Wall Street History

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Wall Street History

03/18/2005

America's Economic Power, Part I

Time to take a look at a highly-regarded book by noted market /
business historian John Steele Gordon, that being his recently
published tome “An Empire of Wealth: The Epic History of
American Economic Power.”

Believe it or not, with my various writing responsibilities I have
zero time to just sit down and read a book, but I’ve been meaning
to devour this one and so we’re going to read it together over the
coming weeks.

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The United States comprises 6% of the world’s land mass and
about 6% of its people, yet it’s responsible for 30% of world
GDP. But America’s economic engine is not only the largest, it
is also the most dynamic and innovative; perhaps best illustrated
by the fact 42% of all Nobel Prize recipients are from the U.S.

Also, 60% of the students studying foreign languages in the
world today are studying English. I see this first hand in my
world travels, and as I remarked in my “Week in Review”
column during a recent trip to Paraguay and Chile, you can
definitely tie economic success to an ability among the business
class to speak our language. I understand how this may seem
more than a bit chauvinistic, but I’ve seen too many examples to
feel otherwise.

John Steele Gordon observes:

“The ultimate power of the United States, then, lies not in its
military – potent as that military is, to be sure – but in its wealth,
the wide distribution of that wealth among its population, its
capacity to create still more wealth, and its seemingly bottomless
imagination in developing new ways to use that wealth
productively.”

So we start at the beginning, the history of our nation and the
beginnings of commerce, but first this gem from Gordon:

“ there can be no doubt that if the United States is famous for
its get-up-and-go, that is because Americans are descended from
those who got up and came.”

Gordon writes that the two most significant technological
developments in human history that signaled the end of the
European medieval world were the printing press and the full-
rigged ship. “The printing press greatly reduced the cost of
books, and thus of knowledge.”

In the mid-fifteenth century there were all of 50,000 books in
Europe, most controlled by the Church which oversaw the
universities. 50 years later there were 10 million volumes and
these were owned not just by scholars, but the aristocracy and
merchant classes, too.

As for the full-rigged ship, it opened the world to true discovery
and long ocean passages. Ships with three and four masts also
enabled Europeans to circumvent the Turks who controlled the
eastern Roman Empire. By the end of the 15th century, the
Portuguese were rounding the Cape of Good Hope and by 1510
they had reached the Spice Islands that yielded big profits for
some in Europe.

Following the success of explorers such as Columbus (even if
inadvertent), expeditions were funded by all the major maritime
powers, with the Spanish the first to strike gold in present-day
Mexico and Peru.

But it wasn’t until around 1600 that the east coast of what we
now call the United States was truly settled; earlier expeditions,
including by Sir Walter Raleigh in the 1580s, having been a
failure.

Then came Jamestown, which as Gordon points out was not
founded by the English state but rather a profit-seeking
corporation.

The printing press and full-rigged ships get their rightful share of
publicity, “but intellectual inventions are often just as important.
And two intellectual inventions of the Renaissance, double-entry
bookkeeping and the corporation, proved vital to the
development of European civilization in the New World and
particularly in what is now the United States.”

[Ferdinand and Isabella had an accountant tag along with
Columbus, by the way, to keep tabs on their investment.]

Because of double-entry accounting, it became possible for
people to invest in far-flung adventures. In the case of England,
The Virginia Company, established by some London merchants,
was chartered by King James I in 1606. As background, Gordon
writes:

“The English economy had been going through wrenching
change for most of the sixteenth century. The population had
grown rapidly, from about three million in 1500 to four million a
century later and five million by 1650. But employment did not
keep pace. The cloth industry, the mainstay of English
manufacturing since Flemish weavers had settled there in the
mid-fourteenth century, had been losing ground to its continental
competition.”

[See any parallels to today?]

At the same time, the feudal system of landholding was
undergoing vast change and by 1630 half the English peasantry
was on the streets looking for employment. Just as in today’s
China, I muse, the peasants headed for the major towns and
seaports. The population of London saw its numbers rise from
120,000 in 1550 to 350,000 one hundred years later, many of
whom were living in dire poverty.

From such ranks came the first settlers, along with a few more
well-educated sorts, and in December 1606, the Susan Constant,
the Godspeed, and the Discovery, left England for the New
World, arriving in the Chesapeake Bay on April 26, 1607, with
105 on board (39 others having died en route).

But the site eventually chosen for the first real settlement in
America, on the banks of the James River, could not have been
worse. For starters, it was teeming with mosquitoes and malaria
was spread through the colonists. The water supply was also
poor, dirty, and often filled with salt when the river was running
low. And then you had the garbage and sewage the settlers
poured in the water which often didn’t pass on out to sea, thus
leading to other diseases such as typhoid and dysentery.

“The result was a slaughter. Of the 105 original colonists, only
38 remained alive nine months later.”

Well, remember this whole mess was the result of a business
venture more than anything else and as Gordon writes, there was
a steep learning curve, the same as in any new enterprise. “The
commercially savvy and often very wealthy London merchants
who dominated the Virginia Company simply had no idea what it
took to establish a successful colony on the edge of the American
wilderness, three thousand miles and three months from home.”

Jamestown hung on as others came to replenish the numbers lost.
In December 1609, the settlement totaled 220. But by spring
they were back down to 60 and ready to abandon the experiment.
“One desperate colonist had killed and eaten his wife (and was
burned at the stake for his crime).”

As the remainder left in June 1610 to head back to England, they
met three ships carrying 300 new recruits at the mouth of the
James River, so, back to Jamestown they all went.

Of course this latest group was really under pressure to find an
export “that would pay the bills and generate a profit to the
stockholders.” At first they tried exporting wood and sand, both
used in the production of glass, but that didn’t pan out
economically. Other items met with similar failure.

By 1616, the Virginia Company had transported more than 1,700
people to Virginia and invested 50,000 pounds, a huge sum for
those days, yet Jamestown was doomed, any way you look at it.

Then came the answer in the form of a common plant to the
Americas, Nicotiana tabacum. Tobacco had been farmed for
thousands of years in what is now Peru and Ecuador and by the
time of Columbus, smoking tobacco had become a habit in much
of the Western Hemisphere.

The local Indians in eastern Virginia grew tobacco but the
colonists preferred that which was produced by the Spanish in
the West Indies. Then in 1612, John Rolfe brought some seeds
from there and planted them. The climate around Jamestown
was perfect, hot and humid, and Rolfe “learned the exacting art
of growing and curing tobacco.” He also married the Indian
princess Pocahontas.

But the first commercial crop wasn’t ready until 1616 and it was
then that Rolfe returned to England, Pocahantas in tow (she
immediately died there). The tobacco was a hit and when Rolfe
returned to Virginia in 1617, according to Gordon the people
celebrated the first American Thanksgiving “because that year’s
tobacco crop was safely in and promised commercial salvation
for the colony.”

[Actually, I always thought it was December 1621 and Plymouth,
Massachusetts.]

In 1618, 20,000 pounds of tobacco were grown in Virginia and
shipped to England, and despite many ongoing hardships,
including a large-scale Indian attack, by 1627, 500,000 pounds
was exported. By 1638, Virginia’s production for use overseas
was 3 million pounds and this source of tobacco was outstripping
all others, including the West Indies.

And with that we wrap up our first tale.

Source: “An Empire of Wealth: The Epic History of American
Economic Power,” John Steele Gordon

Next “Wall Street History” March 25.

Brian Trumbore

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