To Make Money Selling Shovels: First, Buy All The Shovels Then Create The Demand

The adage "The people who make the money in a gold-rush are those who sell the shovels" cropped up again as I was perusing the blogo's fear. It is an analogy I have used myself but I have no idea if there is any truth to it, or like many urban-truths it is merely short-hand for a presumed truth? Or, if there is truth to it, what more might we learn from the fuller, less sound-bitten story?

Thankfully, there is truth to the statement and I have not been guilty of repeating an urban-truth. Reading historical research of census data (like this difficult to read paper) there is statistically significant differences in the relative benefits to merchants (including shovel sellers), hotel proprietors, doctors, etc. (i.e. service providers) relative to the miners themselves. In fact, although the miners were better off in absolute terms (earning on average 3-4x what they would have elsewhere) they were worst off in relative terms because the merchants and other service providers were charging them at extortionate rates.

What is not clear from the analogy, but is from the census data, is that on the whole it was the service providers who were already there and held the distribution points and land that made the money. Many who came along later suffered a similar economic fate to the miners themselves, although they were still more assured of moderate, relative wealth than the miners. I could find no examples of anyone who had come along later with "a better shovel" who became extremely wealthy as a result. Being there first seems to be key.

The man who became the richest guy in California at the time was Samuel Brannan , who is the focus of the adage about shovels. In 1848, Brannan found out about the gold discovered at Sutter's Mill through people buying goods from his store using the gold they'd panned during their spare time (he also collect Mormon tithes in gold). Brannan was no 'poor store keeper' - he had established a couple of newspapers and had the store in Sutter's Mill and was the Mission President of the Californian Mormon Mission. Using his capital, he bought up as much prospecting equipment (including shovels) as he could in San Francisco and then, brandishing a bottle full of gold dust, ran through the streets shouting, "Gold! Gold! From the American River!". He created such a sensation that one of his papers couldn't publish the news as all the staff had left to look for gold. Brannan used his income to buy and sell land during the ensuing Gold Rush.

So what can we learn from this story?

• Be observant and find something considered valuable being done by other people
• Monopolize required, necessary resources before you....
• Generate unreasonable demand through sensational promotion of the thing and then...
• Charge over-the-top margins whilst you...
• Re-invest the profits in further monopolisation

I feel so much better about this analogy, now.