Magic of Compound Interest

Shortly after Henry Hudson sailed up the Hudson River and modestly named it  after himself the Dutch government established a settlement on Manhattan Island. The Dutch Governor, Peter Minuet, bought the island of Manhattan from the Manahat Indians; he reportedly paid for with trinkets that were valued at around 60 Dutch guilders.

A number of ideas come to mind about this transaction.

  • The first question would be the value of those trinkets in today’s currency.  According Google, 60 guilders in 1626 would be worth approximately $22 in today’s dollars and would have allowed you to buy 1-1/2 pounds of silver.  With those 18 ounces of silver currently selling for four dollars per ounce  in today’s dollars the transaction would be for a total of $72 for the Island of Manhattan.
  • Are you wondering whether the Manahat Indians received a fair compensation for the island? One popular historian of Manhattan reflects that may have been passing through the neighborhood and their selling what they didn’t possess made it necessary for the white man to buy part of the island over again from the tribes living near Washington Heights.
  • This being the case, the Indians certainly did come out ahead since they sold something that wasn’t theirs in the first place.
  • The most interesting part of this discussion would be what investment the Indians might’ve made with their $24  in 1626.  My trusty calculator tells me that had they taken their $24 down to the Chase Manhattan Bank branch on Wall Street and deposited it into a 400 year certificate of deposit at 7.2% compounded annually they would be able to cash it in 2025 for approximately $28 trillion.
  • Of course they’ve might have been tough negotiators with the Chase Manhattan Bank and obtained a 10% compound annual rate of return which they would be able to cash in 2025 for approximately $865 quadrillion.
  • A recent estimate of the value of the 843 acres of Central Park can be a basis of a realistic estimate of the current value of the land of all of Manhattan without any buildings. That would place a value of somewhere around $8 or $9 trillion. Of course, without the buildings, people and city the land wouldn’t be worth all that much after all.

Two conclusions can be drawn from the story.

First, The poor Indians may have pulled off the earliest and the biggest real estate scam in the history of the United States.

Second, compound interest and time can do amazing things

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