This week in financial history marks the introduction of the world's most carefully watched index, the birth of a robber baron and much more. (Missed last weeks article? Wall Street History: The NYSE Is Born, Bubbles Form.)
What Hath God Wrought
On May 24, 1844, Samuel Morse sent the message "What hath God wrought" on a telegraph line running from Washington to Baltimore. While Morse's role in the invention of the telegraph has been questioned in recent years, his role in proliferating it cannot be denied.
Morse licensed the patents to his telegraph system to all who could pay. This resulted in a building boom as up to 50 different companies started running lines with the help of the railroad. In return for running lines as they laid the rails, railroad companies were given priority on all messages they wished to send – messages that were sent for free. The telegraph affected many businesses, including having a huge impact on investing.
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Before the telegraph, the information on a company would already be old by the time the mail finally reached an investor. Then the investor would have to place buy and sell orders based on the old info and send them in by mail or travel to a financial district. The telegraph made orders much faster. There was, of course, an outcry that the new speed of trading would hurt the system - a cry that has gone up with each new innovation from the telephone to the internet. The system still stands, although it has certainly had hiccups due to computerized trading - the 1987 crash and the recent dip being the scariest examples. (To read more about the history behind these developments, see The History Of Information Machines.)
May 25 has seen two notable endings. In 1927, it market the day the last Ford Model T rolled off the assembly line. The Model T was Ford's biggest success and reflected its creator's desire to make a car that everyone could afford. The Model T was certainly cheap, but over time, it was failing the customers in an increasingly important way: customization. (Learn more about the founder of the Ford Motor Company in Henry Ford: Industry Mogul And Industrial Innovator.)
By the 1920s, the economy was booming and the average American had a choice between buying a higher class car with options, like those made by General Motors, or a Model T - a car that Ford famously said a customer could have in any color as long as it was black. Henry Ford's son eventually convinced the automaker to rework the Model T into the Model A and institute the annual model change that was becoming standard in the auto industry.
The other ending that occurred on May 25 was less positive, but no less monumental, in nature. On May 25, 2006, Former Enron President Jeffrey Skilling was found guilty of securities fraud, conspiracy and making false statements in several counts related to the Enron collapse. Skilling was sentenced to 24 years and, according to the Federal Bureau of Prisons, could conceivably walk free in 2028 at the age of 74, or - using Enron's accounting practices - 586 million years old. (For related reading, see 5 Lessons From The World's Biggest Bankruptcies.)
The Dow Debuts
On May 26, 1896, Charles H. Dow, a financial journalist, unveiled the first stock index. His Dow Jones Industrial Average (DJIA) was simply that - an average of the top 12 stocks in the market. As this was just at the tail end of the Industrial Revolution, the majority of the companies in the Dow were in the industrial sector (steel mills, railroads, mining, etc.). Dow calculated the DJIA by taking all the stock prices, adding them together and then dividing this by the number of stocks. The number that came out of this equation on May 26 was 40.94. (For more on the Dow's history and the theory behind it, read the Dow Theory Tutorial.)
In 1928, it became necessary to switch the method of calculating the Dow indexes because companies were doing mergers and stock splits that warped the numbers. The Dow switched to a system of flexible divisors that change in order to keep the average from distorting because of these and other complications. In this form, the DJIA is still around today, but the 30 companies that make it up have much less concentration in the industrial sector. The name, however, has stuck. (Find out what the Dow can tell you about the market as a whole in Why The Dow Matters.)
On May 27, 1794, Cornelius Vanderbilt was born on the family farm in Staten Island. Vanderbilt built a fortune - by many measures, the second largest fortune in history - by boat and rail. While still a teenager, Vanderbilt began a ferry business running customers back and forth between harbors. By his 20s, Vanderbilt sold his fleet and was in a partnership running steamships at low rates - in open defiance of a monopoly the New York legislature had granted to a competitor. In the end Vanderbilt won. (For more on Vanderbilt, see The Unsung Pioneers Of Finance.)
Nicknamed the Commodore, Vanderbilt won far more than he lost overall. He destroyed competition with his cutthroat tactics and had many epic struggles that cemented his image as a hard-headed, foul-mouthed sailor, despite the millions he amassed. Vanderbilt will be remembered for many different things, not all of them good, but his forceful ways helped develop routes all through the nation and made travel cheaper and more accessible.
On May 25, 1977, "Star Wars" opened and became a pop-culture phenomenon. The first movie alone grossed nearly $800 million, not adjusted for inflation. When adjusted for inflation, "Star Wars" would still rank well above more recent box-office hits such as "Avatar". The space opera in "a galaxy far far away" was one of the first movies to spin its big screen success into other merchandise. The Star Wars franchise has no shortage of toys, novels, comic books, lunch boxes, video games and much more.
And "Star Wars" wasn't just a hit movie, it also changed the way movies are made and marketed. In fact, many critics blame "Star Wars" and other blockbuster films for pushing the movie industry away from more serious films toward entertaining films with mass commercial and merchandising appeal. Personally, I prefer Darth Vader to many "important" films. Then again, he was on my lunch box.
That's all for this week. Next week brings misery, rogue forex traders and much more.