

TLB: The Miracle of Compound Interest - rms
http://tlb.org/interest.html

======
JacobAldridge
My ancestors gave their $1 to the Knights Templar shortly after they were
founded in 1129. Using innovating banking techniques (for the early middle
ages) that locked in exactly 5%, no more, no less, every year, that $1 grew to
$5,630 by 1307 - when the Order was arrested by the French Crown.

Now by this stage, French Royalty had overthrown the Merovignian traditions,
and the Carolignians had implemented primogenture, which prevented that $5,630
from being split among the heirs.

As such, growth continued (remarkably, at a consistent 5%), so that when Louis
XIV ascended to the throne in 1643 my family had claim to $70.6 Billion
dollars. Several key wars, the revocation of the treaty of Nantes, and the Sun
King's lavish lifestyle did not affect my 5% at all.

So much so, that by the time his grandson was beheaded during the French
Revolution in 1789, my ancestors' $1 was worth $834 Trillion dollars.

Now Napoleon, on crowning himself Emperor, probably should have used that
money to _buy_ Europe, instead of invading it. But mindful of the powerful
miracle of compound interest he was manifesting for my family, he did not - in
fact, his wars of conquest were largely driven by the need to find that 5%
each year.

You can imagine the relief in France in 1940 when that amount (which by now
had reached $119.8 Quadrillion) was handed over to the Nazis. US Troops
located the amount shortly after the landing at Normandy, and decided only the
great US of A was able to continue the miracle.

And so the money grew, through Kennedy, Nixon, Reagan et al, until by 2008 it
was worth $3,149,637,318,314,090,000. In one of his final acts as President
George W Bush handed control of the money into my personal safe keeping (as
with Social Security, he firmly believed I would be able to do better
investing it myself).

And so it was that on this day, 12 months ago, I invested that entire amount
in Lehman Brothers stock.

I should probably check on that soon to see if the 5% came through for the
870th consecutive year.

~~~
ryanwaggoner
Humorous, but I think you missed some digits for the 2008 figure, as
$3,149,637,318,314,090,000 is "only" 3 quintillion, and it was $119.8
quintillion back in 1940.

~~~
JacobAldridge
Yes, my bad - should have been $119.8 Quadrillion in 1940. Corrected.

------
JimmyL
That model has the implicit assumption that there has been uninterrupted law,
order, conduct of business, and interest-paying accounts for the last five
hundred years, which isn't the case.

There's also a more interesting question - what does the notion of "$1 in
1500" even mean?

------
tigerthink
I'm voting for the fortunes divided option. Families can also grow
exponentially.

~~~
ryanwaggoner
I remember reading somewhere that one of the latest generation of the Du Pont
or Rockefeller family were somewhat surprised to find out that their trust was
just a few million dollars, due to the fortune being spread across so many
descendants. And I would guess that many family wealth managers focus more on
capital preservation and income than growth, so inflation eats away at
fortunes over time.

------
chengas123
Assuming 3% inflation, $1 in 1500 is over $3.4 million today. So it's a bit of
a stretch to say that lots of people had $1 in 1500. That's the miracle of
compound inflation!

------
mynameishere
No. One gold coin bought a good suit of men's clothing in 1500 and will buy a
good suit of men's clothing today. That's all you can do. Everything else went
to seed.

------
brazzy
Miracle, eh? Try "fiction". Unlimited exponential growth is _not even
theoretically possible_ in a three-dimensional universe (goes for tree data
structures too, BTW).

The solution is option 2: every once in a while, great fortunes are wiped out
by great misfortune (if not by plain incompetence): War, natural disaster,
hyperinflation, nations defaulting on their debts. You cannot hedge against
everything.

~~~
jey

      Unlimited exponential growth is not even theoretically
      possible in a three-dimensional universe.
    

He's not referring to infinite growth. Also, "three-dimensional universe" does
not preclude unbounded growth, but a finite universe does.

~~~
brazzy
A three-dimensional universe (and, I forgot to mention, the speed of light as
an absolute limit) _does_ preclude unbounded _exponential_ growth. Anything
physical that grows exponentially would eventually (and faster than you think)
have to form a sphere whose radius increases faster than the speed of light.
Thus, exponential growth is, in the real world, never more than a
comparatively short phase.

~~~
jey
Touché.

------
quellhorst
The banks that paid the highest rates for CDs were the first to collapse. The
more money you have, the harder it becomes to get a good return.

If you save right now, you barely get any interest and that you do get is
taxed by the IRS and inflation.

------
ankeshk
Also there is always tax to consider.

~~~
reedlaw
And inflation.

~~~
bcl
Death.

