November 7, 2004
Gold in them there streetsPosted in · 9 comments ·
The demise of Bewley’s illustrates the influence that land is having on business culture in Ireland.
You may have read elsewhere that the first gold was discovered in California in 1848, but the big gold rush didn’t happen until 1849.
The rush was triggered by President James Polk mentioning the discovery in an off hand way during his State of the Union address.
The prospectors (and, years later, San Francisco’s NFL team) came to be known as the 49ers rather than the 48ers,whichwould have been technically more correct.
The long delay between the first discovery at Sutter’s farm in January 1848 and the State of the Union address in 1849 was the main impetus behind the world’s first telecommunications revolution. In 1849, the Western Union Company was founded and, within a decade, most of the US was wired for telegraphy, driven by greed for immediate news of the next big gold discovery.
It is estimated that 15,000 Irishmen who arrived by famine ship made their way across the US in the winter of 18481849 to prospect for gold. By 1853, the Irish had been joined by over 100,000 others, including 25,000 French and 10,000 Chinese.
The entire structure of San Francisco changed dramatically, and so was born theAmerican Dream,where anyone can strike gold. (A modern version of the same dream was repackaged and successfully sold to the American electorate by George W Bush last week.) However, the story of the original Mr Sutter, whose discovery of gold in the Klondike River sparked off the whole gold rush, is an interesting and cautionary one.
Johann Sutter was born in Switzerland in 1803. He was a decent enough fellow, but with a weakness for bad debts. Hounded by creditors he headed off to the US in 1834. After moving from place to place, he finally bought land in the SacramentoValley in 1838. He named his domain New Helvetia, and formalised his plot by becoming a Mexican citizen.
He managed New Helvetia as a small empire with impeccably dressed servants. By 1846, there were 60 buildings inNewHelvetia, including a bakery, barracks, tanning factory, 10,000 sheep and land producing 40, 000 bushels of wheat. In his memoirs, Sutter laments that “my best days were before the gold”. In 1847, Sutter decided to build a sawmill so that he could log the surrounding wooded valleys and sell on the timber to Yerba Buena, as San Francisco was still known at the time.
On January 24, 1848, his mechanic on the sawmill project – aman namedMarshall – came to his office and told himto close the door. Marshall emptied two ounces of gold from his pockets. Sutter, realising what would happen, told his workmen tokeep it a secret until the sawmill and another flourmill he was building were finished. They managed to keep the lid on things for a few months but then, on May 4, the secret was out in San Francisco.Within weeks, the surrounding area went bonkers. The recently-opened school in San Francisco had to shut because its teachers and pupils alike headed straight for the mines. Here iswhat Sutter himself had to say: “All my plans came to naught.One after another, all my people left for the gold mines. Only the sick and crippled were left.”
The mill was never finished as all other productive business got trampled in the face of the gold rush.
Fast-forward to Ireland in 2004, and it is clear that we are in the grip of a frenzy much like a gold rush.Land has replaced gold, but as Led Zeppelin would put it, the song remains the same. Quite apart from the social dislocation arising from astronomical land prices, a real problem for our society is that somuch ofour cash and debts are being funnelled into this most unproductive and speculationprone of assets. The dilemma for a society that allows itself to be swept up in speculation fever is the pernicious impact that “frenzy greed” has on all other business. Instead of building a long-term business with customers, branding, employees and cashflow, the lure of the easy money in land or gold speculation is far too attractive. In Ireland,we are experiencing the dilemma faced by Sutter in California. In 1849, all the best brains, brawn and capital got sucked into prospecting as thousands chased the jackpot dream, while real enterprises such as New Helvetia – with bakeries, tanneries and mills – got elbowed out.
This is because those real businesses were judged, not against benchmarks such as profitability, robustness and market share, but rather against the absurd capital gain promised in gold.The subtext really was that if you weren’t into gold in some way,you were a bit of an eejit. Similarly, in modern Ireland the same type of mentality applies: if you are in businesses other than land, many regard you as a bit of a simpleton. Land is, after all, where the action is. Take Bewley’s last week. Bewley’s is a premier brand. It is a name that immediately says something to all of us, yet it is now no more.Why? The experts tell me that there are a number of trends it was slow to pick up, such as coffee-to-go. Moreover, the cafe market is one of the most competitive areas around.
But it was land that really killed Bewley’s.The crucial transaction that sank Bewley’s had nothing to do with coffee, tea, sticky buns or lunches served.The core of the Bewley’s problem was a sale and leaseback agreement reached between the owners and a land developer. The developer bought the freehold Grafton Street building from the owner for a huge sum, and the owner, in return, entered into a leaseback arrangement with the developer at an astronomical rent.
It was rent, not bad coffee, that torpedoed Bewley’s.
So what is going on here? The owners of Bewley’s got caught up in land fever. They knew they were sitting on a goldmine, and the sale and leaseback arrangement seemed to be a way of cashing in on this goldmine,while at the same time retaining their business. In this deal, the dominant influences were land, the re-rating of the land, and the urge to cash in. It had nothing to do with running the business of selling coffee. In the process, the owner of Bewley’s changed frombeing a caterer intobeing a land prospector. Commonplace speculative land windfalls are dominating business thinking, to the detriment of real, lasting business. Last year, the Killiney Court Hotel was demolished for apartments, not because it couldn’t hack it as a hotel, but because itmademore financial sense for the owners to sell the land to a developer. Like Bewley’s, another Dublin landmark has gone.
Obviously, in both cases, no one can blame the owners for doing what they did, in the same way as no one could blame the 49er teachers in San Francisco’s schools for swapping basic maths for basic mining.However, the collective consequences of these individual actions are disturbing. In societal terms, what does this lead to? First, aweird balance of wealth in society where there has been a massive transfer of wealth fromworkers, employees and entrepreneurs to landlords. Secondly, we will have a banking system totally overexposed to one asset: land. Thirdly,only projects backed by land will get financed. So entrepreneurial ideas that have nothing to do with this new gold will be starved of seed capital. Also, like the oil lobby inTexas or the gold lobby in South Africa, the landlord lobby will become even more influential in politics. After the gold rush of 1849, at least the States was left with an impressive telegraph system, the name of a gridiron team and the enduring myth of the American dream.
After the Irish land rush,what will we be left with?