The Deal: U.S vs the Indians - September 22, 2007

This post from Ross Mayfield's blog absolutely blew my mind:

Do we really understand exponentials? In 1626 Peter Minuit bought Manhattan for $24 of trinkets. Who got the better deal, Peter or the Indians? If you invested in 7.5% interest it would be worth a hell of a lot more than all of Manhattan today.

I did the math: (24)*(1.075)^381. Manhattan compounded yearly would be worth $22,224,711,000,000. Or compounded quarterly: 4.73442004 × 10^13 ($47.3 trillion). To put it in perspective, the entire yearly GDP for the United States today is like 13 trillion. If you'd put that money in the account and then took it out in 1790 and invested it into the Philadelphia Stock Exchange, or the New York Stock Exchange two years later, we are looking at such an ungodly amount of money that it's not really even worth doing the calculation for (although I'd like to see it).

Which brings me to my ultimate point. We are just not meant to consider numbers and concepts of this magnitude--or at least not with any sort of ease. The reason that it feels "good" to believe in God is the same impulse that drives you to believe right off the bat which side of the land deal was better. It could probably be debated either way--because 1) New York obviously wouldn't have been industrialized by native peoples 2) The wealth that that has brought in returns each year probably needs to be added to it's worth today--but I have gone my entire life not considering it from that perspective. And I imagine that you have too; it certainly wasn't mentioned in any of my class textbooks. Is it then pretty understandable that people have all sorts of absurd superstitious beliefs, unreal political dogma or cling to heuristics that are often wrong? And I think that's why you can't always win by rational argument or the presentation of evidence.

Posted by ryanholiday at 10:14 AM

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Those Indians made off with an even better deal since they weren't the tribe that lived there and "owned" the island.

Posted by: Sean at September 22, 2007 01:05 PM

"And I think that's why you can't always win by rational argument or the presentation of evidence."

Very true. Especially when you are arguing with someone whose only reference is wikipedia. To that, I throw my hands in the air.

Posted by: secondwind at September 24, 2007 06:00 AM

7.5% is quite high and you won't find any investment in the real world for such a period of course.
Consider an interest of only 3% ... there you go: only 1.86Mio.$. So Manhattan would've been a very good deal. ;-)

Posted by: Clownkiller at September 24, 2007 08:40 AM

Dude are you insane? Do you know what sort of return you could get if you told a bank that you wouldn't be touching the money for nearly 4 fucking centuries? Ever heard of a CD? Not to mention the fact that the AVERAGE stock return is 10% but I'm sure the return in the US market over the last 380 years is something like 80000000000%.

Posted by: Ryan Holiday at September 24, 2007 08:51 AM

GDP is a terrible measure of wealth for this comparison. That's 400 years of accrued wealth compared to one year of domestic production.

I'm leaning towards this type of measure:

http://en.wikipedia.org/wiki/Capital_formation

Posted by: Brian at October 3, 2007 03:13 PM

Its not really fair to compare the present value of 24 1626 dollars to the present value of Manhattan. At the time, both the 24 dollars, and the island of Manhattan, were assets, each with the potential to produce income. (This of course ignores the fact that the $24 was in "trinkets" not bullion or other form of currency that would have produced interest in the first place. I've never seen glass beads accumulate interest before myself). I would venture to guess that all the rents and real property taxes paid on on Manhattan real estate since 1626 dwarfs whatever accumulation of interest the 24 dollars has seen, not to mention the fact that those monies could then have been invested further.

Posted by: dougsadler at October 4, 2007 08:33 AM