As a species, we tend to remember inventions as the things that changed history. Fire, agriculture, architecture, the printing press, electricity, all of these led to immense leaps forward for humanity.
But what's more difficult to get a grasp on is the impact that concepts and ideas had on our progress.
For instance, a very simple idea — that loans can be made, and periodically interest can accrue on those loans — has been with us since we first began planting seeds in the ground.
As communities became more advanced, so did the underlying idea. As government became more organized, so did the implementation of the idea.
That idea — compound interest — has had an instrumental impact on the development of civilization, and it's about time it had its due.
Compound interest is a simple math formula
Compound interest is a type of loan where the accumulated interest is added to the principle moving forward.
Depending on what side of this relationship you're on, things have the potential to go either very well or very badly for you.
Compound interest is calculated by multiplying the present balance by 1 plus the effective interest rate per period raised to the number of compounding.
The reason compound interest has is so revered is because the compounding property means you can either profit immensely or owe a massive debt.
For instance, there's an apocryphal and probably joking quote from physicist Albert Einstein where he attributes it as the "most powerful force in the universe."
It's easy to see why. Saving $10,000 for 10 years with an interest rate of 5% compounded annually gets you $16,288 after 10 years and $43,219 after 30. Overall, people tend to view free money favorably.
Now, think of yourself on the other side of that debt. It's understandable that people have a certain fear of the concept.
Compound interest made agriculture possible and became a crucial part of humans forming cities.
The origin of interest precedes the development of money.
Loans of seeds and animals were likely the earliest forms of interest.
Seeds yielded increases, and after a harvest they could be returned with interest. Animals could be returned with some of their progeny.
By the earliest recorded historical times, this sort of lending was very common.
The development of money meant that rather than returning grain in exchange for an initial loan of grain, people were able to exchange another item linked to a value.
As a result, there's evidence of interest of around 20% being charged on loans of silver or barley by 3 millennial BC in ancient Sumeria.
Source: A History of Interest Rates
See the rest of the story at Business Insider
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