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 H H o o w w W W e e G G o o t t H H e e r r e e A A S S i i l l i i c c o o n n V V a a l l l l e e y y a a n n d d W W a a l l l l S S t t r r e e e e t t P P r r i i m m e e r r . 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 F F o o r r e e w w o o r r d d 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 akessler@velcap.com 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... Exchange Board, and all sorts of bonds and other bank stocks began to change hands there Alexander Hamilton got his liquidity and eventually so did every other venture that needed capital to grow *** In the middle of 1944, a squadron of B-29 “Superfortress” bombers took off from China Their target was the Imperial Iron and Steel Works in Yawata, Japan, a major supplier of armaments for Japanese battleships... Smith was a professor at U of G around the same time, and in fact Smith and Black were good friends Latent heat is the reason you put ice cubes in your soda No matter how much heat is applied by the hot sun at a baseball game, for example, all the ice has to melt before the soda increases in temperature Latent heat means you can add heat to a pot of water, but it won’t boil and give off steam until... 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... Modbury was a mathematician and a mechanic who was familiar with the works of both Somerset and Papin He took the Marquis’s two-vessel design, and added a useful cock valve to control the flow of steam between the two, and then three, vessels He also ran some of the pumped water over the outside of the vessels to create surface condensation, which helped the steam condense and the engine run faster And. .. each mine vying for the prize of offering the most potent Hairy Buffalo punch At the end of the night, the mine companies were drained of cash and the miners drained of brain cells So instead of selling steam engines, Boulton just traveled around to mines (and later mills and factories) and simply asked the miners how many horses they owned Boulton and Watt would then install a steam engine, and charge... Boulton and Watt would charge just 20 pounds a year Paybacks for the miners were immediate And if the 4 horsepower engine cost, say 200 pounds, B&W started turning a profit after ten years Or they could charge 250 pounds a year for a 50 horsepower engine and turn a profit in less than six years And they had a 25-year patent It was in Boulton & Watt’s best interest to install more powerful engines - they... entire pot of water is at 212 degrees Fahrenheit In other words, he sort of proved that a watched pot never boils Watt ran a series of experiments to measure temperature and pressure and proved a prevailing theory that steam contained “latent heat.” It’s nice to have a smart professor as your mentor, and perhaps this is an early example of a technology spinout from universities Watt theorized that the... engine of most of its power So just as Watt took apart Newcomen’s engine to figure out how it worked, Wilkinson took Watt’s engine apart, and probably started laughing Peeling away the wet hemp used as a sealant, he noticed Watt’s cylinder looked as craggy as the coastline of England While Watt was proud of his 3/8th of an inch from true cylinders, Wilkinson had his secret boring tool and could make Watt’s... 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 . his dad to come play a game of “le catch”. Blaise’s dad was what is known as a tax farmer, sort of a 17 th century version of a loan shark, threat of broken bones and all. Tax farmers advanced. 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. by HarperBusiness available from Amazon.com and fine bookstores everywhere. Library of Congress Control Number: Cataloging-in-Publication data is available. ISBN 0-9 72783 2-2 -9 Pr epar ed