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
dollars which may not sound like much compared to todays tech bro’s, but this was back
in a time where the USA’s annual GDP was only 39.1 billion dollars.
This meant that his fortune was 3% of America’s GDP.
Adjusted for inflation to 2020 dollars this would give ol John D here a fortune of 450
billlion dollars.
Or more than Elon, Bill, and Jeff combined.
But where is this fortune today?
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 carnage, 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 mind you)…
Now 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.
Our good old friend John D Rockefeller here actually 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.
Obviously that one fifth share still made these children unbelievable 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 as we have said, this shouldn’t 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 maths quiet 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 on average.
Now when this fortune gets divided by 3 and handed down its 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 watch our video on what to do if you get rich 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 johns 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 dollars 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 dollars.
Which would mean even spread out evenly 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 up 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, and it got too hard to keep tabs
on, and it just didn’t grow like you would expect it to.
Rockerfeller 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 maintain it’s
principle.
Most of Rockefeller’s grandchildren were worth about 3 billion dollars which is obviously
still a huge amount 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 dollars today buys a lot less than 1 billion dollars
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 people like bill 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 made this video 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 pas 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 people this kind of structure has been made possible in recent decades,
(thanks to a robust financial system and a world fuelled 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.
What a shame….
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 like the one we explored in
our last video operate more to fill the pockets of the people running, rather than to forward
the good of humanity.
Go and watch that video if you are interested, and if you enjoyed this video please consider
liking and subscribing to keep on learning how money works.