Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

What Is the Rate of Return on the Louisiana Purchase?

Economics / US Economy Jul 07, 2014 - 04:45 PM GMT

By: David_Howden

Economics

David Howden and Daniel Fernández-Renau Atienza write: Everyone loves making a buck, including governments. Unfortunately, the reality of many “great deals,” especially in the history books, has today been inflated to mythical proportions.

While most countries throughout history expanded their frontiers through peaceful trade or the spoils of war, the United States purchased much of its land, mostly from foreign governments. Today several of these land purchases are immortalized as great financial coups for the country.


Of the great land purchases, the three most famous are: the purchase of Manhattan from the natives in 1626; the Louisiana Purchase from the French in 1803; and finally the Alaska Purchase from the Russians in 1867. Each of these transactions shares in common the fact that they were voluntarily agreed upon by the parties directly involved, and that the sums involved are paltry by today’s standards. (Historians debate whether the natives that “sold”Manhattan to the Dutchman Pieter Minuit understood the concept of private property in the same sense as European merchants. The surviving documents for the purchase of Manhattan show a completed contract with no ensuing bloodshed or hard feelings on either side.)

The problem with reckoning costs in historical terms is that it compares apples to oranges. A dollar today just doesn’t buy what a dollar bought in 1626, 1803, or even a decade ago.

Adjusting for the effects of inflation throughout American history is a little complicated. Up until 1914 America had been on some form of gold (or silver) standard. There were several bouts of deflation during this time to mute the effects of inflation, which in general was quite tame. Inflation averaged 0.4 percent per year prior to 1914. In 1914, the creation of the Federal Reserve System changed everything dramatically. With the ability to economize on bank reserves and to create fiat money at whim, the inflation rate surged. Since 1914 the inflation rate has averaged about 3.5 percent per year.

Deal

Year

Historic Cost

Inflation-adjusted to 2014

Manhattan

1626

Goods worth about 60 guilders (24 US dollars)

$2,365

Louisiana Purchase

1803

$15 million

$729 million

Alaska Purchase

1876

$7.2 million

$261 million

Adjusting the original purchase prices for inflation, they still look pretty good. In fact, the price Pieter Minuit paid for all of Manhattan would today buy about a half square meter of condo real estate on the island. Not bad. Likewise, sitting smack-dab in the middle of the Louisiana Purchase, farmland in eastern Nebraska today sells for around $7,000 an acre. The United States government bought roughly 53 million acres in 1803 for the same price as 100,000 acres of Nebraska farmland would cost today. Again, that looks like a shrewd investment.

But wait. When these tracts of land were initially purchased they were undeveloped. It would take some time before the pioneers, capitalists, entrepreneurs, and settlers arrived and started to make improvements to the land. Land in Nebraska or Manhattan is now more valuable because of the infrastructure improvements — highways, canals, utilities, and other services — that were made throughout the centuries. This allowed the land and people to be more productive.

Agriculture, such as dominates the eastern Nebraska landscape, has experienced productivity in leaps and bounds over just the past decades. Wheat yields which averaged less than 1,000 kg/Ha in the 1950s have increased to over 2,500 kg/Ha since the mid-1990s. Advances in mechanization, fertilizers, irrigation, herbicides, and methods of planting have all had the effect of increasing what we can harvest from this land. (In 1900, 38 percent of the US labor force was still employed in agriculture; today the figure is less than 1 percent.)

There was virtually no productivity on Manhattan island at the time it was purchased, and thus of less value. Today, 388 years later, and much work by hundreds of thousands of people, Manhattan has been transformed from a wilderness into a global financial center.

Adjusting the purchase prices for inflation for these three tracts of land is a good start, but it still compares apples with oranges. An acre of rocky, uncleared Nebraska land in 1803 is just not the same as a tilled, fertilized acre of farmland today.

To see if the prices paid centuries ago were reasonable, we need to determine what the same land is worth today; this will allow us to see what the return on the original investment has been. One way is to treat the current level of production in each region as a perpetuity to determine its present value. (We will discount these future cash flows at the long-run rate of nominal GDP growth of 5.5 percent.)

The greater metropolitan area of New York City generated $1.3 trillion in income in 2012, roughly 8 percent of the American total. The present value of a perpetuity paying $1.3 trillion per year (ignoring growth), discounted at 5.5 percent, is just shy of $24 trillion dollars.

The Louisiana Purchase is more complicated, as its boundaries do not correspond to actual states today. If we include states that have at least half of their area within what was the Louisiana Purchase: Montana, Wyoming, Colorado, Oklahoma, Louisiana, Arkansas, Kansas, Missouri, Iowa, Nebraska, South Dakota, North Dakota and Minnesota, we find that their combined output is roughly $1.7 trillion, or 12 percent of total American GDP. The present value of such a perpetuity (again, ignoring growth for simplicity) discounted at 5.5 percent is about $30 trillion.

Finally we get to Alaska. The total output of this state was around $60 billion last year in 2013, or about 3.5 percent of the total GDP of the United States. This perpetuity is worth around $1 trillion.

So how good were these original purchase prices viewed with the benefit of hindsight? We can answer this by comparing the present value of their current output with their original cost.

Deal

Year

Historic Cost

Present Value of Current Output

Rate of Return (%)

Manhattan

1626

$24

$24 trillion

7.4

Louisiana Purchase

1803

$15 million

$30 trillion

7.1

Alaska Purchase

1876

$7.2 million

$1 trillion

9.0

While historians often give credit for these purchases to the foresight of the governments of Thomas Jefferson and Ulysses S. Grant, in reality they haven’t paid off as well as one might expect. The Louisiana Purchase in particular has only “returned” about 7 percent once we adjust the figures for economic growth since 1803. The purchase of Manhattan hasn’t fared much better, and the figure would even be worse if we were to include only output produced within Manhattan, instead of the greater New York metropolitan area. All three purchases experienced fairly standard rates of return compared to what the general American economy has been able to generate.

By all appearances, instead of being wonder-investments they are just par-for-the-course. In comparison to many investors, like Warren Buffet for example, these returns are downright dismal.

To be fair, there are intangible benefits to each of these purchases not apparent in the objective numbers. Manhattan provided a trading foothold in the new world. The Louisiana Purchase secured the Mississippi River watershed, and with it, removed the ability of Napoleon and the French from halting the westward advance of Americans. Finally, Alaska has suffered from centuries of public ownership of its lands with heavy-handed regulations stopping entrepreneurs from developing its resources and putting them to good use.

This exercise demonstrates the dangers inherent in looking at historical transactions and thinking of them in modern terms. Not only is adjustment for inflation necessary, it may be insufficient as improvements to productivity still create a comparison of apples to oranges. The real value and relevancy comes by adjusting historical amounts by economic growth; only in this way can we grasp how profitable certain ventures have been.

David Howden is a PhD candidate at the Universidad Rey Juan Carlos, in Madrid, and winner of the Mises Institute's Douglas E. French Prize. Send him mail. See his article archives. Comment on the blog.

© 2014 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules