Not long after telegraph and telephone lines were strung across the U.S, the wireless telegraph was invented by Guglielmo Marconi. His two-way radio broadcast transmitted telegraph signals long distances without any wires.
Marconi recognized the disruptive potential of his new invention and sought out investors in England to fund his new venture. The Marconi Wireless Telegraph Company was formed in 1897.
A similar story played out across the pond in Chicago. Lee De Forest, fresh out of Yale, took a job as a laboratory assistant. De Forest joined Edwin Smythe and Clarence Freeman to help build their own wireless apparatus. In 1901, they successfully sent a communication to a yacht five miles off the coast of Lake Michigan.
The three quickly realized the business potential. All they needed was capital. So De Forest traveled to New York to find investors and form a company. He found Henry Snyder, a promoter, who scrounged up $3,000 from five investors and incorporated the Wireless Telegraph Company of America in New Jersey.
But it was Abraham White who changed the fate of their company forever. White was a self-made speculator who once made $100,000 on a 44-cent gamble. White immediately saw the potential of wireless technology to enrich himself and cooked up a scheme to make it possible:
No sooner had White been told the story of the Chicago experiments, and the success that De Forest and his fellow inventors had had in sending messages without wires than he began to build air castles for young De Forest. They would make fortunes out of wireless telegraphy, and the name of De Forest would go down in history among the great names of science.
They — White and De Forest — would form companies all over the world, and issue millions of dollars of stock to sell to investors, and they, the promoters, with a big slice of these millions as their share in the venture, would exchange their paper stock certificates for the green and white paper bearing the Government’s stamp. Their companies would erect wireless stations along the whole American seaboard, and every ship on the seas would pay them tribute. They would erect a string of land stations from coast to coast, and from the Isthmus of Panama to the snow-capped mountains of Alaska, and thy would compete with the telegraph and telephone companies. They would form a parent American company, that would be a nucleus for a string of wireless companies around the world. Companies would be formed in Canada and England, on the Continent, in Africa, the Orient — in every corner of the earth, and all these subsidiary companies would pay tribute to the parent company. Investors would tumble over each other in their haste to put their funds into the venture.
White first created the De Forest Wireless Company of New Jersey in 1901. Its stock was split between White, De Forest, Snyder, and the original five investors in the Wireless Telegraphy Company.
White then set his sights on the next company. De Forest Wireless of Maine was formed in 1902, capitalized at $3 million, with funds raised through the sale of its promoted stock. White used De Forest Wireless of Maine to take over De Forest Wireless of New Jersey and seized control of the company, forcing De Forest, Snyder, and the five original investors out.
With the company under White’s control, his scheme was put into action. De Forest Wireless would be the parent company and own stock in any new companies he created. Yet, he had no intention of building an actual wireless company. White’s idea was to form new wireless companies across the U.S. and abroad with the sole purpose of printing stock to sell to the unsuspecting public. His agents did the selling. He, of course, got a cut of every stock sale to cover his promotion fees.
The 1901 stock promotion boom played right into White’s hands. He used a familiar tactic of the time to sell the wireless story as the greatest investment of the age:
No stocks will advance like the stock of the De Forest Wireless. It is as certain as arithmetic that great fortunes will be made out of this stock. It should now be purchased in just as large blocks as can possibly be handled, as there is no question whatever but that this stock, purchased at the present price, and held for a reasonable time, will make advances out of all proportion to its present selling price… When it is remembered that the stock of the Bell Telephone originally sold for a dollar a share, and advanced to five thousand dollars a share, it is well to consider the facts as here related.
Early on, White sold preferred stock at $10 per share which came with a bonus of common stock. To entice the public further, he offered an installment plan of $2 down and $2 per month.
To keep the funds flowing, White created spectacles to further promote the companies. He fabricated a story of merging with the Marconi Wireless Telegraph Company. Marconi vehemently denied it. But White pushed anyways. He offered Marconi shareholders a deal to exchange their stock, plus $35, for 20 shares of a company he created called United Wireless.
He gained more publicity by building useless wireless towers at fairs and expositions to sell more stock. A $3,000 tower built in Atlanta, Georgia connected to nowhere but sold $50,000 worth of shares. With the stock sold, the builders later dismantled the tower to recover White’s unpaid debt.
Of course, White seized on every opportunity to exaggerate what his company would do next. In 1903, he promised the ability to send messages from Hawaii to Manila within 18 months. The next year he promised a line of towers stretching from New York to San Francisco would be up and running in eight months. He promised a connection from the west coast to China. And in 1906, newspaper ads promised transatlantic messages.
It was all a dream. The only messages ever sent were to a handful of ships moving up and down the east coast.
While White’s agents sold De Forest stock in cities throughout the country, its share price was tanking in New York. Shares sold for $6 to “suckers” in St. Louis were selling for as low as 35 cents in New York. It got to the point where White’s army of agents bought the De Forest stock in New York for pennies only to resell it in other parts of the country for $4 or more. New investors faced losses the instant they bought.
Eventually White wrapped up the De Forest companies under the United Wireless banner in 1906. It was done in an attempt to avoid growing lawsuits against De Forest Wireless.
De Forest shareholders were allowed to exchange their shares for United Wireless shares in a complex financial scheme that diluted their interest in the company. But they had to agree to not sell their United shares for two years. It was an attempt to keep United’s stock inflated so White could continue to print and sell worthless shares at higher prices.
But by 1910 the ride was over. Five of United’s management were charged and convicted with mail fraud for defrauding investors. White would be locked up as well. The company filed for bankruptcy the next year.
Marconi Wireless bought what remained of United Wireless’s assets in 1912. Marconi’s U.S. operations would be bought by G.E. at the onset of WWI, which later formed the backbone of Radio Corporation of America.
Technological innovations are often rife with financial grift because it has no history or track record. Nobody today would believe a new online retailer would be the next big thing because the amount of “eyeballs” on its site doubled in the last month.
It worked in 1999 because the internet was new and nobody was sure how to measure an online company’s success in those early days so “eyeballs” became a leading metric. Investors now know online success is no different than any other business. Quarter after quarter of cash flows and sales growth are what matter.
A lack of a track record allows people to fill in the blanks however they want. Optimistic stories go a long way in drawing interest early on. As stock prices rise, that optimism feeds on itself and draws more people in.
Never mind that a business might not be a success. Once the public gets a whiff of someone getting rich, more will try to follow. If it drags on long enough, it turns into a frenzy. The story behind the company becomes less important than the story about its stock price. If the price direction is up, any “business” will do.
It happened with the Wireless Telegraph Bubble, the 1920s Bubble in radios (and other things), the Dotcom Bubble, and more recently with SPACs, crypto, and NFTs.
When the public is frantically buying, financial grifters use the dream of fast wealth to enrich themselves by supplying worthless shares to buyers.
The Wireless Telegraph Bubble
- The Fundamental Problem for Every Investment Advisor – Klement on Investing
- Scapegoating the Fed Misses the Bigger Picture – J. Rekenthaler
- The Rise and Rise of the Scam Merchants – Evidence Investor
- The Amateur Investors Ruined by the Crypto Crash – Guardian
- Little Ways The World Works – M. Housel
- Good Losses, Bad Losses (pdf) – M. Mauboussin
- Why History Matters – Investor Amnesia
- How Do Books Become Valuable? – Book Riot
- How the Amusement Park Conquered America – CityLab