Why We Should Be Lucky Bill Gates and Warren Buffet Don't Take After Cornelius Vanderbilt

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Mr. Renehan is the author of Commodore: The Life of Cornelius Vanderbilt (Basic/Perseus, 2007) and other books including Dark Genius of Wall Street, The Kennedys at War, The Lion's Pride, The Secret Six, and John Burroughs: An American Naturalist. He lives in Rhode Island. Find his blog at http:/renehan.typepad.com.

A while back, Forbes Magazine ranked the richest Americans through history using 2006 US dollars weighted against historic GDP at the height of each individual's wealth. On the day of his death during his 83rd year in January of 1877, shipping and railroad titan Cornelius Vanderbilt was worth $105 million in 1877 dollars. According to the Forbes analysis, to control the same percentage of GDP that Vanderbilt controlled in 1877 one hundred and twenty nine years later in 2006, one would have needed to possess wealth in the amount of $168.4 billion. Forbes in turn pegged the 2006 net worth of Bill Gates at $53 billion.

In the spirit of the Rockefeller family, Andrew Carnegie, and others before him, Gates has famously and commendably put more than $28 billion into the Bill and Melinda Gates Foundation. This foundation focuses on bringing initiatives in health and education to the global community. This past June, Warren Buffett announced that he would eventually give away 85 percent of his fortune — about $37.4 billion worth of stock in Berkshire Hathaway — to five charitable foundations, with about $31 billion going to the Gates Foundation.

Although in his day he possessed more than three times the wealth of Bill Gates and approximately four times the wealth of Buffet, Cornelius Vanderbilt was never so generous. Indeed, he was not generous at all.

In researching my new biography Commodore: The Life of Cornelius Vanderbilt (Basic/Perseus), I found Vanderbilt to be the personification of the ultimate economic man as drawn by Charles Dickens in the form of Ebenezer Scrooge during the 1840s. No cult of charity claimed Vanderbilt; no temptation toward beneficence beckoned. Once, when asked to give aid to people standing on a line for a distribution of free food, he noted his own impoverished beginning on Staten Island and, without a hint of irony, said: "Let them do what I have done." Not long after this, in an editorial for Packard's Monthly, Mark Twain admonished Vanderbilt to "go and do something [that will] shine as one solitary grain of pure gold upon the heaped rubbish of your life. ... Go, boldly, grandly, nobly, and give four dollars to some great public charity."

In his parsimoniousness, Vanderbilt was a creature of his times: an era of institutionalized harshness.  During 1817, when the already-prosperous Vanderbilt was just 23, a group of prominent New York merchants and professionals (many of them having formerly been the principle supports of such institutions as the New York Hospital and a variety of other worthy causes) officially and quite publicly began to rethink their habit of giving. Such previously generous philanthropists as DeWitt Clinton, Thomas Eddy, and John Griscom took their cue in this from British reactionaries. In so doing, they succumbed to the rhetoric of several hard-nosed British social thinkers, most notably Thomas Robert Malthus, Jeremy Bentham, and the Scottish conservative Patrick Colquhoun.

Twenty years earlier, all three of those gentleman had been instrumental in the founding of the London Society for Bettering the Condition and Increasing the Comforts of the Poor. Despite the burden of its long-winded name, the London Society specialized in the cutting off of funds for social welfare rather than the distribution of charity. Men like Malthus, Bentham and Colquhoun believed that a distinct line must be drawn between the "deserving poor" (those hit with hard times resulting from unfortunate histories) and "undeserving paupers," the latter being the drunk, lazy and whorish of society, to whom the provision of any form of aid was a reprehensible act of facilitation.

Another key concept underpinning the logic of the London Society was the presumption (for lack of a more accurate term) that paupers outnumbered the deserving poor by a factor of about 9 to 1. In reform meetings and from church pulpits, politicians and clerics again and again cited this astonishing though unverifiable statistic, which soon became accepted as fact. In time, the public mind became convinced that a mere ten percent of London's poor were the crippled and the orphaned, while 90 percent were degenerates. For every one individual in London's slums who genuinely needed aid, popular wisdom held that there were nine who required something else entirely: intolerance, punishment and correction. As a corollary to this line of thinking, logic dictated that 90% of the charitable aid previously offered was superfluous. In turn, wallets closed, and checks stopped being written.

The London Society remained a venerable body and dominant force in British life for decades: influential in the development of such institutions as workhouses and debtors prisons. It was likewise influential, through its example, in New York and other American cities. By the end of 1817, Clinton, Eddy, and Griscom, joined by hundreds of other New Yorkers, had formed a clone organization on the banks of the Hudson: the Society for the Prevention of Pauperism (SPP). 

Several months before the founding of the SPP, New York's Humane Society (which at that time specialized in helping humans rather than dogs and cats) announced rather forlornly the result of recent research revealing a startling fact: no less than 15,000 men, women and children - the equivalent of one-seventh of the city's total population - had been "supported by public or private bounty and munificence" the previous winter.

In their book Gotham, historians Edwin Burrows and Mike Wallace have eloquently described the SPP's point of view, expressed in response to the above data. In the grand tradition of the London Society, the SPP said it believed that "willy-nilly benevolence" only made things worse. "Giving alms to the undeserving poor not only undermined their independence but also drove up taxes and sapped the prosperity of the entire community." Thus, "for their good as well as everyone else's … the SPP recommended that all paupers in the city be cut off from all public assistance forthwith." Soon the Humane Society itself announced its intention to disband, in the wake of its realization that the very act of giving charity had "a direct tendency to beget, among [the citizenry] habits of imprudence, indolence, dissipation and consequent pauperism."

"Tough love" was in. Cruelty equaled kindness. Frugality equality generosity.  And all three were not only cheap, but easy. A few ministers sang out against the reverse-logic of the SPP, but far more praised the organization than damned it. God himself, it seemed was on the side of self-reliance. A generation later, Social Darwinists would express a similar point of view: that the strong must be allowed to flourish, and not be hamstrung by the needs of the clawing weak. Charles Darwin's The Origin of Species would not see print until 1859. Indeed, Darwin himself was but eight years old in 1817, and would not depart on the voyage of HMS Beagle until 1831. Nevertheless, the seeds of what was to become the philosophy of Herbert Spencer (born 1820), not to mention the nearly identical philosophy of the 20th century's Objectivist saint of selfishness, Ayn Rand, were quite evident in the grand pronouncements of the London Society and its New York equivalent, the SPP.

A few notable men of New York, such as John Jacob Astor and the young Peter Cooper, repudiated the SPP, ignored the trend toward avarice, and continued their philanthropy, even expanding it in many areas to try to make up for some of the rapacity of their contemporaries. But Vanderbilt did not.

Only very late in life, in efforts to please his much younger second wife, (Frank Crawford Vanderbilt, whom he married in 1869), did "the Commodore" engage in two relatively paltry acts of giving.

During 1870, Vanderbilt spent $50,000 to purchase the unused Mercer Street Presbyterian Church in Manhattan. In turn, he gave life interest in the property to Frank's friend Charles Force Deems, a Methodist cleric and proprietor of a congregation he had dubbed the Church of the Strangers. (The church catered to people like Frank: former Confederates who, having lost everything during the Civil War, washed ashore as "strangers" in New York.) According to the terms of Vanderbilt's limited gift to Deems, control of the property was to revert to Vanderbilt or his heirs/assignees following Deems's death. The deed on the property, which Vanderbilt knew would appreciate greatly in value through the years, always remained in the name of Cornelius Vanderbilt.

Several years later, at the request of Nashville's Methodist Bishop Holland McTyeire (a cousin-in-law of Frank's), Vanderbilt provided $1 million (less than 1% of his total net worth) to fund Nashville's planned Methodist "Central University," subsequently renamed Vanderbilt University. Although he did not bother to attend the dedication ceremonies during the autumn of 1875, Vanderbilt's gift was nevertheless hailed as the largest single act of philanthropy in American history to that time. Attention to the fine print, however, revealed that a substantial percentage of the $1 million endowment was, by Vanderbiltian order, to be kept in the first mortgage bonds of Vanderbilt's own New York Central & Hudson River Railroad. Thus, as with the church on Mercer Street, Vanderbilt's charity was hardly outright.

Not long before his death, Vanderbilt confided to one of his doctors that he had been "insane on the subject of money-making" all his life. Subsequently, in devising a will which gave more than 95% of his fortune to just one of his eleven surviving children, Vanderbilt said he intended to keep his property "compact ... I will not have it scattered. I will leave it as a monument to my name." Thus he left behind him the legacy he most coveted: a vast hoard of stocks, bonds, greenbacks and railroads, but next to nothing in the way of good works or improvement of society.

Luckily for the planet and mankind, contemporary moguls such as Gates and Buffet have chosen to leave something more.

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Andrew D. Todd - 11/10/2007

A short answer would be that we are not "lucky" that Bill Gates and Warren Buffet do not behave like Commodore Vanderbilt. Rather, their behavior is the cumulative effect of rules designed to curb excesses of power. In dealing with philanthropy one has to make a clear distinction between generations, that is, the founding capitalists versus the heirs. One also has to make a distinction between time periods, that is, Gilded Age, versus New Deal Era, versus Reaganomics Era. Otherwise, one is comparing apples with oranges.

Andrew Carnegie, the spectacular capitalist-philanthropist of the Gilded Age, married late in life, and his only child, a daughter, was born in 1897, when he was sixty-one years old. Bear in mind that, by the standards of a much more physical age, when brawn was much more important than it is now, a woman simply could not be as good as a man. She could not lift and carry as much weight. There was a whole culture built around the fact of physicality, in which the boss had to be able to physically fight truculent subordinates in order to maintain his authority. If a man had only a daughter, the best he could do was to adopt his eventual grandson. If Carnegie had hoped for a family succession, he had left it about twenty or thirty years too late. Of course, Carnegie had established the pattern of his charitable contributions well before his daughter's birth. His wife was thirty years old at the time of their marriage in 1887, and, considering the state of medicine at the time, that definitely put her in the category of Biological Clock-Watcher. Carnegie might usefully be compared to Cecil Rhodes in South Africa.

The Vanderbilts were different, mostly because they had families to provide for, and consequently, dynastic ambitions. The New York Central Railroad survived as an independent company until 1968. It did not experience serious competition until the 1950's, and even then, the competition came, in large part, from the Federal Government, building superhighways and subsidizing aviation. The major routes of the New York Central still exist, and are vital parts of the successor railroads, CSX and Norfolk Southern. Once a railroad was built, or merged together, as in the case of the New York Central, and financially consolidated, it was essentially a species of real estate, with a de-facto monopoly on rail service to a wide belt of land on either side. Competitive long-distance service (eg. New York - Chicago) was frankly run at a loss, out of the proceeds of local monopolies. A Vanderbilt was able to remain at the helm of the New York Central until the 1950's precisely because the business did not require the high grade of judgment of a great businessman. It was almost a species of tax-farming. The second and subsequent generations of Vanderbilts contributed considerable sums to charity, but they were also involved with horse-racing, yachts, art collecting, etc. Of course the charities tended to be heavily biased towards upper-class amusements, such as concert halls, museums, universities, etc. The Vanderbilts spent a lot of money on marrying into the European aristocracy, British by preference, or Italian as a second choice. In 1895, the Vanderbilts spent the down payment on what would ultimately be a total of somewhere between five and twenty million gilded age dollars, in order to marry a great-grand-daughter to the ninth Duke of Marlborough (*). All of this was pretty much the normal pattern for successful gilded-age businessmen. Indeed, some, like the Astors, actually expatriated themselves to Europe.

In the New Deal Era, philanthropy tended to represent a compounding with income tax and estate tax, which is to say, with the seventy-percent-plus marginal rate. When applied three times (income tax, plus two generations of estate tax), the seventy-percent rate became something like ninety-seven percent, or substantially confiscatory. Businessmen are usually power maximizers, not money maximizers. If they have to choose between money and power, they choose the power. For example, the whole point of the Ford Foundation was that, by a correctly structured deal in which the Ford Foundation received nonvoting shares, the Ford Motor Company would remain a hereditary monarchy, estate taxes notwithstanding. The later Rockefellers would fit into this pattern. Their economic situation was what a government bureaucrat would call "use it or lose it."

Very high tax rates ended with Reaganomics. However, by this time, the physical infrastructure of the country was substantially complete, and the remaining investment opportunities were more ephemeral. The most enlightened philanthropists nowadays tend to be financial speculators, not company founders. George Soros would be the archetype, and the standard against which Warren Buffet is measured. Someone like Soros, who made his fortune as a currency speculator, is much more comfortable about putting money into intangibles like traveling scholarships than the average benefactor-- he does not insist on his money going into a permanent structure with his name on it. Perhaps it is the Riverboat Gambler's traditional and expected "easy come, easy go" attitude about money. Equally to the point, such financiers do not have long-term viable companies in which to invest their energies.

Bill Gates is not really an exception to the principle. Microsoft is essentially a short term speculation, like much of the 1980's-1990's high-tech industry. There are certain common characteristics of these companies. They were able to grow rapidly because they could simply buy everything they needed, hiring fully qualified people from defense industries, and subcontracting out actual manufacturing work to firms analogous to a jobbing printer. By contrast, circa 1914, the Ford Motor Company tried to order a piece of machinery, of moderately novel design, from an established machine tool maker, a drill press which would drill several holes at the same time, or something like that. The response-- to a prospective paying customer-- was in effect an invitation to drop dead. Ford had to develop the expertise in-house. Microsoft didn't have to do all this stuff, so it could grow like a weed. The downside, however, is that Microsoft has no ballast. It is likely to be out of business within five years, before the founder's sixtieth birthday, and before his eldest daughter's eighteenth birthday. For that matter, Bill Gates' net worth, consisting in large part of Microsoft shares, is much more suppositious than is popularly believed. Securities reporting requirements mean that Bill Gates' Microsoft shares are considerably less liquid than those of a small investor. He cannot sell Microsoft shares without taking account of what the market's reaction will be to the news that Bill Gates is selling Microsoft shares. It is not surprising that Bill Gates has detached himself from Microsoft-- he could hardly be expected to enjoy the nasty transactions involved in wringing out the last scraps of value from a dying company. That is simply not a very strong foundation for dynastic ambitions. Mind you, the same comments could be made about Apple Computer, or Sun Microsystems, or Oracle. They were all founded by young men who identified quick and dirty tweaks which could apply routine existing technologies to new areas. Bill Gates has an incentive to spend the money while he still has it, as a matter of "use it or lose it."

Cornelius Vanderbilt was a rational actor in terms of his own time. To put it crudely, the social standing of an English duke was a function of his pedigree, plus the requisite funds to behave in a fashion appropriate to a duke, that is, to a traditional agrarian landowner on a large scale. The overriding social distinction about money was whether one was "in trade" or not. Money from a distance (America or Australia) was preferable, simply because its possessor was detached from the process whereby it was made. Banking and stockbroking were considered comparatively aristocratic-- good enough for younger sons-- because there was a layer of insulation from the actual underlying factory work. In his business ethics, someone like Lord Leverhulme, the great soap manufacturer, probably compared favorably with most American capitalists, but, notwithstanding his title, it was not until the 1960's that his descendants began marrying recognizable aristocrats.

By the time of the later New Deal, of course, war and revolution had thinned out the European landed aristocrats to such a degree, and had turned so many of them into penniless fugitives (the stereotypical "White Russian Prince" of the 1920's), that merging with them no longer seemed particularly attractive to the successful industrialist. The successful American industrialist (or his heir) was much more likely to be intent on a sense of legitimacy in his own country. In the case of the Rockefellers, that worked out to going into elective politics in a big way. This of course meant that a conspicuously grand way of life, with palaces and all, was counterproductive.

Now we come to Bill Gates. His timetables are ultimately derived from the high-tech industry, and for him, five years is a really long time. Microsoft is now paying out more in share repurchases than its net operating revenue. The obligation to support the share price means that the company is slowly liquidating itself. The New York Central took a hundred years to reach its point of financial collapse. Microsoft will reach it in a much shorter period. The current CEO, Steve Balmer, is a public hysteric. Jokes circulate widely about his habit of throwing chairs when frustrated. He screams out threats in public, and tells easily debunkable lies, the way Joe McCarthy used to do. One can see how Bill Gates has a strong need to disassociate himself from that kind of thing.


(*) Ralph G. Martin, _Jennie: The Life of Lady Randolph Churchill_, v.2, _The Dramatic Years, 1895-1921_, 1971, ch. 2 (pp. 29-30, 370, pbk ed.)







See also: Paul Fussell, _Class_, 1983. Written at the very tail end of the New Deal period, just as Reaganomics was beginning.