By Dr. Brian Grinder and Dr. Dan Cooper

Friends of Financial History is pleased to launch a new feature that was developed with the financial educator in mind. This column will appear regularly and will provide interesting historical information for many of the most important financial concepts. The format is intended to facilitate transition directly from the magazine to the lecture. The column is prepared for Friends by two-award winning educators, Dr. Dan Cooper and Dr. Brian Grinder.

The first column discusses compound interest and gender-bias in the historical context of the life of Hetty Green, also known as the "Witch of Wall Street". This month we celebrate Women's History and remember the accomplishments of Ms Green in the world of American finance. We welcome any comments on this new addition to Friends.

Legends are often illusory, and the legend surrounding Hetty Green (1834-1916) is no exception. Discerning facts and fiction in the life of this eccentric millionaire is difficult indeed. Books with such titles as The Witch of Wall Street: Hetty Green, Some Queer People and Charmers and Cranks: Twelve Famous Women Who Defied the Conventions include less than flattering accounts of Green's life. Much has been written about her greediness and miserliness, often to the exclusion of her financial abilities. One thing is certain, Green's life offers a unique anecdote on the power of compound interest. We use Hetty Green's story in our classes to introduce a discussion of both the time-value of money and diversity.

Friends of Financial History has also fostered the myth surrounding Hetty Green. The July 1982 edition of Friends states, "...she must have possessed some unnatural powers of magic. ...she started with a one million dollar inheritance and turned it into one hundred million dollars..." But in fact, the only magic that Hetty Green knew and understood was the magic of compounding. Green understood that money was a tool that must be employed efficiently if its owners were to profit, and the only way to profit was to be on the magic side of compounding. However, she lived in an age where Wall Street was largely a man's world. Women, it was believed, were not capable of handling money. This was very likely the greatest problem Hetty Green faced in her Wall Street career.

As a child, Green was exposed to the world of business and finance by her father and grandfather who were engaged in the profitable business of whaling. Since her mother was ill much of the time, Green spent more time immersed in the business world than in the more acceptable feminine activities of the nineteenth century. It is believed that as a young girl, Green often spent the evening reading from the financial news to her father and grandfather. A quick mind, an aptitude for business, and the tutelage of her father and grandfather no doubt helped her to become knowledgeable in the field of finance. This early financial education was to be of great benefit to Green.

After her parent's deaths, Green had a difficult time gaining control of any of the family fortune. Both sides of her family resisted her direct control simply because she was a woman. Women, it was commonly supposed at the time, simply did not have the ability to handle finances. As a result a woman's inheritance was generally placed in a trust account which was administered by a competent male. Finally, she managed to gain control of $1,000,000 after the death of her father. This sum was to become the base for the vastly large fortune she accumulated over the next fifty years.

How does a woman with a great deal of money and ability operate in a financial environment that largely excludes her gender? Perhaps Green's eccentricities and apparent greediness were simply her way of dealing with this hostile environment. For it was definitely hostile. A contemporary of Green's once explained her investment success by claiming she had a powerful masculine brain in an otherwise female constitution. She constantly had to be on guard for individuals eager to take advantage of her supposed financial inadequacies. Her strange behavior may have simply been a defensive posture that enabled her to operate in the world of finance.

Green's investment philosophy can be summarized in her own words:"I don't believe much in stocks. I never buy industrials. Railroads and real estate are the things I like. Before deciding on an investment I seek out every kind of information about it. There is no secret in fortune making. All you have to do is buy cheap and sell dear, act with thrift and shrewdness and be persistent." (WOW p. 139)

What can we learn about Hetty Green? While few of us would want to emulate her eccentric and frugal lifestyle, we can learn from the financial concepts she used. First, it is clear that Green was not a speculator. She did not seek investments which promised to yield tremendous short-term returns. Instead, she invested conservatively and for the long-term. Although we will never know the exact amount of Green's wealth at her death, she is said to have increased her one million dollar inheritance one-hundred fold over a fifty-one year time period. We are quick to help our students understand that this feat can be accomplished with an annual compound rate of interest of less than 9.5%.

Second, Hetty Green was always on the magic side of compound interest because she allowed compounding to work for her rather than against her. She lent millions in her lifetime, but never borrowed. When panics hit and wiped out highly levered investors, Green was able to pick up investment bargains because she always had plenty of cash available. Green understood that seizing opportunities requires preparation and careful planning. She was simply never caught unprepared.

Third, she never consumed investment principal. Anyone who has ever studied Hetty Green's life knows this is an understatement. Her frugal ways were legendary, but even here there is a lesson to be learned. Frugality in moderation can be of great benefit to an investor, because financial goals are more difficult to reach once investment principal has been consumed. Green understood that consumption today precludes future compounding and that the benefits of compounding require a long investment horizon. This is a lesson our students must also understand.

Finally, Green proved that women are not financially inferior to men. She did battle with the best financiers of her time and usually won. The path she blazed through Wall Street was most impressive. Whatever her other personal failings in life, Green was a shrewd businessperson and a successful investor. She proved that true investing success can be blind and a function of aptitude and preparation rather than gender and race. We live in a time when opportunities for women in finance are greater than they have ever been thanks in part to Hetty Green.

Bibliography

• Black, Ladbroke, Some Queer People, London, Sampson Low, Marston & Co., LTD., 1979.
• Garrison, George H., "Hetty Green Witch of Wall Street," Friends of Financial History, Issue #16, July 1982, 18-19.
• Lewis, Arthur H., The Day They Shook the Plum Tree, New York, Bantam Books, 1963.
• Ross, Ishbel, Charmers and Cranks: Twelve Famous Women Who Defied the Conventions, New York, Harper and Row, Publishers, 1965.
• Sparkes, Boyden, and Samuel Taylor Moore, The Witch of Wall Street: Hetty Green, Garden City, New Jersey, Doubleday, Doran, and Company, 1935.
• Wycoff, Peter, "Queen Midas: Hetty Robinson Green," The New England Quarterly, June 1950, 147-171.