American History Revised (42 page)

We actually had a president of whom it can be said that the presidency of the United States was a demotion in terms of number of civilians under his authority.

George Washington’s previous profession was plantation owner. The federal government, with fewer than 350 nonmilitary employees, was smaller than his former organization, Mount Vernon. Mount Vernon was an impressive operation consisting of five farms, each a separate profit center headed by an overseer responsible for providing weekly reports. It was the largest flour producer in the colonies, and was the first plantation to practice serious crop rotation. In addition, Washington developed a substantial fishing industry, imported his own livestock from England, bred a new kind of mule, and started up a loom operation and tanning factory.

Clearly this was an enterprising man, always on the lookout to make small, incremental improvements. A practical man more than an idealist, he was the right man for an entrepreneurial startup: the implementation of a new form of government.

1789
The oldest “right” in the United States—the one and only right explicitly mentioned in the Constitution—is not the political right of free speech or liberty, but the economic right of patent protection. Article 1, Section 8, grants Congress the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” This was written in 1789, a full three years before the Bill of Rights. So important was this “authors and inventors clause” that it became known as the “progress clause;” when presented to the Constitutional Convention, there was no debate and it passed unanimously.

This was no fluke. Already, in the brief period after independence and before the Constitutional Convention, twelve of the thirteen colonies had enacted copyright laws. The men they sent to draft the Constitution were fully aware of the Industrial Revolution in England and how new technologies spurred economic growth. In the midst of their deliberations in Philadelphia, they took an afternoon off to go see John Fitch’s new steamboat undergoing trials on the Delaware River. New inventions were a major excitement for them.

Within a year of passing the Constitution, there emerged the Patent Act and the Copyright Act. So important were patents that a patent application was not submitted to a patent office—there
wasn’t any. Rather, it was submitted to the secretary of state, then reviewed by the secretary of war and the attorney general, and, if approved, signed by the president and the secretary of state.

Fast-forward to 1859. No politician was more cognizant of the importance of patents than Abraham Lincoln: he was a patent lawyer and in fact had been issued a patent (the only president to earn such an honor; his invention was a device to lift boats over river shoals). When asked “What were the three greatest inventions and discoveries in world history?” he responded, “The arts of writing and printing, the discovery of America, and the introduction of Patent-laws.”

Were you a Rip Van Winkle who fell asleep and woke up in the nation’s capital city at the outbreak of the Civil War, you would find Washington DC a city of dreary mud roads and two-story wooden tenements, dominated by five huge marble-clad edifices: the White House, the Capitol, the Post Office, the Treasury Building, and the Patent Office.

The history of patents in America involves more than superior inventiveness, it involves protracted legal battles in court.
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Alexander Graham Bell had to fight more than six hundred patent lawsuits. Fortunately he won them all. Today his telephone patent is known as “the single most valuable patent ever issued in the world.”

Others were not so fortunate. Eli Whitney’s cotton gin was such a simple invention it got copied quickly. He fought more than sixty lawsuits, and spent so much money on legal fees he never made any money on his invention. Samuel Morse got hit by sixty-two would-be inventors claiming they had invented the telegraph; he, too, prevailed. Thomas Edison had so many problems with patent lawsuits he resolved he would only invent things he could sell.

Coca-Cola executed this resolution to the fullest: it relied totally on sales. Rather than patent the formula and lose it after seven years, the company gambled that no one would be able to figure out the formula. No patent was ever filed. When ordered by the government of India in 1977 to disclose the formula, the company played hardball, said no, and left the country. In the meantime, the company built up a massive international marketing and distribution system that eventually created the world’s best-known brand.

In the early 1990s, journalist Mark Pendergrast stumbled upon the original formula in the company archives. Asked
what might be the effect of publishing this secret formula, the executives of Coca-Cola essentially told Pendergrast it made no difference, it was too late to challenge Coca-Cola’s position in the marketplace. “Call it ‘Yum-Yum’….Now what? What are they going to charge for it? How are they going to distribute it? How are they going to advertise?”

Continued the Coca-Cola executive, “We’ve spent over a hundred years and untold amounts of money building the equity of that brand name. Without our economies of scale and our incredible marketing system, whoever tried to duplicate our product would get nowhere, and they’d have to charge too much. Why would anyone go out of their way to buy Yum-Yum, which is really just like Coca-Cola but costs more, when they can buy the Real Thing anywhere in the world?”

So much for Yum-Yum.

1796
From the founding of America until the Civil War, the major source of personal wealth was not farming or commerce, but investing in raw land. Said George Washington to his real estate agent in 1767, “Any person … who neglects the present opportunity of hunting out good lands, and in some measure marking them for his own, in order to keep others from settling them, will never regain it.” Writing to a potential investor about his plan to buy up an assemblage of choice Western lands, Washington urged the utmost secrecy: “I recommend that you keep the whole matter a secret, or trust it only to those in whom you can confide.” While president, he borrowed money to purchase three thousand acres in the Mohawk Valley, and quickly sold it for twice what he paid. At the time of his death, he owned 71,000 acres.

All the Virginia planters were interested in making a quick buck in land speculation. They included even Patrick Henry, author of the famous slogan “Give me liberty or give me death!” “Insatiable in money” was how Jefferson described him.

As settlers moved westward, the land they occupied increased in value and enjoyed a ready market of settlers who followed. “All I am now worth,” the new secretary of state of America wrote in 1796, “was gained by speculations in land.” Ten years earlier he had purchased twelve thousand acres in Pennsylvania for fifteen cents an acre; now his land was worth 2 dollars an acre—a thirteenfold jump. Furthermore, not all speculators paid cash: after the Revolution, military warrants that had been given as payment to soldiers (100 to a private, 1,500 to a general) had depreciated 80 percent. By buying devalued military warrants for twenty cents on the dollar, property speculators could make five times the thirteen times their investment, or 65 times the amount of their original investment.

Robert Morris, signer of the Articles of Confederation and the Constitution, and superintendent of finance during the Revolution, acquired a land tract of more than a million acres, and “flipped” it to a group of English investors for more than three times what he paid for it. (To be sure, he also made lots of bad real estate investments and died bankrupt.)

Everybody benefited from raw land, not just the dealmakers. For the many thousands of immigrants, the abundance of land at reasonable prices meant freedom from Europe’s lingering feudal constraints. Said one European visitor, “It does not seem difficult to find out the reasons why people multiply faster here than in Europe….There is such an amount of good land yet uncultivated that a newly married man can get a spot of ground where he may comfortably subsist with his wife and children.” On average, a homesteader could buy a plot of land, say fifteen acres, build a house and cultivate the land, and earn enough to pay off his debts in ten years.

When Thomas Jefferson, himself a major landowner, was offered all of France’s territory in what became known as the Louisiana Purchase, he knew exactly what Talleyrand meant when he said, “You’ve made a good deal for yourselves.” The $15-million asking price from France worked out to be four cents an acre—at a time when public land was going for two dollars an acre—and rising. That’s a fifty-fold return right there.

The key to a growing real estate market, of course, is population. Married women in 1790 bore an average of almost eight children. Between 1790 and 1860 the population increased dramatically, doubling every twenty-three years. This growth, combined with the flow of immigrants, led to enormous demand not only for rural land but for space in cities. From 1820 to 1860, cities went through periods of wild land speculation and building. Many new cities emerged; Cincinnati, Pittsburgh, Memphis, Louisville, Detroit, Chicago, Denver, Portland, Seattle, and San Francisco. The major growth city was New York: in 1800 the population was sixty thousand; by 1860 the population was greater than one million. The city’s leading entrepreneur was John Jacob Astor, who made his fortune selling furs—but not for long. Whatever extra capital he had, he used to buy real estate and make an even bigger fortune. Manhattan land he bought in 1800 for $50 an acre, was worth $1,500 twenty years later.

Said Henry George in his powerful 1887 book,
Progress and Poverty:
wealth originated in land. He meant this as a socialist polemic against the rich. What he failed to recognize, however, was that land was a long-term investment, a reward for those who had the foresight to buy in early. Take, for example, the city of Las Vegas, now one of the richest real estate properties in the world. In 1900 the population of this forlorn outpost in the desert was only thirty people. One hates
to think what land was going for back then.

1803
The United States was offered a deal—take it or leave it—by Napoleon’s cash-strapped France: purchase the Louisiana Territory for $15 million. There were a number of legal obstacles involved, but no problem: when an opportunity for sudden riches comes along, most people—even the president and Congress of the United States—are willing to bend the rules a little.