Benjamin Franklin’s Gift

 Yesterday while searching for a graph to illustrate how important time is to compound interest,I came across a wonderful post at http://www.crackerjackgreenback.com/the-basics/compound-interest-a-lesson-from-benjamin-franklin/ .Here it is in full below. 

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

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?

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.)

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!