Compounding case study selling manhattan for $24

Did the Native Americans make a good deal when they sold Manhattan to the Dutch for $24?

This is the premise of a talk given by Monish Pabrai¹. And his answer contradicts the common interpretation that the Dutch took advantage of the Native Americans when they made that deal, and the answer is due to one thing: the power of compounding.

Assume the Native Americans had a money manager that said, with this $24 I can invest it and get a 7% return.

The back of the envelope compounding math is as follows:

1626 -> 2024: ~400 years Assume a 7% return -> rule of 72; your money doubles every 10 years Doubling every 10 years means it will double 10 times in a 100 year period, therefore 2^10 = 1024;

For every 100 year period you multiply your money by ~1000.

400 years later that $24 would equal 24 trillion.

If you add up the value of the undeveloped land today, excluding the buildings built on top of it, it wouldn’t be worth $24 trillion.

The entire wealth of the planet is $300 trillion. The wealth of the united states is $80 trillion. It’s very unlikely that the land value of manhattan alone is worth 30% of the entire wealth of the United States.

Ultimately if they had held on to the island until 2024, they would have actually lost value by holding on to it.

Of course, this isn’t the reality of how that transaction unfolded, but it’s a useful way of thinking about capital allocation, opportunity cost, and compounding.