The economic causes of great fortunes

II 1 1 II ll

Ifn ll^H]

ANNA ■■ YOIJNGMAN

V

Book ^^

Copyright ^°

COPYRIGHT DEPOSm

The Economic Causes of Great Fortunes

BY

BANKERS PUBLISHING COMPANY

NEW YORK

THE BANKERS PUBLISHING CO.

h

'V

Copyright 1909

By the Bankers Publiahing Co.

New York

Chapter I. — Introduction 1

a. The method employed.

h. The fortunes selected for special investigation,

and the general considerations governing such

selection. c. The reasons for treating the fortunes of the men

of to-day from the standpoint of the group,

rather than from that of the individual.

Chapter V. — Personal and Non-Personal Factors Involved in Gain-getting. ... 143

a. An analysis of several different forms of gain-getting (based upon the specific investigations that have been undertaken).

h. The gains arising in the course of the general process of fortune accumulation.

1. Non-personal factors conditioning such gain.

2. Personal factors.

c. Criticism directed against men of large fortunes.

1. Its character.

(Failure to see the importance of the nonjDcrsonal factors conditioning gain.)

2. Misplaced condemnation.

X. Large scale production. y. Dishonesty.

Chapter VI. — The Social Service Rendered BY Owners of Great Fortunes. .170

a. Vagueness of the concept of "social service." h. The relation of "social service" to individual gain. (No necessary connection between the two — gain may be made at the expense of the community.)

c. The futility of attempts to establish a relation

between the degree of social service on the one hand, and both the size of the reward and the amount of personal activity or personal ability, on the other hand.

d. The "justification" of large fortunes.

(No validity in attempts to "justify" individual gain on theoretical grounds.)

e. Social expediency and large fortunes.

Introduction

AN examination of the causes of great for- JlIl tunes may be undertaken in either one of two ways. The analysis may be (1) impersonally theoretical, seeking onlj^ occasional corroboration by an appeal to the facts, or it may be based (2) upon a detailed examination of particular fortunes, conclusions being strictly deduced from a consideration of the facts presented.

The first method of procedure is apt to give rise to grave errors. Mistakes are likely to occur frequently, because of a failure to recognize the operation of certain factors, which, in the absence of a detailed study, are either unknown or else appear unworthy of notice. Furthermore, a theoretical analysis which makes an appeal to the facts for confirmation, instead of being based, in the first place, upon the facts furnished by a specific inquiry, presupposes an a 'priori judgment of what aspects of the question under discussion are worthy of consideration. This judgment once formed, the facts are apt to be coerced, however unconsciously, to support the position taken.

The second method of investigation is conceived to be the more legitimate, although it has some obvious limitations. The most patent objection is, of course, the difficulty of disentangling from a heterogeneous mass of material only such facts as appear to be of a causally relevant nature. There is always a danger that undue emphasis may be given to circumstances, which, although important in the single instance, have less significance for the general question bearing on the causes of the growth of large fortunes. However, by examining in detail a number of fortunes differing in respect to the time and the manner of acquisition, and by subsequently subjecting them to an unbiased analysis, any general results that may be deduced will have a degree of validity unattainable by the more impersonal method. In brief, a basis for theorizing will be afforded, which will be sound, just in so far as the preceding studies have been accurate, exhaustive, and well selected.

It must, of course, be conceded that the question of selection calls for the exercise of considerable judgment; and if the fortunes examined do not represent sufficiently diverse types of activity, then the facts are likely to support a distorted theoretical conclusion of but limited application. The fortunes which have been selected

INTRODUCTION. 3

for examination in the following study, although few in number, represent a highly diversified range of economic activity, and they cover a period sufficiently lengthy to include the several phases of commercial and industrial development through which the United States has passed since the Revolutionary War.

The fortune of John Jacob Astor, gained from trade and from land-speculations, is the typical American fortune of the pre-corporate regime} The Gould fortune is a product of the period that intervened between the close of Astor' s career and the distinctively industrial era of the present day. It was made chiefly by means of speculative investments in the securities of various railroads, and it is one of a number of fortunes similarly acquired, at a time when the railroads of the country were practically the only great public-service corporations in existence. It is not only representative of its time, however, but it offers certain unique and picturesque features incident to "high finance," which call for explanation in any study of great fortunes. Finally, the fortunes of the "Standard Oil" and the "Morgan" men, although originating generally

iTo be sure, Astor's Fur Company was incorporated, but merely as a matter of form, since Astor owned the business entirely, with the exception of a few shares granted to his subordinates.

at an earlier period, present all the characteristics of the modern situation, in which industrial corporations vie with the railroads in their importance for purposes of speculation and of investment.

In the days of John Jacob Astor, the growth of a great fortune could be studied in isolation, and the activities of its owner could be narrated almost without reference to the existence of liis contemporaries. With the exception of certain subordinates to whom he granted a minor interest, Astor did not have even a partner in his great fur company. As for his real-estate investments, he would have been exceedingly loath to share with another the immense gains which came to him from that source. But even in the time of Jay Gould there had come about a change. Gould, individualist though he was, made his fortune under a corporate regime, and he was thereby compelled to identify himself more or less with those interested in the same corporate undertakings. To understand fully the activities of Gould, one must, for example, know somewhat of the career of James Fisk; and for a complete knowledge of Gould's later undertakings, it is essential to remember that he was supported by a small coterie of men, most of whom were directors of the Union Pacific at the

INTRODUCTION. 5

time of his entry into that road. However, his interests and those of his associates were confined almost exclusively to one field — railroads. It is not necessary to seek for ramifications of his interests into other fields, through the mediation of these lesser members of the group. It becomes possible, therefore, to gauge the extent of his wealth and influence, and to analyze the causes making for his personal gain, by a simple examination of his individual operations.

But of late years conditions have changed. As a result of the interrelations made possible under a highly- developed corporate system of business enterprise, the man of great fortune has come more and more to be regarded as but a member of a group of men having great fortunes. It is less than a quarter of a century since the idea of a group activity began to secure recognition; but today it has become possible to speak familiarly of the "Standard Oil" or of the "Morgan" men. More than that, the group has attained such importance that, to understand the nature and sources of an individual's gain, it is necessary to undertake an examination of the character and the activities of the group of which he is a member. It is still possible, of course, to trace the history of the way in which Mr. Rockefeller, for example, laid the foundation of his fortune in the Standard Oil Company (although that has been done ad nauseam). But Mr. Rockefeller's Standard Oil holdings are but a part of the numerous interests in which he, as a member of the so-called "Standard Oil" group, shares. It is, in fact, through group activity that he and many others, who are counted among the richest men of the country, are today enlarging their private fortunes, and the group should, therefore, receive consideration in anj^ study attempting to explain the causes of the accumulations of men of great fortune. For that reason, it is proposed to treat the fortunes of the men of today from the standpoint of the group, rather than that of the individual, while the fortunes of John Jacob Astor and Jay Gould will be used to illustrate the individualistic methods of acquisition.

Chapter II. The Fortune Of John Jacob Astor/

"^^THEN John Jacob Astor landed in America in the spring of 1784, he encountered a civiHzation industrially unique and wholly alien to his brief experience. Witness the anecdote that is told concerning his astonishment at being able to secure a position unhampered by the payments and regulations of apprenticeship." The lack of social restraints upon the freedom of production and exchange seemed, no doubt, peculiarly inviting to one who must have imbibed, even if iJohn Jacob Astor was born in Waldorf, Germany, in 1763, the son of a butcher. At the age of sixteen or seventeen he left home, working his way to the coast, whence he took ship for Engand. After four years spent in London with a firm of fluteand piano-makers, of which his brother was a member, he set sail for America, having accumulated money enough to pay for a passage in the steerage and to provide himself with a few additional pounds sterling.

For incidents of his early life cf. James Parton, Life of Astor, New York, 1865; Washington Irving, Astoria; J. t). McCabe, Great Fortunes and How They Were Made, 1871; Hunt's Merchants' Magazine, Vol XI, p. 153; W. O. Stoddard, Men of Achievement, 1901; W. W. Astor, Pall Mall, Vol. XVIII.

sParton's Life of Astor (New York), 1865, unconsciously, old-world ideas of privilege. Add to this that the country held numberless untested possibilities of wealth development, and it is not hard to predicate the pecuniary success of an individual such as John Jacob Astor, who could boast a more than ordinary amount of commercial astuteness.

It is not to be inferred, however, that the country was in all respects industrially unexploited, nor that the fur trade and foreign shipping, the fields in which Astor was to lay the foundations of his fortune, were absolutely untried. Indeed, the fur-bearing regions of the continent had been tramped over long ere this by adventurous employees of the early French companies, by trained agents of the Hudson's Bay Company, and by resolute traders and trappers who were independent of all organized ventures. Moreover, before the war of the Revolution, the natural products of the colonies had given rise to a lucrative carrying- trade which showed indications of a speedy revival after the Peace of Paris under the direction of Boston merchants of considerable wealth.^ But after all, the exploitation of these two fields of commercial acsWeeden, Economic and Social History of New England, Vol. II, p. 8:31 ; cf. also MacPherson, On Commerce, Vol. IV, pp. 57, 117, 195.

tivity was only in its initial stages. In 1784, New York was as yet of secondary importance as a center of the American foreign trade, while the condition of the fur-trade is evidenced by the fact that the western part of New York state and even portions of Long Island were still prolific of peltries.

That John Jacob Astor at the age of twenty should have come in contact with a loquacious countryman who impressed upon him the moneygetting possibilities of the fur-trade, was a piece of rare good luck.^ The elements of fortune — even for the wholly penniless — were all there, though no doubt it required a laudable effort of the imagination for a young man so entirely ignorant of the conditions prevailing in America to appraise them at their full value. To begin with, the fur-trader required only a minimum capital; as Astor's German acquaintance told him, with a basket of toys or even cakes, valuable furs could be bought on the wharves and in the markets of New York, which could be sold with advantage to resident merchants, or, if sent to London, disposed of at an advance of 400 or 500 per cent.^

4Cf. references previously given to "Lives" of Astor.

sParton, Life of John Jacob Astor (New York, 1865). Parton is unreliable, but the statement seems probable in the light of other evidence concerning the profits of the fur-trade.

Such extraordinary returns are the natural result of trading operations carried on between two civilizations having entirely different standards of value. Both civilizations may conceivably profit by these operations, but the greater part of the gain is very likely to accrue to one of them at the expense of the other. In the case of the white men and the Indians of North America, the gains arising from commercial intercourse were confined almost exclusively to the former, though, it must be confessed, their pecuniary successes were often attended with severe personal hardship and occasional loss of life. At its inception the Indian trade was but slightly influenced by a trade-morality even of the mildest sort, so that the ignorance of the Indian combined with his susceptibility to drink and finery delivered him over to the greater or less cupidity of the white man. An idea may be had of the conditions confronting fur-traders in the remote comparatively unworked regions of the country by consulting some of the schedules preserved by pioneers in the field.^ It is quite evident from tliese schedules that there must have been an opportunity for great profits in such exchanges.

^Alexander Henry, who began his career as a fur-trader in 1760, has left an account of his travels and adventures, in which he has embodied a list of the prices of goods bought from the Indians at Fort des Prairies:

Indeed, the fact is patent, even though various incidental expenses connected with obtaining the skins and transporting them to market are not

A gun 20 beaver skins

A Stroud blanket 10

A white blanket 8

An ax (1 lb.) 3

y2 pt. gunpowder 1 " "

10 balls 1

The principal profits, however, he says, came from the sale of knives, beads, flints, steels, awls, and other small articles. Tobacco, for which the Indians showed a decided preference, sold at the rate of one foot of Spencer's twist (a twist of black tobacco about an inch in diameter) for each beaver skin, while rum was dispensed at the rate of two beaver skins per bottle. Penny prints, such as are sold to children, were considered especially valuable as talismans, and Henry states that they were an exceedingly fertile source of profit, although he gives no exact information as to rates of exchange. (Alexander Henry, Travels and Adventures in Canada and the Indian Territories, ed. by James Bain [new ed., 1901], p. 320.) Bain thinks Astor conducted his trade in furs at Montreal under Henry's direction. Russell gives a schedule of the trade of the Hudson's Bay Co. in 1788.

A common musket 10 beaver skins

A pound of powder 2 " "

4 pounds of shot 1 " "

A hatchet 1

6 knives 1 " "

A pound of glass beads 2 " "

A cloth, coat 6 " "

A petticoat 5 " "

A pound of snufp 1 " "

Combs, looking-glasses, brandy, and other articles were exchanged in proportion, Russell states rather indefinitely. Moreover, in the exchange two otter skins and three martens were reckoned the equivalent of one beaver skin, whereas a single fine skin of either otter or marten was worth more than a beaver. Bancroft, History of the Northwest Coast, Vol. I, p. 459, quotes the statements of Russell made in his History of America, Vol. II, p. 263.

estimated, while the prices at which they were eventually sold are not stated. However, some definite testimony on this head is afforded by Alexander Ross who, while connected with the Astorian venture, spent a winter in the interior (600 miles from the mouth of the Columbia River), in a region not previously invaded by trade. During the 188 days of his stay he procured 1,550 beavers, besides other peltries estimated to be worth £2,250 in Canton, wliich averaged the company 5V2d. each, or £S5 sterling in all. Ross says :

So anxious were ihcj'^ [i. e., the Indians] to trade and so fond of tobacco that one morning before breakfast I obtained 110 skins for leaf tobacco at the rate of five leaves per skin, and at last when I had but one yard of white cotton remaining one of the chiefs gave me .-'!) j)rime beaver skins for itJ

Enough has been said, perhaps, to illustrate the enormous profits arising out of such transactions with the Indians, although it must be remembered that losses due to accidents in transport, Indian uprisings, and other unforeseen happenings had to be taken into account, while the salaries of subordinates, and the maintenance of trading-pobts were items of large expense to the organized companies.

^Alexander Ross, Adventures of the First Settlers on the Orecfon or Colvmhia River, IBlO-lfJ. Reprint by Thwaites of the London edition of 18'19, p. 158; Early Western Travels, edited by Reuben Gold Thwaites, Vol. VII, 1904.

This, then, was the trade to which John Jacob Astor addressed himself upon his arrival in America. He engaged his services to a New York dealer who bought and exported peltries, and soon he was making trips to Montreal in the interests of his employer, gathering information as to the possibilities of the trade, and acquiring adroitness in dealing with the natives. The accounts concerning this early period of Astor' s life are meager, conflicting in details, and prone to substitute eulogy for facts. But it would probably be safe to say that by 1786 or thereabouts he had severed his connection with Mr. Bowne, his employer, and with a small stock in trade had established an independent business. He obtained his furs, apparently, not only from the Indians themselves, but from white trappers and from the occupants of farm-houses throughout New York state. ^

The actual expenses of such a trade were of course slight, and if connections could but be established with those markets where furs were in greatest demand, profits might rise to many times the original outlay. That John Jacob Astor should have thought of London as the goal of his operations — the market in which he

sParton, Life of Astor; also, cf. other accounts of Astor's Y. '':=■ that have been cited.

could take advantage of the largest price discrepancies — is not altogether surprising, especially since the merchants of Montreal with whom he had come in contact all shipped their furs to London.'' Nevertheless, the energy and dispatch with which he put his plans into execution were indicative of a quite extraordinary enterprise. Very early in his career,^'' in fact, as soon as he had accumulated a sufficiently large stock of furs, and had saved money enough to pay for a passage in the steerage, he set out for London with the purpose of forming connections there which would permit him to avail himself of the high prices of a European center of distribution. Evidently this venture was successful (though no direct information on the subject is to be got) for Astor's profits grew steadily until by 1794^^ he was in a position to devolve all but the managerial and financial work connected with his undertakings upon subordinates. ^-

slndeed, the furs obtained in Montreal must perforce be (•hipped to London, as there was a law against exporting them from British possessions; cf. George Bryce, The Remarkable History of the Hudson's Bay Co., p. 193 (Toronto, 1900).

loAs to the exact time accounts are conflicting and extremely unreliable.

iiln 1794 Jay's Treaty resulted in the relinquishment of the trading-posts held by the British within the territory of the United States.

i2"In a dozen years [he] had diverted some of the most profitable markets from his competitors and was at the head of

About this time he bought a vessel of his own in which to sliip his furs to London. There, it is said, he heard of the trade of the East India Company with China, and, in consequence, in 1800 sent his first ship to Canton/^ Whether or no he had to go so far afield to learn the lucrative nature of the China trade, may well be matter for debate. An enterprising merchant and shipper who had acquired a fair-sized working capital would have been very Kkely at that period, when considering the advisability of extending his trade, to have looked toward Canton, especially if he dealt in a commodity such as furs, which found an eager and extensive market in China.

Weeden, discussing the revival of trade after peace had destroyed the profitable occupation of privateering, says :

In 1783 they had begun to agitate the China trade in Salem. In 1784 the Connecticut men mooted the same question and asked for state aid in so large a venture, which the sturdy farmers in the legislature wisely declined. In the same year Captain John Green sailed direct in the ship Empress from New York for Canton. In 1785 Elias Hasket Derby cleared his ship Grand a business branching to Albany, Buffalo, Plattsburg, and Detroit." Cf. article on John Jacob Astor by William Waldorf Astor, Pall Mall, Vol. XVIII, p. 171.

isParton, Life of John Jacob Astor (New York, 1865); also Pall Mall, Vol. XVIII. William Waldorf Astor writes that "before the end of the century he had, to quote his own expression, 'a million dollars afloat,' which represented a fleet of a dozen vessels."

Turk, Captain West, from Salem for the Isle of France, and finally for Canton. i*

Thomas H. Perkins, who had been trained by Derby, also became prominent in the China trade, his vessels going chiefly to the northwest coast of America and from there to China and Boston. For over fifty years (from 1792 onwards) he was engaged in this trade, and it was claimed that in the early nineteenth century no private firm in the world transacted more business in the China trade.^^ Weeden says again:

Like all grand commerce of the olden time, the China trade was a mighty round of small exchanges multiplied into the final freight of rich goods which included all the accumulated values that had gone before. 1 6

Ginseng and specie were particularly in demand for the outward bound cargoes, while the ships came back laden with tea, coffee, muslins, silks, and other fine fabrics. The customary profits on muslins and calicoes from Calcutta in those early days were estimated at 100 per cent, and over.^^ i-tWeeden, Economic and Social History of New England, Vol. II, pp. 820, 821; cf. also MacPhcrson, On Commerce, Vol. IV, p. 57.

i^Weeden, Economic and Social History of New England, Vol. II, p. 822.

i7ln 1789 four of Derby's ships were in Canton, and he recorded (1785-99) 125 voyages, 45 of which were either to India or to China.

It is not surprising that the foreign carryingtrade should have taken this particular direction. No doubt enterprising American merchantmen would have engaged in it even before the Revolutionary War, had not the East India Company held a monopoly of the China trade. The goods imported into China were there exchanged for other goods which, brought back to Europe or to America, yielded a very handsome profit that offered decided inducements to a sliipper wishing to extend his operations. The "Empress of China," for instance, on her pioneer voyage to Canton in February, 1784, loaded chiefly with ginseng, obtained a return cargo whose sale netted a profit estimated at $30,000 — a sum exceeding 25 per cent, of the capital employed. ^^ As in the Indian trade, profits grew out of an exchange between widely separated peoples of different degrees of civilization and of diverse tastes. However, the resemblance probably goes no further, as the Chinese merchant was, no doubt, as

In this year, 1789, fifteen American vessels entered the port of Canton; cf. MacPherson, On Commerce, Vol. IV, p. 195.

In 1788 a Boston ship-master began to obtain furs from the Indians of the northwest coast which were carried to Canton and exchanged for Chinese produce. From 1799 to 1818, 108 American vessels were engaged in this trade, 15,000 sea-otter skins being collected and carried to Canton in 1803. (Bancroft, History of the Northwest Coast, Vol. I, p. 359.)

i8"Life of Major Samuel Shaw, First Consul at Canton," Hunfs Merchants' Magazine, Vol. XVII I.

astute as the Yankee trader, though the latter could not fail to profit by the enhanced values of his importations, resulting from the creation of certain place utihties. The goods shipped to China, natural products such as furs, ginseng, and quicksilver, ^^ were exported from a country with a relatively small population, having a relatively slight demand for such commodities, to a densely populated district, where the peculiar tastes of the inhabitants afforded an eager market for them. Moreover, they came from a virgin country to a region whose natural resources had been thoroughly exploited, a circumstance which likewise tended greatly to enhance price discrepancies. In addition, the American trader profited by the introduction into his own country of the teas, silks, and fine fabrics of China for which there was an ever-growing demand with the increase of wealth and the development of luxurious tastes. He was also advantaged by the fact that China had practically a monopoly of all such commodities, so that the supply imported could to a certain extent be regulated to meet changes in demand.

There is no available information concerning the exact nature and extent of Astor's Chinese

isSandalwood also, obtained in the Sandwich Islands, was imported by American shippers.

ventures. It must suffice that he sent quantities of furs to Canton, and brought back chests of tea in exchange. His tea ships were evidently the source of considerable profits, as it is said that his loss of over a million "^ in the Astorian venture was more than compensated by the profits from liis tea, which arrived safely despite the war with Great Britain.^^ Another circumstance that contrived to render the import trade profitable was the method of payment of imposts. ^^

20Stated by Parton. William Waldorf Astor estimates his losses at $800,000.

21 A table showing the impoi'ts of tea from China during a series of years will enable one to form an idea of the exceptional gains to be derived by a merchant with tea to sell in the years 1810-15.

Imports of Tea (in pounds)

Millions Millions

1805-6 9.8 1811-13 3.4

1806-7 9.4 1813-13 1.4

1807-8 5.6 1813-15 1.4

1808-9 1.5 1815-16 7.7

22McCabe, Great Fortunes and How They Were Made (1871), p. 77; also. Life of Moses Taylor, H%int's Merchants' Magazine, June, 1864, contains an incidental reference to the favorable eifects of the prevailing system of government credits.

The American State Papers, Finance, Vol. V, p. 377, give some statistics concerning the amount of the duties on tea which are as follows:

Bohea 13c 34c 13c

Imperial gunpowder . . . 50c

Hyson 33c 64c 40c

A letter from a Boston merchant dated December, 1835 (cf. American State Papers, Finance, Vol. V. pp. 379, 280) also gives

The United States allowed nine, twelve, and in some cases eighteen months to elapse before the payment was demanded, and in the meantime the goods brought in could be sold at an advance over cost plus duties, and with the proceeds other ships could be sent to Canton and return before the duty-bonds were due. In this way, says McCabe, John Jacob Astor had free of interest from the government during a period of eighteen or twenty years over $5,000,000. The statement seems not improbable if it be remembered that the duties on tea were very high, and that they were increased in some cases 100 per cent, for the years 1812-17, as a result of the war. During this time, it should be borne in mind, John Jacob Astor is said to have been exceptionally fortunate in bringing in his ships.

McCabe-^ quotes Francis in his Old Merchants

valuable information concerning the schedule of duties and the relation of these to cost. "It so happens," he says, "that I can give you facts in place of speculation in answer to your inquiry as to the cost of tea in China. Within a week two of our ships have come direct from Canton." Imperial gunpowder, costing 42 cents per pound, pays a duty of 50 cents; Hyson, costing 37 cents, pays a duty of 40 cents; Souchong, costing 15 1^ cents, pays a duty of 95 cents; while Congo pays a duty equal to about 170 per cent, of its cost. "The teas usually bought," writes the merchant, "cost us about 40 cents or 32 cents per pound and pay a duty of 40 cents." Since the percentage of duties to cost was in general considerably larger than this during the war period, the immense advantage to be obtained from deferring the payment of such duties is obvious.

23McCabe, Great Fortunes and How They Were Made (1871), pp. 76, 77.

of New York because of a specific instance given by the latter of the way in wliich dilatory governmental regulations operated to the gain of the merchants. The illustration is suggestive, however hypothetical the statistics may be. The Griswolds, owning the ship "Panama," start from New York with a cargo worth $200,000, $30,000 of which is invested in ginseng, spelter, lead, iron, etc., while the remainder consists of 170,000 Spanish dollars. The ship lands at Canton and returns with a cargo of tea in exchange for the commodities carried thither. The tea upon importation pays a duty equal to twice its estimated value. If the cargo brought in is assumed to be worth $200,000, it will therefore pay a duty of $400,000, and will thereafter be valued at $600,000. Estimating that the profits from the sale of the tea will be fifty per cent, of the original cost of $200,000, the cargo then becomes worth $700,000. The tea will probably be sold to wholesale grocers soon after its arrival, the purchasers giving their notes due at the end of four or six months. These notes may be discounted by the shippers, and with the proceeds two more vessels with a cargo of $200,000 each may be sent to Canton, and return before the $400,000 debt due to the government has to be paid.