“Ah, if only he could die temporarily!” Mark Twain’s signature character Tom Sawyer thought after initial romantic rejection from neighbor girl Becky Thatcher.
In real life in April 1894, in what is now the Eastern District of Missouri Bankruptcy Court, the balance sheet of Samuel Clemens did experience such a temporary death.
Twain, who had built a fortune of approximately three-million dollars due to over a decade of royalty payments from both Tom Sawyer and Huckleberry Finn, invested nearly all of that money in escalating bets on “The Paige Compositor”, a revolutionary typesetter that promised the possibility of tripling newspaper production during the midnight hours.
The problem? The Paige Compositor had over 18,000 parts. Not only did this make the cost of the technological advancement unrealistic for publishers, but as anyone who has driven a European car with all the fancy gadgets can attest, the high number of component parts begs frequent failure.
This idea drove Mark Twain to bankruptcy. Many academic textbooks that summarize Twain’s life barely give a nod to the investment in the Paige Compositor, giving it a mere nod with something like, “Twain was a poor investor who had to file for bankruptcy late in life despite making millions.”
That type of portrayal incorrectly casts Twain as a fool in his personal life, something that Twain himself admittedly fed into by famously reflecting on this investment with the observation: “There are two times in a man’s life when a man should not speculate. When he can afford to, and when he can’t.”
But the true understanding of Twain’s investment story with the Paige Compositor is more nuanced, and therefore, more human. Twain, like many boys who eventually grew into professional writers, got his start by working at a family print shop. He was a manual typesetter for a rural Missouri paper run by his older brother Orion Clemens.
When James Paige approached the late middle-aged and prosperous Twain for funds to invest, Twain wasn’t running on mere nostalgia—he also knew how much money could be made by selling equipment to the two thousand different newspapers that were published in the United States at the time. Once he made the initial investment, Paige kept needing more capital to finish the investment—do you cut off an investment at $1.5 million because it is not finished, or furnish the next $250,000 that might not only thwart the loss but lead to fantastic investment returns? Incrementalism is how you accomplish great feats but also how you can suffer mounting losses without consciously assessing your heightened risk.
After throwing away a decade of his earnings from the Great American Novels to satisfy creditors of the Paige Compositor, Twain turned to his friend and John Rockefeller’s business partner Henry Huttleson Rogers to sort out his finances.
Rogers convinced Twain to transfer all of his intellectual property to his wife so that she would collect the royalties from his books. Then, had Twain declare bankruptcy, regain his footing with positive cash flow, and then convinced Twain to launch a year-long speaking tour to earn fees that could further rehabilitate his finances. Twain earned so much money on this speaking tour that he voluntarily to chose to pay all the creditors that he borrowed from to fund his investment in the Paige Compositor.
Rogers’ tactic of switching Twain’s assets into his wife’s name in conjunction with a bankruptcy filing is not permitted under modern bankruptcy laws. However, as part of a long-term estate planning strategy that is not engineered to avoid a specific, known creditor or claimant at the time of the conveyance, such maneuvers are still permitted today.
Many professionals that face the possibility of multiple, long-tail malpractice claims or face a particular prospect of liability, will often systematically transfer their wealth to their spouses or children during their working lifetimes to guard against a risk specific to them personally. Asset protection, in which individuals amass some capital or an ongoing stream of profits and title it in something other than their own name directly, was a strategy being pursued by Northeast businessmen and regarded with moral suspicion in the American heartland.
In Twain’s case, he was far more clever than the history books remember him. Yes, perhaps someone who generates torrents of cash for decades should never have to experience the b-word, but the underlying basis for the investment that bankrupted Twain had a plausible chance of success. He was able to recover and re-establish an upper middle-class lifestyle, enjoying the same lifestyle that he had enjoyed prior to the Paige Compositor invention.