It has been 25 years since the first online transaction, but we are still struggling with the balance between convenience and security.
By Louis Hyman and
Dr. Hyman is a professor of history and the director of the Institute for Workplace Studies at Cornell, where Ms. Thompson is a graduate student.
“Why would anyone want to buy anything online?”
This was the question that Guy Haskin Fernald, at the time an undergraduate student in computer science at Swarthmore, remembers hearing when he began work on one of the world’s first e-commerce websites, NetMarket, in 1994. It sounds ridiculous today, but at that time, only academics and geeks used the internet; the rest of us did not — and we shopped at the mall.
Mr. Fernald’s question was answered 25 years ago on Sunday, after he helped open NetMarket and what is widely considered the world’s first secure e-transaction took place.
Why that transaction happened at that moment — not before or after — is as much about technological progress as it is about politics and business in the early 1990s. If that first transaction portended a new world of commerce, it was also constrained by the blinders of 1994.
The mid-90s were a heady time. The internet, with all its promise, was just emerging, but it was coming on rapidly. The National Science Foundation had created NSFnet, the backbone for networks that make up the internet, in 1985. The number of hosts connected to the network exploded from 2,000 that year to two million less than a decade later.
Technological progress meshed with political revolution. The Cold War had ended just a few years earlier. The West had won because free markets and free societies seemed to reinforce one another. E-commerce expressed that newfound optimism about civil liberties and economic growth.
As the United States rebounded from the 1991 recession, the United States government, with a Democratic president and Democrats in control of Congress, sought to encourage growth while balancing the budget and embracing free trade across the globe. Policymakers rejected access fees, limited platform liability and, crucially, legalized public-key encryption. The Clinton administration, which was at first conflicted, eventually took very deliberate decisions to liberalize and defend the commercial internet.
For the rest of us to trust e-commerce sites took some time.
Early e-commerce advocates emphasized the free in free trade. The first building blocks of online commercial infrastructure were, in large part, free. Many key technologies had their roots in academia and cyber-counterculture: open-sourced operating systems like Unix, server software like Apache, security protocols like Secure Sockets Layer and programming languages like Java made many aspects of the online store possible. The basic foundation of the internet, the packet-switched network protocol called TCP/IP, had existed for two decades, but it took these new technologies, which were built on top of it, to create applications like browsers.
For e-commerce to succeed required overcoming a contradiction built into TCP/IP: If the packets of information moving around the internet were open, how could you safely transfer financial information? The answer was public-key encryption, which was, at that moment, moving from a tightly regulated Cold War weapon into the public sphere.
E-commerce helped keep us hidden from governments through encryption, but it also pushed us to be visible to businesses as we shopped. The web cookie, pioneered by Lou Montulli of Netscape, created a unique identifier every time a browser connected to a website. The cookie allowed us to have online shopping carts, but it also set the stage for us to be tracked across the internet. E-commerce legitimated encryption in a way that even governments could not resist, but also fostered consumer tracking in a way that we couldn’t either.
The business infrastructure of the early 1990s made e-commerce possible in ways beyond the encryption. The early 1990s also marked the moment when credit card securitization really took off. In 1990, 1 percent of American credit card debt was securitized. By 1997, 51 percent was. Electronic payments, made possible through credit cards, were easier than ever.
If credit cards enabled checkout, then supply chain management made delivery possible. During the 1970s, Walmart had achieved its market breakthrough by computerized inventory and logistical management, and then in the 1980s other corporations, trying to keep up, began to manage their supply chains. With e-commerce still in its earliest phases, business thinkers were already hard at work considering how to use data to optimize their now global supply chains.
The 1994 Marrakesh Agreement, which established the 123-nation World Trade Organization in 1995, made those flows smoother than ever before. This increased economic interconnectedness, lack of any major wars, and the relative political stability of the mid-90s, quite anomalous in human history, made up the right geopolitical mix to enable the technical innovations behind e-commerce to come together. E-commerce seemed to go hand in hand with the triumph of Western democracy and logistical capitalism.
Today, of course, we know that there is no such determinism to either the internet or e-commerce. There is, however, a similar underlying problem to the one faced in 1994: a lack of trust. Consumer privacy and transactional security remain challenges for e-commerce globally, and it is not clear that all of it will end well. Here in the United States, we continue to struggle with how to balance privacy and commerce to preserve both civil liberties and free trade. The old struggles of capitalism and society continue in a new guise.
If we are a bit less blinded to the shortcomings of e-commerce than we were in 1994, we also remain guardedly optimistic, at least if our rising online spending reflects our beliefs. If the early days of e-commerce depended on trust, then the future of e-commerce depends less on the next technology than on how we choose to design and deploy that technology in a trustworthy fashion, just as we did in 1994.
Louis Hyman is a professor of history and the director of the Institute for Workplace Studies at Cornell, where Kwelina Thompson is a graduate student. They are co-authors of “the History of E-commerce,” a research study by Cornell and PayPal, from which this essay is adapted.