FRANKLIN’S INTEREST
What Happens When You Mix Money, Multiplication, and Not Much Else
Compound interest—which Albert Einstein is said to have called “the most powerful force in the universe”—is the simple idea that when initial money (known as the “principal”) deposited into a bank collects interest and that interest is added to the principal, the interest itself begins collecting interest. The money builds upon itself, allowing the person holding the bank account to build up a sizable war chest over time.
But what if you kept the money in your account, earning interest for decades or even centuries? How would accountants handle that? To answer this, all you need do is look to Ben Franklin, who made exactly that type of investment.
In his will, Franklin left 1,000 pounds each—equivalent to approximately $4,400 in US currency—to the cities of Philadelphia and Boston. But the cities were not given access to the money immediately. Instead, Franklin required that the money be held in trust for one hundred years after his death (which was in 1790). After that, the cities could remove a portion of the trust money to establish a trade school. But the remaining money had to remain in the bank for another one hundred years.
Franklin’s investment paid out handsomely. When he placed the money in the trusts in 1785, the 2,000 pounds combined would have been worth about $100,000 to $125,000 US dollars in 2013. When the trusts became due in 1990, Philadelphia’s was worth $2 million. Boston’s trust, from which less money had been withdrawn following the first century, was worth $5 million. Philadelphia used the $2 million to provide scholarships for local high schoolers. Boston used the $5 million to fund the Benjamin Franklin Institute of Technology, which was established out of the smaller portion of the trust withdrawn one hundred years earlier.
You may wonder what would happen if Franklin had required that the trust remain for another century. In that case, the trust may be ruled illegal. As recounted by Lapham’s Quarterly, in 1938, a lawyer named Jonathan Holdeen divided $2.5 million into a series of trusts, each of which had 500- or 1,000-year locks on them. One of the trusts was given to the Unitarian Church, another to Hartwick College in New York, and another to the state of Pennsylvania, as a way to honor Ben Franklin for inspiring the idea. Holdeen’s goal was to make it so that the citizens of the state never had to pay taxes again—starting in the year 2938 or so.
These trusts, known as the Holdeen Trusts, soon ran into a problem. The size of an ever-growing trust of that starting size and duration could outpace the net worth of the known universe. Holdeen himself estimated that the trust for the Unitarian Church itself could reach $2.5 quadrillion (that’s 2.5 million billions) by the time it became payable.
Litigation hit full swing after Holdeen’s death in 1967, and in 1977, a judge ruled that the trusts could remain for however many centuries Holdeen required, but the interest had to be paid out to the beneficiary each year. Hartwick College, therefore, gets about $450,000 annually from their Holdeen Trust and, in or around 2936, will receive a lump sum payment of $9 million.