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Entrepreneurial Capitalism and Innovation:
A History of Computer Communications 1968-1988
By James Pelkey

Entrepreneurial Capitalism & Innovation:
A
History of Computer Communications
1968 -1988
By James Pelkey

This history is organized by three co-evolving market sectors and also standards making.
An overview of the schema is presented in the Introduction.

DATA COMMUNICATON
Ch. 1: Emergence
Ch. 3: Competition
Ch. 5: Market Order
Ch. 11: Adaptation

NETWORKING
Ch. 2: Vision
Ch. 4: Arpanet
Ch. 6: Diffusion
Ch. 7: Emergence
Ch 8: Completion
Ch. 10: Market Order

STANDARDS
Ch. 9: Creation

INTERNETWORKING
Ch. 12: Emergence

 

 

Chapter 3
Data Communications: Market Competition 1969-1972
Modems and Multiplexers

3.2 The Economic Roller Coaster 1969-1975

On January 7th, 1969, the Federal Reserve Bank, fearing inflation, decided to slow the economy by raising interest rates: the prime interest rate would jump to a record 7%. Compounding the deadening effects of this dramatic rate hike, Congress in that same month increased the capital gains tax to 35% from 24% and repealed the Investment Tax Credit. [7]

By November 1969, these actions had their intended effect and economic activity peaked, ending a growth cycle dating back to February 1961. [8] A year later, November 1970, the economy bottomed and then grew for three years before peaking once more in November 1973. The next bottom was attained in March 1975. These quick successions of peaks and bottoms made for very different conditions than the ever-predictable growth of the 1960’s.

By mid-year 1969, investors could no longer ignore the fateful signs of a slowing economy and the stock markets turned bearish. For anyone who did not appreciate how over-priced technology stocks had become, they soon took notice as their luster proved more a reflection of investors' greed than companies' prospects. Indicative of how technology would be impacted, domestic shipments of computer hardware dropped from $5.5 billion in 1969 to between $4-4.5 billion in 1970. [9]

Venture capital also began drying up in 1969. In 1970 and 1971 about half the amount committed in 1969 was invested in venture capital funds. (See Exhibit 3.0 Net New Commitments to Venture Capital Firms 1969 to 1978.) And that was the good news, because in the following years venture capital all but dried up. The lack of both public and private capital caused management to scramble. Thousands of companies that once dreamed of going public quickly sought to merge or be acquired. The stock markets would rebound with double digital growth in 1971 and 1972 before dropping drastically in 1973 and 1974 (the S&P 500 Index dropped 14.7% in 1973 and 26.5% in 1974).

Exhibit 3.0
Net New Commitments to Venture Capital Firms1969 to 1978
[10]
(Millions)

1969
1969
1971
1972
1973
1974
1975
1976
1977
1978
505.7
271.8
251.8
156.9
133.2
124.2
19.8
93.3
68.2
978.1

 


[7]Business Week Jan 69 p. 38

[8] Kaufman, p.138

[9] TBD

[10] Source of data: Venture Economics, Venture Capital Yearbook 1988, p. 17 Entries are presented in 1987 dollars, deflated using the GNP deflator. From NBER Working Paper Series: Venture Capital and Capital Gains Taxation, James M. Poterba, Working Paper No. 2832