Spanish were terrible at trade, their navy subpar, and their global influence waning.
(...) thanks to a Brit named John Law, the French were in the midst of their own speculative bubble. The Mississipi Company was worth more than all of the gold and silver in France. The Dutch tulip mania of the 1630s didn't quite kill off speculation there. Between the fall of 1719 and the summer of 1720, close to two hundred joint stock companies, many of them purely speculative, went public.
The memory of the South Sea Bubble kept England in the muck for 50 years.
(...) English investors became very risk adverse (...) In the 1870s, the British were wealthy and America was poor. Undersea telegraphs opened America to British capital markets, and tons of money flowed to the U.S. to finance the building of the U.S. railroads. But rather than owning equity in these railroads, the British mainly lent money, still more comfortable with getting paid interest and their eventual money back, rather than take the risk in equity, 250 years after the South Sea Bubble burst.
Between 1797 and 1821, during the Restriction, England's economy took off (.) Manufacturers got wealthy, but landowners, who still controlled Parliament, were left behind.
John Law
After the death of Luis XIV, the french monetary system as "une" mess (...) Law volunteeered to fix it. (...) He set up Banque Generale, which issued fiat currency (...) like it was, well, paper. Around the same time, he set up the Mississipi Company, whose stock ballooned concurrent with the English South Sea Company (...) . A bursting of the Mississipi Bubble in 1720 caused a run on the Banque and a depression in France for years to come. Almost three hundred years later, the French don't call their banks, Banques, but Credits, as in Credit LYonnais.
Transistors
The transistor was an important step from mechanical to electronics (...) But in one of the strangest twists to this story, AT&T would not use transistors in its phone network for another 10 years, as it was sitting on a decade worth of vacuum tube inventory.
Instead of making larger chips with more similar-sized transistors, Fairchild worked on fitting a few additional smaller transistors on the same size chip. (...) Shrink, intergrate, shrink, integrate. (...) if you made it cheaper by half, they would not only come, they would use three times as many.
Intellectual Property
In fact, the U.S. is a huge exporter of these pieces of intellectual property, although these exports are hard to measure. Often, an entire architecture of a chip, valued at a billion dollars, can be e-mailed to a factory in Taiwan, without a cash regsiter ringing or a Commerce Department employee around to measure taht export. That chip and other intellectual property are then combined, using low-cost labor with other low-margin components, like a power supply and some plastic, and turned into a laptop or DVD player. Odly, this "margin surplus" run by the U.S. is the way to run an economy with declining price products. Gold won't help. Instead, it requires a stock market to balance out world trade. Fortunately, we've got one of those!
Today's Industry
The quest from profit comes less from squeezing costs out of the amnufacturing process and more from expanding sales channels, or creating new designs, or leveraging other partners or lowering customer service costs. THese, require computer systems and software tailored for specific tasks, rather than a new factory.
19th Century Stock Markets
Trade in stocks and bonds accounted for over half of the telegraph usage in those days.
Markets were more interlinked than ever. In 1857, Prussian wheat was dumbed on the world markets, hurting the U.S. railroad's wheat transportation business. This slowed the expansion of the railroads, which hurt western land speculators, such as the Ohio Life and Trust Company in Cincinnati, which promptly collapsed. News spread via telegraph, causing a run on U.S. banks, which didn't have enough gold to give depositors because the gold-carrying ship "Central America" sank in a hurricane. All thoses falling dominoes led to the panic of 1857.
The 1860s and 1870s saw an enormous amount of money wired to build railroads. The British seemed to prefer debt to stocks, as they wanted to be paid back their principle. Their South Sea Bubble memories and aversion to risk would cost them.
The 1920s
On the brink of the 1920s, Wall Street hhad what it needed to fudn America's post-World War I growth. Banks provided mortgages; ships could handle trade; trucks coming out of the factories could move goods around; cars became affordable for the noueau riche; and soon proliferating radio stations blasted culture high and low into living rooms. Again, the stock market served a valuable function by providing risk capital to these new ventures. And investors were happy to chase the potential returns.
In September 1929, Yale Economics Professor Irving Fisher, the market strategist of his day, said he thought stocks would "remain permanently high" (oops). It all ended on October 24, 1929, with the Great Crash.
Volume languished for almost 20 years. October 10, 1953, saw 900,000 shares traded. That was the last day that fewer than 1 million shares traded at the NYSE.
