No country in the history of the world has created so much wealth as has the United States. Nor has any country created so many fortunes of legendary size. The names are still household words: Vanderbilt, Astor, Carnegie, Rockefeller, Morgan, Gould, Mellon, Harriman, Frick, Huntington, Croker, Flagler, Duke, and Hearst. And yet none of those names are among the great American fortunes of today. Indeed, only three of those names—Rockefeller, Hearst, and Mellon—make the Forbes list of today’s 400 largest fortunes, and not one is near the top.
What happened to these vast fortunes? Why don’t American fortunes last as so many European fortunes have? The Howard family, dukes of Norfolk, for instance, has been among Britain’s richest families for more than 500 years. But while John D. Rockefeller Sr. was worth perhaps $2 billion in 1915 (a year when the federal government spent only $746 million), his grandson David Rockefeller stands at 147 on the Forbes list. By far the wealthiest living Rockefeller—largely on account of a long, successful career in finance—David in 2009 had a net worth of $2.2 billion, about what his grandfather was worth in nominal terms a century ago. Taking inflation into account, however, his fortune is only about 10 percent the size of his grandfather’s. Moreover, Senior’s great grandson, Sen. John D. (“Jay”) Rockefeller IV, has a reported net worth of just $83 million. To be sure, $83 million will keep the wolf very comfortably far away from the door. But it is only a small fraction of the fortune his namesake created.
One reason often given for the short life-span of great American fortunes is the estate tax. But the estate tax actually has very little to do with the transience of American wealth. Death duties, as the British straightforwardly call them, have long been much higher in the United Kingdom than in the United States, but great British fortunes persist for generations, thanks to good lawyering and estate planning.
Why then are the great American fortunes so seemingly ephemeral? The answer lies in three exceptional features of American life: our inheritance laws and traditions, our economic dynamism, and our vibrant tradition of philanthropy.
Primogeniture and Entail
In pre-industrial Europe, land was the basis of most of the great fortunes. Even the proceeds of fortunes made in some other way, such as trade or banking, were usually invested in land as the new wealth tried to enter the ranks of the aristocracy. In feudal times, land was granted by the king in return for military service. And it was important to keep large estates intact so that the lord could fulfill his obligation to provide knights and soldiers when the king called for them.
As feudalism had waned in Western Europe, military obligations were replaced with taxes. But the principal mechanisms for ensuring that landed estates stayed intact—primogeniture and entail—continued into the 20th century.
Primogeniture simply means the tradition that the eldest son inherits the estate intact, with younger sons and daughters getting little or nothing. Should there be no son, the land usually went to the nearest male heir. It was never a matter of law (at least in England), but it served the purposes of a well-established aristocracy that was the dominant force in British politics well into the 19th century.
Entail was a legal device to ensure that wastrel heirs did not destroy their inheritance or divide it. In effect, entail is a perpetual trust in which the heir has only a life tenancy in the property. So the property could not be divided or mortgaged, and the holder had no say as to whom the entail passed after his death. (In Jane Austen’s Pride and Prejudice, for instance, the fact that Mr. Bennet had five daughters but no son meant that the estate was entailed away to his cousin Mr. Collins—a very sore point with Mrs. Bennet.)
Neither entail nor primogeniture was ever widely adopted in the American colonies. The reason they were not is largely due to the fact that most immigrants to the American colonies in the early days of settlement were not aristocrats, and primogeniture and entail were mechanisms for maintaining an aristocracy. Further, while land in Europe was scarce and thus to be husbanded closely, the American colonies had land in limitless abundance, free for the taking (except, of course, for the labor of making it productive).
In England, the laws of intestacy followed the tradition of primogeniture. The law in the new American colonies largely did not. Rhode Island was an exception and early Massachusetts and Pennsylvania laws called for the eldest son to get a double portion of the estate. But by the middle of the 19th century, the American tradition had become to divide an estate more or less equally among all the heirs.
There are plenty of old money fortunes around. They just seem small compared with new money fortunes.
As always there were exceptions. John Jacob Astor, who died the richest American in 1848, left the great bulk of his fortune to his son William Backhouse Astor. (His only other surviving son was mentally ill, confined to a private sanitarium.) When “Commodore” Cornelius Vanderbilt, the wealthiest man in America, died in 1877, he left almost all of his $105 million fortune to his son William H. Vanderbilt.
The Commodore’s other children (he had eight daughters and another, profligate, son) sued to get a larger portion of the estate than their father had left them. The case was a sensation, covered in every newspaper in the country, and William Vanderbilt settled more money on his sisters and brother to end it. He went on to double his father’s fortune in the next eight years before his own death. But he did not follow his father’s precedent, instead leaving the money to be divided among his four sons while also providing generously for his daughters.
Today there are thousands of living Vanderbilt descendants, and the last one to be vastly rich thanks to the Commodore’s fortune was Harold S. Vanderbilt, a great-grandson of the Commodore who co-invented contract bridge and defended the America’s Cup. Childless, when he died in 1970 he left most of his estate to Vanderbilt University, which his great-grandfather had endowed a century earlier.
Entail did not exist in many of the American colonies, and many others abolished it at the time of the Revolution. Indeed, Thomas Jefferson regarded the abolition of entail when he was Governor of Virginia as one of his great accomplishments, along with writing the Declaration of Independence and founding the University of Virginia.
Because primogeniture and entail did not become part of American culture, fortunes have almost always been divided with each generation, so even the largest of them are soon spread through an ever larger pool of descendants.
The American Economic Juggernaut
By no means the least of the good luck the United States has enjoyed has been in timing. The republic came into existence just as the world economy was beginning its most profound transformation since the dawn of agriculture 10,000 years earlier. The new opportunities for wealth creation were nearly limitless, and the country’s ambitious, risk-taking population made the most of them.
First, by a happy coincidence, the country declared its independence in 1776, the very same year that Adam Smith’s The Wealth of Nations was published. Smith overturned the old economic theory called mercantilism, which greatly favored existing fortunes over those who strove to create new ones. Free markets and vigorous competition, Smith argued, led directly to more wealth creation than was possible in an economy that limited imports and favored monopolies.
And because the United States lacked an established aristocracy and, indeed, had been largely peopled by those of ambition who came to the New World in hopes of prospering economically, the new economics was welcomed here more quickly and more completely than in other countries. When, in 1824, the Supreme Court overturned a monopoly in steamboat navigation that New York state had awarded to Robert Fulton and his partner Robert Livingston, the people of New York and much of the rest of the country reacted with joy.
The first steamboat to enter New York waters after the decision did so “in triumph, with streamers flying and a large company of passengers exulting . . . against the New York monopoly,” wrote Charles Warren in 1926. “She fired a salute which was loudly returned by huzzas from the wharves.” The number of steamboats operating in New York waters grew from 6 to 43 in just two years, while fares fell by 40 percent. Among those who would make a great fortune in steamboats—before moving into railroads—was Cornelius Vanderbilt.
And in 1784, the year after Britain acknowledged the independence of the United States, James Watt patented his rotary steam engine. It was a profoundly important invention for it allowed work-doing energy in almost unlimited amounts to be utilized at a fraction of the previous cost. Before the steam engine, work-doing energy came only from wind and falling water, human and animal muscle.
The Industrial Revolution, already underway in the Midlands of England, powered by water wheels, was given a jump-start by Watt’s great invention. Industrialization brought down the price of goods, which stimulated demand. That allowed economies of scale to reduce prices still further, and a virtuous circle was created that both greatly improved the standard of living and created vast new fortunes. As early as 1827, the young Benjamin Disraeli coined the word “millionaire” in his novel Tancred to denote the holders of these new industrial fortunes that were beginning to rival those of the old landowning class.
The high-pressure steam engine, developed simultaneously by Richard Trevithick in Britain and Oliver Evans in the United States in the early 19th century, further jump-started the new economy. The high-pressure engine could power railroads, and for the first time in human history, the overland transportation of bulk goods became cheap. Again the price of industrial and agricultural goods fell further and demand rose. Such giant fortunes as those of E. H. Harriman, Jay Gould, and James J. Hill would surge forward on railroads.
But the new steam engine could also power many other devices, such as printing presses, greatly lowering the cost of newspapers, books, and magazines. Men such as James Gordon Bennett, who more or less invented modern journalism, would build fortunes on the new technology.
This unparalleled munificence inescapably affects the size of the fortunes that emanate from it.
These extraordinary new economic opportunities provided the means for entrepreneurs to create new fortunes that put the older ones in the shade. At the end of the 18th century, two of the richest men in the country were George Washington and Elias Derby. Washington, whose fortune was based on land, was worth an estimated $530,000 when he died in 1799. Derby, of Massachusetts, built his fortune on trade and was worth about $800,000 when he died the same year as Washington.
But when Stephen Girard of Philadelphia died in 1831, a generation later, his trade and banking fortune was worth $7.5 million. John Jacob Astor, a poor immigrant from Germany, began in the fur trade and quickly expanded into foreign trade, especially with China. He then invested his money in New York real estate as that city became the greatest boom town the world has ever known, thanks to the Erie Canal. When he died in 1848, he was by far the richest man in the country, worth at least $20 million. No wonder that when he was asked on his death bed if he had any regrets, he is supposed to have replied that the only one he had was not having bought all of Manhattan.
But Astor’s millions seemed modest when, another generation further on, A. T. Stewart built a $50 million dollar fortune on retail stores and the importation of luxury goods, and Commodore Vanderbilt left $105 million. In the next generation, Andrew Carnegie created a fortune in the brand new industry of steel that was worth $475 million at the turn of the 20th century. The new oil industry created still more vast fortunes, as did the automobile industry, fueled by the oil that the oil barons pumped out of the ground.
Old American fortunes do not disappear so much as they are eclipsed by newer ones as the economy expands and opens up new areas for entrepreneurial activity. There are plenty of old money fortunes still around. They just seem small compared with new money fortunes. The richest Americans have always been nouveau riche.
Mark Twain noticed this phenomenon as early as 1867 in his book The Gilded Age, when he wrote that New York’s old “Knickerbocker aristocracy,” which had headed New York society since colonial times, “find themselves supplanted by upstart princes of Shoddy, vulgar and with unknown grandfathers. Their incomes, which were something for the common herd to gape and gossip about once, are mere livelihoods now—would not pay Shoddy’s house rent.”
The Vibrancy of Philanthropy
There is relatively little tradition of private philanthropy in Europe. Sure, the Cavendish Laboratory at the University of Cambridge was founded in 1874 by William Cavendish, Seventh Duke of Devonshire, who held the honorary post of chancellor of the university. But Margaret Thatcher offered to leave her papers to her alma mater, the University of Oxford, provided the university raise the money to house them and make them available. Oxford declined, having little experience in fundraising. (Cambridge now has the papers, having been willing to solicit the necessary funds.)
By the time of the Industrial Revolution, however, Europe had many institutions of learning, museums (or, more often, private or royal collections open to the public), parks, and gardens. The new United States had few such amenities. But in the mid-19th century, two Americans of huge fortunes established a tradition that flourishes to this day: that those who flourish abundantly in the American economy can serve their country and communities further by giving substantial portions of their wealth to worthy causes. These men were George Peabody and Peter Cooper.
Peabody (1795–1869), born in what is now Peabody, Massachusetts, was among the first to become known as an international banker, a financier who served the rapidly globalizing economy of the 19th century. He lived the last 32 years of his life in London, then the center of the financial world. Peabody never married and he began to give away large portions of his fortune during his lifetime. He established the Peabody Institutes in both Peabody and Baltimore, where he had spent much of his early career. He also established the Peabody museums of natural history at Harvard and Yale, and the Peabody Essex Museum in Salem, Massachusetts. But his biggest projects were the Peabody Donation Fund in London to provide decent housing for working families, which he funded with $2 million, a huge sum for the day, and the Peabody Education Fund (also given $2 million) to provide education to children in the devastated post–Civil War South.
So great was Peabody’s generosity that Queen Victoria offered to make him a baronet (an offer he declined), and after his death he was temporarily buried with great ceremony in Westminster Abbey. His body was later returned to the United States aboard HMS Monarch, the Royal Navy’s largest warship, with French and American warships as escorts.
Peter Cooper (1791–1883) had little formal education as a child. But his remarkably inventive mind (he would build the first locomotive in America, invent packaged gelatin, and manufacture the first steel I-beams) and his first-class business instincts made him a very, very rich man by the time he was 60. Cooper once said that he spent the first third of his life getting started, the next third making a fortune, and the last third doing good with that fortune.
As a young man, Cooper had hired tutors to teach him in the evening what he had been unable to learn in school. He wanted to make such a thing—night school—available to others who needed to work during the day but wanted to learn, too. Night school was by no means the least of Cooper’s inventions. In the 1850s, he founded the Cooper Union in New York City, which, besides being a world-class engineering school, also offered night classes and lectures to the general public at no cost. Its reading room was also open to the public. The Cooper Union remains to this day one of the very few institutions of higher learning that does not charge tuition.
With the example of Peabody and Cooper, men of wealth began to give money in sometimes huge amounts to endow colleges, hospitals, parks, zoos, botanical gardens, and art museums. They gave this country a cultural and educational heritage that is unsurpassed in the world. Henry Clay Frick, a partner of Andrew Carnegie, gave his magnificent art collection to the city of New York, along with his house on Fifth Avenue to display it, and $15 million to care for it. His close friend Andrew Mellon (they had, coincidentally enough, each introduced the other to the woman they would marry) gave his art collection to the nation, building the National Gallery of Art in Washington to house it.
J. P. Morgan built a library on 36th Street in Manhattan to contain the greatest collection of rare books in the New World. Much of his enormous collection of old master paintings ended up at the Metropolitan Museum of Art and the Wadsworth Atheneum in Hartford, Connecticut, where he had been born. Andrew Carnegie said that “the man who dies rich dies disgraced,” and gave away almost his entire fortune to build thousands of local libraries and to fund such institutions as Carnegie Mellon University and the Carnegie Corporation. Carnegie Hall in New York is generally considered the finest concert hall in the country.
There are now more than 50,000 charitable foundations in the country, with more than 50 of them worth over a billion dollars. The largest by far—the Bill & Melinda Gates Foundation—is worth almost $30 billion.
This unparalleled munificence inescapably affects the size of the fortunes that fund it. The Ford family, while still very wealthy indeed, is nowhere near as rich as the Ford Foundation, whose assets surpass $10 billion. Today, Warren Buffett and Bill and Melinda Gates are leading an effort to emulate Andrew Carnegie and give most of their wealth to the charity. If they honor their pledges, the names of these billionaires are unlikely to appear on the Forbes list two generations hence. Instead, the list will be populated by people who made now unimaginably large fortunes in technologies we do not yet dream of.
For while presently in recession, the American economy remains the world’s most innovative and dynamic. That is not likely to change any time soon. Seven of the 10 largest fortunes in America, as measured by the Forbes 400 list, are based on technology that did not exist—and largely was not even dreamed of—40 years ago. And the amount of money required to make the list is more than 12 times as great as it when the list was first compiled in 1982.
In other words, the largest American fortunes of 1982 have already largely been supplanted by a whole new set of much larger fortunes.
Welcome to America.
John Steele Gordon is the author of six books, including An Empire of Wealth: The Epic History of American Economic Power and The Great Game: The Emergence of Wall Street as a World Power, 1653–2000.