The Gamblers Who Invented Modern Encryption

The history of invention is not a story of orderly, incremental progress from Point A to Point B. All too often, the technologies we take for granted today came about in fits and starts, where great progress came after prolonged periods of relative stagnation. When progress came, it might arrive as part of a burst of activity, where inventors who had been working independently of one another competed against one another, sometimes knowingly and sometimes not, to be the first to patent the same invention.

And then at other times, we have those situations where after being invented, the invention itself would become lost, where it would have to be invented again at a later date before it finally took hold. Sometimes, that has happened more than once for the same invention.

That brings us to the story we're going to tell today, which involves the invention of asymmetric encryption - the technology we use today to secure electronic communications so that the messages we send will only be read by the intended recipient.

What Is Asymmetric Encryption?

Computerphile provides the following YouTube video description of public key cryptography.

The modern incarnation of asymmetric encryption was developed in 1976 by Whitfield Diffie and Martie Hellmann, which was later developed into a practical computer algorithm by Ron Rivest, Adi Shamir and Leonard Adleman at the Massachusetts Institute of Technology in April 1977. They were awarded U.S. Patent No. 4,405,829 on 20 September 1983.

As it happens, their work followed the independent conception of the method by James Ellis in 1970 and the subsequent development of the basic algorithmic method by Clifford Cocks and Malcolm Williamson in the United Kingdom, who defined the basic algorithm in 1973, but who didn't develop it further given the limitations of the computer technology at the time. Since Cocks and Williamson were working for a British intelligence agency, their work wasn't publicly acknowledged until 1997 when it was finally declassified.

Asymmetric encryption then is definitely an example of near-simultaneous independent invention, but it also proved to be the digital electronic computer equivalent of an earlier secret invention by Bell Labs' Walter Koenig for the U.S. National Defense Research Committee, which was conceived for the purpose of keeping long-range radiophone transmissions secure during World War 2, but which proved to not be feasible with the technology of the day, and thus, was lost until Ellis considered its potential nearly nearly three decades later.

Did Gamblers Get There Four Decades Sooner?

Here's where it gets interesting from our perspective. In doing other historical research, we came across a contemporary news story that described a new betting system, one devised by bookmakers and the owners of a race track led by Louis A. Cella just outside of the city of St. Louis to get around what was a new law aimed at ending organized gambling on horse racing in the state of Missouri, incorporated multiple elements of what we would recognize today as public key encryption to do the job.

The more remarkable aspect of the story is that they were doing it, by hand, in 1905. Here's an excerpt of how the betting system worked on its first day in operation at the Delmar Race Track in St. Louis County.

The six bookmakers sat on stools in front of the booths they formerly occupied. Beside each was a tired-looking man who held up in one hand a small slate, twice the size of a folded race program, on which were chalked figures showing teh odds offered on horses entered in the race. The man who took the bets had a leather satchel in front of him; at his elbow was a man who was humped over a sheet of paper tacked to a wide board.

As the bettor crushed his way forward to the man with the satchel, that individual took his money and called off to the man with the big sheet in front of him:

"Fifteen to five straight No. 3. Badge No. 1111."

The bettor's money dropped into the satchel, and the sheet writer scratched a lot of cipher letters in the columns under the figure "3". Sometimes he wrote with a stylograph which made no mark on the top sheet, but left its record through carbon paper on lower sheets. In this case, "No. 3" was Eclectic, winner of the third race. After the running of the race, the winning bettors lined up behind the old betting booth while a man checked off from the betting sheet the winning ticket numbers and amounts.

There were delays and hitches. Before any bet was paid there was a lot of figuring by the cashier, who was evidently trying to decipher the cabalistic markings into something that he could understand. When he had finished this and the bettor presented the badge whose number corresponded with the record, he was paid.

That piqued our curiosity so much that we were compelled to find out more about how this peculiar system for placing bets came about. Here is some of the back story from 1905 for why the race track owners and bookmakers would have a motive to invent their system:

Race-track gambling had become highly developed in Missouri in recent years under the operation of the so-called Breeders' Law, which, under the guise of encouraging the breeding of fine stock, legalized bookmaking on the races.

In St. Louis the gambling had become especially demoralizing, the betting agents even invading the stores and soliciting wagers from employees. Accordingly, at the recent session of the Legislature, which contained an unusually large number of men of high character, the Breeders' Law was repealed, and, in spite of the efforts of the race-track owners, a statue was enacted making it a felony to record bets on horse races.

When the new law became effective about the middle of June, the Delmar Jockey Club announced that it would continue its races indefinitely and that the bets would be recorded in cipher. The club's legal advisers held that convictions would be impossible with this device because there would be no plain record of bets, and the clerks could refuse to disclose the meaning of the cipher records on the plea of self-incrimination.

Their system wasn't invented in secret, as contemporary newspapers reported on how it would work months before they put it into action, including in the nation's capital.

At the monthly meeting to-day of the board of stewards of the Western Jockey Club permission was granted the Delmar Jockey Club to conduct a racing meeting, beginning on June 12. The officials of the Delmar track believe they have evolved a plan by which the anti-betting legislation, effective June 17, can be evaded and still allow patrons of the track to place wagers on the results of the races.

The law recently passed in Missouri against betting on horse races treats only of "registering" bets, and by the new method of betting to be adopted no book registration of any wager will be made. Instead, every attendant will buy a numbered badge for $1. On the back of the badge will be numbered leaves. When a bettor desires to wager, he will tear off a numbered leaf, write down the amount he wishes to risk, and hand the leaf to the bookmaker with his money. The ticket will be placed on a file, each horse having a bill file. After the race the bettor will get his money if he wins.

In this system, the numbered badges take the role of the public key. The bettors who purchased them from the race track for admittance would not need to know the encryption system that the bookmakers would use to secure the records of their transactions, within which the public key (badge number) was encrypted with along with the details of their wager. The bookmakers would then only send a message back to the bettor if the horse they bet upon won their race, where the "message" they had previously sent regarding their wager was de-encrypted by the bookmakers to calculate their winnings, and who would only present them to the individual who presented the recorded badge number, thus completing the secure "communication".

At $1 each in 1905, that was a hefty price to pay for the privilege of being allowed to wager on horse races for the promise of potentially winning a large pool. In terms of the inflation adjusted dollars of 11 decades later, that is consistent with a modern day price of $27.40. The high price of admission would contribute to a considerable decline in attendance at the Del Mar Race Track, where attendance had previously been free, where the race track owners collected a portion of the bookmakers' proceeds from bets placed by those in attendance. Under the new system, the race track owners would claim no share of revenue generated by the bookmakers.

Beating the Rap

It's important to note that Missouri's repeal of its Breeders' Law did not outlaw gambling between individuals in the state. Instead, it was aimed at ending organized bookmaking and poolselling, which is why lawmakers targeted the registering or recording of wagers under the new law, since such records would be necessary to conduct gambling on a large scale. For law enforcement officials to successfully curtail such organized gambling on horse racing, they would need to present evidence of these recorded bets in court, without which, the prosecution of gambling interests would fail.

The race track owners and bookmakers thought their system would be capable of withstanding prosecution, but weren't 100% confident that it would, so they were anxious to have their day in court to definitively find out, one way or another. So much so that they worked out a deal in advance with the St. Louis County prosecutor where if they were unsuccessful, the first bookmaker convicted under the new law would only be fined and not sent to prison, as their existing business would no longer considered to be sustainable under the law.

That was also a key part of getting the bookmakers who were putting their livelihoods on the line to go all in with the new betting system.

Most of the bookmakers have expressed themselves as unwilling to take a chance against the felony punishment, which is the penalty for making books after Friday, when the old breeders' law goes out of action. There will be enough left, however, to make a thorough test of the law. It is understood the management of the course has agreed with the prosecution that in the event of a conviction the punishment will be a fine instead of a felony sentence.

Would the encryption of the bookmakers' records successfully keep them from being convicted under Missouri's new anti-poolselling law? Per the agreement made in advance between the race track owners, bookmakers and County Attorney, the St. Louis County Sheriff arrested a bookmaker named George Ehrlich after the last race of the first day that the new law was in effect, who was subsequently released on bond. However, there were problems with collecting evidence to try Ehrlich, which led to delays in the trial for the legal test of the law.

On 23 June 1905, a second bookmaker, Mark Gumperts, was arrested at the Delmar Race Track with several of his clerks, whose case would provide the legal test of whether the use of encryption could keep an individual engaged in poolselling from being convicted of that crime by a jury. The case started on 24 July 1905 and a verdict was rendered at 11:00 PM. Here is the result as reported in the day's media (which didn't place a high priority on spelling names correctly):

After deliberating for two hours a jury in the St. Louis county circuit court acquitted Max Gumperts on a charge of violating the anti-betting law passed at the last session of the legislature to prevent betting on horse races. It was in the nature of a test case, but the effect of the acquittal is problematic, as the state may endeavor to secure convicions in other cases which are now pending before the circuit court.

The encrypted records of the bookmakers proved successful in helping Gumperts and his clerks to evade conviction under Missouri's anti-poolselling law, as the prosecution was unable to prove its case. The following description of the evidence the prosecution presented appeared in a newspaper article summarizing the case, where the encrypted materials proved to be of no value to the prosecution.

The Prosecuting Attorney then exhibited the hand blackboard, the code sheet, on which mysterious hyeroglyphics were inscribed, and the satchel containing the money, all of which were taken from the defendants at the time of the arrest.

The legal case against the other bookmaker charged with violating Missouri's anti-poolselling law, George Ehrlich, would ultimately be dismissed without any trial.

The Aftermath

The success of the bookmakers and track owners in beating the state felony charges against them would ultimately prove pyrrhic as it would be completely overshadowed by other events.

While the court cases against the bookmakers were pending, the Delmar Race Track remained in operation and continued to allow gambling, which grated on Missouri's governor, Joseph "Holy Joe" Folk. Growing impatient at the defiance of the anti-poolselling law that he had championed as part of what he called the "Missouri Idea", he took a hard turn toward tyranny and ordered the St. Louis City Police Department to cross out of their jurisdiction into the wholly separate jurisdiction of St. Louis County and conduct a raid on the track using force to stop all its operations and make arrests on the afternoon of 24 July 1905. The St. Louis City police raids then continued for several more days until the track owners capitulated and stopped their operations, which marked the end of both gambling on horse racing and horse racing itself in St. Louis after a continuous 138 year run.

Having no need to encrypt the records of wagers that could no longer be made, there was no need to continue the unique betting system the owners of the Delmar Race Track and the bookmakers had gambled on developing, so their invention of a primitive form of public key encryption was lost. It would take another seven decades and the development of modern computing technology along with sophisticated mathematical theory to revive what they had pioneered for the express purpose of evading criminal conviction. The inventors who came later had no idea of what had transpired before.

The story of the Delmar Race Track's demise is fascinating on many levels, where many of the legal issues associated with encryption by the public to secure their personal information, communications and financial transactions are just as much relevant for ordinary Americans today as they were for the handful of race track owners and bookmakers 11 decades ago. That's why telling that story of the time when gamblers invented modern encryption, anywhere from 40 to 70 years earlier than anybody knew, is the focus of our 12th anniversary post today.

Celebrating Political Calculations' Anniversary

Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:

• A Year's Worth of Tools (2005) - we celebrated our first anniversary by listing all the tools we created in our first year. There were just 48 back then. Today, there are nearly 300....
• The S&P 500 At Your Fingertips (2006) - the most popular tool we've ever created, allowing users to calculate the rate of return for investments in the S&P 500, both with and without the effects of inflation, and with and without the reinvestment of dividends, between any two months since January 1871.
• The Sun, In the Center (2007) - we identify the primary driver of stock prices and describe a whole new way to visualize where they're going (especially in periods of order!)
• Acceleration, Amplification and Shifting Time (2008) - we apply elements of chaos theory to describe and predict how stock prices will change, even in periods of disorder.
• The Trigger Point for Taxes (2009) - we work out both when, and by how much, U.S. politicians are likely to change the top U.S. income tax rate. Sadly, events in recent years have proven us right.
• The Zero Deficit Line (2010) - a whole new way to find out how much federal government spending Americans can really afford and how much Americans cannot really afford!
• Can Increasing the Minimum Wage Boost GDP? (2011) - using data for teens and young adults spanning 1994 and 2010, not only do we demonstrate that increasing the minimum wage fails to increase GDP, we demonstrate that it reduces employment and increases income inequality as well!
• The Discovery of the Unseen (2012) - we go where so-called experts on income inequality fear to tread and reveal that U.S. household income inequality has increased over time mostly because more Americans live alone!

We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:

• The Major Trends in U.S. Income Inequality Since 1947 (2013, Part 1) - we revisit the U.S. Census Bureau's income inequality data for American individuals, families and households to see what it really tells us.
• The Widows Peak (2013, Part 2) - we identify when the dramatic increase in the number of Americans living alone really occurred and identify which Americans found themselves in that situation.
• The Men Who Weren't There (2013, Part 3) - our final anniversary post installment explores the lasting impact of the men who died in the service of their country in World War 2 and the hole in society that they left behind, which was felt decades later as the dramatic increase in income inequality for U.S. families and households.

Resuming our list of anniversary posts....

• The Toolmaker's Tool (2014) - we make the code we use for creating online tools available to all!
• Replacing GDP with the National Dividend (2015) - we explore our development of an alternative measure of economic welfare that can replace GDP.
• The Gamblers Who Invented Modern Encryption (2016) - we discover that a group of gamblers seeking to break the law in Missouri back in 1905 put together many of the elements that underlie secure electronic communications and financial transactions in 2016!