Benjamin Franklin and Compound Interest: “Money makes money. And the money that money makes, makes money”

bencompWe’ve all heard of the power of compound interest. We’ve all heard of Benjamin Franklin. But have you heard of the story where Ben Franklin let his money compound quietly for 200 years? Here’s an excerpt from the book The Elements of Investing:

Benjamin Franklin provides us with an actual rather than a hypothetical case. When Franklin died in 1790, he left a gift of $5,000 to each of his two favorite cities, Boston and Philadelphia. He stipulated that the money was to be invested and could be paid out at two specific dates, the first 100 years and the second 200 years after the date of the gift. After 100 years, each city was allowed to withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance—which had compounded to approximately $20 million for each city. Franklin’s example teaches all of us, in a dramatic way, the power of compounding. As Franklin himself liked to describe the benefits of compounding, “Money makes money. And the money that money makes, makes money”

Very neat. A bit of digging suggests it all started out as basically a dare. From a Philadelphia Inquirer article:

Benjamin Franklin, God love him, may have been the first Philadelphian with an addytood. How’s this for an in-your-face response?

In 1785 a French mathematician named Charles-Joseph Mathon de la Cour wrote a parody of Franklin’s Poor Richard called Fortunate Richard in which he mocked the unbearable spirit of American optimism represented by Franklin. The Frenchman wrote a piece about Fortunate Richard leaving a small sum of money in his will to be used only after it had collected interest for 500 years.

Fat chance someone would be dumb enough to try that. Ha. Ha.

Franklin, who was 79 years old at the time, wrote back to the Frenchman, thanking him for a great idea and telling him that he had decided to leave a bequest to his native Boston and his adopted Philadelphia of 1,000 pounds to each on the condition that it be placed in a fund that would gather interest over a period of 200 years.

The trusts for Philadelphia ended up a lot smaller than the trust for Boston, which many people assume is a result of poor management, but perhaps the lower returns were an acceptable result of Philadelphia following Franklin’s original instructions for the money:

“Boston has always prided itself that it compounded the money wisely. Philadelphia has always had an inferiority complex because it didn’t,” said Bruce Yenawine, a Syracuse University Ph.D. candidate in history who has spent years researching the Franklin funds in both cities. “But Boston decided to minimize risks and maximize proceeds. Philadelphia, on the other hand, focused on the other side of Franklin’s instructions by loaning the money to individuals. I think that’s more in keeping with what Franklin wanted.”

Franklin stipulated that the 1,000 pounds (the equivalent of $4,444) be invested and used to provide low-interest loans to “married tradesmen under the age of 26” to get them started in business. Over the 200-year life of the trust, money from the Philadelphia fund was loaned to hundreds of individuals, mostly for home mortgages during the last 50 years. Boston, meanwhile, invested the bulk of the money in a trust fund that Yenawine describes as “a savings company for the rich.”

This NY Times article suggests that the initial funds came from Franklin donating his own government salary:

The 2,000 [pounds sterling] Franklin set aside came from the salary he earned as Governor of Pennsylvania from 1785 to 1788. ”It was one of Franklin’s favorite notions, one he tried to get written into the Constitution, that public servants in a democracy should not be paid,” Mr. Bell said.

Relating this back to personal finance, here is another Elements of Investing excerpt relating a Ben Franklin quote and compound interest:

Think in terms of opportunity cost. Think of every dollar you spend as the amount it could grow into by the time you retire. Ben Franklin famously advised, “A penny saved is a penny earned.” He was right but not entirely right. The Rule of 72 shows why. If you save money and invest it at, say, a 7 percent average annual return, $1 saved today becomes $2 in about 10 years, $4 in 20 years, and $8 in 30 years, and so on and on, inevitably growing. So the dollar a young person spends on some nonessential today would mean that $10 or more will be given up in retirement.


  1. boomalog says:

    Great read, thanks jonathan!

  2. Excellent!

  3. part compounding, part inflation effect. It would have been nice if the authors had adjusted for inflation. Being the nerd I am, I did. 5000$ in 1790 is worth 134000$ today. 20m/134K=149. A return 149 times initial investment is great, but not on the order of the 400 times initial return we are led to believe initially.

    • The utility of the initial and final amounts may be affected by inflation, but the actual initial and final amounts are, necessarily, nominal. The initial $5000 resulted in ~$20M after 200 years.

    • Good point. Looks like you used a 1.5% inflation rate.

      I cranked through the numbers and the return is just a hair under 5% to compound $5k for 100 years, take out $500k, and then end up with $20 million after another 100 years.

      Long-term inflation in the U.S. since the Civil War according to academic studies I have read has been around 4.5% per year. So some of this is fun with numbers!

  4. Any calculation of inflation is questionable at best, let alone a calculation from the 1800’s. Even assuming the cpi is accurate, that wasn’t around until the early 1900’s.

  5. Amazon audible has a special offer where you can download Franklins autobiography in a combined digital book and audio recording format for just a couple of bucks.

    I enjoyed listening to it while driving and doing stuff. Light hearted and interesting. Gives you a feeling for his flair and personality.

  6. FriendOfAll says:

    What a smart man!!!

  7. I did not know that he put his thoughts on compound interest into real-life practice. How fun that the second payment only came recently enough that it was in many of our lifetimes 🙂

  8. Wow what a cool story! Benjamin Franklin was a seriously a cool guy (amongst other descriptors). I have Malkiel’s “A Random Walk Down Wall Street” (a great read!) and will look into “The Elements of Investing”.

  9. I actually just finished reading The Elements of Investing this past week and thought it was a great book. Its a very simple and basic book on the fundamentals of investing for the long term, e.g. retirement. I would highly recommend it to everyone. The part of Benjamin Franklin stands out to me the most as well. He was really the first to stress the power of compounding interest, and lucky for Boston and Philly too.

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