John Jakob Raskob

Some Common Internet Errors

If you're interested in John J. Raskob and have used the Internet for research, you have already found that there are hundreds of web pages that mention him. Below are some links that I've found most useful.  First, though, it might be helpful to point out some of the most common errors that I've discovered concerning Raskob on the Internet.

The most common mistake I've found on Internet pages that mention John Jakob Raskob is his middle name misspelled "Jacob."  Even reputable sites fall prey to this error and it's perhaps understandable given that Jacob is more common than Jakob, especially in the United States. Curiously, though, another frequent error is to misspell his last name "Rascob."  This mistake is most common at personal web sites, but can be found even at more polished, professional sites and a wide variety of printed documents.  Occasionally, he is identified as Jacob J. Raskob.  I've even seen John Jaskob!  In any event, you may want to search on these misspellings if you want to get the widest variety of information on the man.

After misspellings, the most common Internet fallacy is John J. Raskob's relationship with General Motors.  Frequently, he is identified as the "creator" or "founder" of General Motors. While Mr. Raskob was the Treasurer and a vice president of GM in the 1920’s and played an important role in the growth of GM during this time frame, he did not create it.  That distinction belongs to William Durant.

Why is John J. Raskob famous?

Mr. Raskob is mainly known for five main reasons;
—Building the Empire State Building,
—"Everybody Ought to be Rich," (an article he wrote for the Ladies Home Journal in August, 1929)
—His role as Democratic National Chairman from 1928 to 1932, backing the unsuccessful bid of Al Smith for president,
—His career as a financier, especially his roles with General Motors and DuPont and
—His endowment of the Bill Raskob Foundation and the Raskob Foundation for Catholic Activities, Inc.

The Empire State Building

The story goes that one day John Raskob called architect William Frederick Lamb into his office to discuss designing what would come to be known as the Empire State Building.  Mr. Raskob was fond of using jumbo pencils, the kind that often used to be used in elementary schools.  He took one of his pencils, stood it on end and asked Lamb, "Bill, how high can you make it so that it won't fall down?"  Thus began the saga of the creation of one of the most famous buildings in the world. There are many interesting web sites that talk about the Empire State Building.  Here is a short list:

The Official Empire Building web site is likely the authoritative site on the building.
The New York Public Library web site displays a number of pictures of the building under construction.
Some of the most interesting facts about the ESB are:
It was constructed incredibly quickly.  Only 27 months elapsed between the time Raskob asked Lamb the "pencil question" to opening.
Construction lasted only one year and 45 days.
The building did not start making money until after it was hit by a B–25 bomber in 1945

Everybody Ought to be Rich

Published in August 1929 just before the beginning of the Great Depression, this article in the Ladies' Home Journal has been used as an example of irrational exuberance ever since. Though the title and timing of the article may continue to tarnish Raskob's historical reputation, a close reading of the piece reveals that much of what Raskob wrote is misrepresented and the piece contains many prophetic statements.

Let's begin with Raskob's definition of what it means to be rich.  Raskob begins the article by saying,

". . . a man is rich when he has an income from invested capital which is sufficient to support him and his family in a decent and comfortable manner - to give as much support, let us say, as has ever been given by his earnings."

For Raskob, being rich means being able to retire in comfort.  He gives as an example three trusts that he had managed over 20 years with a $15 per month investment.  (This would be roughly equivalent to saving $160 per month in 2003.)  Using a buy-and-hold strategy and reinvesting the dividends paid by each trust, they were each worth over $80,000 by 1929 (a testimony to Raskob's financial adroitness; an implied rate of return greater than 25%!).  He suggests that this amount is sufficient to make the beneficiaries of these trusts "rich."  In 1929 $80,000 was a large sum of money, no doubt about it.  This would be equivalent to roughly $840,000 in 2003.

Raskob's point is that you don't have to be a millionaire to be rich; you just need enough to sustain your life style.  If the title of the article had been, "Everybody Ought to Plan for Retirement by Investing in the Stock Market," perhaps history would have been more kind to him.  While a novel idea then, the idea that the average person could build wealth by investing in the stock market is a widely accepted strategy today.

It was novel in 1929 to suggest that the average American would be wiser to invest in the stock market than in savings accounts and other low interest financial instruments.  Raskob notes that even if the average person is interested in ". . . investing in some stock he has nowhere to turn for advice. He is not big enough to get much attention from his banker, and he has not enough money to go to a broker - or at least he thinks he has not."  In contrast, today there is not nearly the sense of exclusion from the market.  Raskob predicted this.

He informs the reader that he advocates for the formulation of a new type of financial entity which he calls an "equity securities corporation."  He envisions that this corporation, ". . . will invest in common stocks only under proper and careful supervision.  This company will buy the common stocks of first-class industrial corporations and issue its own stock certificates against them.  This stock will be offered from time to time at a price to correspond exactly with the value of the assets of the corporation and all profit will go to the stockholders."  Sound familiar?  This describes what we call a mutual fund today.

Raskob's next step is even bolder.  Many have argued, too bold.

He envisions the creation of "discount corporations" which will help the average investor to leverage the funds invested.  The method for doing this is relatively simple.  If an investor can borrow money to invest in the stock market at an interest rate lower than the rate the market is going up, the investor will be able to afford to buy many more shares of stock than otherwise possible.  Raskob's "discount corporations" would be the financial institutions that make loans to investors in the stock market.  Buying stock with borrowed money is often called buying "on the margin" or buying "short."

It's instructive to remember that, as Chairman of General Motors' Finance Committee, Raskob had established the General Motors Acceptance Corporation or GMAC in 1919.  General Motors was the first automobile manufacturer to allow its dealers to offer a line of credit directly to customers.  When first proposed, many criticized GMAC as folly.  They argued that most working class Americans couldn't really afford new cars and would default on their loans in large numbers.  GMAC was seen as an "incentive for extravagance."  Of course, these critics were proven wrong.  As Raskob observes:

"The results have been exactly opposite to the prediction. The ability to buy automobiles on credit gave an immediate step-up to their purchase. Manufacturing them, servicing then, building roads for them to run on, and caring for the people who used the roads have brought into existence about ten billion dollars of new wealth each year - which is roughly about the value of the farm crops."

Here we see the central theme of Raskob's article.  Allowing members of the general public access to credit not only increases their buying power, it creates wealth for the entire country.  In this context, Everybody Ought to Be Rich is as much a treatise on the superiority of capitalism (over socialism) as it is a primer on investing.

 

 

 

Copyright © 2002-2005 by Jakob Raskob