Hot Property: The Stealing of Ideas in an Age of Globalization Hardcover - 2005

Excerpt

Chapter 1
The Golden Covenant

Manhattan’s 30,000 citizens were awakened on the morning of April 30, 1789, by the roar of cannons. But this day the gunfire was not for war, but to celebrate George Washington’s inauguration as the first president of the United States.

Soon after 10:30 a.m., the president-elect, led by a joint congressional committee, appeared in Lower Manhattan at Federal Hall (formerly City Hall), which was serving as the new nation’s temporary capitol. Washington was dressed in a brown suit of homespun broadcloth—a gift from the Hartford Woolen Manufactory, a small mill in Connecticut. Before the Revolutionary War, this wealthy Virginia planter had had his suits made of silk and velvet by London’s finest tailors. But now he wore a simple American-made suit—his personal gesture of support for domestic manufacturing. Yet the new president’s appearance was far from drab. His suit was adorned with brass buttons embossed with the new national symbol, the bald eagle, and his cuffs had a row of studs, each marked with thirteen stars, symbolizing the founding states. Washington’s overture was widely noted in the nation’s newspapers, which reported that everything he wore that day had been made in the United States.

George Washington’s support of domestic manufacturing was not some passing political sop to a special interest group. Rather, his position had been forged by eight hard years of Revolutionary War experiences and huge debts to European suppliers and financiers.

Several times, Washington’s army almost lost the war because ammunition was in short supply. In the first year, soldiers often went into battle with no more than nine cartridges each. At the battle of Bunker Hill, the Americans quickly ran out of ammunition, finishing the fight by clubbing the English troops with the butt ends of their muskets. Thousands of Washington’s troops spent the winter of 1777–78 at Valley Forge, Pennsylvania, with no shoes for their feet, few clothes, and not enough blankets to keep out the cold. In a letter dated December 23, 1777, a desperate Washington wrote to the Continental Congress that he had “no less than two thousand eight hundred and ninety-nine men in camp unfit for duty, because they are barefoot and otherwise naked.”

From the beginning of the war, Washington’s army lacked guns, gun- powder, rope, sails, shoes, and clothes, among many other military necessities, largely because Great Britain had long prohibited most manufacturing in its American colonies. Instead, the mother country restricted colonial production to timber, furs, minerals, and agricultural goods. Thus, the U.S. economy was overwhelmingly agricultural when war came, with more than 94 percent of the population living on farms. After independence was declared, the new nation had to buy its war matériel from the Dutch, French, and other European suppliers, and do that largely on credit. Any nation that sold goods to the American colonials risked a conflict with Britain, then the world’s foremost military power. And when British leaders said they would hang any of the revolutionary leaders they captured, the threat was real, making government service a bit riskier than it is today.

In late 1776, a distressed Continental Congress sent Benjamin Franklin, the best-known American, to Paris to seek French support and goods. His list of purchases in 1777 illustrates just how little manufacturing capacity America had. He bought 80,000 shirts, 80,000 blankets, 100 tons of powder, 100 tons of saltpeter, 8 ships of the line, muskets, and 100 fieldpieces. Then Franklin arranged for smugglers to carry the goods across the Atlantic Ocean in a 4,000-mile, three-month journey to St. Eustatius, a Dutch island in the Caribbean, where smugglers received the supplies and slipped them through the British naval blockade and into the colonies, a 1,400-mile trip that consumed another five to six weeks.

For eight years, Washington and the Continental Congress struggled to obtain enough materials for their troops. By war’s end, the need for U.S. military and industrial self-sufficiency was seared into their consciousness. For Washington, wearing a plain brown suit of American-made broadcloth on Inauguration Day was a small sacrifice that sent a large message to his fellow citizens.

Before taking office, Washington informed Thomas Jefferson, the man who would soon be secretary of state, that the development of manufacturing and inland navigation would be his greatest concern as president. As the historian Doron S. Ben-Atar reveals in his 2004 book Trade Secrets, Washington was a strong proponent of importing European technicians, and in his first State of the Union message, he also encouraged the introduction of foreign technology. In his many speeches, Washington “voiced the widespread expectation that the federal government would devote its energies to industrial development.”

After assuming the presidency, Washington and the Congress moved quickly to reduce America’s dependence on other nations for its national security needs. Action was imperative, because as the Revolution’s leaders had seen, today’s allies often become tomorrow’s enemies. In that quest for self-sufficiency, Washington turned to Alexander Hamilton, a loyal, brave, and brilliant aide who had led a bayonet attack at Yorktown. Far more foresighted than most of his contemporaries, Hamilton envisioned an economic and political structure for a post-Revolution America. When Washington appointed him secretary of the Treasury, Hamilton was ready with recommendations. In January 1790, he presented Washington and Congress a white paper titled “Report on Public Credit,” which outlined the actions necessary to make the new nation appear creditworthy to foreign investors, including a controversial recommendation to pay off all the state debts incurred during the Revolution. At almost the same time as it received Hamilton’s credit report, Congress ordered him to prepare a report on manufactures that would “render the United States, independent on foreign nations, for military and other essential supplies.”

On December 5, 1791, Hamilton submitted to Congress his “Report on Manufactures,” which outlined why and how the United States could achieve economic equality with Europe and an industrial self-sufficiency. Building a strong U.S. industrial base, he wrote, “ ’tis the next great work to be accomplished.”

To become a true equal of Europe, Hamilton proposed that the United States follow Europe’s lead and erect a tariff wall behind which the American market could develop and American manufactures could prosper. This, he argued, was the only way to confront Europe’s manufacturing subsidies, its high tariffs on U.S. imports, and its repeated pattern of dumping goods at artificially low prices in the U.S. market to kill America’s infant industries. Without his proposed actions, American manufacturers could never compete fairly, either in Europe or in their own domestic market, Hamilton reasoned.

Behind this tariff wall, the government could provide the protections of a strong patent system, giving inventors and investors a government-guaranteed right to the exclusive use of their innovations for a fixed period. To accelerate national development, Hamilton also wanted to encourage the migration of skilled foreign workers to America. They would bring badly needed abilities and state-of-the-art technology to the new nation. In his report, Hamilton commented favorably on the actions of Samuel Slater, a twenty-one-year-old mechanic who in 1789 had slipped out of England with one of the British textile industry’s crown jewels: the secret of how to build and operate a machine that could spin cotton and wool into thread.

Hamilton’s message to potential immigrants was loud and clear: bring your nation’s industrial secrets to America, gain citizenship, get a patent, be honored, and become wealthy.

One irony of the American Revolution is that most of its leaders were Anglophiles. In the French and Indian Wars, Washington sought a regular commission in the British army but was rejected because of his colonial status. Franklin was the delight of London society until he defended the colonists’ rights. And in the years leading up to the Declaration of Independence, Jefferson, Madison, and Monroe, among other revolutionary leaders, thought of themselves as loyal British citizens and sought a course that would allow the colonies to remain a part of Britain.

Even after the Revolutionary War, with all the bitterness it generated, many English traditions and assumptions remained embedded in the hearts and minds of Americans. One of those fundamental notions was that patent and copyright protections encouraged innovation and national development. The appeal of those ideas is understandable, in part because they had an extended history. By the late 1700s, Britain had the longest continuous patent tradition in the world, one whose origins traced back to 1449, when Henry VI issued John of Utynam a letter patent (an open letter with the king’s seal) granting the Flemish glassmaker a twenty-year monopoly on the process that produced the windows at Eton College. In exchange, the foreign glassmaker was required to teach English artisans his process.

As former subjects of the English king, the newly minted Americans were familiar with the doctrine of the public interest, as incorporated into Britain’s Statute of Monopolies (1624). It gave a fourteen-year monopoly to “the true and first inventor” of new manufactures—a law in effect for more than 150 years before the American Revolution. Likewise, the colonists were familiar with Britain’s copyright law, the Statute of Anne, which was enacted in 1710. Under that act, the monopoly power of publishers was weakened and the rights of authors of new works were strengthened with copyright protection for fourteen years, with the possibility of a fourteen-year renewal. And while the Statute of Monopolies did not apply in the colonies, the various colonial governments enacted patent laws that imitated it. After independence and before the ratification of the U.S. Constitution, twelve of the thirteen colonies enacted copyright laws based on the Statute of Anne.

For the leaders of the new nation, the basic concept was simple: patents and copyrights encouraged inventors and authors to produce more new and useful creations. These innovations could help the U.S. progress. And as the details of these creations became public, the general knowledge of the nation would be expanded. The process as a whole could only make life better for most Americans and would help the new nation grow richer and stronger faster. The concept was so fundamental that the Founding Fathers integrated it into the Constitution, believing that the public good fully coincided with the claims of individual authors and inventors. When the “authors and inventors clause” (sometimes called the “progress clause”), drafted by James Madison and Charles Pinckney, was presented for consideration at the Constitutional Convention on September 5, 1787, there was no debate and not a single dissenting vote.


Creating a working system of patents and copyrights was a top priority for George Washington. In his first State of the Union message (January 8, 1790), he recommended that Congress enact legislation to encourage the introduction of new inventions from abroad and foster their creation domestically.

Congress acted quickly, and the president signed the first Patent Act into law on April 10, 1790, and the first Copyright Act less than two months later, on May 31, 1790.

The Patent Act made the issuance of a patent a matter of the highest importance—a function administered by the president and three senior cabinet officers. There was no patent office. Rather, a patent petition was submitted directly to Secretary of State Thomas Jefferson. Then Secretary of War Henry Knox and Attorney General Edmund Randolph reviewed it. These three constituted a patent board. They established strict rules for obtaining a patent, and on the last Saturday of every month, they met to review applications. If two of the three approved, a patent letter was prepared for the personal signature of President Washington, who then sent it back to Jefferson who, as secretary of state, also signed the letter and then had the Great Seal of the United States affixed. The patentee then had a fourteen-year period during which to exclude others from using the creation. The total cost was roughly $5, which went not to the Treasury but to the clerks who copied and processed the paperwork. Those early patent grants are greatly valued today for their historic signatures.

Jefferson was surprised by the number of innovations inspired by the prospect of a patent. Soon after passage of the 1790 act, more applications and models of inventions were appearing at his office than he and his two colleagues could handle.

As often happens with something new in government, the first patent act was a false start, and Jefferson knew it. He urged Congress to alter the “whole train of business and put it on a more easy footing.” To that end, he drafted legislation and sent it to his congressional allies in February 1791. Jefferson’s escape from the patent board, however, was delayed for more than a year as Congress repeatedly postponed any vote on his or any other patent reform proposal. Meanwhile, the board was obligated to carry out its duties.

In 1792 Jefferson wrote his old friend Congressman Hugh Williamson of North Carolina that of all the duties ever imposed on him, reviewing patent applications consumed his time the most and gave him the most “poignant mortification.”

By early 1793, only 57 patents had been issued and 114 applications were pending, while dozens of others had been denied. Inventors hated the system; it delayed consideration of their applications and imposed such scrutiny that for every one approved, another was denied. The board abhorred the process because it had neither the time nor the resources to meet its obligations.

Eventually, Congress enacted the Patent Act of 1793, without most of Jefferson’s recommendations. What emerged was legislation that sharply changed the patent system from one with strict rules to one with virtually no rules. Congress allowed inventors to register their inventions with the State Department without an examination. The courts were assigned the responsibility of sorting out which patents were legitimate and which were not.

Not surprisingly, with such lax rules the number of applications and issuances rose. Between 1793 and 1836, when the patent laws were next altered, more than 9,500 patents were issued. In such a lenient environment, piracy flourished.

Many applicants went to the State Department, where models of inventions were found, bought a copy of a patent, duplicated it, and then filed an application for the same invention. Often, the same idea was patented multiple times. The owners of the later grants would enter business, telling others they had the exclusive use of an innovation, or take the official documents to unsuspecting licensees and investors for money. In other situations, an inventor would create an innovation, unaware of the advances of others, secure a patent, and sincerely believe that the conception was his alone. The result was a patent holder’s nightmare and a lawyer’s dream. The courts were soon clogged with lawsuits.

In the end, the most important feature of the Patent Act of 1793 was what it did not provide: protections for foreign inventors. Only American citizens were eligible for a U.S. patent. Thus, any American could bring a foreign innovation to the United States and commercialize the idea, all with total legal immunity.

In 1800, the law was amended to allow foreigners who had resided in the United States for two years to obtain patents, subject to an oath that the ideas they were attempting to patent had not previously been known or used in the United States or abroad. The oath, of course, was meaningless. In 1832, the law was changed to permit the issuance of a patent to those resident aliens who gave an oath declaring their intention to become U.S. citizens. They also had to work the patent inside the United States within twelve months, or it would be voided.

Because of these discriminatory laws, between 1793 and 1836 the U.S. government issued patents only to foreign citizens who worked in America, had alien status, or swore an oath to take citizenship. In 1836, Congress finally gave foreigners the right to obtain a U.S. patent without such restrictions. But even then, the system remained discriminatory. By law, a U.S. citizen, or an alien declaring his or her intention to become a citizen, paid a patent application fee of $30. Citizens of all other nations, except those of the British Empire, were charged $300. Subjects of the king of Great Britain paid $500. Apparently, some old wounds had not yet healed.

Hamilton and Congress wanted to rapidly industrialize the United States and do so by whatever means necessary—a practice we now call “nation building.” America thus became, by national policy and legislative act, the world’s premier legal sanctuary for industrial pirates.

The benefits of sanctuary, moreover, were not limited to foreign tech- nicians and craftspeople willing to bring technology to America. It also worked well for those Americans bold and capable enough to steal foreign industrial secrets and bring them back to the United States. Among the foremost of these spies, and certainly one of the most influential in early American history, according to industrial espionage expert John Fialka, author of War by Other Means: Economic Espionage in America, was Francis Cabot Lowell, a cultured Boston entrepreneur.

In 1810, the thirty-five-year-old Lowell set out to steal one of the foremost industrial secrets of that age: the plans of the British textile industry’s Cartwright loom. In such locales as Edinburgh, Lancashire, and Derbyshire, textile makers were spinning cotton and wool into thread and then weaving the thread into cloth with water-powered, mechanical looms—an economic alchemy that transformed cotton and wool into gold for England. The secrets of this technology were so precious that British law forbade the export of the machinery, the making or selling of drawings of that equipment, and the emigration of the skilled workers.

Thanks to Samuel Slater, who brought the secret of England’s automated spinning machines across the ocean, America knew how to turn cotton fibers into thread mechanically. But the nation did not know how the power loom worked or how to machine-weave thread into cloth in the vast quantities that it made possible.

No Mission: Impossible adventure was better planned or executed than Lowell’s caper. First, he developed a cover story for his trip to England: his health was bad, and his doctor prescribed a foreign tour for relaxation and recuperation. While the idea of touring cold, dank nineteenth-century British mills where the air was filled with lint might seem an improbable cure for any affliction, Lowell was a major American merchant shipper, and his Boston pedigree was impeccable. To allay the suspicions of his intended victims, he took his wife and young children with him to England, stayed in the best hotels, and toured the countryside in an elegant rented carriage.

British textile producers welcomed the touring American importer, proudly showing him whatever he wanted to see in their factories— something they never did for their local competitors. The idea of a proper Bostonian, a Harvard graduate, a rich shipping merchant being an industrial spy out to steal their manufacturing processes was simply ridiculous.

What his British hosts did not realize was that Lowell possessed an almost photographic memory and that he shared their avaricious economic attitudes. Nor did they know that after each day’s tour, he would return to his room and carefully draw out what he had just been shown and record the details of his conversations. Eventually, Lowell accumulated from his British hosts all the technical information he needed to build a fully integrated textile mill—one that could take cotton bales in one end and ship finished cloth out the other. How he got the plans out of England remains unknown. His bags were searched twice, but nothing was ever found.

On returning to Boston, Lowell and his brother-in-law, Patrick Tracy Jackson, raised $100,000 in capital and created the Boston Manufacturing Company. They then bought an existing building just outside Boston near Waltham, a facility with a ten-foot waterfall, to power their first mill. Working with a hired mechanic, Lowell constructed a prototype mill and a power loom that were superior to the British versions he copied. His company was an immediate success. Lowell then built a group of mills at a village that eventually was named after him. Soon the Boston Manufacturing Company was weaving more than one-third of a mile of cloth per day, a feat that was as extraordinary then as going to Mars would be today.

By the time Lowell began to build his first factory, America was again at war with the British. Instantly, he became a hero for bringing America England’s most valuable industrial secret. After the war, the British moved to destroy their new U.S. competitors, using the old technique of selling their goods in the U.S. market for far less than Lowell’s production costs—a predatory practice called “dumping.” The British used cotton produced in India with cheap labor, brought it to England, mechanically spun it into thread and wove the thread into cloth, and then shipped it to America. The English product was not only less expensive; it was of better quality, reflecting greater experience.

Lowell and his U.S. colleagues responded as Hamilton had foreseen. In 1815, they enlisted the political help of Massachusetts Senator Daniel Webster, who was not a strong supporter of protective tariffs. But he did believe that the United States required self-sufficiency in manufactured goods if it was to prosper. That could not be if English and European producers were allowed to dump their goods on the U.S. market and kill America’s infant industries. In 1816, Webster, working with Senator John Calhoun of South Carolina, who represented a major cotton-producing state, pushed through Congress a protective tariff on cotton and woolen imports of 30 percent for two years, 25 percent for another two years, and 20 percent thereafter. This gave the infant U.S. textile industry a market all its own and the time to grow. American cotton producers were also given a market: American textile makers. And those who truly wanted foreign goods could continue buying them, but at a higher cost and with the import duties going to the U.S. Treasury. It was Webster and Calhoun’s legislation, but it was Hamilton’s plan in action.