“Within seventy years of his death, the last of the great Vanderbilt mansions on Fifth Avenue had made way for modern office buildings. When 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.” — Fortunes Children, Arthur T Vanderbilt.
I recently just finished reading Fortune’s Children by Arthur T Vanderbilt, which is a fascinating biographical recounting of the Vanderbilt family, from their rise to prominence in the mid-late 1800s to their fall from the top of the dollar bill pile in the early 1900s.
The quote above is in the introductory chapter of the book. It is, in fact, the exact quote that a friend of mine sent me that made me want to read the Vanderbilt history in the first place.
There is always something to be learned from entrepreneurs and their biographies. We often read tales of great business tycoons and how they started their companies, amassed great wealth and then the book ends. But their story doesn’t. Well, in some cases, the story does. But the story of the money does not.
It is therefore particularly interesting to read a book about a family and how subsequent generations coped with the wealth their forebears built.
Or in the case of the Vanderbilts, America’s one-time most prosperous family, how well they did not.
The family’s fortune was created by Commodore Vanderbilt, who at the time of his death in 1877, left an estate worth over $100m. Estimates put that amount of money as an equivalent of around $200bn[1]. More than today’s richest man Jeff Bezos (~$141bn). The fortune itself was doubled in 7 years from the time of the Commodore’s death by his son, William. Whom, he ironically, thought would be a complete failure. Their money is synonymous with the railway and trains of the USA, and that is where they made a large part of their fortune. However, the Commodore had his start in boating, operating fleets of steamships that took passengers all over the USA. It was from this money that he traversed into the new steam railways and built the original Grand Central Station in New York. So how did they go from the wealthiest family in the US to not having a millionaire among them in the 1970s?
The answer gives clues about how to maintain wealth and the different potholes that people can avoid when raising successors with any kind of inheritance.
Lesson 1: Splitting Wealth
There are two remnants left from the Vanderbilts mansions that once lined Fifth Avenue in New York City. The first is the limestone relief panels, carved for the carriage porch of Alice and Cornelius Vanderbilts mansion, now located across the street from their original location at the entrance of the Sherry-Netherland Hotel. The second remnant is the wrought-iron gates that now form the entrance gateway to the conservatory gardens in Central Park.
In the Commodore’s will, he left trust funds for all of his children, so they would have money to live off. But the rest of his estate, around ~$90m, was left to only one of his sons — ‘Billy the blatherskite’. As we know, William grew that money to over double what his father had made in as little as seven years. It was the Commodore’s express wish that the bulk remained passing from one to one. Not being broken up into small pieces and divided time and time again.
Arthur points out in his book that earlier drafts of Williams’ will had included this stipulation. He had intended to give all of his wealth to his oldest son and leave only trust funds for the rest. However, towards the end of his life, and possibly with the intervention of his second sons’ wife, this shifted and the will changed to be divided more equally between his descendants. His oldest still got the family heirlooms that would typically indicate he was at the head of the family, but not the wealth that Commodore would have wished to a company such items.
“What you have got isn’t worth anything, unless you have got the power, and if you give away the surplus, you give away the control.” — Consuelo Vanderbilt
Every time the wealth was split, those who inherited wanted to spend it. Each branch of the family wanted their own mansion, their own holiday home, their own yacht, and the list goes on. Each desired a private empire with the money that they had seen the rest of their family spend. For that, in their mind, was how a Vanderbilt was supposed to live.
Throughout the Vanderbilt families prominence, there have been ten mansions on Fifth Avenue in New York. By 1947 not a single one still stood.
The amount of money that the Vanderbilts had during that period was so vast that it is hard to put into perspective. Perhaps the easiest way is to look at the amount of money an average person, making ends meet, was expected to earn in a year. For example, a member of their household staff might expect $2000 per year give or take depending on their seniority. On several occasions, the Vanderbilts spent over $200,000 on a single night and party. They could have paid one hundred staff for an entire year with one night’s spending.
If they had chosen every single one of them would have been able to live comfortably for the rest of their life if they had kept with their trusts. They had an annualised income of $50,000 — $120,000 depending on the size of their trust. That level of income would have allowed them to live in luxury for 100s of years. But because the money was split, the principle capital spent, the trusts started to vanish, their outgoings drastically outpaced their incomings.
The lesson then, from the Vanderbilts, is if you want to split the money between different members of your family, then your descendants need to limit their spending according to the size of their portion of the inheritance. A $100m estate might bring in $10m a year, theoretically giving you $10m a year to spend without spending the principal. If you have two children, however, and they each get $50m. Then they only have $5m per year of spendable capital. Of course, this gets worse the further it is split (amongst three children $3.3, amongst ten grandchildren $1m). [2] By the 1970s, the Vanderbilt family had 787 descendants of the Commodore.
If every generation is living at their parents spending capacity or even just trying to maintain the quality of their parent’s lifestyle/estate, then their share will quickly evaporate, and their wealth crumble. This effect is most clearly seen with the length of time the Vanderbilts extravagant mansions existed, but more specifically, how barely any of them outlasted the generation that built them.
Lesson 2: Having something to prove
The late 1800s and the early 1900s are often known as the gilded age. They were full of wealth and spending that had not been seen in the modern era. There were parties costing hundreds of millions of dollars in today’s money. The largest houses New York City has ever seen were built, mansions on a scale, unprecedented up until that point.
But this was a common occurrence, of The Four Hundred were at the top of the New York social scene and they lived like it. But at the top of every hill, there is always another hill, and this golden hill was no different. The head of the 400 were society’s social queens. They threw the grandest parties; spent $1000s of dollars trying to impress each other, trying to catch the notice of these Lords and Ladies of society.
They crowned their own royalty. But because there was no actual hierarchy, no genuine rankings of these paper royals, the top seat could be occupied by anyone.
Battling to the top of the social ladder is an expensive affair. Alva Vanderbilt spent over $300,000 on a single house warming party in 1883. Which if we take the same method we used earlier to calculate the value, was over $300m in 2020 money. It was 10% of the cost of the house itself.
It is important to note that it wasn’t until this party that the Vanderbilts were the staples of New York society that they became. They were outsiders, incredibly wealthy outsiders. But outsiders nevertheless. Alva’s party was the social movement that catapulted their name to the top of all lists and bought them to the forefront of the Four Hundred.
This social climbing and then the maintenance of your social position, was an insanely costly affair, with Alva embarking on new building projects every 3–4 years building new houses, new villas, new mansions. Everything had to be bigger, better and more grand than what had come before it. But more importantly, it had to be better than every neighbour’s property.
Sixty-four years after Alva Vanderbilt’s housewarming fancy dress ball on March 26, 1883, not one of the Vanderbilt family mansions that had dominated Fifth Avenue remained: 459, 640, 642, 660, 666, 680, 684, 742–746, 871, each had been demolished.” — Arthur T Vanderbilt
Being drawn into this showboating competition can still be seen today in some effect with celebrities using their wealth to flash the cash and show new houses, cars, jewellery that they have purchased. Each is trying to outdo the last. Or look at the social media influencers of the last five years and how they incite the younger generations. But these are perhaps out of scale compared to the Vanderbilts. To be more on par with their spending, we need to look no further than the superyacht competition between Russian Oligarchs and Middle Eastern Royal Families.
Money is arguably always a tool to get what you want. It provides the ability to purchase the groceries at the local store but also create private space companies (yachts are clearly not big enough statements anymore) or buy entire islands.
Combine wealth with an ego or having something to prove and you get the overspending, exorbitant flaunting of the Vanderbilts. This style of living, as if you have something to prove, [3] with the money you have will only result in being drawn into spending competitions that will leave your descendants out in the cold. While, there is not quite spending at the levels seen back in the gilded age (if you adapt for GDP spent), or at least curtailed to some extent, there are still many fortunes waiting to be lost.
Lesson 3: Not adapting
A common problem with money as it gets ‘older’ is the rise in ideological conservatism. Ignoring the right-wing, left-wing debate, what I mean by this is as you accumulate more money and as time goes on longer, the desire not to see that money vanish in some astonishing losses increases steadily. Therefore, you often find people that earned money doing one thing, rarely diversify from what they initially did to make the wealth, or if they do, broadening their investments is only a token amount or accidental.
Now, this isn’t a problem if your industry is going to be around for 1000 years and you have structures in place to make sure that your children or heir apparent manage the companies or assets that you have in those industries to manage both the creation and maintenance of that wealth.
This is why Aristocracy in Europe survived for 100s of years without changing at all. They had a way of life that didn’t need to change because society and the industries they involved themselves in did not change in their lifetimes enough to put their lifestyle into jeopardy. Bar, of course, falling out favour with the monarch and having your head chopped off.
But when society changes quickly, when new industries and technology spring up the incumbents have to take notice, they have to act and to change. But very rarely do.
In the case of the Vanderbilts, they had made most of their wealth in the railways. But less than 100 years later that industry had left them behind and evolved into something else. [4]
“By 1970, the foundering giant had filed for bankruptcy. All of its railroad property was transferred to the government’s Consolidated Rail Corporation (Conrail).” — Arthur T Vanderbilt
Now the Vanderbilts had an opportunity to branch out, to be involved in another industry. There was the chance to start a Newspaper in several cities, and one of the Commodore’s grandchildren had started a successful company in that space. But ‘journalism’ was not considered an acceptable profession for a Vanderbilt, and his parents made him give it up.[5]
The concept of a profession not being ‘right’ for someone or an opportunity “just not for me” is something that is still rampant in our society today. We often hold ourselves or others back by creating more reasons not to do something than to do it. We are conservatively minded by sticking to what we know and feel safe doing, rather than taking risks.
When it comes to growing wealth, being safe and conservative with your investments is a relatively wise decision. Careless and frivolous spending will eat into your ability to maintain and increase your capital. But you can be too conservative, to stuck in your ways to want to change. You can not take the opportunities to invest in the new and upcoming technologies because you don’t ever think they’ll catch on (horse and carriage to motorised cars, for example).
The Aristocracy of Europe felt this rumble of change in the last 100 years. The ones that have survived in more than just name have had to adapt. They changed. They let tourists into their homes to see the history their families lived. They let TV shows and films use their grand houses as sets. They opened themselves up to weddings and events. They had to adapt to pay for the upkeep of their estates. The very symbols of wealth that their ancestors had created are now the most significant drains on their lifestyle.
If you close yourself to change, then you cap your wealth. If financial ruin doesn’t take you from within (overspending, lousy luck, global economic issues), then inflation will eventually get you. If your wealth isn’t growing, then it is always shrinking. To grow there has to be some level of risk. Even if that risk is purely diversification of assets, taking the primary income from an industry and redistributing it to other asset classes.
Lesson 4: Non-asset assets
Arguably spending on real estate is a diversification of assets. And the Vanderbilts most certainly spent heavily on property . But there is an essential difference between the way that they invested in property and a sustainable, efficient asset management strategy. It all stems back to the attempts to outshine the other Four Hundred. The spending that was associated and expected of a Vanderbilt.
The decadence that had existed within those gilded walls, the extravagant parties hosted under interior decoration that had more in common with art than buildings. But much like art, the value is in the eye of the beholder. A Vanderbilt house was valued at less than 10% of its construction cost when it needed to be sold. A devasting loss of investment in any normal circumstance. Spending such lavish sums eans you squander on things that provide little value to other people. For you, it might be the perfect home (ironically, the number of mansions and continuous building that many of the Vanderbilts undertook this would be unlikely something they ever felt about their own residences).
All the trips to Europe to buy heirlooms and antiques, all the time and money wasted shipping white marble from Italy or wood from the black forests of Germany wasted because the future buyers didn’t perceive that value.
“The only remaining Vanderbilt building in New York City is, in fact, Grand Central Station, rebuilt in 1903 to replace the original structure the Commodore had erected.” — Arthur T Vanderbilt
The only real return they saw on their Fifth Avenue properties and not all of them will have even come close to breaking even was the price of the land that the buildings resided on. Those massive mansions were taken over by commercial buildings as the city expanded.
Add in the fact that their diversification would have cost more to upkeep per year than they would ever have bought in if they had rented them out and you end up with another cycle of financial disaster.
Assets become assets if other people find them valuable. Otherwise, they are merely sentimental. There is nothing inherently wrong with putting money towards none assets, giving to charity, buying things for people or using money in a way that won’t generate a return. In fact, in many cases, if you are benefiting other people, this behaviour is actively encouraged.
The problems arise when you’re using all your wealth to fund these non-assets or diminishing return assets.
Again, as is a common theme in this article, the irony is that if they had managed to hold on to their wealth and maintain these properties without ending in financial ruin, they would have become assets. Their value would have increased beyond compare, in much the same way that the surviving and evolving Aristocracy of Europe saw their family seats become assets rather pure expenses. But ultimately they would have achieved what they so desperately wanted, to become American Aristocracy.
The lessons in short:
- Splitting wealth might be unavoidable nowadays but avoid raising your children with a lifestyle that is not sustainable. Their expectations will define their lives in the future.
- Spend within your capital limits, don’t outspend your incoming
- Seek diversification to protect the wealth that is accumulated, don’t be too conservative and never branch out. If you have inherited money rather than made it yourself, this will be harder. If you are a parent to a child that is going to inherit wealth, give them the chance to make mistakes and attempt to make money for themselves, so they get comfortable with different levels of risk.
- Don’t buy more false assets than is sustainable. Don’t let them become drains on your principle of wealth and always try and invest in assets that will at least maintain their value rather than lose it.
An extract from a newspaper after the Commodores death while his heirs were fighting a court case and contesting his will.
“The Vanderbilt money is certainly bringing no happiness and no greatness to its present claimants, and we have little doubt that in the course of a few years, it will go the way of most American fortunes; a multitude of heirs will have the spending of it, and it will be absorbed in the vast circulating system of the country. The plans of the dead railway king will come to nought; and if he ever revisits the earth to look after what he had so much at heart in his last years, he will be satisfied that the art of founding a family was one of the things that he did not know.” [6]
Notes
[1] This is probably incorrect. In fact, I spent a good bit of time looking around trying to find out exactly how people have come to this conclusion (the original source is on his Wikipedia page — $185bn). However, no inflation calculators or I found based on reality came out with a result anywhere near that. If you simply account for inflation, then $100m becomes $2.4bn in 2020.
So it appears what they have done is adjust for per cent of GDP and bought that forward into today’s dollars. He was worth roughly 0.01% of the total US GDP in 1877, which gives him in 2020 a net worth of around $200bn.
[2] Of course, this is based on simple calculations to illustrate the point of how wealth, when diluted amongst recipients, makes maintaining it harder and more likely to be lost.
[3] Another point I wanted to highlight but didn’t quite fit in the flow of this article is that there was a common theme running through some of the branches of the family where they wanted to ‘legitimise’ the Vanderbilt name. The American Society of the late 1800s and early 1900s had an addiction to the royalty and establishment in Europe. They wanted nothing more to be called Lords and Ladies in their own right to tie their names to the great families of Europe. Nothing shows this more than the marriage of Consuelo Vanderbilt who married the 9th Duke of Malborough. Ironically, that marriage was arranged so that the Duke could pay for the upkeep of Blenheim Palace and maintain his vast estate with the money from the Vanderbilt purse.
[4] There are multiple issues with the Vanderbilts and the railways and many factors that went into the decline of their company. But what is important is the lack of adequate diversification and unwillingness to adapt to the times.
[5] He went to them looking for a loan to help the business during a rough spot and as a condition of the loan, they made him hand over control to the family lawyer and stop working with the company. That multi-million dollar loan was lost as the business collapsed less than two years later.
[6] He might not have managed to found a dynasty, but he left his mark, and the genesis for his success can still be seen in some of his descendants. Take Anderson Cooper, son of Gloria Vanderbilt, who was part of the famous custody battle in one of the last great generations of Vanderbilts. Cooper makes around $13m a year from his job on CNN.
