Crackerjack Greenback Prudent Advice for a Prosperous Future

November 11, 2008

Compound Interest – A Lesson from Benjamin Franklin

Filed under: Investing,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

Benjamin Franklin by kimberlyfaye on Flickr       In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Benjamin Franklin’s Poor Richard’s Almanack. The Frenchman called his parody Fortunate Richard and, attempting to mock the American optimism so well-represented by Franklin, wrote that Fortunate Richard left a small sum of money in his will to be used only after it had collected interest for 500 years.

       Mr. Franklin thought the idea was fantastic and wrote back to Monsieur de la Cour thanking him. Franklin decided to leave a bequest of £1,000 (about $4,550 at the time of his death) each to his native hometown of Boston and adopted hometown of Philadelphia on the condition that it gather interest for 200 years. Franklin believed 200 years was the maximum length of time any person should be able to control assets from beyond the grave.

The Strings

The Puppet Master by stephen031 on Flickr       In 1789, Benjamin Franklin added a codicil, or supplemental provision, to his will providing about $4,550 each (about $108,000 in 2008 dollars) to Boston and Philadelphia. Mr. Franklin stipulated that the funds should be used to make loans at 5% interest to young craftsmen under the age of 25 to help them set up their businesses. The loans were to be given only to those craftsmen who were married, had completed their apprenticeships, and could obtain two co-signers to vouch for them.

       After 100 years, each city was to take 75% of the fund to use for public works (like bridges, pavement, public buildings, and the like). They were to then continue loaning the money for another 100 years. At the end of that 100 years, each city would get about 25% of the money and their respective states would get the rest. Had Boston and Philly followed through with Franklin’s wishes successfully, they would each have had nearly $20,000,000 in their funds at the end of the 200 years.

What Really Happened?

Boston by Paul Keleher on Flickr       In truth, Boston only had about $5,000,000 in its fund at the end of the 200 years, and Philadelphia only had about $2,000,000. That’s still a strong testament to the power of compound interest. Turning $9,100 into $7,000,000 is sure to catch most people’s attention. (And that’s after spending 75% of it halfway through the 200 year period. It could have theoretically reached well over $78,000,000 if they had never spent any and had managed it well.)

Philadelphia by George L Smyth on Flickr       Boston and Philadelphia both started out following Franklin’s wishes, but other factors came into play and thwarted his original plans. The Boston fund started investing in savings accounts and a life insurance company after the Industrial Revolution, when more people started working for big companies instead of setting up their own small businesses. Philadelphia used its fund mostly for mortgages during the last 50 years, which was probably more in line with Franklin’s intentions.

Franklin’s Message

       The point of Franklin’s experiment was partially to benefit two cities dear to his heart, but I believe he was also trying to illustrate the tremendous power of compound interest for future generations. The longer you keep your money invested, the more amazing the power of compound interest. So start saving today, and put your money to work for you!

The Power of Compound Interest
Click the graph to see the power of compound interest.


  1. Great post. I have to wonder what would have happened if our federal government had ever figured this out………..

    Comment by Joshua — November 11, 2008 @ 10:36 am

  2. Joshua, what do you mean? If the government had set aside a little money to invest a long time ago? That is an interesting thought…maybe we wouldn’t have so much debt and would have lower taxes! 🙂

    Comment by Paul Williams @ Crackerjack Greenback — November 11, 2008 @ 10:40 am

  3. I was being a tad bit sarcastic…. my apologies. But it did make me wonder how a Federal government, free from the need for tax revenue, would fair? Sadly, I think it would never happen…. we would simply spend more than we have as a nation… but the idea is nice.

    Regardless, good post.

    Comment by Joshua — November 11, 2008 @ 9:43 pm

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  5. No worries! I didn’t think you were sarcastic. I just wanted to understand what you were saying before I responded.

    I’m not sure we would be free from tax revenue if the government had figured this out a long time ago. I agree with what you said – we’d probably have spent it all and would still be in the same situation. Still, it would have been a nice thought if prudent people would have always been in control of the money. Not likely given the track record of politicians… 😉

    Comment by Paul Williams @ Crackerjack Greenback — November 12, 2008 @ 8:50 am

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  7. But in what or whom would “the Federal government” invest secure enough to ensure a return over 200 years? BF essentially invested in Boston and Philadephia, which reinvested variously. That would hardly work for the Fed. In treasuries? Then then the Fed would be paying itself the interest. In stocks and corporate bonds? That’s been suggested for the Social Security. Recent market experiences have kind of put a lid on that idea.

    Comment by Mark — January 3, 2011 @ 10:22 pm

  8. Why not invest it the same way Franklin advised in his will? Small loans were to be made to young people just starting out. The loads carried a simple 5% interest annually. Ten percent of the original loan amount, plus the annual interest were repaid each year, so that the entire amount was repaid after 10 years. The ROI would be very close to the current rate of return earned on such federal investments as the Social Security Trust. If we’d followed Franklin’s example 200 years ago, we’d be in great shape, now, as you note. As these investments grew, there would be less and less need for additional tax revenue. No more printing money to make up the gaps.

    Comment by John — July 30, 2011 @ 2:04 pm

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