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"If there really are seven wonders of the world, then the eighth is compound interest."

Milton Freidman, - Nobel Laureate Economist

Few people realize the power of saving over time. Interest on an investment is the consideration paid to an investor for the use of their funds over time. Compound interest refers to aggregation of both principal and interest over time as successive investment periods earn interest on increasingly larger principal amounts due to the fact that interest earned during previous investment periods is added to existing principal. That may sound like a mouthful, but the concept is surprisingly simple - and the effects can be stunningly significant.

It is an often told lore in finance: Most people know that Manhattan was purchased from the American Indians. More specifically, in 1626, Peter MINUIT, a Dutchman, is said to have purchased the island for the equivalent of $24 in trade goods from the Manhattan Indians. Twenty-four bucks! For New York City? What fools! Maybe. Maybe not.

Twenty four dollars, invested in 1626 at a fairly modest 8% rate of interest, would be worth $197,948,307,461,013.00 today. That's 197 trillion, more than the assessed value of all the real estate currently in Manhattan! If you think of all the fortunes made and lost on Wall Street, all the real estate deals, the general commerce, how can this be? The answer is the time value of money.

Consider the most basic example: A $1000.00 investment for 1 year, a simple interest rate of 10% per year, no compounding. At the end of one year you would have earned exactly $100.00. Alternatively, if you invested the same $1000.00 in an investment for the same one-year period at the same simple interest rate of 10%, except this investment is compounded monthly (12 times per year), at the end of one year you would have earned exactly $104.71. Same investment - same interest rate. You may be thinking this $4.71 is chump change - and perhaps it is for a single year. But let's look at another longer-term example to see how the effects magnify over time.

Twin brothers, Mike the Miser and Sam the Spender, are each willed $10,000 by their generous old Aunt Tillie on their 18th birthday. Sam the Spender doesn't squander his stipend, but instead places it in a one-year certificate of deposit, 10% interest rate - no compounding. Sammy wisely decides not to touch the principal and instead spends the $1000.00 dollars interest earned each year (in our example, for simplicity sake, interest rates remain unchanged). Mike the Miser, on the other hand, decides Aunt Tillie's stipend is found money and he chooses to invest it and not spend any of the principal OR the earnings. He invests his $10,000.00 in a one-year certificate of deposit, same 10% interest rate as his brother, compounded quarterly. At a barbecue to celebrate their 28th birthday, Sam is astonished to learn his brother's investment has grown to nearly three times its initial value - $26,850.64. Mike wisely advises his twin brother to check out an investment that compounds his earnings - and over the next few years Sam really means to - but somewhere in the hustle and bustle of every day life Sam neglects to - and even forgets about it - until ten years later - another barbecue. This one to celebrate the high school graduation of Sam's daughter and Mike's son, both born 4 weeks apart.

Mike queries his brother, "Did you ever check out an investment that compounds??". "Never got to it," Sam confesses, "but how big a difference could it make?? I'm earning the same 10% as you!" "Well my investment is now worth over 72 grand ($72,095.68 to be exact)," Mike advises. Impossible, Sam thinks, and begins to doubt his brother's sincerity, or at least his math skills. They never discuss Aunt Tillie's gift again - until 27 years later.

Both families are big on barbecues and this barbecue is to celebrate the long deserved retirement of both twin brothers. Both healthy at age 65, the two had similar careers with comparable earnings history. In discussing their retirement plans, Sam confides he hopes his Social Secuity income coupled with his modest pension will allow he and his wife to keep their home. It would be tight, but they would try. Mike is slightly embarrassed to share with his brother his retirement plans that include the recent purchase of a 50-foot Carver touring yacht.

"Yacht!", Sam exclaims, "You don't know how to pilot a Yacht!" "Of course not," Mike concedes, "which is why I had to hire a captain." At this point Sam is certain some yet-to-be learned fate such as a lucky lottery ticket must have befallen his suddenly prosperous brother. "How can you afford all that?," Sam snaps at his brother.

"Didn't you ever follow my advice in regard to Aunt Tillie's gift?," Mike asks for the last time. Although Sam still had the original $10,000 left to him more than 47 years ago, it is with something just short of disbelief that Sam learns in the ensuing conversation that Mike's $10,000 is now worth more than 1 million dollars ($1,037,735.55 to be exact). The barbecue ends and each brother and their wives depart for their respective, and very different, retirements.

On the drive home Sam can't help but taste just a hint of sour grapes still not believing his perceived misfortune. Even though Sam withdrew $1,000 each year for 47 years, that now sure seemed to pale in comparison to what his brother had accumulated. Still refusing to believe the cold hard reality, Sam is sure that somehow, Aunt Tillie must have been more generous to his brother. After all, he muses, Aunt Tillie always liked Mike better.

In truth, Aunt Tillie loved both nephews the same. About that, Sam was wrong.... but, of course, Milton Freidman is right.

This financial lesson can be a hard one learned, and the earlier in life you learn it the better off you will be.

GCF has a full array of products that allow you to realize the power and benefits of compounded interest!

Click here for a listing of deposit products.


"The first million is the hardest." - Milton Snavely Hershey

"Hershey" has become a household name, and is virtually synonymous with chocolate. Yet, if you had lived in Lancaster County, PA in the late nineteenth century, the name Hershey would have been unknown to you. The name Snavely, on the other hand, was far more famous. The Snavelys were among the most prosperous and successful Mennonite families in Amish country. Milton Hershey's mother Veronica (known as Fannie) was a Snavely, who married a drifter and bum named Henry Hershey. Henry Hershey frequently abandoned Fannie and young Milton leaving them with no visible means of support - so much so that Milton considered himself an orphan. As was the Mennonite tradition, Fannie gave up her status and access to the Snavely wealth and business interests when she married Henry Hershey. To survive, she relied heavily on her sister Martha Snavely with whom she was very close. Martha Snavely never married, and therefore took part in various Snavely family business and farming interests. She was known throughout Lancaster County as a shrewd businesswoman, and was a strong positive influence on young "Milt," as she called him. Until the day he died, Milton Hershey would credit "Aunt Mattie" as he called her, with much of his business success. Yet it very nearly never occurred.

Perhaps driven by his failure of a father, young Milton tried repeatedly to make a living in the candy making business. Martha Snavely put all the funds she could muster into his ventures, and when they were temporarily exhausted, she coaxed her brothers (Milton's uncles) to lend more. Yet young Milton failed. Once, twice - three times. Each failure was unique for various reasons, including bad luck. The first attempt was in Philadelphia, then in Denver - followed by a disastrous stint in New York City. Each time Milton's mother and Aunt dutifully followed him - usually his only employees. In 1886, when a defeated Milton returned to Lancaster, he was only hours ahead of an attorney intent on repossessing the remaining kitchen equipment he had shipped along. He had to rely on a childhood friend to loan him the 50 cents needed to pay the freight. At age 28, he was a three time loser and penniless. He made a pitch to his previously generous uncles, but they had had enough. They had backed him three times, and finally decided they would no longer throw good money after bad. So Milton went to The Bank of Lancaster County to attain a loan and was promptly refused. It seemed word had spread of Milton's failures.

But young Milton was still certain that each failure had taught him valuable lessons. In particular, Aunt Mattie had always felt that the problem with all confections was there very limited shelf life (often just days). So Milton and Aunt Mattie worked long hours into the nights perfecting new packaging - which successfully extended Milton's caramels shelf life to weeks, even months. But Milton had no access to capital, as Aunt Mattie was out of cash (having spent most of her fortune on Milton's previous failed ventures) and Milton's uncles steadfastly refused. The situation seemed hopeless.

The gamble: Aunt Mattie made a final gamble. She gave Milton the deed to her house, which she owned free and clear, and instructed him to take it to the Bank of Lancaster County as collateral for the $700 (about $15,000 in current dollars) loan he needed for supplies. "But Aunt Mattie," Milton objected, "I've already been to the bank and they said they wouldn't loan me any money."

"Milton Snavely Hershey," Martha Snavely thundered, "The Bank of Lancaster County has been doing business with the Snavely family for nearly a century. You take the deed to my house and my good name to the Bank. They'll loan you the money." It worked. Indeed no one at the Bank thought Milton Hershey had the slightest chance of being successful, yet Martha Snavely's name and her real estate collateral provided enough security for a $700, ninety-day note.

And a little luck: With just days until his note was due, a British importer visited Lancaster looking for a "caramel manufacturer" he had heard of who made candy with a unique packaging that had a very long shelf life. He placed a large consignment order to be shipped to and sold in Europe. If the candy indeed made the voyage, there would be more orders to follow, as caramels were the rage in that part of the world. Milton accepted the order with no idea how he would pay for the materials he needed to fill it. With his aunt's house facing foreclosure, he went to bank to plead for not just more time, but another $1,000. As it happened the Bank's Senior Management team was at a conference in Philadelphia, so Milton met with a young junior loan officer named Frank Brenneman. Brenneman was impressed with young Milton and visited his small rented shop - his mother and aunt his only employees - wrapping candies with bloodied fingers, trying to fill this one big order. Brenneman was certain his conservative bosses would commence foreclosure, yet his gut told him to demur. He told Milton to come back in the morning - he would sleep on it. Frank Brenneman did not sleep that night in a quandary over what to do. Still uncertain the following morning, he arrived at work to find Milton waiting for an answer. Frank Brenneman extended Milton's note for ninety more days and added an additional $1,000. And then he did something remarkable. To avoid trouble with his bosses, the young loan officer co-signed his own name to the note and joined Aunt Mattie as a partner.

Young entrepreneur, mother, aunt and a small hired labor force worked around the clock to fill the huge European order, which shipped just ahead of the deadline. All that was left to do was wait - and worry. Milton worried. Aunt Mattie worried, and with his career on the line, certainly Frank Brenneman worried. With just days to go before foreclosure on his aunt's house, and an almost certain end to a banking career (not to mention a fourth spectacular failure for Hershey), a package arrived. Inside was a check for 500 Pounds British Sterling (worth about $50,000 in today's dollars). Milton Hershey was seen running down the street toward the Bank still clad in his dirty apron. The check was good, and the Hershey Empire was born. Milton Hershey would go on to build a great product, city and fortune - and then leave it all to an orphanage - perhaps history's most benevolent capitalist... a fascinating story for a different week. Milton Hershey would tell the story throughout his life, that his success was the result of "A steadfast aunt, a little luck and a courageous banker."

Milton Hershey never forgot those who helped him, particularly Aunt Mattie. For most of the next decade, Aunt Mattie toiled by his side, offering untold amounts of advise, labor, guidance and love. In the process, The Lancaster Caramel Company became one of the most influential businesses in Lancaster County and a major player in the U.S. candy business. "Aunt Mattie is the brains of the operation," Hershey once quipped to a colleague. Indeed, the never-married Martha Snavely was a shrewd businesswoman who protected Milton from what she believed was his naivete. She taught him to "focus on specific problems," and to "take care of your workers - you need them." Perhaps the most important lesson Aunt Mattie instilled in Milton was to take occasional risks. It is hard to overstate the impact this strong Mennonite woman had on Milton S. Hershey.

And so it was, in the spring of 1894, after just a few days ill, Aunt Mattie died of pneumonia. For Milton Hershey, it was a devastating blow. A colleague would hear a grieving Milton Hershey say simply, "Now I am alone." He must have felt so. If blood is thicker than water, than his staunchest benefactor was now gone. Unsure of himself, Milton plowed forward. But this time, alone. He built the Lancaster Caramel Company into one of the leading candy manufacturers and Milton S. Hershey became one of Lancaster County's wealthiest citizens. His factories grew, he paid higher than average wages and was known throughout the land as "the one to work for."

Success for Hershey now seemed to have no bounds. Until, in 1900, Milton Hershey stunned the nation, when he sold the Lancaster Caramel Company to his largest competitor for (the unheard of sum of) one million dollars ($23,359,277.36 in today's dollars). One newspaper screamed simply "Why?" Hershey had his second million, and indeed it came easier, but he was far from done.

"Here there will be no unhappiness."

Around the same time two brothers named Orville

and Wilbur were experimenting with a new invention on the sandy beaches of North Carolina, Milton Hershey risked his first fortune to invent another still yet unproven new product: Milk Chocolate. Like the Wright brothers, he, too experienced unparalleled success, and his second fortune quickly surpassed his first. By 1906, Hershey Chocolate sales topped one million dollars. The ascent from that point forward was even more dizzying. Believing "there are causes more noble than profit," Hershey spent his new, seemingly limitless resources in a strange way. He gave back.

Almost all of it. For example, the rapid expansion of the chocolate factory necessitated a large local work force. A large local workforce needed housing. Hershey dismissed the standard practice of large corporations building large low cost "tenement style" housing to lodge workers. Instead, he instructed his planners to build high quality housing with conveniences yet unheard of - such as indoor plumbing. People should "want to live there," Hershey explained. And it was more than housing. Other municipal services were added such as commercial retail space, streets, utilities - even a local trolley line. Milton Hershey was repeatedly advised against such "elaborate investments" for the benefit of a workforce that, the finance men explained, needed Hershey far more than Hershey needed them. Milton Hershey scoffed at such talk.

Remembering his late Aunt Mattie Snavely's advice "to take care of his workers," Milton Hershey would set the gold standard in this regard, building "Hershey, Pennsylvania" into a model corporate town the likes of which the nation - perhaps even the world - had ever seen.

And in exchange, his workers took care of him. Some suggested Hershey was as clever as he was benevolent, rewarded tenfold by the unparalleled loyalty and productivity of a work force second to none. He paid higher than market wages and received higher than market quality. He repeatedly called on his workforce to surpass some corporate objective, and they responded emphatically every time. Through the first two decades of the 20th century, Hershey used his profits to expand his town, adding a hospital, theaters, shops and restaurants. Investment advisor after investment advisor tried to quell his exuberance for community investment and service - to no avail. Hershey would explain simply, "Here there will be no unhappiness." And for a quarter of a century there virtually was none. But trouble was brewing on the horizon, and even Hershey, PA was not insulated from the greatest challenge facing the world to date: The Great Depression. Stay tuned to see how America's most benevolent capitalist dealt with that crisis - the likes of which would threaten everything he had built.

Tim Hand
Chief Operating Officer
Executive Vice President

GCF has a full array of products that allow you to realize the power and benefits of compounded interest!

Click here for a listing of deposit products.