The Mayflower was a huge commercial endeavor. It was costly. They had British financiers, and capital from men known as “adventurers”—quite literally, the provenance for the modern idea of venture capital—is what financed it. The Pilgrims sold shares. Either you could work for your shares or you could just buy them. Same thing with the Virginia Company, which had a very similar structure.
DR: If there had not been slavery, do you think American capitalism would have developed differently?
BS: That’s a huge question. Obviously, it is impossible to separate slavery from the history of American capitalism.
Initially, slavery was not as essential to the growth of the U.S. economy until cotton became this immense cash cow for the South, requiring an increasing need for slaves to harvest it. And as the overseas demand for cotton increased, the southern economy became far wealthier than its population or other natural resources would have made possible.
And sometimes, numbers tell the best story. On the eve of the Civil War, there were about 30,000 miles of railroad track. The biggest system at the time, the Illinois Central, cost about $25,000 per mile to build, give or take—labor, steel, land all included. This implies that the entire value of the railroad infrastructure of the United States had a cost basis of $750 million or so. Based on data from slave auctions, we know that the value of the average slave across age and gender was about $700 or so in 1859. The 4 million slaves in America were declared to have a value of $3 billion. One of the southern states even cited this exact dollar value in their reasons for secession. Another claimed it was $4 billion.
At the same time, the northern economy went into overdrive during the war effort. The Pacific Railway Act was passed, creating the transcontinental railroad, during the Civil War. Land-grant colleges too. The telegraph became instrumental for modern warfare. Even the dollar became temporarily decoupled from gold during this time, the Greenback Era. It is very difficult to separate slavery and its aftermath from the story of American capitalism.
DR: Let’s go to the post–Civil War period. Of the things you write about that are very significant to the further growth of American capitalism, one of them is oil. Why was oil so important, and when did it really get discovered?
BS: In 1859. Even before this, oil was known to exist; it would seep out of the ground in some places, but you couldn’t extract it at scale or at will. In Titusville, Pennsylvania, a businessman known as Colonel Drake drills down fifteen or sixteen feet with a small steam engine.
All of a sudden it’s a gusher. It sets off this enormous speculative activity, where men rushed to the oil fields of Pennsylvania right during the Civil War. You have this activity in the North that’s almost decoupled from the world altogether. Oil then goes on to light homes. This is obviously long before the automobile. That was the real change in American homes. Instead of candles, you’re able to have cheap lighting. Later, obviously, it didn’t hurt the American automakers that there was a domestic oil industry to power all these cars.
DR: Speaking of oil, you write about a man named John D. Rockefeller, who was not from a wealthy family. What did he do to become the wealthiest man in the history of our country, as measured by the percentage of GDP he had?
BS: He probably understood economies of scale better than anyone who’s ever existed in this country. He was derided as a bookkeeper. His detractors would say he was just that. But he was an incredible organizer of talent, of capital, of subsidiaries, all the things you need for industrial scale.
He was also one of the largest users of the trust mechanism. At that time, one corporation couldn’t own shares in a corporation in another state.
The only way you could do that is to have a trust. You take your shares, put them into a trust, and the corporation in another state would put theirs in a trust as well. The trust beneficiaries would be the shareholders on a pro rata basis. John D. Rockefeller and Standard Oil executed that in a very large way before anybody else really knew how to do that. That’s what he brought to the table.
DR: Let’s talk about railroads. Why were railroads so important to the development of American capitalism?
BS: When the transcontinental railroad was completed in 1869, you can imagine the symbolism and implications of this vast country being connected. Throughout the nineteenth century, America seemed like a blank canvas that could be filled in. What the pioneers had done in settling land, you could now connect. Unlike industrialization in England, the transportation infrastructure in America itself was the industrial catalyst. It dramatically reduced the price of commodities, of natural resources, since transportation was a major cost. Railroads also enabled the idea of mail-order catalogs, so a consumer in a small town had access to the same goods as in a major city.
DR: Let’s talk about electricity. When it came along, in the first couple decades or so of the twentieth century, it wasn’t as if everybody had it. Who was most responsible for electricity getting developed in the United States?
BS: Certainly Thomas Edison—everybody knows that. But there were a number of people before Edison who had experimented with electricity.
Electricity took some time to really take hold in the home, primarily because you had cheap alternatives. You had gas infrastructure in a lot of the major cities and urban environments, and you had plenty of oil from Standard Oil.
So electricity as infrastructure for the home didn’t take off until maybe 1910, 1920. But there were other things like streetcars that took off. Electricity had a lot of uses in industrial settings. Department stores had ample electric lighting, office buildings had lighting and elevators.
DR: World War I comes along. How did it affect our capitalist approach?
BS: The construction of planes, certainly, climbed from a few hundred annually to tens of thousands. Radio technology matured on the battlefield and the oceans. But there is one thing that World War I really moved forward—the income tax.
The income tax required a constitutional amendment. In 1895, the Supreme Court had ruled such a tax unconstitutional, because it could put a disproportionate burden, on a per capita basis, on certain states versus other states. The Sixteenth Amendment is what made the income tax possible when it was ratified by the states in 1913. With the income tax, it soon became clear that you could use it to finance the American entry into World War I.
The next thing you know, tariffs on imports and the taxes on alcohol and tobacco were not nearly as important. Right after World War I, you have Prohibition, and Prohibition would not have been possible if the government had not figured out that the income tax was extremely effective at raising revenue, far superior to the tax on alcohol.
DR: Let’s skip forward to World War II, which obviously has a major effect on the United States and the capitalist system. You mentioned Henry Ford. Automobiles became much more prevalent after World War II?
BS: You had well over ten million automobiles in the 1920s on American roads. During World War II, the automakers put out maybe a couple of hundred consumer automobiles for the consumer market over a three-year span—not a couple hundred thousand, a couple hundred. You’re talking about an entire full-scale nationalization of every automobile factory in America to build tanks, to build the Liberator planes. All industrial capacity was essentially converted for the purposes of war. But after World War II, the one-car household often became a two-car household with the move to suburbia.
And then there were the R&D efforts during the war, which seeded a lot of future industries. There is this very interesting article published in 1945 by a man named Vannevar Bush, who headed scientific development during the war, in which he is fearful that all these wartime discoveries, all this knowledge, are going to be lost, because there is no effective way to keep track of it all. And he outlines a physical retrieval system for information that, decades later, Tim Berners-Lee, who invents HTML and the World Wide Web, credits for aiding his thinking.
DR: You mention in your book the impact of radio and cin
ema that arose before World War II. How important was the postwar rise of television to the growth of American capitalism?
BS: Radio was the first time in human history when you had millions of people doing something, listening to a hit show or a World Series game, for instance, at the exact same time.
In the 1930s, film was one of the few green shoots during the Depression. You had big films like Gone with the Wind. You had sound coming to film for the first time in the late 1920s, then hugely prevalent after that.
But television put a window on the world inside almost every home in this country. The adoption rate was very, very fast. It changed politics; it was considered a deciding factor in the Kennedy-Nixon election, given how photogenic and smooth Kennedy was.
In the 1950s, it gave rise to professional football, a sport perfect for TV. Pro football was not commercially viable before; teams played so few home games, attendance revenues were insignificant. TV rights fees changed that. Football is still the most expensive programming on TV. And there was a certain intimacy about TV stars who came into your living room on a weekly basis—Ronald Reagan, for instance, who hosted the show General Electric Theater for much of the ’50s.
DR: How important were computers to the growth of American capitalism?
BS: Tremendous. Punch-card computing can almost be traced back to the eleventh census of the United States, all the way back to 1890.
A man named Herman Hollerith receives a contract from the federal government to take all this census data and put it on punch cards. They had figured out a way of putting electricity through the holes of the punch cards to tabulate them, to count the results and sort data fields mechanically.
Hollerith then becomes part of a company called CTR, Computing-Tabulating-Recording. CTR hires an executive named Tom Watson Sr. who had left, under murky circumstances, a company called NCR, National Cash Register. Watson figures out that the punch-card business is where the future is and renames the company IBM [International Business Machines].
And IBM has a huge punch-card business in the ’30s for everything from the Soviet five-year plans to the Nazis to every American company—companies like Time Inc. that are managing huge subscription rolls. This was well before electrons, transistors, and semiconductors were used in computing.
And again, the earliest user of the next wave of computing is the government. The Cold War saw no expense spared in the 1950s, nor did the space program in the 1960s. Both were catalysts for further commercialization.
The impact was huge. In the ’60s, you had mainframe computing touch every industry in terms of managing inventory, managing supply chains. Sam Walton of Walmart was one of the very early users of computers. He was well known for investing heavily in technology. Ross Perot became computing’s first billionaire; Electronic Data Systems had its IPO in 1968. Intel was founded the same year, so that was certainly a seminal time for computing.
DR: You talk about the importance of start-ups to American capitalism, particularly in the last few decades. The start-up phenomenon is a uniquely American kind of thing.
BS: When I say “start-up,” I mean a particular type of business where venture investors are willing to tolerate losses for a long time in pursuit of hypergrowth. The other thing is that up-front capital costs for your average software start-up are insignificant compared to what industrial capitalism required.
Look at a company like Airbnb or Stripe or Dropbox. These are companies that are worth tens of billions of dollars now.
But these three were ventures backed by Y Combinator [a well-known seed investment company] that got started for $100,000, $120,000. There is no better example of how the venture model operates. As the companies progressed and met milestones, more capital was added by other venture funds, and they became these gigantic hits within a decade. All of these companies rely on some form of virality or network effects (or both), which are economies of scale on steroids. This just does not happen in any other setting. Imagine building a viable first version of your product with $100,000, then with additional rounds of capital, that becomes worth $10, $50, $100 billion less than ten years later. It’s not possible for such an inexpensive funding model to propel hits at this scale in hardware, for instance.
When I say “start-ups,” I largely mean software start-ups now. It’s not unique to the United States anymore. India and China are right up there, and they’re creating very big hits as well. But this model has pretty severe limitations. You are not building viable models of rockets, surgical tools, or robots that do the dishes for $100,000.
DR: You describe another period when finance is very important, where high-yield bonds propelled the advent of private equity. How important was all that to the growth of American capitalism?
BS: It was very important to industrial capitalism. You saw this era of conglomerates in the late ’60s and ’70s, and a lot of wealth started accumulating inside these corporations. You had all sorts of companies buy all sorts of disparate assets, like Coca-Cola buying Columbia Pictures. Private equity at that time found corporate America largely to be stodgy.
Then private equity and leveraged buyouts entered that business, which you know well, and started cleaning up and instituting some operating discipline. I write in the book that private equity is almost the last cycle of capitalism, whereas venture financing is at the very embryonic stages. When you have a public company that is not very efficient, that’s when private equity steps in.
DR: How important has the Internet been to the growth of American capitalism? What about the ubiquitous smartphones that everybody has?
BS: Smartphones are very important, obviously, to the United States, but almost more important to India and China.
In 2007, when the iPhone came out, that was the first time you saw China manufacture a product known to the world as being of extremely high quality. That “Made in China” badge was no longer about inferior goods. If they can manufacture something to Steve Jobs’s exacting standards, they know what they’re doing. The world then took notice. That was a seminal moment for the rise of Chinese capitalism.
At the same time, my family, when we were in India, did not have a landline telephone. The vast majority of Indians today who have a mobile phone have never had a landline in their lives. The smartphone is the first time they’ve ever had access to the Internet. They didn’t have desktop computers or laptops or television, in the vast majority of cases. So it is a substantial leap.
Both of these things are extremely important—for growth in India, certainly in terms of the consumer Internet and consumer economy; and for China, in terms of manufacturing, allowing them to move up the value chain. China now manufactures all kinds of things, from drones to boring machines. They certainly moved up from making shoes and plastic toys to a completely new era of precision manufacturing.
DR: Having studied four hundred years of it, do you think that American capitalism is going to prosper and do well in the next fifty years or so compared to the Chinese form of capitalism? How do you compare the two?
BS: There’s a giant question mark. The communists seem to be very good at capitalism. There is still a giant portrait of Chairman Mao that hangs over Tiananmen Square. China is one large consumer market. It’s now the largest market for automobiles. It’s the largest market for European luxury goods. It has a lot of internal momentum, and that’s something that America has never faced. Americans have never faced a competitor that has a larger consumer market than we do, that produces a greater variety of consumer goods than we do. And on top of that, China has its own online companies that are worth hundreds of billions of dollars, like Alibaba and Ten Cent.
The Chinese were a factory to the world, but now they’re a factory to themselves. It’s going to be very challenging for America to meet that challenge head-on.
Think about your small thousand-dollar drone. That’s not going to be manufactured in the United States. This small drone has sophisticated flight capabilities, sophisticated sensor
s and cameras. You weaponize that, you have next-generation infantry for a few thousand dollars. Momentum begets momentum, and China is in a period where all of their accumulated advantages of the past two decades are compounding quite quickly.
Our big mistake is leaving the bulk of our economic policy to be determined solely by the impulses of the consumer market. Consumers think on very short-term horizons. They just want the cheapest products and services at good quality, and lots of them. And I think entrepreneurs and the marketplace can satisfy this, but it is not enough. Citizens need their government to think on a generational basis in terms of economic policy, just like we do for defense or clean air or even national parks.
WALTER ISAACSON on American Innovation
Author of The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution and many other books
“Curiosity leads you to be interested in all sorts of disciplines, which means that you can stand at the intersection of the arts and sciences. To me, that’s where creativity occurs—at that intersection.”
Americans have always seemed to be innovative, inventing equipment, tools, processes, and services that have helped the country meet its needs, grow its capabilities, and, as a by-product, increase its wealth.
Nowhere has this been more true than in the technology sector since World War II. Engineering skills developed in the military and in academic life, combined with a renewed and increasingly driven entrepreneurial instinct, sparked a tech boom that changed the world in ways that once seemed unimaginable.
While the computer’s forerunner was actually invented by a British woman, Ada Lovelace, in the nineteenth century, the computer was improved and enhanced dramatically by a number of large American companies, principally IBM in the 1950s and ’60s. But the computer, initially quite large and cumbersome by today’s standards, spawned—most especially in the newly named Silicon Valley area of Northern California—a whole variety of products that revolutionized the business world as well as life itself.
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