Albert Einstein called compound interest as the most powerful force in the universe In 1626, the Red Indians in the east coast of U.S.A, sold Manhattan , to a group of immigrants for $24 in beads and trinkets
For Centuries they were subject to a lot of criticism and comment because of the apparently low value of sale. But it appears that the Red Indians seem to have got a better deal than the people who bought the island. Assuming that the Indians were able to invest their sale proceeds into an 8% compounded rate of return the $24 compounded would have grown to $30 trillion in 1989 when the book was written.
As per the tax records of that time the entire real estate of Manhattan was worth only $28.1 billion.
Lynch argues that even if there are rampant under declarations and the entire property is worth $56.2 billion “the Indians would be ahead by $29 trillion and change”.
Assuming a two-percentage point lower interest rate the Indians would have still ended up with $34.7 billion without having to spend money on the maintenance and upkeep of Manhattan .
This example clearly brings out the power of compounding. Compounding is essentially reinvesting the earnings from a particular asset rather than spending it.
So, in the example taken above, 8% interest on $24 would have been $1.92.Now, instead of spending it, if the money were to be reinvested, the total principal would grow to $25.92. An 8% interest on this amount would be $2.07 around 15 cents more than the previous year.