The California Gold Rush & Other Bubbles by Horizon Kinetics

This section features a person who is historically insignificant in the business world, but is included to illustrate a point about bubbles. When bubbles are viewed at a granular level from the perspective of individuals rather than at a fiscal level, it becomes obvious that bubbles are much more complicated than the statistics would suggest. The bubble in question is known as the California Gold Rush and we’ll examine it from the standpoint of Johann Suter, known in the U.S. as John Sutter. He was an immigrant from Switzerland who became famous after the discovery of gold on his property in 1848 precipitated the California Gold Rush.

Sutter arrived in the area of what is today Sacramento in about July 1839, when California was part of Mexico. He became a Mexican citizen in 1840 and was granted title to 48,827 acres of land in the Sacramento area, which is almost 200 square kilometers. His goal was to build an agricultural settlement known as New Helvetia.1 In the course of building his settlement, he hired a workman named James Marshall to build a sawmill. Obviously, a certain amount of wood would be required to build the dwellings and farm structures of an agricultural settlement. About the time the settlement was being developed, the United States seized the territory of California from Mexico, and it became American territory.

In 1848, while working on the settlement, Marshall found gold, the discovery of which Sutter wished to keep quiet. Sutter had no interest in developing the gold, because he feared, correctly as it turned out, that a gold discovery in the area would cause it to be overrun by squatters. However, since news of that type cannot be kept secret, Sutter’s land was, in fact, overrun. The great California Gold Rush of 1849 had begun, and the people who flocked to California in that period of time are known as the forty-niners.

The following facts refer to the consequences of the California Gold Rush rather than to that period itself. They illustrate the effects of a bubble, which are infrequently limited to the initial subject of the bubble. One fact is that the population of the nearby city of San Francisco increased 25-fold in one year which, obviously, had an impact upon property values. The discovery of gold in California did not go unnoticed by the rest of the world. A gentleman by the name of William Aspinwall saw that immigrants to the area would need a means of transportation to California. He was not necessarily interested in developing the gold himself, but saw an opportunity in providing transportation to potential prospectors. In addition, he engaged in an initial public offering in 1848 for the Panama Railway. Before the Panama Canal was built, travelers en route to the West Coast of the United States who did not wish to sail around Cape Horn had to disembark in Panama and then use land transportation across the isthmus. As an aside, in that same year, Aspinwall organized another venture called the Pacific Mail Steamship Company, which became a charter member of the Dow Jones Transportation Index.

[drizzle]Getting back to John Sutter, he wanted to defend his gold claim, but he was essentially pitted against tens of thousands of immigrants. He wrote a letter asking his son to join him in defending the family holdings. The idea was to defend the Mexican land grant, but it was not clearly defensible under U.S. law. Under the treaty by which the United States and Mexico ended the war, the United States was obligated to honor Mexican land grants. However, California was a newly organized territory that had no legal mechanism for enforcement, so it had to be defended in a different manner. Sutter’s property became known as El Sobrante, which in Spanish means “leftover.” It was an apt title, because Sutter found it very difficult, if not impossible, to defend his claim. In point of fact, in 1858, the United States Supreme Court invalidated his land grant.

When Johann Suter Jr. arrived in the U.S. from Switzerland, he realized that a person could get killed defending a land grant against an American mob that was suitably enraged by gold fever. However, he observed that the Sutter property was on the American River, which joins the Sacramento River and eventually flows into the San Francisco Bay. He realized that the many settlers overrunning the city of San Francisco would need another place to live. He thought that the confluence of the Sacramento River and the American River would be a good place for another real estate development, and thus was founded the city of Sacramento.

A certain mythology surrounds Levi Strauss, since many believe that he made a lot of money in the California Gold Rush by selling picks and shovels to miners. It turns out to be completely false. Levi Strauss did not arrive in San Francisco until March 1853. By that time, the gold fever was somewhat exhausted. He did, however, operate a successful dry goods store. His big success came in 1873 when he met a tailor by the name of Jacob Davis who had developed the idea of reinforcing the textile strength of denim work pants by using copper rivets. Davis had patented that process and received patent number 139121 but, being a poor tailor, he was afraid that he would be unable to afford the legal fees for defending his patent against the inevitable challenges. He and Levi Strauss became partners, and Strauss’s wealth was created in the blue jeans market. It was really an accident.

Returning to the consequences of the Gold Rush, in 1854, the capital of the California territory was moved from San Jose to Sacramento. San Jose had been the capital of California under Mexican rule and during the first years of U.S. rule. It was the capital because it had been the site of the largest mining complex in the State of California. That complex was called the New Almaden Mine. It mined quicksilver, otherwise known as mercury, which was used in the then-current technology used to separate pure gold from gold ore. The New Almaden Mine was the largest mercury mine in North America.

However, the California Territory Legislature, in its search for revenue—and here we see that the California revenue crisis is nothing new—saw the vast influx of immigrants as an opportunity. It passed a law in 1854 that imposed a tax of $20 per month on any foreign miner, of which there were many. In 1854, $20 was a great deal of money, and the miners, of course, did not want to pay it. To facilitate collection of the gold tax, the state capital was moved from San Jose to Sacramento. As an aside, the local newspaper of San Jose is still called the San Jose Mercury News. The reason for that publication’s name was that the city was home to the largest mercury mine.

The anti-foreigner tax ultimately drove many of the foreign miners from the mining properties, but there were many Americans as well who, in the inevitable scramble for resources, found themselves unable to stake a claim or, if they did stake

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