ADD history of technology and capital markets

Kessler, A. (2005). How we got here: A slightly irreverent history of technology and markets. New York, HarperCollins.

The title is accurate – this is a short history of how technology and capital markets evolved to where we are today (and, given the evolution of the Internet, the two will merge). Kessler connects many events in a very short format, sprinkling the text with a bit too many one-liner jokes. He does better on technolology history than financial markets, but I still enjoyed it. Quickly written and quickly read, with some good little tidbits here and there (such as the account of B.F. Skinner, psychologist and pigeon trainer, creating a bomb guidance system with pigeons inside the bomb nose cone trained to peck at outlines of Japanese war ships.

Not sure if I would recommend this – too quickie unless you already know the history (but then it is fun.) The definitive book on these topics is yet to be written. Notes:

Part I: The industrial revolution
Cannons to steam
– Newcomen and his steam engine for pumping out water from mines
– Boulton & Watt and their reciprocating steam engines (no longer relying on condensation to pull the piston back in), decreasing costs and more horsepower
– power looms and other production equipment demanding power to run
– cheap cotton clothing that was also better, because it stretched the cotton and didn’t itch
Positively electric
– research into electricity (Franklin, Volta, Galvani)
– Jacquard and the punch card loom for patterns
– Babbage and the difference, later analytical engine
– Boole and logic by mathematics (reducing the necessary complexity of calculating engines)
Transportation Elasticity, Sea and Rail
– railroads, the railroad bubble, enabled by a nascent stock market
– explains this in terms of cost reduction: steam ships, the screw and later propeller
– the Suez canal in 1869 lowered transport costs from East to West with a factor of 3 or more

Part 2: Early Capital Markets
Funding British trade
– King (and sometimes Queen) needed money to fund Navy and colonialization
– introduced joint stock company
– King wanted to sell off monopolies, Parliament limited them to 20 years ->birth of the patent system
Capital Markets and Bubbles
– stock market and securities first took modern form in England, but they had learned it from Holland
– Bank of England introduced modern currency
– South Sea company in 1720, at the same time France had the Mississippi company (worth more than all the gold in France). Eventually killed mercantilism
– the Dutch had the tulip craze in 1630
(- in 1999,, which sold discount tickets for airlines, was worth more than the airlines….)
– after the bubble, Brits risk-averse, created consols (long-term lending)
Fool’s gold
– mid-1800, England got its trade surplus in gold
– factory owners and workers underrepresented in Parliament, suffered from Corn laws which meant workers couldn’t pay for food
– government borrowing against their gold reserves
– Newton fixed the price of gold in pounds in 1717, lasted until 1931
– the Gold standard held money supply constant and wages flexible, which turned out to be the wrong way around

Part 3: Components needed for computing
– the short history of the telegraph and the telephone
– the problem of amplification – power needed
Power Generation
– battle between Edison and Westinghouse on DC and AC
– Tesla invented AC, works better over long distances because the electrons don’t have to move so far
– Edison invented a computer switch – but didn’t realize what he had done

Part 4: Digital computers
Ballistics, Codes and Bombs
– Tesla invented radio by experimenting with sending electricity through air
– Marconi got it to work first
– Tesla also invented the AND gate, in 1903
– AT&T developed automated switches, then George Stibitz developed an adder since he needed to do calculations
– air force needed precision – if they had had it, atom bomb may not have been necessary
– (BF Skinner created a precision device with trained pigeons, who were rewarded with hemp seeds for pecking on Japanese war ship silhouettes)
– early computing history, Turing, Echert-Mauchly, von Neumann , etc
Transistors and Integrated Circuits provide scale
– the whole transistor story, up to Intel
Software and Networks
– basically the story of the Internet, via AlohaNet, Ethernet, etc.
– cisco (from Francisco) , made their money when the browser came, and the LAN traffic rule (80% internal, 20% external) flipped
– history of GPS

Part 5: Modern capital markets
Modern Gold
– from gold standard through Bretton Woods to Nixon ending convertibility in 1971
– necessitates a stock market to capture value
The Business of Wall Street
– stock market is good for three things:
— provide expansion capital for businesses
— agree on a price for a business
— transfer shares from owners to others who may have a completely different risk profile or time horizon
– interplay with communications technology and the stock market
– increases in communications speed set off bubbles and panics, but the market survives
– increasing demand for information, not just prices
"Wall Street has a love affair with technology, to obtain valueable information faster than others, to handle crippling volumes of transactions, and then to invent profitable products."
– fire insurance and life insurance privatize risk, but do little to reduce the risk by themselves
– health insurance set  up to ensure that doctors got paid more than to make sure people had money to pay
The Modern Stock Market
– essentially a story of the impact of computers on Wall Street, but sloppily written
– NYSE was quick to do electronic trading but very slow on the back office, so stock certificates were piling up at the end of the 60s
– NASDAQ formed 1961, operational 1971
– Intel was a complicated company, required explanations – hence, the road show
– DTC (electronic certificates) implemented 1973
– fixed commissions disappeard in 1975 with the Securities Exchange Act
– Jeff Citron with Datek and programmer Josh Levine invented day trading when he found that he could trade on the small exchance system, which the bigger traders wouldn’t – he could then trade within the spread
– as the regular traders moved off NASDAQ, Levine set up ECN, his own electronic matching service, which now has more than 50% of trades on NASDAQ
– increased liquidity enabled hedge funds, which rely on their ability to get in and out fast to keep profits stable
– argues that the NYCE is outdated, that trading in listed stocks is too expensive, and that everything will move to electronic trading, which will provide more risk capital but also more volatility

Appendix; ENIAC Press Release – because it was extremely ahead of its time