Wednesday, September 29, 1999

Is That Such a Bad Deal?


As I sat in traffic this morning, listening to NPR (National Public Radio), I heard a discussion about the legendary bad deal where a group of Native Americans traded Manhattan Island to the Dutch for $24 in trinkets in 1624. The discussion was trying to debunk the myth, for there is little historical basis for this legend. (The only documentary source is a letter found over 200 years after the fact.) Native Americans and Europeans did not have the same concept of land ownership; the dollar and U.S. currency didn't exist at the time.

But, the basic part of the myth remains -- Manhattan Island is one of the most sought-after pieces of real estate on the planet, and $24 seems like such a piddling little piece of change. Or is it?

In 375 years, the roughly 25 square miles of Manhattan have become a cosmopolitan mecca and extremely expensive. My rough guess is that a squarefoot of Manhattan is worth about $5,000 at today's values (I'm extrapolating from a few real estate ads). That's for a square foot of land, not a square foot of a townhouse or condo, and I'm prepared to believe that I'm off by a factor of five or 10. At that price, Manhattan Island would be worth about $7 trillion (or maybe $70 trillion) today. Again, that's just for the land.

Now, let's pretend you invested that $24 in an index fund that returned an average of 10% annually. (Obviously, it would have been tricky to do business on Wall Street in 1624, but this is a thought experiment.) Invested at 375 years at 10%, that $24 would have grown to almost $80 quadrillion dollars.

Hmmm. Maybe it wasn't such a bad deal after all.

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