Wealth

By Bob Gariano

Anyone who reads about Warren Buffet and Bill Gates and their latest philanthropic activities might begin to question the basic capitalistic instincts of these two successful business people. This was especially reinforced recently when Buffet suggested that estate and inheritance taxes should be dramatically increased. The cries of distress from people of means, and their potential heirs, could be heard across the country. It is my opinion that to understand the rationale behind Buffet’s pronouncements, one should read an article written more than hundred years ago by the industrialist, Andrew Carnegie. The article, entitled “Wealth” was first published in the June 1889 issue of the North American Review. The full text is still readily available from several internet sources. The compelling logic and clear thinking of this writing will impress people of means even today. The article certainly reinforces the ideas that Warren Buffet has embraced.

Before reading the article, it is useful to review the background of the author. Andrew Carnegie was born in 1835 in Dunfermline, Scotland. Carnegie’s father, William, was a handloom weaver who was displaced when automated knitting machines eliminated the need for workers in this field. Seeking work and a better life for his children, William Carnegie immigrated to the United States with his family in 1848. They settled in Allegheny, Pennsylvania, which is now a part of Pittsburgh.

Andrew Carnegie found work in a cotton factory as a bobbin boy and his meager earnings helped to support the impoverished immigrant family. Despite this humble beginning, Carnegie enthusiastically embraced the opportunities of his new country. He determined to educate himself by reading, writing, and attending night school. At age 14, Carnegie became a messenger in a telegraph office, where he caught the attention of Thomas Scott, the superintendent of the Pennsylvania Railroad Company. Scott made Carnegie his personal secretary and assistant. This was the break that the young Carnegie needed. Rising quickly through the ranks of the railroad, Carnegie used his earnings to make investments in the young country’s transportation infrastructure. By the age of 30, Carnegie’s annual earnings exceeded $50,000, a sum that placed him among the most highly paid Americans of the time.

Because railroad infrastructure was based on ferrous metal production, Carnegie recognized the transforming new technologies of steel making. Steel and cast iron are used for steel rails, rail cars, steam engines, and railroad bridges. Carnegie began to assemble the Carnegie Steel Company. The results soon dwarfed any modern day Silicone Valley success story. In 1900 the profits of Carnegie Steel were $40,000,000. Carnegie’s share was $25,000,000. In 1901, Carnegie sold the Carnegie Steel company to legendary banker, J P Morgan, and this enterprise became the basis of the United States Steel Company.

After the sale, Carnegie devoted the rest of his life to philanthropy and, before he died at his country estate in Lennox, Massachusetts in 1919, he distributed over $350,000,000 to various causes in the US and England. His charitable activities are still evident in such institutions as the Carnegie Corporation of New York, the Carnegie Institute of Technology (now Carnegie Mellon University), and the Carnegie Endowment for International Peace. Monuments to Carnegie’s largess and philanthropic skill include more than 200 libraries in the US as well as concert halls, museums, other public use buildings.

From the vantage point of a hugely successful entrepreneur who created one of America’s great fortunes by the time he was 40 years old, Carnegie wrote the article “Wealth” as his description of how to make best use of money. In the article, Carnegie sketches out his logic regarding the accumulation and dispersion of wealth. While a short review will not capture all of his ideas, I think that the fundamental logic is as persuasive today as it was 119 years ago.

First, Carnegie reinforces his position as a capitalist and entrepreneur. He contends that many of the luxuries and advantages of modern life have been created by business builders who wish to accumulate wealth. He makes an interesting case for discrepancies in individual wealth, writing that such differences should be “welcomed as highly beneficial” and even essential for progress to occur in our civilization. As he writes in summary of this point “We start with a condition of affairs that the best interests of our civilization…inevitably gives wealth to the few.” Nothing is surprising in the reading of these first pages of the article. The ideas are a testament to the benefits of capitalism and competition.

Carnegie then attacks the possibilities of what is to be done with this accumulated wealth and he analyses three methods. The first method is most odious to this self made man. The person of wealth can bequeath the estate to their families. Carnegie views this as the most destructive approach. He writes, “Why should men leave great fortunes to their children? If it is done from affection, is it not misguided affection? Observation teaches that it is not well for children to be so burdened.” We can certainly observe in tabloid accounts the destructive effects of such inherited wealth on “burdened” children of wealthy, generous parents today.

Carnegie speaks from experience when he writes that a man should provide for the education of his children and give them the satisfaction and opportunity to be successful in their own way. Carnegie writes, “I would as soon leave my son a curse as the almighty dollar. The thoughtful man must admit to himself that it is not the welfare of the children, but family pride, that inspires these legacies.”

Carnegie then examines the second method to dispose of accumulated personal wealth. This involves bequeathing the wealth to be used after the rich man’s death for public purposes. Carnegie is immediately critical of this approach, writing that it works provided that “a man is content to wait until he is dead before his wealth becomes of much good in the world.” Cynically, Carnegie observes that so much of these posthumous grants are used only to build “monuments to the rich man’s folly.” Remarkably, like Buffet, Carnegie, the capitalist, applauds the use of inheritance taxes which are designed to redistribute such accumulated wealth in a more useful way. He writes, “Of all forms of taxation, this seems to be the wisest.” 

The third method to disperse accumulated wealth is the one championed by Carnegie. Carnegie makes the compelling case that the second career for the person of wealth ought to be in personally managing the dispersion of the wealth accumulated over a life time of success. This is not simple or easy. It takes work and wisdom to give money away effectively. Carnegie offers only one fundamental rule in this endeavor, ”In bestowing charities, the main consideration should be to help those who would help themselves; to provide part of the means by which those who desire to improve may do so.”

This final idea has a personal meaning for me. I grew up in old Allegheny, now a part of inner city Pittsburgh, not more than one mile from Andrew Carnegie’s boyhood home where he had grown up more than one hundred years earlier. The area is still, as it was in Carnegie’s time, of somewhat “humble demeanor”. Nevertheless, in this working class neighborhood, I personally found opportunity. Instead of hanging out on the tough streets of this working class steel town, I spent many afternoons reading in the Carnegie Free Library. The library and its books were a refuge and a creative escape for me. I often visited the amazing exhibits at Carnegie Museum. Later I would attend Carnegie Mellon University. Certainly, I can attest that the Carnegie fortune touched my own young and newly formed ambitions and dreams.

Buffet, Gates, and Carnegie seem to me to be of the same mind. Carnegie was demanding in his challenge to people of wealth, especially those that hoard their fortunes until they die. Of such people he writes, “The man who dies thus rich, dies disgraced.” By contrast, he makes it clear that the good luck and astute business activities that built his own and other fortunes should be viewed as a temporary gift. Accumulated wealth should be given away in philanthropic pursuits with the same energy and diligence in which they were acquired. His view is that accumulated wealth is a responsibility for the person of means and that the wealthy person is “entrusted for a season with a great part of the increased wealth of the community.” Certainly Buffet and Gates seem to be in agreement with this philosophy of charity.