LESSONS LEARNED #11: “Before you condemn capitalism, imagine a world without professional sports, movies, cell phones and tampons.” -Old Pithy

Posted by PITHOCRATES - April 29th, 2010

AT THE END of the American Revolution the world said, “Okay.  Now what?”  We were a joke.  We were broke.  We were weak.  And now that the common enemy was no more, we weren’t very united any more.  Most assumed we would end up back with Great Britain.  And because of that many thought there was no sense rushing in to make treaties that will just have to be unmade.

It was complicated dealing with us.  In a confederacy of strong states, it was not easy making trade or treaties.  Multiple currencies, tariffs, laws, etc.  To enter the world of the European powers, America needed to put on her big boy pants and speak with one voice.  Some Founding Fathers saw this.  That’s why they met in Philadelphia and drafted the Constitution.  And with ratification, we had one voice.

ALEXANDER HAMILTON WAS a capitalist.  Thomas Jefferson was not.  Hamilton understood money and finance.  Jefferson did not.  Hamilton liked manufacturing and commerce.  Jefferson did not.  He thought everyone should be a simple farmer.  Everyone, that is, but him.

When elected president, people hailed Jefferson as the people’s president.  Simple, unassuming, the epitome of egalitarian republicanism.  Only thing was, there wasn’t anything simple, unassuming or egalitarian about him.  He attacked the nobility, the corruption of big cities and the evils of commerce and the ‘money’ men.  Yet he indulged in the good life like no other American.  He always lived beyond his means.  He lavished himself in the finest luxuries of the time.  And he absolutely loved Paris though it was everything he said he hated.

Hamilton put America’s financial house in order.  He helped give the new nation legitimacy.  He opened European credit to us.  Problem was that, in Jefferson’s eyes, America was becoming too much like Great Britain.  And worse, it was becoming less Virginian.  So they squared off and fought each other.  Tooth and nail.  They gave birth to America’s first political parties (Federalists and Republicans).  They viciously attacked each other in the press.  Yes, politics were nasty right from the beginning.

Then something happened that caused Jefferson to embrace much of what Hamilton did.  He fell ass-backwards into the Louisiana Purchase.

THERE WERE DREAMS of a French empire in North America.  But the slave uprising in Saint-Domingue (present day Haiti) put the kibosh on that.  With Saint-Domingue lost, there was no point in France keeping New Orleans or the Louisiana territory beyond.  And Napoleon needed money.  He was at war.  And that war was about to expand to include Great Britain.  So he offered it all to the Americans for about 15 million dollars.  Though a steal, 15 million was still a lot of money.  And then Jefferson embraced what that capitalistic bastard (we can call him that for Hamilton was the fruit of unmarried loins) created. 

(This sale was also strategic.  By expanding America’s western border, it kept that land from falling to the British.  America would grow and, in time, a stronger America would challenge Great Britain for all that sea-going commerce in the Atlantic.  If it couldn’t go to the French, better it go to the Americans.  And, in the process, it would really piss off the British.  Like I said, strategic.)

The deal included gold, bonds and some debt assumption.  Jefferson was adamantly opposed to Hamilton’s assumption of states’ debt back in Washington’s administration for it only aggrandized the central government.  And Jefferson absolutely hated banking (probably because he was forever in debt).  And though he was brilliant, he was not so brilliant when you put dollar signs in front of things.  Jefferson made the purchase, but the bond deal put together was pure Hamiltonian. 

France wanted cash.  We didn’t have it.  But we now had established credit in Europe.  We could issue bonds.  Because of our credit worthiness, the Dutch were willing to buy those bonds from France at a discount and give France the cash Napoleon wanted.  And, voilà, Hamilton’s capitalism allowed Jefferson to double the size of the United States while reducing the threat in North America from the competing European powers (Great Britain, France and Spain).  It also enabled Napoleon to cause further mischief in Europe (an unfortunate side affect).  Sorry about that, Europe.  It was an unintended consequence.

THE FREE FLOW of ideas and capital can define capitalism.  Some people have great ideas.  Others have lots of money and are willing to take a risk.  Separately, these two don’t do much to make life better.  But bring them together, though, and let the good times roll.

Venture capitalists are rich.  And they’re looking to get richer.  It’s what they’re good at.  They look for talent.  New start-up companies with a good idea.  An idea that may change the world.  They may not have that creative spark to create something new, but they can recognize that spark when they see it.  And when they see it, they want to finance it.  If they pick a winner, we may get that something that changes the world.  And they may make a dump truck full of money.  Everyone wins.

Venture capitalists bring in money.  And talent.  The entrepreneur spends his or her time creating.  The venture capitalist helps build the business.  Kind of like a mentor.  They can be demanding, though.  And impatient.  They expect a big profit on their investment.  And they don’t want to wait around forever to get it.  When things work, they can work well.  Very well.  The entrepreneurs create something new and remarkable that everyone must have.  They then take their company public.  Their initial public offering brings in gazillions.  And those initial investors (the entrepreneurs and the venture capitalists) get incredibly rich.

IN 1976, THREE guys had an idea.  They made an electronic device in a garage that they thought people would want to buy.  It was crude and ‘some’ assembly was required.  And by ‘some’ I mean a lot.  Initial financing was limited.  A car and a scientific calculator just didn’t sell for a lot.  Two of them (one had since left the company) approached a couple of venture capitalists who introduced them to a man by the name of Armas Clifford (Mike) Markkula Jr.  He, too, was a venture capitalist.  And an engineer to boot.

Markkula joined the company.  He was one of the driving forces behind a new product introduced in 1984.  Their Super Bowl ad was, is, a classic.  That product was the Macintosh computer.  Those two men introduced to Markkula were Steve Jobs and Stephen Wozniak.  That company is, of course, Apple.  Today, Apple’s iPhone dominates the market.  And they’re still innovating.  Thanks to a venture capitalist willing to take a risk.

CAPITALISM CAN DO remarkable things.  It can build a nation.  Or change a world.

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