The Gold Rush That Changed Everything


On this day in economic and financial history...

The California Dream began on Jan. 24, 1848, in the Sacramento Valley, on the shores of the American River. That day, James Marshall looked into a ditch dug during construction of a sawmill he was building with John Sutter and saw a small, glinting nugget of gold. He announced to his fellow workmen: "By god, I believe I have found a gold mine." Within months, word had spread to the Pacific Northwest, to the distant Hawaiian Islands, to Latin America, and from there to the rest of the world. A Gold Rush was on in California.

California had at that point been separated from Mexico for just more than two years, but it was not yet an American state. The California Gold Rush marked the first time that the search for gold was not tightly controlled by the government. By the summer of 1848, some of the first prospectors were already striking it rich, providing all the whisper fuel needed to lure hundreds of thousands to come. Antonio Franco Coronel, a former Mexican army officer, found more than 8 pounds in his first three days of prospecting that summer, worth $2,000 at the time -- more than $210,000 today at current gold prices.

The Gold Rush got the presidential stamp of approval in December of 1848, when President James K. Polk revealed a package he had received containing 230 ounces of gold in an oyster tin in his annual message to Congress. The Gold Rush began in earnest in 1849, which led to its eager participants being called "49ers," and within two years of James Marshall's discovery at Sutter's Mill, 90,000 people flocked to California in search of quick riches. By 1854, more than 300,000 people from all over the world had converged on the area, transforming San Francisco from a sleepy backwater of 200 people into a thriving city of thousands and changing the state of California into a state of frenetic activity and get-rich-quick schemes -- not unlike its current image as the home of Hollywood and Silicon Valley.

California was on the fast track to statehood, and it became the 31st state in 1850. Its nickname ("The Golden State") and motto ("Eureka") both pay homage to the Gold Rush. The get-rich-quick mentality born at Sutter's Mill began to pervade America's consciousness. In the words of historian H.W. Brands:

The old American Dream ... was the dream of the Puritans, of Benjamin Franklin's "Poor Richard" ... of men and women content to accumulate their modest fortunes a little at a time, year by year by year. The new dream was the dream of instant wealth, won in a twinkling by audacity and good luck. [This] golden dream ... became a prominent part of the American psyche only after Sutter's Mill.

Within the first five years of the Gold Rush, an estimated 12 million ounces of gold were extracted from the Californian soil. Because the price of gold was fixed in dollar terms at $20.67 per ounce throughout the 1840s and 1850s, this amounted to just under $250 million in contemporary value. Today, that hoard would be worth nearly $20 billion.

More than 150 years later, California is by far the leading state in the U.S. in terms of both GDP and population. Its nearly $2 trillion in GDP is driven by a number of industries that have become gold mines for investors, from energy to electronics, finance to food. Five components of the Dow Jones Industrial Average are headquartered in California: , , , , and . You can read more about the Golden State origins of each Dow company by clicking on their respective links. In all, 53 of the Fortune 500 are headquartered in California, with 12 of those companies occupying the Fortune 100 -- including all five of our Dow components. None are mining companies.

Most of the state's mining operations closed down after World War II. However, as gold prices hover near record highs, some opportunistic companies have sought to find the flakes that the 49ers left behind.

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You couldn't give this money away
Historical episodes of hyperinflation often serve as warnings for modern monetary-policy makers. The sextillion-percent inflation in Zimbabwe is a recent and obscene example. Weimar Germany's interwar hyperinflation continues to invoke fear in European central bankers, who worry over the possibility, however faint, of another Nazi uprising. However, one instance of hyperinflation often goes unmentioned despite being, as Johns Hopkins economics professor Steve Hanke notes, "much more virulent than the oft-repeated Weimar episode." Under Slobodan Milosevic, a two-year period of hyperinflation destroyed more than half of the per-capita income of Yugoslavia, culminating on Jan. 24, 1994 with annual monthly inflation of 313 million percent.

That day, the Yugoslav government redenominated its currency, issuing a "super" Dinar equal to 10 million of the old ones. This was the third redenomination since the previous November, in which devaluation had destroyed at least 99.99% of the value of the original currency. Hanke explains the true depth of this devastation succinctly:

"Between January 1, 1991 and April 1, 1998, the dinar was officially devalued 18 times ... and 22 zeros were lopped off that unit of account. For a sense of the impact on the local population, imagine the value of your bank accounts in dollars and then move the decimal point 22 places to the left. Then try to buy something."

Eventually, the national mint actually ran out of capacity and was unable to continue churning out new bills to overwrite the old, worthless currency.

Going rogue
On Jan. 24, 2008, French bank Societe Generale announced that it had lost $7.2 billion due to the actions of a single rogue trader. The staggering loss, attributed to midlevel employee Jerome Kerviel, was more than four times the size of the rogue trading losses that had destroyed Barings Bank in the 1990s. SocGen's effort to unwind its unwanted positions in advance of its public announcement roiled global markets and was blamed in part on the Federal Reserve's decision to reduce rates by 0.75%, a larger cut than the central bank had ever enacted before.

Many experts were dubious of SocGen's claim that Kerviel acted alone, as his total outstanding position had run up to more than $73 billion, which was greater than the bank's entire market cap at the time. SocGen's claims of fraud were not substantiated by French investigators, who instead charged Kerviel with breach of trust and illegally accessing computers. Found guilty at the subsequent trial, Kerviel was sentenced to three years in prison and will be forced to pay SocGen damages of more than $6.5 billion. SocGen will not get much of this money, but Kerviel will spend the rest of his life burdened by a debt few can imagine.

Mmm, leftovers
Some people might freak out if their candy bar spontaneously melted at work, but not Percy Spencer -- he wanted to figure out what had happened. Before long, his experiments concluded that a microwave tube in his Raytheon lab could cook a wide range of foodstuffs. This research led to the first microwave oven patent, which was issued on Jan. 24, 1950.

Raytheon quickly established itself as a leader in commercial microwave ovens, but like any new technology, it took a while to catch on. The first commercially successful home microwave wasn't put on the market until 1967, at a price of $495 -- equal to about $3,400 today. This was obviously a bit much for many families, and by 1971, fewer than 1% of American households owned a microwave. Today, only 5% don't own one. The next time you feel like having some popcorn or reheating last night's takeout, thank Perry Spencer and Raytheon for figuring out how to make it work with just the press of a button.

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Fool contributor Alex Planes owns shares of Intel, but holds no other financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool recommends Chevron, Cisco Systems, Intel, and Walt Disney. The Motley Fool owns shares of Intel, Raytheon Company, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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