A Brief History of the California Economy

LEADING THE WAY

A major transition occurred in the last quarter of the century.  After the end of the Cold War, defense spending in the state waned.  But, the electronics manufacturing spurred by World War II and the Cold War had sowed the seeds of the electronics and computer industries.  California would rise to dominate these high technology industries that would dramatically alter the economic landscape of the 1990s. 

Silicon Valley-based companies such as Hewlett-Packard and Intel drove the technology industry into the 21st century.  Hewlett-Packard was founded by two Stanford University graduates in 1938 and the company’s first major order was from Walt Disney.  Disney purchased oscillators used in the stereo sound system in the groundbreaking animated film Fantasia.  By 1962 Hewlett-Packard was listed in Fortune’s top 500 U.S. companies. 

  Most of the value in a personal computer resides in the silicon chips, each containing millions of semiconductors (transistors).  The most important chip is the central processor unit, or CPU.  The development of the personal computer industry can largely be traced by CPU development.  In 1971 the world’s leading microprocessor designer and manufacturer, Intel—founded by former Fairchild Semiconductor employees—produced its first microprocessor, the 4004, for use in a business calculator.  In 1974, it released the 8080, which was used in the first personal computer, the Altair.  By 1985, Intel was producing the 386 processor—which was more than 100 times faster than the original 4004—that gave personal computers multitasking capabilities.  In 1989, Intel introduced the 486 processor, which was powerful enough to fully support the graphic interface (point and click) pioneered by Apple.  In 1993 the even more powerful Pentium Processor was introduced which enabled computers to easily incorporate more complex data such as digital sound, photographs, and motion pictures.   

Another pioneering computer company—also born in California—added an essential component to personal computers.  Apple Computer was founded in 1976 and initially prospered from the Apple II computer.  Building on this success, it introduced the Macintosh computer in 1984, which included a graphical user interface (GUI) that greatly simplified its operation.  Before the GUI, computers were predominantly the domain of hobbyists, sophisticated users, and technicians. The GUI turned the personal computer into a mass marketable appliance with broad applications, which in turn created vast new economic opportunities. 
The development of the computer industry also fostered a boom in the software industry.  By the late 1990s, Microsoft’s Windows software was the dominant operating system used by over ninety percent of the world’s personal computers.  Software companies such as Electronic Arts began to develop entertainment software for this operating system.   The computer games industry exploded and soon the computer and entertainment industries were joining forces.  During the 1990s, computer-related services—programming, network and database development, component design, and a plethora of Internet services—eclipsed computer and electronic manufacturing as the leading high technology growth industry.   

The 1990s were a pivotal and paradoxical decade for California.  It began with a severe economic slump and ended with a record-breaking expansion.  The end of the Cold War led to significant reductions in federal defense spending—characterized by reduced procurement and base closures.  This led to a major downsizing of the state’s aerospace industry and reductions in Department of Defense payrolls.  To make matters worse, the state was plagued with a series of natural and manmade disasters that further tarnished the Golden State’s image.   These factors resulted in a much longer and far deeper recession than the rest of the nation.  

During the latter half of the decade however, the state’s economy consistently grew faster than the nation as a whole.  Computer industry developments, such as falling chip prices and the development of the Internet, sparked a boom in various high technology fields, including computer services such as software and programming.  Electronics manufacturing—computers and telecommunications—recovered from the recession, but, more dramatically, computer related services proliferated to support the propagation of personal computers, personal communications devices and Internet business activities.  All this combined to generate historically high levels of employment, income growth and wealth accumulation.  The Silicon Valley of the 1990s represented the 20th Century’s Gold Rush.  As mentioned in Chapter 3, California high technology companies received over $16 billion of venture capital investments in 1999 alone.  Thus, California ended the decade as the world leader of emerging industries that will be center stage in the economy of the future.

Return to Beginning The Gold Rush Plants the Seed 1848-1860  20th Century Industries    1900-1929 Adversity Beget Prosperity 1925-1945 A Modern Economy is Born    1946-1975       Leading the Way   1976-1999