Capitalism and Inventions — Part 2

The last time I wrote about the history of capitalism, I stopped at where Samuel Slater came to America with a smuggled blueprint for building textile factories.

Soon after Slater had laid foundation for America as an industrialist nation, America began to be recognized by the rest of the world as a place where ingenious innovations can be made. One critical event was the exhibition at Hyde Park in England where the Americans brought their new inventions for the rest of the world to see. One of them was Samuel Colt. In order to show the precision of the manufactured parts for his revolver, he picked random 10 of them, disintegrated and mixed the parts to build 10 new revolvers. And they all still worked. American industrialists began producing things cheaper with the economy of scale and opened doors for the era for consumers.

In the late 19th century was the infamous war of currents. Thomas Edison, who advocated for direct current (DC) for electric power distribution became adversary with George Westinghouse and Nikola Tesla who backed alternating currents (AC). DC operated at the same voltage level throughout and used three-wire distribution system, where +110, 0 and -110 volts were separately transmitted. However, the voltage drop due to the resistance of the system conductors was so high that it needed generating plants every 1–2 km. Edison wanted this to happen, but since it was so much more costly and inefficient compared to AC, which used higher voltage distribution system and lower and safer voltage for customer use by transformer, it eventually fell out as a valid system for distributing electricity for the mass.

Then was Henry Ford in early 1900’s, who introduced moving assembly belts into his plants and was able to shorten the time to build Model T from 12.5 hours to 1.5 hours. This resulted in lower price for the automobiles, which then even average Americans could purchase. This was a revolution in transportation for the mass now that most people had mobility.

In 1929 was the stock market crash in the U.S. and began the Great Depression, a severe worldwide economic depression. There are basically two competing theories as to why the Great Depression happened. One is the Keynesian theory where it says that the loss of confidence from the public led to reduction in consumption and investment. The other is monetarist theory, which basically says that the Great Depression began as an ordinary recession but shrinking of the money supply greatly exacerbated the economic situation. Franklin Roosevelt, the President of the United States then, began his New Deal policies as a response to the Great Depression. Although it is difficult to know whether it was New Deal policies or World War II that eventually ended the Great Depression, America quickly became an economic superpower. America proactively engaged in the rebuilding of the world’s economy by supporting international organizations such as IMF and World Bank.

After the war, one of the most phenomenon was that the soldiers returned home and became a consuming middle class. GI Bill allowed them to buy homes with low-cost mortgages and started business with lost-cost interest loans. Also, for the first time in American history, there were more white collar workers than blue collar workers. Even with such changes in American economy, concept called “credit” was so not prevalent. In 1950’s, however, with the Diners Club’s credit cards allowing its members to pay for their spending later, the era for credit-based spending began. Credit card companies, who quickly realized that they made money by encouraging spending, started aggressively expanding their customer base.

It is a rather random series of events compiled as a history of capitalism but they share a common theme: people come up with inventions when they need them, whether it be tangible or intangible, and they become popular to become the standard and continue on for a rather long time. For example, it is interesting to see that the low-cost mortgage programs for GI Bill made the concept of owning home so desirable for Americans and continues to remain as a quite real part of an American Dream. I believe it is crucial to understand why things are the way they are before following the conventions, especially when you are talking about your financials. Otherwise, you would simply become a part of the mass without much control for your financial destiny.