John D. Rockefeller was the richest American to ever live, as well as being the founding member of the three-comma club as the worlds first billionaire. At the height of his fortune, a few years before his death, he was worth an estimated $1 billion, which may not sound like much compared to today’s tech-CEOs, but this was back in a time where the USA’s annual GDP was only $39.1 billion.
This meant that his fortune was 3% of America’s GDP. Adjusted for inflation to 2020 dollars, this would give Rockefeller a fortune of $450 billlion, or more than Elon, Bill, and Jeff combined.
But where is this fortune today? (It’s probably somewhere and no one knows about it)
Of course John himself died almost a century ago; but if there was any fortune that was going to indefinitely set up future generations surely it would be this one right?
The same goes for most of these historic magnates, the fortunes of everybody from Carnegie, to the Medici have more or less faded into total obscurity, outside of maybe a few names plastered on random buildings… (buildings that they don’t even own).
You might think you already know the answer, oh these fortunes get split up amongst children, and then children’s children, and then children’s children’s children, until it was spread so thin amongst latter generations that it became almost totally irrelevant.
But that’s not entirely true.
What’s more is that the real reason for the fall of these financial empires can tell us a lot about how money works, as it has been passed down through generations and history.
So to address the standard explanation for this phenomenon of missing fortunes we need to address that yes, wealthy couples that have more than one child will normally split that money up evenly between them all. Of course, exceptions exist, but this is the standard operating procedure.
John D. Rockefeller had 5 children, which meant even his astronomical fortune was split up relatively quickly – this was before considering the charitable contributions that were written into the business titans well.
That one fifth share still made these children unbelievably wealthy, but adjusted for inflation they wouldn’t even top the Forbes list. In fact, they would only barely make the top ten (the poor things).
This process only got worse as time went on, today there are over 70 direct Rockefeller heirs, and this isn’t even a particularly old dynasty. When we think of really old money like the Medici’s and the Rothschilds’ there are now thousands of direct heirs.
But should this actually matter?
Sure people make more people, but money makes money a lot faster. Lets take old man Rockefeller again. He was almost 100 when he died and passed this money down to children who were relatively elderly in their own right. In fact, tragically by the time of his death 2 of his children had already passed away which actually changes this math quite a bit.
As tragic as this was it actually makes for a good example because on average global billionaires today tend to have around 3 children. Now, when this fortune gets divided by 3 and handed down, it’s not done so in the form of cash; it is almost entirely in the form of family trusts that will hold onto a broad selection of assets. Go and read the post on what to do if you get a sudden windfall to understand how to set one of these structures up for yourself.
Now the thing with assets is that they tend to appreciate in value. Shares in the largest oil companies in the world and a broad portfolio of high profile real estate would have done very well in the years following John D’s death in 1937. Between that time and 1960 when john Rockefeller junior died 23 years later, the S&P 500 was up 1,000% even after inflation.
This would mean if John’s children were just broadly invested in American markets, which they were, and lived on less than the modern equivalent of a billion dollars a year, which they did, they would be many times wealthier when they died than when they received their inheritance.
Even the prolific “respawn” rate of the Rockefeller family couldn’t outpace pretty basic market returns, and this is ignoring the privileges these children would be given like access to highly lucrative directorships, political appointments and world class educations, that would enable them to bring in healthy incomes in their own right.
To keep things simple, if we took the Rockefeller fortune of around $1 billion in 1937 and just kept it broadly invested until today then we can follow market returns to show that this fortune would have ballooned to over $4.2 trillion. Which would mean evenly spread out amongst the 25 direct living beneficiaries today, they should each be the richest people in the world.
This is also ignoring that they were primarily invested into oil, which until recently has outperformed the general market as a whole. This should go doubly for older and (arguably) wealthier families like the Medicis and Rothschilds, who have had even more time for this wealth to compound on itself, but of course it hasn’t.
So what gives then, where did this money actually go?
Well 4 things:
- It got given away
- It got taken from them
- It got too hard to keep tabs on
- It didn’t grow like you would expect it to
Rockefeller senior gave a good chunk of his fortune away during his lifetime and an even larger chunk after his death. These donations went on to fund schools, museums, national parks, and an extensive list of other charitable ventures. This work was continued by his living children who each in turn gave away close to half of their fortunes. This meant that money was not being re-invested and was instead only really maintaining it’s principal.
Most of Rockefeller’s grandchildren were worth about $3 billion which is obviously still a large sum of money, but goes to show the families wealth was only ever managed to keep up with inflation with the rest going primarily to charitable and political projects. While it looks like each of these grandchildren have a fortune three times larger than their grandfather, you must remember $3 billion today buys a lot less than $1 billion a hundred years ago.
Then next issue is that it got taken from them. Everything from estate and capital gains taxes to divorce settlements have further cut down these funds.
Beyond that, it has been really hard to keep tabs on this wealth. For obvious reasons the family is not bragging about their fortunes to Forbes magazine like some other intergenerational tycoons.
Since this wealth is now so diversified and split up amongst multiple family offices managing thousands of trusts there really is no way to saying who owns what unless they tell you, which they won’t. Of course people like Bill Gates or Jeff Bezos don’t speak openly about the details of their fortune, but it’s pretty easy to work out since it is primarily tied up in a public company and a series of high profile business ventures and properties.
But for people like David Rockefeller, or David Rothschild there is no list of everything they own and owe, which is probably for the best.
I am sure YOU wouldn’t want those kinds of details to be accessible about your own finances, and the same expectation of privacy should extend to these guys as well even though they are obviously many times wealthier.
How many times?
Well they aren’t going to say. And finally we have the reason I wrote this post in the first place. Investing has never been as lucrative as it was in the past 150 years. The Medici’s rose to prominence in the 12th century; this was at the start of the Renaissance, which once again saw art and science flourish in Europe, but despite this the economy of this region didn’t really grow very much.
Even by the most generous estimates the wealth of Europe barely grew at all between the middle ages and the start of the industrial revolution; most people were content to live a life the same as their parents before them and their children after. The idea of technical innovation and capital investments wasn’t really a thing.
Because of this, the logic that we have used for money making more money by being invested into the market does not hold true past about the mid 1800’s. This mean that humans making more humans did spread the family fortune without the chance for money making money to catch up.
This may very well become the reality again; we have become very comfortable with the idea of constant compounding growth in an ultimately finite world, so there is the very real possibility that these past decades have been more of an anomaly rather than something we should take for granted.
Either way what if you were an aspiring financial monarch that wanted to establish a financial dynasty that lasted throughout the ages?
Well curiously enough there are actually institutions that specialise in exactly this.
For a pretty significant fee, wealth management companies will structure family fortunes in such a way that they should remain intact almost indefinitely. These companies will write wills and suggest investment strategies for long term sustained growth.
They will also take a very hands-on approach to educating younger generations to make sure they are ready to properly steward the fortune when the time comes. They will also normally suggest a structure where the majority of the wealth gets passed to a single child over it being split evenly and diluted. For good measure, why not make this your eldest son to really get a modern monarchy vibe going.
Now of course this kind of structure has been made possible in recent decades, (thanks to a robust financial system and a world fueled by innovation), but it’s also become pretty unpopular.
Things like the Giving Pledge have seen a good portion of the worlds richest people agree to give a majority of their fortunes away to charity when they pass away. These two plans are obviously not compatible with one another, so it looks like once again giving money away may prevent us from all being slaves to the 17th generation of Bezos overlords.
Now all of these rich people giving away their life’s work to these charities probably want to make sure that this money is going to get used for worthy causes, especially considering they won’t be alive to oversee it.
This might not be as easy as you think because some charities operate more to fill the pockets of the people running them, rather than to forward the good of humanity.
I will be writing a post on that! Go read that post if you are interested, and if you enjoyed this post please share it and subscribe to keep on learning how to Earn Your Six.
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