2. A Man With A Plan

On June 13, 2020, in the city of New Orleans, a bronze bust of John McDonough, a real estate tycoon of the early 1800s, was attacked by a group of demonstrators protesting racism. They first defaced the statue's granite base and then loaded the bust itself onto a truck and drove to a spot where they could roll it into the Mississippi River. A second statue of McDonough was attacked a month later. I'm going to guess that unless you're from New Orleans or maybe Baltimore, you've never even heard of John McDonough. Much less have any idea why his statues were torn down. The reason for that is simple. McDonough lived in a plantation maintained entirely by slaves. I'm personally more interested in the reason those statues were erected in the first place. Because when he was alive, McDonough was considered by his contemporaries to be an anti-social and eccentric miser. Sort of the Howard Hughes of his day. When he died in 1850, an obituary claimed that he left no friends to grieve at his death. So why was McDonough honored with statues after he was dead when he wasn't much liked by his neighbors when he was alive? Hello and welcome to You Can't Take It With You, a podcast about the afterlife of America's greatest fortunes. I'm Eric Schoenberg, a research psychologist interested in why people want to become rich. Economic theory assumes people save money only to spend it later, but that leads to a puzzle. Why do rich people leave so much money behind when they die? One obvious answer is that they do it to help their kids, but what about people who die really rich but don't have any children? In the last episode, I discussed the story of the childless Mark Hopkins, who left $24 million in 1879 without any instructions about what should be done with it. In this one, we will look at another fortune created by a man without any children, but who made very careful plans about what should happen to his money after he died. Though as we'll see, things didn't quite work out as he had planned, even before his statues got toppled. McDonough's story begins in Baltimore, where he is born in 1779, one of 12 children of a revolutionary war veteran who is a friend of George Washington's. As a teenager, he was apprenticed to a local merchant who sent him on business to New Orleans around 1800, while it was still part of Spain, where McDonough soon set up his own trading partnership. Following advice from his father, McDonough began to invest his trading profits in raw land. He would eventually own real estate throughout Louisiana, Florida, Georgia, Alabama, and Mississippi, including a belt of undeveloped land entirely encircling the thriving port city of New Orleans. By 1806, he had made enough money to give up his trading entirely and focus full time on managing his real estate empire. In June 1817, while he was still under 40 years old, he abandoned his mansion in New Orleans to move to a plantation across the river, living the last three decades of his life as a near recluse among his enslaved workers. McDonough kept his private life very private, but the story is told that his move was prompted by his being thwarted from marrying the woman he loved because of religious differences. Whatever the reason, he never married and never had children, and when he died, he asked to be buried in the slave graveyard of his plantation. He was renowned for his peculiarities and single-minded focus on building up his wealth. Here are some of the things writers said in his obituaries. "The deceased was disliked as a neighbor, regarded as a corruptor of the judiciary, and a hard credit of. His manners were rigid and repelling. To his relatives who were quite poor, he preserved a studied coldness, only relieving their poverty by the most meager contributions." At this point, you probably aren't at all surprised that his statues eventually got torn down. But why were they put up? Well, it turns out that there was another side to McDonough, revealed in private letters, and especially in what he decided to do with his vast wealth after his death. For one thing, it turns out that McDonough was neither as socially isolated nor as uncharitable as he appeared. He kept in close touch with his family in Baltimore, and paid for the education not only of a large number of his siblings and their children, but also for the children of deceased friends and acquaintances. When McDonough's first employer went bankrupt in 1817, McDonough invited him to come live on his plantation, where he remained until his death a dozen years later. More important, McDonough was a deeply religious man who viewed his wealth through the prism of his spiritual beliefs. In 1804, just as he began to accumulate serious wealth, he wrote out 13 rules for the guidance of my life. Telling himself, "Persue strictly these rules, and the divine blessing and riches of every kind will flow upon you to your heart's content." Three of these rules are particularly noteworthy in understanding why he accumulated such vast wealth. First of all, McDonough enjoined himself to work hard. "Labor to the last moment of your existence." Second, he believed that the purpose of that labor was certainly not luxury. "Deprive yourself of nothing necessary to your comfort, but live in an honorable simplicity and frugality." Rather, he thought that the best use of money was to make more money. "Never spend, but to produce." And McDonough practiced what he preached. He worked 18-hour days right up until his death, and in his will noted that he was especially proud that he had acquired his wealth entirely through. "Honest industry and the Sweat of my brow." McDonough's attitude was further reflected in an even more unusual aspect of his story, namely an innovative plan he created in 1822 to give his enslaved workers the chance to earn their way to freedom. His plan originated because he wanted them to honor the Sabbath by abstaining from labor on Sundays. But a long experience convinced me of the impossibility of carrying this out with men held in bondage. And, on reflection, I saw much in their case. They were men, and stood in need of many little necessities of life not supplied by their master, which they could obtain in no other way but by labor on that day. Consequently, after long and fruitless exertions, to obtain obedience to that injunction, I determined to allow them one half of Saturday from midday until night, to labor for themselves. Unre penalty, if they violated thereafter the Sabbath day, of sale to some other master. Now, having done that, McDonough saw no reason not to let them use their earnings to buy themselves extra time to work further on their own behalf, first buying back Saturday morning, then Friday, and so on until he calculated, after around 15 years, they would be able to buy their complete freedom. It's important to note that McDonough himself did not view this plan as a charitable act, since a key part of the deal was to ask his enslaved workers to work longer and harder on McDonough's behalf so that they could make enough money to buy their own enslaved replacements. I lay no claim nor am I entitled to any credit or praise on the score of generosity. The result of my experiment in a pecuniary point of view, is that in the space of about 16 years which these people serve me, they have gained from me, in addition to performing more and better labor than slaves or narrowly perform, a sum of money which will enable me to purchase double the number of those I sent away. Finally, McDonough's belief in the honor and value of work was such that he thought his approach superior to simply giving his slaves their freedom. Why not just promise him freedom after 15 years' service? To this I have many and strong objections. In that mode, his freedom would appear the gift of his master, who might repent and retract his promise. In the other mode, the slave would have gained it, have purchased and paid his master for it. Now, if you're having trouble deciding how exactly you feel about John McDonough at this point, there's two more important things to know. First, he still was a man of his times, so he didn't think it was a good idea for the freed slaves to to stay in Louisiana and thus plan for them to return to Africa. Second, he believes so deeply in the importance of education in general and specifically in its necessity in preparing his enslaved workers for freedom. That although educating slaves was illegal in Louisiana at the time, he petitioned the state legislature for special permission to set up his own school, offering bond and security to guarantee that the educated slaves would ultimately leave Louisiana. And when the legislature denied his request, McDonough went ahead and did it anyway. He went even further, believing that the group would need both a doctor and a teacher to create a successful society in Liberia. He chose two especially promising youngsters from among them and sent them for higher education at Lafayette College in Pennsylvania. Although McDonough formulated his plan in 1822, he kept its secret until after his first group of about 80 slaves had departed for Liberia in 1842, when he wrote a letter to a local newspaper explaining and justifying his plan. It received a very mixed reception, and so he returned to a studied public silence about his activities until he died in 1850 at the age of 71. At his death, McDonough owned more than 600,000 acres of developed and undeveloped land throughout the south, likely making him the largest landowner in America, an empire worth over $2 million. As I noted last time, comparing fortunes across time is difficult. At a minimum, one must adjust for inflation to deal with the problem that the very measure of wealth, what economists call the "unit of account," changes over time, like a yardstick that keeps shrinking. Measuring inflation isn't easy, but ultimately it's really just math like converting feet to meters. The harder problem is that wealth is not just about what you can buy, after all. Even John D. Rockefeller couldn't buy a computer or a cell phone or penicillin, so in that sense a poor American today is richer than even he was. But also money is about how much power it represents. I mean really, is a poor person today richer than Rockefeller just because they can buy a cell phone? For this reason, the book The Wealthy Hundred, which I mentioned last episode, tries to rank fortunes across time by comparing them to overall GNP, a measure of the total level of economic activity. This also is the benefit of allowing us to compute a modern equivalent, which in the case of John McDonough would be around $13 billion, putting him at 83rd on the list offered by the book. Given McDonough's poor public reputation, it shouldn't come as a surprise that when he died, and it was revealed that he had devoted basically all his wealth to charities in his native home of Baltimore and adopted home of New Orleans. Mostly for funding schools for poor children, his contemporaries were stunned. Here is one of those same newspaper correspondence the day after the will was made public. This document will greatly modify the public prejudice which has long existed against Mr. McDonough. On account of his miserly habits, his hard, exacting nature, and his apparent insensibility to the ordinary feelings and ties of humanity. But the story of the afterlife of McDonough's wealth actually begins well before he died. Since he wrote his will 12 years earlier in 1838, signing it on his 59th birthday. Written without consulting any lawyers, who he didn't trust, without consulting anyone really, the will itself was 31 pages long, but also included another 38 pages. Of highly detailed instructions to guide his executors in managing his real estate empire. He made five copies of the will to be stored in various safe places, but made very clear that it was not to be made public until after his death. Despite all this, or perhaps because of it, McDonough's careful and elaborate plans quickly started falling apart. And the fate of his wealth wouldn't be fully resolved until 1874, 24 years after he died. One major problem arose from whom he wanted to get his wealth. Specifically his decision to leave virtually everything to six charitable organizations and nothing to his family other than a small bequest to one particularly needy sister and her children. Thus giving the neglected relatives a strong incentive to try to have the will overthrown. The other major problem arose from how he wanted his wealth to be used. Namely he did not want to simply give his money away. Instead he explicitly prohibited the sale of any part of his real estate holdings, which he wanted to leave intact so as to provide a steady stream of income to be split among five organizations for helping the poor. The two problems combined to provoke the first attack on McDonough's will by providing a legal rationale for 26 of his relatives, mostly descendants of his brothers and sisters, to immediately sue to have the will overturned on the basis that his plans were unrealistic and more problematically illegal. Though initially unsuccessful in state court, the relatives want a victory when a federal court overturned the will due to a quirk in Louisiana law. Because of the state's distinctive history, its legal system was closer to the French Napoleonic Code than to English common law. And thus included a prohibition against wills which left money to unknown or unborn individuals, and obvious problem under McDonough's plan. By declaring the will in valid, the court was effectively ruling that McDonough died in testate without a will like Mark Hopkins, and his money would therefore go to his legal next of kin, in this case his relatives. But the cities of New Orleans and Baltimore appealed, and in 1853 the United States Supreme Court overturned the lower court's ruling, reinstating McDonough's charitable plans. Their opinion acknowledged that McDonough's plan was perhaps unrealistic. He has overstep the limits which the laws have imposed upon the powers of ownership, overlooked the practical difficulties which surround the execution of complex arrangements for the administration of property, greatly exaggerated the value of his estate and unfolded plans far beyond its resources to affect. But in the end, the court ruled that these flaws were not enough to justify throwing out the will entirely, so the family lost and charity won. Unfortunately, the problems proved to be serious ones. McDonough was a savvy investor willing to work endless hours to build his empire, but the task of maintaining it profitably proved to be just as hard, and beyond the ability of the six-person committee established by the cities to manage it. His properties were widely scattered and included a large amount of unproductive property that not only did not generate income, but actually required further investment, so administrative costs were high. Although the total value of the portfolio was estimated at over $2 million when McDonough died, over the next eight years, income from his estate averaged only about $12,000 annually. Thus, while McDonough had planned for his empire to eventually fund $5 million in charitable gifts, eight years after his death, the total given to any of his intended beneficiaries was exactly zero. Understandably frustrated, one of them, the orphan school for boys in New Orleans, filed suit, and in January of 1857 obtained a decree giving it the right to one-eighth of the estate's income. Since it was unclear how the estate could balance this obligation with its others, the management committee immediately decided to seek court approval to sell all the real estate, use a portion of the proceeds to pay off the charities that had specific claims, and then divide the remaining funds between the two cities to use for free public education as they soft fit. In April 1857, a New Orleans city court agreed to the plan. By the end of 1859, the committee had liquidated McDonough's real estate empire for a total of about $1.8 million. Netting each city $750,000 after paying off two charities, as well as another $100,000 awarded two years earlier by the Louisiana Supreme Court to one of the orphans the McDonough had educated, based on a handwritten codecil that wasn't presented to the probate court until seven years after McDonough's death. But the battles over the estate weren't quite finished. Presumably inspired by that earlier claimant's windfall, an 1860 former employee of McDonough's who claimed to also be his nephew. discovered another handwritten codicil giving him $300,000, but his claim was dismissed by the Louisiana Supreme Court in 1866. Undaunted, he refiled his suit in 1870 only to lose again in 1872, finally ending the ongoing saga of who would get Macdonald's money. Two years later, in 1874, the United States Supreme Court also ended the saga of what was left behind. When it resolved a lengthy dispute over the ownership of land, Macdonald had bought in West Florida right before the Louisiana Purchase in 1803, seven decades earlier. Macdonald's money and his legacy were now in the hands of the civic leadership of the two cities. Baltimore already had a public school system, so they used the money to create the Macdonald Institute, a private farm school for poor boys, which is today a prestigious private boarding school with a few scholarship students. While New Orleans, which didn't have much in the way of public schools, used the money to construct new school buildings throughout the city, ultimately around 40 were built. But there was one more absolutely astonishing feature of Macdonald's plan. You see, his will specifically noted that his schools were supposed to educate poor children regardless of race. Given that I already mentioned, then in the early 1800s, it was illegal to educate slaves in Louisiana. As you can imagine, Macdonald's proviso was not a popular one, and was especially unpopular in 1859, the year New Orleans finally received money from the sale of Macdonald's empire. The city promptly built three schools exclusively for the use of white children. Further construction was halted once the Civil War began a year later, but even after the war, the city of New Orleans continued to follow the letter of Macdonald's intentions by using the money to build schools for both black and white children, but followed the spirit of the south by making the schools segregated and unequal. Only four of those roughly 40 buildings ultimately built were constructed four black students. Baltimore likewise made the Macdonald's school notionally colorblind, but nevertheless managed to avoid enrolling any black students until 1959. So, why did John Macdonald want to become so rich? What preference was he revealing? The Macdonald's plans didn't work out as he intended, due to the mismanagement and racism of the public and heriters of his wealth. There's no question his money did ultimately help to educate many poor children. So did he pile up all that wealth because he loved orphan so much? Layton's life, Macdonald clearly thought so. After all, this is exactly what he wrote in his will. The first principal and chief object I have at heart, the object which is actuated and filled my soul from early boyhood with the desire to acquire fortune, is the education of the poor. He went on to say that even if he had had any children, I would bequeath a very small amount to each merely sufficient to excite them to habits of industry and frugality, but no more. And yet, three decades earlier, in 1804, when he first began to build his wealth, Macdonald gave a very different picture of his motivations. His rules for the guidance of my life include the importance of frugality, but not one word about the importance of charity, indeed, throughout his life, Macdonald's own frugality extended to not giving much money away either. And more important, there's this. If Macdonald was primarily motivated to educate the poor, why didn't he actually give his wealth to charity when he died? Remember, he wouldn't allow either city to sell any of his real estate. Rather, he gave them only the future income that his wealth would generate. In 1790, when Macdonald was 11, Benjamin Franklin died. One of America's founding fathers, Franklin is of course known for a lot of things, but one less known fact about him is this. In his will, he left about $4,000 to the cities of Philadelphia and Boston, on the condition that the money be placed in a fund that would gather interest for 200 years. He did it to demonstrate the power of compound interest, and indeed, even though the cities were allowed to spend about three-quarters of the accumulated balance after a century, by 1990, the funds had grown to $4.5 million in Boston and $2 million in Philadelphia. If you think about this, you might ask, why don't all rich people become super rich through the power of compound interest? Maybe Macdonald's mistake was giving the orphan school for boys in New Orleans the right to any money until his empire had grown to the size needed to fund his dreams. But that's the problem with the power of compounding. It kind of requires that you not care about actually spending any of your money, which is fine if you're someone like Warren Buffett, who famously still lives in the house he bought in Omaha for $31,000 in 1958, despite being now worth over $100 billion. Even when he bought the house, he called it Buffett's Folly, because in his mind, $31,500 was really a million dollars after compounding. Amusingly, his family overheard him wondering aloud if he really wanted to pay $300,000 for a haircut. Of course, it turns out Buffett was wrong. If he'd invested that $31,000, it would actually be worth more than $3 million. On the other hand, he'd also still be living in whatever tiny house he owned before. Plus, it's worth noting that even though Buffett did splurge on the house, and presumably a few haircuts, his wife eventually left him. Most people aren't like Buffett, of course. Usually, people have more trouble saving than spending. But even most of them would agree with economic theory that they should be willing to save rather than spend as long as their savings are an interest. And it is undeniable that pretty much all the tycoons whose lives I will talk about got very rich because as their income rose, their spending didn't. Economists still assume, however, that the point is to spend the money eventually. On the other hand, in 1905, 100 years after MacDonna wrote out his rules for living, the German sociologist and economist Max Weber argued that the beliefs MacDonna had about the inherent value of hard work and frugality represented a very particular Protestant ethic that lay at the very heart of the economic success of the West European world, an ethic which Weber called the very "spirit of capitalism." That is, Weber thought that the enormous economic growth in Western societies starting in the 19th century was precisely the result of the spread of the belief that labor was its own reward and that any wealth that resulted was valuable in and of itself because it was a sign of God's favor. In other words, consumption was not the goal. It was the work and accumulation that mattered. I would argue that MacDonna ultimately left his wealth to charity for the simple reason that he couldn't take it with him. Had he been able to avoid dying, I suspect he would have happily continued to build his wealth forever without devoting much of it to any purpose whatsoever. I should add, however, that although I might sound cynical about MacDonna's beliefs about his own motivations, I do think that dumping his statue into the Mississippi might have been a bit unfair. While I sympathize deeply with the anger and frustration at the racism that runs through MacDonna's story, I think it's important to realize that MacDonna showed no interest in having statues of himself anyway, which first went up in 1938, nearly a century after his death. In his will, he wrote, "I request that my funeral is plain, made without parade and with the least possible expenses, and I have one small last request to make, that it may be permitted annually to the children of the free schools to plant and water a few flowers around my grave." Depressingly, but not surprisingly, the city of New Orleans eventually turned his small requests into a large and racially segregated event. Personally, I think Macdonough would have been far more offended by that than by what that crowd did to his statue. In the first episode, I argued that Mark Hopkins' mistake was in not having a will which gave most or all of his wealth to charity. Macdonough did exactly that, but still fell short of achieving what he wanted to accomplish. In the next episode, I will discuss oddly parallel stories of two great fortunes earned well over a century apart that were left entirely and successfully to charity despite repeated attacks. [Music] You can't take it with you was produced and engineered by Jim Latham, vocal acting by Mark DeCarlo and Sean Brandy. If you're interested in learning more about this story, I recommend William Allen and John Johnson's book Life and Work of John Macdonough.