October 28

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When Banking Was a Gamble

We got a frantic call from my youngest son from school this week. What could be happening?!

He forgot his shoes.

How is that even possible? How do you leave the house, leave the car, and walk into school only to realize you are in your socks? Middle school kids are interesting creatures.

Senay is starting to thrive in Gainesville. The last time I saw her, I couldn't believe how tan she had become. It looks like she's been sunbathing on the beach every day, but in reality, she spends hours on the pickleball court, practicing for the University of Florida pickleball team.

I am in first place in our fantasy football league. In fact, I am currently undefeated at 7-0. This week, I play my son, Alex, who is in second place and who was the champion last year. It should be an interesting day of football on Sunday. I'm sure there will be a lot of trash-talking.

Our dryer has been broken for over two weeks. It has become a desperate situation. With three teenage boys, the laundry piles up supernaturally fast. We have resorted to the old-fashioned way, just like they did on the frontier. 



After writing last week’s article about how the world is much better now than 100 years ago, I became more curious and decided to delve deeper into the topic. It's amazing to see how far society has come, especially when imagining life before the Industrial Revolution in the late 19th century. Let's take a look a three examples.

Poor Rural Family

The average agricultural laborer in the 1870s earned around $300 per year ($6,000 in today's dollars), varying by season and crop. Most of their income was in cash, but barter was still common for local transactions.

Rural areas often lacked formal banking services. Only about 20% of American adults had access to banks, and most rural families never used them.

Rural families typically relied on credit from local merchants or wealthier landowners. Interest rates ranged from 10% to 25%, and failure to repay could result in loss of land or equipment.
Savings were rare. If any money was saved, it was often stored at home in tins, jars, or under mattresses.

The stock market had no relevance to rural life. Stock ownership was limited to the wealthy or well-connected in cities. Poor rural families had no access to brokers or knowledge of investing in shares.

While many families owned their farms, mortgages became more common. Rates were 6-10% (depending on what kind of connections you had). Loan terms were 5-10 years with a balloon payment.

You would always be one bad season of crops from foreclosure. They lived in constant fear of ending up homeless and living as an indentured servant for a wealthier landowner.

Grocery Store Owner

A successful grocery store owner in a big city could earn between $1,500 to $5,000 annually. For comparison, a skilled worker in the city might earn around $600 a year.

As a city-based business owner, they likely had access to multiple banks. Banking in cities was far more established. But you would probably be nervous about the banking system. Between 1800 and 1913, the U.S. experienced at least seven major banking panics that led to waves of bank failures. These included the panics of 1819, 1837, 1857, 1873, 1884, 1893, and 1907, each leading to widespread economic damage and a lack of confidence in the financial system. Can you imagine living in a world where it was common for someone to wake up to discover that all their money was gone?

While cash was becoming more prevalent, bartering was still common, especially for rural customers or lower-income city dwellers. The store owner might accept goods in exchange for groceries. Maybe a duck would get you a teakettle.

City banks offered savings accounts with 3% to 5% interest rates. The store owner might save some profits to build a reserve for business or family emergencies.

While the stock market was still seen as risky for middle-class families, some business owners ventured into investing. The stock market was often viewed as speculative, and many avoided it unless they had extra wealth to risk.

You would largely be excluded from opportunities to participate in wealth-building through ownership or investment. Almost all wealth-building tools were reserved for the old-money rich.

Wealthy Financier

A financier in the 1870s could earn $50,000 or more annually, much of it tied to investments and ownership in assets like railroads. The average CEO of a large company at the time earned 30 to 50 times what a skilled worker made (that number is now from 300 to 1000 times).

He would have accounts in multiple national and private banks, using them to manage large sums of money. He would invest heavily in land and real estate.

He would be deeply involved in the stock market, focusing on the booming industries of railroads, mining companies, and emerging industrial firms. Ticker tape machines at the broker's offices were the only way to track prices. They were unable to day trade with their smart phones.

Wealthy financiers used leverage—borrowing money to invest. They could take out large loans at favorable rates, perhaps 6% or 7%, and reinvest in lucrative industries, multiplying their wealth. This strategy created some of the richest families in history.

By this time, wealthy individuals had access to life insurance, which could provide large payouts to heirs. This, along with trusts and estates, ensured their fortune could be passed down to future generations with minimal loss.

The top 1% of households owned more than 50% of the wealth in the U.S., while the bottom 40% owned less than 1%.

Today, the top 1% of households own more than 35% of wealth, and the bottom 50% of Americans control about 2%.

Of course, in medieval Europe, the top 10% owned 100% of wealth.

Be Blessed,

Dave

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