I just visited the Thornhill Estate, which is the ancestral family home of Missouri’s Second Governor Frederick Bates. Because Bates died of pneumonia in his first year of office as governor at the age of 48, his historical impact has been generally neglected. While he was alive, he was a bitter rival with Meriwether Lewis and William Clark because they had greatly differing views on settling land title disputes.
After Thomas Jefferson invoked his constitutional powers to negotiate treaties to acquire 10+ million acres from Napoleon and the Kingdom of France for three cents per acre in the Louisiana Purchase, President Jefferson appointed a rising Detroit postmaster named Frederick Bates to be in charge of recording land titles in the Missouri Territory.
Clark and Lewis encouraged Bates to sell the territories to the highest bidder and collect revenues exclusively on behalf of a government-funded escrow account that was being used to industrialize the Midwest.
Bates had a different view. He read the Louisiana Purchase to only cover land sales from the Kingdom of France, and believed that private French and Spanish businessmen that purchased areas in the Missouri Territory deserved compensation before being stripped of their land. Lewis and Clerk had an adverse possession view of the world, and first argued that the Louisiana Purchase involved the divestiture of all land in the territory in favor of the United States—perhaps a credible argument to use against the French investors, but much more dubious when applied to the Spanish landowners in the Midwest. Alternatively, Lewis and Clerk argued that anyone with a superior claim to the land forfeited their ownership of the land through their absence and were entitled to no compensation.
Frederick Bates thought this was a fundamentally unfair worldview that would undermine the moral authority of America’s land title decisions when it appeared to be acting out of raw power rather than an authority that derived from fair dealing.
Also, he had a pragmatic concern. He feared that deprival of French and Spanish ownership in the region would disincentive France and Spain from trading with St. Louis, Missouri, and Bates wanted to establish St. Louis as a trading post superior to Chicago. Given that the Chicago land title market was not compensating the French and Spanish, Bates thought that even a nominal land payment would generate so much goodwill that would translate in increased export and import business with the Old World that it would be an example of doing the right thing being synonymous with doing the self-interested thing.
Because President Jefferson vested Bates with the sole authority to settle land disputes, his view won out and he was correct that trade with Spain and France—and France in particular—would flourish.
As a reward for his development of the Midwest, President Monroe awarded Bates 1,000 acres of land for free that Governor Bates turned into the family farmstead in the County of Saint Louis, Missouri.
When I visited the Bates ancestral grounds, there were three economic insights that I found worthy of reflection:
First, even though Governor Bates was earning a very lucrative salary in settling land title disputes, he still saw fit to run a business developing 900 acres of peach orchards that were used to sell peaches outright and also convert into brandy and fruit wine.
It was a smart business decision that reflected the tenuous nature of political appointments at the time. If American voters had caught Federalist fever in 1804 and elected Revolutionary War Hero Charles Cotesworth Pinckney as President instead of Jefferson, Bates would have had no fallback if Pinckney’s men instead of the Jeffersonians were appointed to determine the details of westward expansion.
Also, the distinction between labor compared to labor tied to business ownership manifested itself when Governor Bates unexpectedly died on August 4, 1825, just one year into his service as Missouri’s second governor. There were no spousal pensions in force, so his death meant no income to support his wife Nancy.
On the other hand, all of these peach trees could continue to get harvested year after year after Frederick’s death, or they could have theoretically paid for a one-time lump sum. Each of these options do not extent to Bates’ options in the employee context.
Secondly, Bates’ life in the early Missouri territory is a testament to how quickly life can industrialize without the presence of red tape.
In the State of Missouri, there are currently 7 bank branch locations that have been waiting to secure final approval to be built for more than five years. As in, some bank came up with the idea to build a bank branch in 2012, and as of 2017, regulatory approval has still not been fully secured. There is a drag on economic growth when industrious individuals and businesses have to stall in implementing their idea.
The typical bank branch employees has 14 employees. There’s 100 people who could have been employed at banks in Missouri these past few years, but are not, because the bank has not received permission to exist due to traffic studies, zoning grants, and council votes.
Bates would spend a night in his study reviewing claims for thousands of acres of land, literally pull out the quill by his nightstand, and settle disputes involving thousands of acres of land over the course of a week or two in deliberation. Fast decision-making, and the ability to shorten the time between when an idea is entertained and when it is implemented, does have consequences for economic growth.
Charlie Munger recently received attention for comments he made a few months ago at the 2017 Daily Journal meeting when he said that Al Gore inadvertently got rich because his disdain for carbon-emitting stocks led him to “clean energy” Silicon Valley firms that were clean energy because they were largely service firms. And service firms, when they catch a tailwind, are the best investments that offer the possibility of 20% annual earnings per share growth during its 5-15 yearlong prime.
The “regulatory state” does affect the analysis of businesses. Because railroads and telecoms are so regulated and so capital intensive, it is difficult to cast them aside. If you are focused on capital preservation, you can have some assurance that AT&T and Burlington Northern Santa Fe will be operating for a long time. On the other hand, if you are looking for 14% annual returns, you won’t find it from these businesses absent a severely distressed valuation. An investor’s investment is protected by the high barrier to entry, but is compromised in terms on the growth side.
With service firms, you can get much quicker growth by taking advantage of the low barriers to entry and relative lack of regulatory oversight. When you look at the list of the best service sector stocks over the past ten years, you’ll see businesses that were ten-baggers over the course of the decade.
The risk is that the lower barrier to entry for your chosen investment will also exist for its future competitors. The list of service firms that were high-performing investments in 1997 is very different from the list in 2017, and that will be true in 2037 as well.
Third, although we take it for granted now, it is amazing how much the social organization of society has shifted as private business has replaced land ownership as the primary source of wealth.
Dr. Thomas Stanley, in his book The Millionaire Next Door, discussed how social mobility in the United States changed with the Industrial Revolution. Prior to 1840, over 86% of American wealth was inherited, largely through land ownership. Frederick Bates had four kids—an obvious chain-link existed to keep the thousands of acres within the family by passing them down through the generations.
Even though the denominator would cut things up—a one-thousand acre peach farm would be cut down to 250 acres if given to the four sons—it provided a heck of an offset in that each son would get to spend half their adult lifetime taking the proceeds from the sales of 250 acres of peach trees to build up their own base in their lifetime.
By 2012, the average American in the top 1% got to spend less than 8 years in that status. What we understand as the affluent is a largely changing demographic. Of those that make it, they are only spending about a fifth of their adult life with such a status. The upside is that it is much easier to get there than ever before—less than 10% of America’s current millionaires inherited it.
This change is largely a byproduct of scalability. When you own land, you are limited with your growth options. If you owned a thousand-acre farm that is well-functioning, you’re never going to double or triple your output in short order. You are physically constrained by the land from doing so.
On the other hand, if you create a product like Tylenol, there is no logistical ceiling on your growth. With marketing and awareness, and proof of concept as headache and fever pain abated, the growth of a product like Tylenol can be scaled indefinitely.
And that is what happened after its invention at McNeil Laboratories in 1955. From 1955 through 1980, Tylenol averaged 35% annual growth. That is because creating a pill is largely limitless task. The reason why Silicon Valley entrepreneurs are able to produce $100 million fortunes in order a decade is because of the force of scalability. Even when the business flounders, and you see investors pour in at 200x earnings for a concept, it is respect for potential of scalability that makes overvaluation possible.
When we enjoy the 4th of July Weekend, the story is rightly on the impressiveness of the story of America’s founding. But there is also the important story of America’s action in its early years which laid the groundwork for economic prosperity, and these events don’t have a clear fit for reflection and memorialization.
Although largely forgotten now, it was the work of men like Frederick Bates that made American prosperity possible. The records indicate that Frederick Bates’ father was a Goochland, Virginia farmer who wanted the best for his son, and sent him to the law firm of Alston & Gannon to study land law after a day of farming. Accustomed to seventeen-hour days, Bates thought nothing of moving to Detroit and then St. Louis to make use of his talents and reap the benefits of his industry and ambition.
Also, in his early days of settling the Missouri territories, Bates reportedly got into a fight with William Clark, Meriwether Lewis, and the father of Texas himself Stephen F. Austin about providing compensation for a Spanish shipment of goods that was seized by a Missouri Territory militia. Because Bates technically had the authority to provide payment, he overruled Clark, Lewis, and Austin to do so. It is a model worthy of imitation that Frederick Bates took his duty to settle disputes in the Missouri Territory so seriously that even the most powerful men on the Frontier could not shake him from wielding power with honor.