Wealth

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WEALTH

As used here, wealth is synonymous with net worth, the value of an individual's assets (things owned) minus the value of his or her liabilities (things owed). Individuals with an unusually high net worth, like George Washington and Robert Morris before 1790 or so, were "rich" or "wealthy."

In the new American nation, assets tended to be quite visible. Sums that individuals owed to others were relatively difficult to discover, however, so many early Americans who owned considerable assets, but who owed equally considerable debts, were incorrectly identified as wealthy. Thomas Jefferson and Robert Morris after about 1790 are prime examples. Only with painstaking research, and a good deal of luck, can scholars be certain that particular individuals were indeed wealthy and not merely creditworthy. Usually, only a careful review of a subject's probate records can conclusively demonstrate that the value of his or her assets greatly exceeded the value of his or her liabilities.

liabilities

In the colonial and early national periods, liabilities consisted largely of various types of debts: book accounts, promissory notes, drafts, bills of exchange, bonds, and mortgages. The vast bulk of colonial and early national economic transactions were conducted via book account rather than with cash. As the name implies, book accounts were accounting notations made in books. The notations tracked the value of goods or services received and given over a period of weeks, months, years, or even decades. Farmer Brown, for example, credited the account of day laborer Obadiah Smith for thirty-seven days of work and fifty-five cords of wood. Brown debited Smith for the food, liquor, tobacco, shoes, clothes, and other goods that Smith received from him. Book account entries referenced the money value (in local pounds or dollars) of the traded goods, so scholars err when they claim that Americans in this period engaged in barter. Cash payments were indeed rare, sometimes made only on the balance due at the end of an exchange relationship, but the goods and services traded were almost invariably assigned a money price.

Promissory notes and drafts were short-term IOUs. Unlike book accounts, they were readily transferable from person to person and often made explicit promises about repayment dates and interest charges. Drafts and their foreign exchange equivalent, bills of exchange, were used like modern-day checks to transfer funds to distant persons. They could also be used to borrow for a few weeks or months.

Bonds were IOUs for significant sums and long terms, typically one year, with the holder maintaining an option to "call" the principal thereafter. Bonds almost always stipulated the payment of interest and stiff penalties in case of default. Like IOUs, they were negotiable or transferable to new parties. They differed from mortgages in only one important respect, namely that mortgages offered a specific piece of real property as collateral for the loan.

The fact that creditors could call for the principal of a bond or mortgage after the maturity date helps to explain the angst felt by many early Americans regarding indebtedness. Borrowers suffered the existence of such onerous terms because lenders insisted on them. Usury laws capped the legal interest rate too low, well below the usual market rate. Lenders therefore demanded valuable concessions, like call provisions and stiff default penalties, to compensate them enough to induce them to lend at the legal rate.

Calls for repayment usually came at the worst time, during economic slumps. Delinquent debtors were often sued for the principal, unpaid interest, and damages; they usually lost. If they could not pay the judgment, the sheriff seized their real or personal property, or both, and tried to sell it at auction. If the judgment remained unsatisfied, the debtor could be imprisoned for being bankrupt, that is, having negative wealth. Only at the end of the period did debtors' prisons begin to disappear from American life.

assets

One person's liability was another person's asset. A bond, for example, was a liability of the borrower but an asset for the lender or subsequent owners of the bond. In closed economies, therefore, the value of financial assets and liabilities exactly cancelled each other out. The liabilities of many early Americans, however, were owned by foreign investors, primarily in Britain and Holland. A Philadelphia merchant, for example, might owe several Liverpool merchants on account and a large bond to a London capitalist. A New York patron might owe a mortgage on one of his estates to a consortium of Dutch investors, while a Virginia or Mississippi planter might be in hock to a British tobacco or cotton factor. In the period under study, net financial claims were usually negative. In other words, Americans owed more to foreigners than foreigners owed to Americans. Individual Americans, nevertheless, could hold a significant percentage of their assets in the form of financial claims. In 1774 about 17 percent of colonists' total assets were financial. The share of financial assets as a percentage of all assets grew over the period, especially after the financial revolution spurred by Alexander Hamilton in the 1790s.

Physical assets like land, buildings, ships, slaves and indentured servants, livestock, tools of the trade, and personal and household items such as clothes, furniture, and cookware were the preferred assets of most early Americans. In 1774 about 55 percent of colonists' nonfinancial assets were invested in land, 20 percent in slaves and servants, 10 percent in livestock, and 15 percent in producer and consumer goods. Aside from land, which was important everywhere, tremendous regional variations existed. In 1774 slaves composed a much higher percentage of assets in the South than anywhere else and livestock and producer goods predominated in the middle colonies, while New Englanders invested relatively heavily in consumer goods. Over the entire period, occupation dictated the proportion of assets held: farmers owned mostly land and livestock; planters held land and slaves; artisans and manufacturers held producer goods and buildings; and merchants owned ships, buildings, financial assets, and consumer goods. Similarly, region, occupation, and age largely determined the aggregate value of an individual's assets.

wealth accumulation

Most early Americans accumulated wealth by buying or producing low, selling high, and avoiding the converse. Merchants and retailers sought to buy low in one market, or at one time, for resale at a higher price in another market, or at a later time. Physiocratic notions of the sterility of commerce induced many early Americans to look down upon such activities, but they were important to the economy nevertheless. Just as crucial were the activities of artisans and farmers, which added value to goods by transforming them. Ironworkers, for example, turned labor, iron ore, wood, and other raw materials into useful products like stoves, musket balls, and horseshoes. Milliners transformed cloth, thread, ribbons, and other fineries into fashionable dresses. Farmers turned land, labor, and seed into wheat, apples, and pigs. Farmers' wives ultimately made butter from the corn and grasses fed to their milk cows. Similarly, professionals created value by adding their expertise to goods, as when a midwife used her experience to help a mother give birth, or an accountant used his mercantile training to create order out of a jumble of accounts. In all of those cases, if the sale price of the output exceeded the costs of all the inputs, the net worth of the producer increased. If costs exceeded the price, the producer's wealth decreased.

Some Americans seeking easy riches engaged in what modern economists call rent seeking. Basically, that entailed obtaining valuable assets, usually land or corporate charters, from the government gratis or at bargain prices. Sundry land companies, including the Scioto and Yazoo, were tainted by such insider scandals which smacked of old world nepotism, favoritism, and corruption. Other early Americans eager for quick riches engaged in outright theft, fraud, or counterfeiting. Sometimes such activities paid off handsomely, but often they ended in shame, imprisonment, or death. Some individuals inherited their fortunes. Rent-seeking activities, theft, and gifts did not create new wealth, of course, but merely transferred it to new owners.

Early Americans naturally resented those who accumulated wealth through gift or graft. Many believed that high net worth individuals like Philadelphia merchant-banker Thomas Willing (1731–1821) or New York furrier-speculator John Jacob Astor (1763–1848) must have obtained their wealth through illicit or at least unethical means. America's rich, who were not so numerous nor opulent as in Europe, responded by asserting that their wealth stemmed from luck and pluck, not theft, inheritance, or government favor. Importantly, most early Americans aspired to increase their personal net worth at least enough to become "comfortable" or "independent," so that no matter what they thought of Philadelphia merchant-banker Stephen Girard (1750–1831) or New York's land-rich Van Rensselaer or Livingston clans, they generally disdained wealth redistribution schemes.

Ambivalence towards wealth had deep religious roots too. Christianity, particularly the Protestant varieties that permeated early America, espoused the virtues of asceticism and poverty but also gave impetus to Lockean views toward property acquisition and Weberian attitudes toward hard work. It is not surprising, then, that some members of the most pious sects, including the Quakers, were among the early nation's wealthiest individuals.

bibliography

Huston, James L. Securing the Fruits of Labor: The American Concept of Wealth Distribution, 1765–1900. Baton Rouge: Louisiana State University Press, 1998.

Jones, Alice Hanson. Wealth of a Nation to Be: The American Colonies on the Eve of the Revolution. New York: Columbia University Press, 1980.

Mann, Bruce H. Republic of Debtors: Bankruptcy in the Age of American Independence. Cambridge, Mass.: Harvard University Press, 2002.

Pessen, Edward. Riches, Class, and Power: America before the Civil War. New Brunswick, N.J.: Transaction, 1990.

Soltow, Lee. Distribution of Wealth and Income in the United States in 1798. Pittsburgh, Pa.: University of Pittsburgh Press, 1989.

Wright, Robert E. Hamilton Unbound: Finance and the Creation of the American Republic. Westport, Conn.: Greenwood, 2002.

Robert E. Wright

Encyclopedia of the New American Nation