This article was posted on Monday, May 01, 2023

There have been seriously wealthy people since before forever. The first Roman emperor, Octavian (27 BC – 14 AD), accumulated an estimated net worth of $4.6 trillion, equal to 20% of the Roman Empire’s economy. Jakob Fugger amassed somewhere between $400 to $500 billion, equivalent to 2% of Europe’s GDP at the time of his death in 1525. Mansa Musa I of Mali (1280 – 1337) collected an estimated net worth of $400 to $415 billion from salt and gold production. Mali continues to export salt and gold to this day.

His first two principles gave a type of psychological permission for an aspirational family to not keep up with the Joneses, but to live beneath their means. It’s okay to squeeze another year out of that old winter coat.

Today especially, but even back then, there must have been an abundance of people who would, for their own reasons, thrust unwanted advice upon the very rich regarding exactly what the rich should do with their own money. It seldom amounted to much. The rich quickly learned to ignore unsolicited advice from unproven people.

It is a different matter entirely when suggestions regarding wealth management come from peers and near-peers. Andrew Carnegie qualified as both an unsolicited wealth advisor and peer of the ultra-wealthy. In 1901 he sold Carnegie Steel to John Pierpont Morgan for $480 million (then-money, a little over $14 billion in now-money), making him one of the world’s richest men, and peer-ish enough for nearly anybody.

Andrew Carnegie’s association with unsolicited peer-to-peer wealth advice came before the public with two articles he wrote, first published in 1889, when he was 54 years old. This was before he bought the company that later developed into Carnegie Steel. That is relevant because (i) it demonstrates his early interest in the ultimate purpose of wealth. It also (ii) demonstrates the acuity of his observations.

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He was not the first to ask, “What is the purpose of wealth?”. He was not even the first to unfold the question into its predicates. Rabbi Hillel the Elder, early in the Current Era, back when years had two digits, asked the same question but divided it into three parts: (i) “If I am not for myself, who will be for me?” Carnegie answered in his Principles 1 & 2. (ii) Rabbi Hillel’s second postulate was “If I am only for myself, what am I?” Carnegie responded with Principles 3 & 4. The Rabbi’s last question, (iii) “If not now, when?” was not specifically addressed by Andrew Carnegie, but his answer was implied in context: “When your wealth permits”.

Carnegie’s articles were originally printed in the June and December issues of The North American Review, the first literary periodical in the United States. The magazine was published continuously from 1815 to 1940. In 1964 it was resuscitated by the poet Robert Dana, then of Cornell College. He kept it four years, then in 1968 The North American Review was purchased by the University of Northern Iowa, who continues to publish it five times a year. In its day the magazine was subscribed to by everyone who counted and everybody who wanted others to think s/he counted. And it was sometimes read.

The Four Financial Principles

The two articles have subsequently been published in tandem as the Gospel of Wealth. In them Carnegie advanced four financial principles. He thought these, all four of them, in the order given, were fundamental to a good life. The first two Principles were directed to those just beginning their journey.

Principles 1 and 2:

(1) The rich should live unobtrusively, and

(2) provide only modestly for their families.

Clearly, the term “The rich” was a marketing phrase, as the first two Principles were retrospective. They were what Carnegie thought appropriate for a young couple just starting out. Notwithstanding the greeting, they were not addressed to the already wealthy. They were intended to attract the aspirational reader.

A self-made man-of-the-times would scoff at being advised to conduct his life in the manner Carnegie urged. Few alpha males fight their way to the top of the food chain only to live as the first two Principles require: an unrecorded life with an inexpensive family.

But the poor, to whom those first two Principles were directed, had to start somewhere. A young couple’s first two steps towards a better life combine to put their financial affairs in order: live modestly and mind your budget.

Today we have the semi-popular 30-20-50 budgeting formula, which does much the same thing, but benefits by defining “modestly” and “budget”. The 30% refers to the maximum mortgage debt (principal, interest, real estate taxes, and fire insurance) a poor but aspirational person or family should carry. They will pay those costs even if they rent, so the 30% limit remains applicable.

Twenty percent goes to savings, which can be accomplished through an automatic deduction from their paycheck. This leaves the remaining 50% for discretionary purposes like baby formula, utilities, and car payments.

Carnegie, in his first two Principles, in effect, gave a type of psychological permission for an aspirational family to not keep up with the Joneses, but to live beneath their means. It’s ok to wear darned socks, to squeeze another year out of that old winter coat or to pass still wearable clothes from the eldest child to the younger if the sacrifices were the down payment on a better future.

Carnegie knew whereof he spoke. He was born to poor parents. His father was a linen weaver. This was considered a marginal profession at the time because there were so few barriers to entry. Nonetheless, demand for the cloth was such that Carnegie’s father could support his family even through the bad times, if only at a de minimis level.

Carnegie’s birth-home in Dunfermline, Scotland. At the time, it was a center for the weaving of linen.

Then industrialization swallowed weaving. The machines took over. They could do things better, faster, and cheaper than cottage weavers. Cottage weaving was no longer financially feasible. Even a de minimis standard of living was out of reach. In 1848, when Andrew was 13, his parents, Will and Margaret, sold everything they could and booked passage to America.

The Carnegie family disembarked in New York and proceeded to Pittsburgh, Pennsylvania, where they had friends and relatives. It was a 370-mile journey by canal and steamboat and took three weeks. Today it’s a six hour drive.

Once in Pittsburgh, Andrew worked in one of the industrialized cotton mills as a bobbin boy. He carried bobbins to the loom-workers, whose only job was to keep the power-looms fed. Andrew worked from dawn to dusk. His pay was $1.20 per week. A year later he was hired as a messenger for the local telegraph company, where he taught himself to use the equipment and was subsequently promoted to telegraph operator.

That was a skill the Pennsylvania Railroad found useful. According to Wikipedia, depot telegraph operators would keep track of train arrival times at each station and telegraph the information on to other operators and the dispatcher. The local operator would also set the track switches to enable the inferior train to pull into the siding upon the approach of the superior train.

Andrew took a job with the railroad, where his diligence was recognized. He was promoted to superintendent at age 24.

One had to mind the telegraph, but there was much dead time between messages and Carnegie was both ambitious and an insatiable reader. He took advantage of the generosity of a local Civil War veteran who made his personal library available to local working boys. For the rest of his life, books provided Carnegie with most of his autodidactic education. Access to the veteran’s library almost certainly influenced Carnegie’s philanthropic underwriting of public libraries in later life.

Principle 3

(3) The rich should use their accumulated wealth to promote the general good through donations to universities, libraries, medical institutions, public parks, etc.

Carnegie shifted gears when he reached the last two Principles. He no longer focused on living within one’s means. That now was assumed. The discussion was now about excess wealth. These funds can be substantial, but are not now needed and will likely never be needed, yet good manners require something to be done with them. These funds can be substantial.

Carnegie reached that point in 1901, upon the sale of his steel company, to John Pierpont Morgan for almost half a billion dollars (then-money).

It’s difficult to spend that much money wisely. He decided to give it away, in the manner he recommended in his 1889 articles, specifically Principle 3.

Over time Carnegie established a dozen or more charitable trusts and institutions, the largest of which was The Carnegie Corporation of New York. It was founded in 1911 to support education, in the United States and (later) the world.

The Carnegie Mansion at 2 East 91st at 5th Avenue, New York City. Purchased 1902, following the sale of Carnegie Steel to J.M. Morgan.

Principle 4

(4) for the rich are mere trustees of their wealth.

The responsibility of the trustee is to administer trust assets in accordance with the desires of the grantor. This is a relatively simple matter when the donor is also the trustee, but things can change upon his death. Successor trustees have been known to interpret the terms of the trust in expansive ways that would be unfamiliar to the original grantor.

An increasing number of seriously rich people preemptively manage the possibility of mission creep by transferring their wealth during their lifetime or upon their death. One occasionally hears of arrangements whereby the grantor retains the trust income during the remainder of his life and the beneficiary receives the principal in a lump sum upon his death.

More, later.

This article is for informational purposes only and is not intended as professional advice. Klarise Yahya is not a financial planner. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate, perhaps Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].