Why Aren’t Most People Wealthy Today Through the Passing Down of Wealth and Compound Interest?

“History is filled with the sound of silken slippers going downstairs and wooden shoes coming up.” -Voltaire

Why aren’t you the beneficiary of generations of wealth accumulation by your ancestors?

The short answer is it gets diluted as the family tree branches out and as younger generations squander their inheritance.

Of course, for that to happen wealth must exist in the first place. Reality is that throughout most of history, most humans have been dirt poor peasants. Until recently, labor (because of its abundance) has never really been a way to build personal wealth, so preservation of wealth was only an issue for a small proportion of landowners.

Most of us don’t have to go far back along the family tree to find ancestors that either starved to death or had everything taken from them by an authoritarian government.

The idea of a middle class segment of society with the ability to create wealth is very new. This is because the economic (time, effort) surplus generated by inventions like the washing machine, running water, transportation, computing, refrigeration, etc. is a recent phenomenon. Without such inventions – plus relative post-war stability for much of Western society – we wouldn’t even be pondering this question.

For those with wealth in their family tree, where did it go?

Redditor r/Wrkncacnter112 explains:

My cousin is an economics professor. He did a study on rich families and found that it was extremely rare for any rich family to maintain its wealth status for more than a few generations. At least some of them may remain “comfortably well off” for many generations, but massive wealth and power almost inevitably dissipate unless there is a formal set of institutions to protect it from the rest of society (e.g., ruling royal families).

It’s kind of analogous to why string tangles easily — the untangled state is only one possible state, with infinite ways for the string to tangle. So the odds are very high that wadding up a string will cause it to tangle against itself somewhere along its length.

Similarly, there are only a few ways to preserve and grow wealth, and they must be practiced consistently and continuously in order to work. There are essentially infinite ways to screw that up, and the changeover in generations means people with highly varying personalities and experiences inherit the money.

Under those conditions, even if every generation is composed of an only child, the odds of someone dissipating the fortune within a few generations are pretty high, and they only increase when you add in multiple siblings, spouses, multiple offspring, cousins, etc., not to mention the vicissitudes of life such as illness, accidents, natural disasters, wars, etc.

Even most royal families have fallen prey to these things pretty consistently; the British one may seem perpetual, but their line has died out or been usurped several times (for example: Victoria’s replacement of the main Hanoverian line, the Hanoverians’ replacement of William III’s branch of the family, the Glorious Revolution, the Restoration, the English Civil War, the execution of Charles I, the replacement of the Tudors by the Stuarts, the War of the Roses, and so on forever).

The “British royal family” may be doing very well for itself, but how rich and powerful are the Stuarts or Tudors now? Not to mention an unending list of events that could have caused the destruction of the entire institution, such as the collapse of the British Empire, the Blitz and Hitler’s planned invasion of Great Britain, Napoleon’s planned invasion, the French Revolution, the Gordon Riots, the American Revolution, the Seven Years’ War, the Protectorate, and the Spanish Armada, just to name a few.

It is vanishingly difficult to maintain great family wealth (or even ongoing family identity that does not radically change) over multiple generations.

Wealth destruction is often a mundane affair

Most of us aren’t Royalty and the erosion of wealth is much more mundane affair. Here’s a practical example that is probably replicated hundreds of millions of times across society (by Redditor r/dmcevoy14):

This happened to a family friend of mine. Their mother inherited the family dividend portfolio of like 5mil. It made something like 150k a year I was told… was built up over like 40 years of investing… though she sold all of it and took the cash and spent the majority of it on a huge house, furniture and new cars. I think she said there is maybe 400k left and her mother is questioning if she now has enough to make it through retirement. Unfortunately, my friend will not see any of that money.

All it takes is one bump in the road to ruin multiple generations of family wealth.

Your ancestors can do everything right, but all can still be lost

All it takes is one wrong turn for a massive fortune to be destroyed. It’s much easier to lose money than it is to make it. I love this hypothetical story originally told by r/JacobAldridge in 2009:

My ancestors gave their $1 to the Knights Templar shortly after they were founded in 1129. Using innovating banking techniques (for the early middle ages) that locked in exactly 5%, no more, no less, every year, that $1 grew to $5,630 by 1307 – when the Order was arrested by the French Crown.

Now by this stage, French Royalty had overthrown the Merovignian traditions, and the Carolignians had implemented primogenture, which prevented that $5,630 from being split among the heirs.

As such, growth continued (remarkably, at a consistent 5%), so that when Louis XIV ascended to the throne in 1643 my family had claim to $70.6 Billion dollars. Several key wars, the revocation of the treaty of Nantes, and the Sun King’s lavish lifestyle did not affect my 5% at all.

So much so, that by the time his grandson was beheaded during the French Revolution in 1789, my ancestors’ $1 was worth $834 Trillion dollars.

Now Napoleon, on crowning himself Emperor, probably should have used that money to buy Europe, instead of invading it. But mindful of the powerful miracle of compound interest he was manifesting for my family, he did not – in fact, his wars of conquest were largely driven by the need to find that 5% each year.

You can imagine the relief in France in 1940 when that amount (which by now had reached $119.8 Quadrillion) was handed over to the Nazis. US Troops located the amount shortly after the landing at Normandy, and decided only the great US of A was able to continue the miracle.

And so the money grew, through Kennedy, Nixon, Reagan et al, until by 2008 it was worth $3,149,637,318,314,090,000. In one of his final acts as President George W Bush handed control of the money into my personal safe keeping (as with Social Security, he firmly believed I would be able to do better investing it myself).

And so it was that on this day, 12 months ago, I invested that entire amount in Lehman Brothers stock.

I should probably check on that soon to see if the 5% came through for the 870th consecutive year.

Key takeaway: Don’t take your ability to build and preserve wealth for granted. You’re living in a rare time in human history and have an opportunity your ancestors would die for. And many did.