October 9, 2011
THE POWER OF COMPOUND INTEREST:
Trust Issues (Paul Collins, 10/01/11, Lapham's Quarterly)When the first century of Franklin's rather more practical plan arrived in 1891, it bore $572,000 for Boston and Philadelphia. That was hardly one earth of solid gold, let alone 200 million of them, but Franklin had made his point--and in particular, he'd made it to a New York lawyer named Jonathan Holden.Given that ever less work is required of us it would seem imperative to get going on O'Neill accounts, so we can use these dynamics to develop wealth over the course of people's lifetimes.
Trained in law at Colgate and a multimillionaire through property investments, Holden was the sort of fellow who gave himself haircuts to save money, advocated the use of phonetic spelling in English, and lived on a diet of prunes and shredded wheat. By 1912, as the founder of what he christened "The Futurite Cult"--a few of its publications still survive in far-flung libraries--he'd concluded that the earth had achieved "a stage of civilization when vested property rights will be unmolested even in the case of conquest." The time was right, he decided, to take Franklin's grand economic experiment to its next logical step.
"One of the first American statesmen performed an act which is suggestive of possibilities," Holden said of Franklin in a 1912 pamphlet, wondering whether "some citizen of the present day felt disposed to carry the 'Franklin Plan' still further."
That citizen would be Holden himself. Beginning in 1936, he sluiced $2.8 million into a series of five-hundred- and thousand-year trusts--just one of which, allocated to the Unitarian Church, would be worth $2.5 quadrillion upon its maturation in the twenty-fifth century. A thousand-year fund dedicated to the state of Pennsylvania would yield $424 trillion; the money was to be applied to abolishing the state's taxes. Holden didn't even live in Pennsylvania--he'd picked the state as an homage to Franklin.
And then, of course, there was Hartwick College. Choosing them for a thousand-year trust was more straightforward: Holden had two children and one grandchild attend the school. Then again, as a man fixated by compound interest, perhaps Jonathan Holden was simply enchanted with the college's motto of Ad Altiora Semper: "Ever Upward."
The trustees overseeing these immense funds would be Holden's own children, and perhaps in turn their own descendants. Though not necessarily rich themselves, they would control great riches--and so, long before passing away in 1967 at the age of eighty-six, Holden decided that after his death, the world would still need a way to clearly distinguish the next fifty generations or so of these munificent descendants. Holden was a common name, but Holdeen was not; with a trip to the courthouse, the lawyer added an "e" to his last name.
The old man never did manage to talk any of his children into adding the extra "e" to their names as well. But it hardly mattered: as far as he was concerned, the Holdeen dynasty had begun.
Ten years after Holdeen's death, in a Pennsylvania courtroom in 1977, economist Jack Rothwell laid out the Armageddon that awaited the state. As the trustees of an increasingly vast fund, Holdeen's descendants would gradually control ever-larger swaths of currency. The Holdeen Trusts, he argued, would grow until "They would absolutely own the world."
"Any time you wanted to make a telephone call or take a trip...You would be paying money to the Holdeens," added economic forecaster Michael Evans. "Everyone in the world would work for the Holdeens."
It wasn't the first time the court had heard this argument. Even within his own lifetime, Holdeen's plans nearly disappeared into a maze of lawsuits. In some cases the federal government had opposed the trusts on tax grounds, while in others the state government of Pennsylvania had defended them out of self-interest; some beneficiaries of the funds opposed their breakup, while others wanted to smash open the piggy bank a thousand years early. More ominously, in 1958 the IRS had clashed with Holdeen, arguing in court that it had rightly demanded taxes off of what it considered an invalid tax shelter. The trusts, the IRS argued, would in any case wreck "the tax base of the nation, if not the world."
Although the judge in that case mused the eventual size of the funds meant that "in this day of space exploration...Possibly other worlds will have to be discovered for the plaintiff's future investments," the funds nonetheless survived a number of early challenges. Their survival owed much to their being more high-minded than Thellusson's scheme for enriching his family. Although nearly all states had perpetuity laws like Britain's, there was more leeway given to charitable trusts like Holdeen's. One hundred-year account, set up by suffragette Anna C. Mott, dumped $215,000 on Toledo in 2002--rather more than the thousand dollars she started with--and similar funds were created in the 1920s to relieve Britain from its national debt. In 1919, the Indiana legislature even passed a law to allow a charitable five-hundred-year trust by Charles Fairbanks, an Indiana senator who had also served as vice president under Teddy Roosevelt.
But while some trusts accumulated for a century or two, and others were created with yearly payouts in perpetuity, none were accumulating in near perpetuity. Even Franklin's fund, after a solid two-hundred-year run, finally ended in 1990 with a bounty for the Franklin Institute in Philadelphia and the Benjamin Franklin Institute of Technology in Boston. The roughly $7-million-dollar total payout didn't quite attain the heights that Franklin predicted; such plans rarely factor in the cost of trustees' fees, taxes, or legal battles. But if Franklin's trusts survived at least relatively unscathed, it was the sheer ambition of the Holdeen trusts that would finally give America a decades-long legal fight worthy of Jarndyce v. Jarndyce.
"This stuff is endless," one court staffer groaned to a Philadelphia Inquirer reporter in 1994. "It truly is endless."
Eventually the Holdeen trusts were allowed to stand, but they paid out yearly instead of accumulating and compounding. The matter was not truly settled until 2005, a full ninety-two years after Jonathan Holdeen first wrote his will.
Posted by oj at October 9, 2011 8:33 AM
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