Pr epar ed Exclusively for You ALSO BY ANDY KESSLER Wall Street Meat: Jack Grubman, Frank Quattrone, Mary Meeker, Henry Blodget and me Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score Pr epar ed Exclusively for You HHooww WWee GGoott HHeerree A Silicon Valley and Wall Street Primer . A History of Technology And Markets Andy Kessler ESCAPE VELOCITY PRESS Pr epar ed Exclusively for You Copyright © 2004 by Andy Kessler All rights reserved, including the right of reproduction in whole or in part in any form. Printed in the United States of America Author photo by Claudia Marcelloni Adobe Acrobat® Edition produced and distributed courtesy of The Pragmatic Programmers, LLC. Please visit www.PragmaticProgrammer.com for more information on our Pragmatic Bookshelf titles. Escape Velocity Press www.escape-velocity-press.com Printing 10 9 8 7 6 5 4 3 2 Printed edition published by HarperBusiness available from Amazon.com and fine bookstores everywhere. Library of Congress Control Number: Cataloging-in-Publication data is available. ISBN 0-9727832-2-9 Pr epar ed Exclusively for You For my Dad, who sparked my interest in technology Pr epar ed Exclusively for You Table of Contents Foreword 5 Logic and Memory 7 Part 1: The Industrial Revolution 13 Cannons to Steam 15 Textiles 29 Positively Electric 37 Transportation Elasticity, Sea and Rail 43 Part 2: Early Capital Markets 57 Funding British Trade 59 Capital Markets and Bubbles 65 Fool’s Gold 73 Part 3: Components Needed for Computing 87 Communications 89 Power Generation 95 Part 4: Digital Computers 99 Ballistics, Codes and Bombs 101 Transistors and Integrated Circuits Provide Scale 117 Software and Networks 131 GPS 153 Part 5: Modern Capital Markets 159 Modern Gold 161 The Business of Wall Street 165 Insurance 177 The Modern Stock Market 187 Bibliography 203 About the Author 205 Pr epar ed Exclusively for You Foreword Talk about twisty-turny paths. I started life as an electrical engineer and ended up running a billion dollar hedge fund on Wall Street. Like a pinball bouncing off of bumpers, I’ve been a chip designer, programmer, Wall Street analyst, investment banker, magazine columnist, venture capitalist, op-ed writer, hedge fund manager and even a book author. My mother thinks I can’t hold a job. Friends suggest I know very little about everything and a lot about nothing. That’s hard to argue with. But throughout it all, 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 I’m not entirely sure how I came up with this list, but it has worked. I’ve invested by it and have read and understood the news by it. It has helped explain the unexplainable and has helped me peer into the fog of the future. I sat down with two different groups of people and tried to explain why these creeds are so valuable. The first group, engineering students who lived by math and science, were confused over how technology leads to business, even though advancing technology has driven and continues to drive most everything. The next group, business school students, was Pr epar ed Exclusively for You 6 HOW WE GOT HERE combative; they suggested that business and management skills trump economics. Maybe so. So both groups were equally skeptical, and barraged me with questions like: “How do you know they work?” “How come we’ve never heard of these things?” “Can you prove it?” “What if you’re wrong?” “You’re just making this up, right?” To explain in 20 minutes what took 20 years to seep into my sinews, I’d have to walk them through the history of the computer industry, from the transition from telegraphs to gigabit fiber optic networks and show how we moved from the industrial revolution to an intellectual property economy. And that’s the easy stuff. Add money, and a diatribe turns into a dissertation. I’d have to explain how stock markets came into being, and insurance and the follies of gold standards. And then somewhere in this tale would have to be the link between military doctrine and commerce. I needed to answer a few too many burning questions. What is the history of the computer industry? Of the communications industry? Of the Internet? Why does the U.S. dominate these businesses? Didn’t the British rule the last big cycle? What happened to them? Why do we have money? What is it backed by? What was the gold standard all about? Do we still have a gold standard? How did the stock market come into being and what is it for? Aren’t banks good enough? Who wins – money or ideas? Does the military get its technology from industry or the other way around? Did anything besides Velcro and Tang come out of the Space Program? Why does the U.S. have any industrial businesses left? There are too many questions to answer. So instead, I wrote this primer. Enjoy. Send me feedback, ideas and suggestions at [email protected] with HWGH in the subject. Pr epar ed Exclusively for You Logic and Memory I hate to admit it, but it was taxes that got it all started. In 1642, 18-year-old Blaise Pascal, the son of a French tax collector, tired of waiting for his dad to come play a game of “le catch”. Blaise’s dad was what is known as a tax farmer, sort of a 17th century version of a loan shark, threat of broken bones and all. Tax farmers advanced tax money to the government and then had a license to collect taxes, hopefully “harvesting” more than they advanced. Elder Pascal was constantly busy calculating and tabulating his potential tax haul. To help him out, Blaise envisioned a mechanical device with wheels and cogs and gears and numeric dials that could sum up numbers to eight digits long. That’s 10 million francs. Dad must have been a top tax guy. Clockmakers were the high-tech folks of the era so Pascal built a model for his device by modifying gears and dials that he probably scrounged from clocks. The Pascaline fit in a brass box and was an amazing 17th century device. The computer industry was on its way, albeit at the pace of a woozy escargot. In 1649, King Louis XIV granted Pascal a patent for his odd device but it failed to affect much change over the next 45 years. Pascal, by the way, would contribute more than a mechanical calculator to this tale. He proved that vacuums exist; that one could measure pressure by inverting a tube of mercury; and as a vicious gambler, tried to figure how to beat the house and ended up inventing probability theory. Pr epar ed Exclusively for You 8 HOW WE GOT HERE In 1694, a German, Gottfried Wilhelm von Leibniz, created a box similar to Pascal’s but his could actually multiply. Leibniz used something called a stepped drum, a cylinder with a number of cogs carved into it, and gears that would engage a different number of cogs depending on their position. It was incredibly complex, which is why very few were ever built. Inside a Pascaline or a Leibniz box were two simple elements needed to create the modern computer: Logic and Memory. The memory depended on the position of the mechanical dials. If the dial said 5, unless someone moved it, it would stay a 5. That’s pretty simple memory. Pascal’s complex gears produced the arithmetic logic. If you add a 7 to the 5, the first dial was designed to show a 2 and then would kick the second dial ever so slightly to have it incrementally carry a 1 to the 10’s column. Logic. All this was rather slow, figure an addition every second if you were lucky. Plus, you had to write down the results every once in a while. But it beat ink and paper, in both speed and accuracy. So Pascal got the computer business started, but with a whimper, not a bang. Logic and memory. That’s it. My kingdom for Logic and Memory. So simple, yet so hard to implement. * * * Let’s fast forward a bit. In 1880, 238 years after the Pascaline, the constitutionally-mandated U.S. census took place as usual. The results were ready in 1887. Because of population growth, many feared the results of the 1890 census wouldn’t be ready until well after the 1900 census! Big problem. But the solution was simple. A guy named Herman Hollerith came along and invented punched cards for the census, based on punched cards that a countryman of Pascal’s named Joseph Jacquard had invented in order to program automatic looms. But Hollerith invented three devices--a puncher, a sorter and a tabulator that would read the census punched cards and keep a running count. The memory was the holes in the punched cards, and the logic was a set of mechanical gears and wheels that would keep a running count. It was complex, but it worked. He built 50 machines, each capable of tabulating 7000 records per day, roughly a 10 times improvement over hand tabulation. The 1890 census quickly counted 62,979,766 U.S. residents. Pr epar ed Exclusively for You LOGIC AND MEMORY 9 Hollerith formed the Tabulating Machine Company in 1896.