Can This Be Right?

Inflation adjustment is a little tricky, but this still seems like a strange claim:

However, Aaron Blake at the Washington Post finds that controlling for inflation, in fact George Washington would be the nation’s richest president.... In today’s dollars, Washington’s net worth would amount to more than $500 million.
I'm not after the basic claim of the article, which is that we've had a lot of presidents richer than Romney would be if elected.  What interests me is the claim that George Washington was fantastically rich.  I had never gotten that concept from readings of history.  What I thought I understood was that he began quite modestly, as a surveyor -- I've been to places he surveyed, including the town in Virginia that now bears his name.  His marriage to Martha Custis brought him some wealth, and his status as a war hero made it possible for him to obtain more, but I thought he was in debt for a long time after that, nearly until the war started.

That seems to be in accord with the Wikipedia article, which notes:
After retiring from the presidency in March 1797, Washington returned to Mount Vernon with a profound sense of relief. He devoted much time to farming and other business interests, including his distillery which produced its first batch of spirits in February 1797.  As Chernow (2010) explains, his farm operations were at best marginally profitable. The lands out west yielded little income because they were under attack by Indians and the squatters living there refused to pay him rents. However most Americans assumed he was truly rich because of the well-known "glorified façade of wealth and grandeur" at Mount Vernon.  Historians estimate his estate was worth about $1 million in 1799 dollars, equivalent to about $18 million in 2009 purchasing power.
Eighteen million dollars is still quite rich, but it's nowhere near $500 million.  Is the Washington Post as bad with numbers as everyone else in D.C., or is there some way of making sense of the claim?

11 comments:

BillT said...

Blake may be considering the current value of the land, assuming he'd still own that much "undeveloped acreage" so close to the Beltway...

Grim said...

Maybe so. That sounds like a way you could get a number as high as he does; but it's more than an order of magnitude higher than the usual estimates.

MikeD said...

Bill beat me to it. I think they just valued the land he owned as if he still owned all of it.

E Hines said...

One way of arriving at a $500+ million value in current dollars is this, which might not be any more implausible than simply holding the estate (which itself ignores some factors).

It's been some 214 years since Washington's retirement. If we take the $1 million dollar value of his estate and convert it to cash that then got invested at no better rate of return than inflation, we can arrive at today's value of those million dollars with this formula:

(1+i)^y * ($1 million), where i = the annual rate of inflation (in this context), and y = the number of years over which we're inflating. Taking the historical rate of inflation as 3%,

1.03^214 * ($1 million) = $559 million.

There are refinements to be made to this back-of-the-envelope estimate: a more accurate value of the estate at the start, and a more detailed record of those 200 years of inflation--which would include years of deflation. This coarse estimate also ignores currency conversions over the time. Also, play with the numbers. A small variation in the inflation rate produces wildly divergent end values over that long period.

There is a hole in that "hold the estate" valuation, too: the apparent assumption that any improvements to the estate, including to its physical plant, with resultant changes to output value--which should be included in the estate's valuation--and changes to the products produced on the estate, have been accurately assessed.

The true present value of Washington's estate probably lies well inside those two extremes. Though I'd gladly either trade present value with him....

Eric Hines

RonF said...

Since when is it wrong to be rich? I don't recall the Democrats abandoning Ted Kennedy, and he could have bought and sold the whole GOP slate combined out of petty cash.

Grim said...

It's not a question of whether it's right or wrong to be rich; it's a question of whether, as a matter of fact, Washington was fantastically rich or barely able to sustain a facade of prosperity. That's a significant historical point, and I think the claim that he was wildly rich is simply wrong.

However, if it's not wrong, we will need to revise our understanding of Washington substantially. So, I'm interested in sorting out if the claim is right, or as incorrect as it appears to be on its face.

bthun said...

I'm not sure that using the inflation rate over the last couple of centuries is the right way to measure this net worth matter.

Real estate appreciation, -Washington's net worth is being based on his real estate holdings, right?- may approximate the inflation rate over time, but even small variances of say 1-2% can make a pretty large difference in the estimated worth of a $550k property over a two hundred plus year period. Not to mention that todays reported inflation rates (CPI) do not follow the real inflation rate once energy and food are thrown back into that market basket.

OK, I confess, I'm being picky due to the make up of variables like inflation when the component parts of the variable change over time.

And other than some studies I found on Confederate inflation a while back, I can't find anything in one spot showing U.S. inflation rates prior to 1913.

Then there is a matter of the overhead associated with owning/operating real estate, businesses and so on. Overhead in the form of maintenance, taxes, etc. Such overhead has caused more than a few of the landed gentry to liquidate assets over time in order to continue to operate the remainder.

Establishing the fact of Washington's wealth or lack of is a good thing for the sake of history, but Washington's stature is not moved in any direction by such a determination. At least not for me.

In any event, the attempt to equate George with Mitt and/or any of our current crop of well heeled politicos is interesting.

Grim said...

The usual sense I've encountered is that inflation was essentially flat for the first hundred years of the Republic -- not that there weren't periods of sharp inflation, but that they balanced with periods of deflation, so that the value of the dollar was largely steady.

Thus, using these calculations, $1 in 1774 equates to as much as $1.41 in 1874, but is back down to $1.04 by 1900.

That same dollar is worth at least $27.90 today, because the 20th century saw massive inflation.

Now, interestingly, the calculator does offer a parallel to the Washington question. It calculates the $1 from 1774 as being worth $27.90 today, unless you are asking about the labor value of a commodity from 1774. Then the figure is $508.

That's not just inflation, but the vast increase in the cost of labor. That lets you get to a similar magnitude to the Post's findings, but it does so in just the wrong direction: Washington's labor costs were low because he held slaves. Insofar as they're estimating that as part of his wealth, they would need to deduct the entire slave-related labor following 1865; and that would seem to cut down on the value of his estate considerably.

bthun said...

Exactly.

karrde said...

From what I remember reading, Washington may have been rich on paper (and low in liquid assets) for most of his life after the Presidency.

Attempting to assess Washington's wealth when he was alive (in a way that can be compared to now) is very different from assessing the value his estate would hold if it had been invested safely and kept whole since the time of Washington's death.

One is an attempt to value his holdings then in a way that would make sense to people now. How much food (or gold) would his wealth have bought him, if he chose to spend it all in one year?

The other is an attempt to estimate the potential value of his estate to any hears that might remain, had he left the estate in trust for two centuries.

As Hines says above, the $500 million number looks more like the second case than the first.

Is anyone asking what the Romney fortune would look like if his estate was kept in a trust for two centuries?

I think this is yet another in my list of reasons why I don't trust most newspapermen to report on anything involving numbers. They get dazzled by large values, and seem unable to sort out what the value represents.

rcl said...

Per Grim's deflation remark I was reading a piece on the late 19th century which noted our post civil war period was deflationary for decades. Wages went down for forty years or so. Still this was the period of America's most dynamic economic growth in production and industrialization.

The simple linear inflation computation used to figure Washington's net worth is a simple convenience to the journalist not history.