Original Sin Plus Compound Interest Equals Wealthy Nation?

John Maynard Keynes in his 1930 essay, titled “Economic Possibilities for our Grandchildren”, which I lifted from here has a passage which is not his main point but that of my title. Keynes traces the total value of Great Britain’s foreign investment circa 1930 “to the treasure which Drake stole from Spain in 1580”. Here is Keynes passage:

The value of Great Britain’s foreign investments to-day is estimated at about £4,000,000,000. This yields us an income at the rate of about 6½ per cent. Half of this we bring home and enjoy; the other half, namely, 3¼ per cent, we leave to accumulate abroad at compound interest. Something of this sort has now been going on for about 250 years.
For I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her Budget, and found herself with about £40,000 in hand. This she invested in the Levant Company –which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment. Now it happens that £40,ooo accumulating at 3f per cent compound interest approximately corresponds to the actual volume of England’s foreign investments at various dates, and would actually amount to-day to the total of £4,000,000,000 which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest!

So you take an original sin, you put it through compound interest and you have a wealthy nation! Is this more general than the case of UK and Spain?

This entry was posted in economics. Bookmark the permalink.