Money Tips from the California Gold Rush (Supply & Demand)

This week we are talking about the business lessons from the California Gold Rush!

VIDEO SUMMARY

This is a special video this week. We are going to be looking at an important moment in business history, and discuss some valuable lessons you can use in business today. So in this video, we are going to talk about the California Gold Rush.
The California Gold Rush was an important moment in history. You may have heard the term “the 49-ers” which comes from the huge amount of people who moved to California in 1849. The population of San Francisco grew from 1,000 people to 25,000 people by 1850. People moved to California from all over the world because people were finding large amounts of gold.
Some people became very rich by finding gold deposits, but what a lot of people do not realize about the gold rush is that the most successful people were the business owners providing supplies and services to the miners. The reason for this is that prices during this period skyrocketed. Let me show you some of the prices during the gold rush. These values were published in a recent article by the San Francisco Chronicle here.

There are three main reasons why prices were so high.

1. Barriers to entry from geography
2. A valuable commodity (Gold)
3. Increased demand from population growth

Let us break each one of these down. First, there are barriers to entry from geography. It was very difficult to get to California. Gold was actually discovered in 1848. The reason the miners were called 49-ers was that no one showed up until a year later because it was so difficult to get there. There were only three ways to get to California.

• You could walk across the continent.
• You could sail to Panama, walk through the jungle, and board another boat on the other side.
• You could sail around South America.

All of these methods were dangerous and took a very long time. Once all these people arrived in California, it also took a long time for any new goods to arrive. The remote geography of California creates a barrier to entry into the market.

Second, was the presence of a valuable commodity. People were finding gold. There was this new source of value entering the economy, so people were able to pay the high prices.

Finally, the increased population growth drove demand. It is easy to imagine all the problems created by extreme growth from 1,000 people to 25,000 in a short amount of time. You create shortages in housing and food. There is only so much housing available, which is why you see people paying the equivalent of $1M for a tent.

The reason I like to talk about this moment in history, is because it is a good example of supply and demand at work. Economics teaches us that prices are driven by supply and demand. You can see this on a chart with axis for price and quantity. Two intersecting lines represent supply and demand. If the quantity of demand increases, prices increase. If the amount of supply increases, prices decrease.

We can use this graph to understand why prices during the gold rush are so high. The barriers to entry from geography means that the amount of supply is set. You cannot bring more goods into the market, because it takes a year to get there. But since the population sky-rocketed, demand increased, and prices also increased. This environment was very good for the business owners who became very successful. I am not saying that the business owners exploited people. Increased prices are a sign of value, and you want entrepreneurs to see high prices and enter the market to fill that need. You better believe those business owners ordered more supplies. When the supplies eventually arrived, the prices dropped back down, and everyone is better off.

The reason you look at history is to better understand the world today. If you are a business leader, and you understand supply and demand, you can better position your business to take advantage of opportunities in the market.

Let us look at an example in the business world today and see if we can draw any similarities. The example I am going to use is the Commercial Space Industry. When we talk about space travel, what is the valuable commodity that exists today? That commodity is “weightlessness.” Weightlessness does not exist on the service of the earth because of gravity, but once you enter a micro-gravity environment you can do a lot of amazing things. There are technological advances in chemistry, biology, manufacturing, and medicine that you cannot do on earth, but you can in space because of weightlessness. Let us just look at chemistry as an example. If you were to create a chemical solution by suspending particles in a liquid, gravity would eventually pull those particles to the bottom of your liquid. If you take gravity out of the equation, you can perfectly suspend those particles throughout your mixture and a whole new type of chemistry becomes possible. This is so valuable that the biggest Fortune 500 companies right now are paying enormous amounts of money to perform science experiments on the International Space Station.

The reason prices to perform experiments in space are so high, are the same three reasons we saw when we looked at the California Gold Rush.

• Barriers to entry from space
• A valuable commodity (Weightlessness)
• Increased demand from companies

Now I am not saying we are in a new gold rush. What I am saying is when you understand business history you will see these ebbs and flows of supply and demand. These patterns in business show up again and again. It is the business person’s job to understand these fluctuations in supply and demand, and use them to provide value to society. I wanted to have this discussion to show you how useful it can be to learn about business history. History provides you context to understand the business environment today. That helps you make better business decisions.

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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.