Benjamin Franklin and the Invention of Microfinance

Published by EH.NET (October 2010)

Bruce H. Yenawine, Benjamin Franklin and the Invention of Microfinance. London: Pickering and Chatto, 2010. x + 221 pp. $99 (hardcover), ISBN: 978-1-84893-034-6.

Reviewed for EH.Net by Ronnie J. Phillips, Networks Financial Institute, Indianapolis, Indiana.

If you enjoy learning about the Founding Fathers and financial history of the U.S., you will love this book. The mention of Benjamin Franklin and microfinance in the title will certainly attract potential readers. The book provides a detailed accounting of Benjamin Franklin?s bequest in his will of ?2,000 pounds sterling ($4,444 at the time) to the cities of Boston and Philadelphia (?1,000 each).? The funds were intended for young married artisans — manual workers in the skilled trades. Franklin provided detailed instructions on how the funds were to be used over a two hundred year period including calculations of the size of the fund.? Franklin believed that if his instructions were followed to the letter, the funds would generate a total of $36 million. The book explains why things did not work out as Franklin intended.

Microfinance is a topic that has gained prominence in recent years in large part due to the work of Muhammad Yunus in Bangladesh who received the Nobel Peace Prize for his work in popularizing, but not inventing, the idea of microfinance. Despite the implications of the title of this book, neither did Franklin. However, both found innovative ways to make microloans to those at the lowest income levels in society.? Franklin was one of the early American pioneers of establishing a loan fund as part of a will and in doing so he was following a tradition that began in England in the late fifteenth century.? However, the somewhat misleading title of the book should not detract from the overall excellence of this scholarly work.

As noted, bequests of money to establish charities to help workers had a long history in England.? As Hollis and Sweetman (1998) report, one of the most important of charities bequeathing money to skilled tradesman in England was founded by Samuel Wilson who, in 1766, left ?20,000 pounds to the Corporation of London. The charity stipulated that each loan should be between ?100 and ?300, with maturity not longer than five years. The interest rate was to be 1% in the first year and 2% thereafter. In the first 20 years of the fund, the losses were low but this was because a large portion of the repayments were obtained from the cosignatories each borrower was required to have. Eventually, the borrowers were required to have up to four cosignatories. Wilson?s charity was eventually shut down after suffering substantial defaults.? Part of the problem was the misuse of the funds by the trustees of the charity. Though Wilson?s charity lasted fifty years, and others lasted a century, they all fell victim to decisions by the administrators of the charities. Changes in the nature of the security and making loans to those with connections to the administrators helped undermine the charities (Hollis and Sweetman, 1998, p. 1878)

With this brief historical background, we can now judge how well Franklin?s charity did. First of all, the administrators were to be Selectman from the towns and members of the clergy. Presumably these individuals were more likely to be honest in Franklin?s estimation. Also, everyone remembers that one of Franklin?s businesses was printing, including the printing of bills of credit issued by state governments during the Revolutionary War. It should not be a surprise that Franklin required repayment of his loans in Spanish milled dollars or the equivalent in gold coin.? The loans were to be at 5% interest and have two cosignatories. The loans were to be between ?15 and ?60 pounds. These certainly qualify as microloans and the conditions under which they were lent should mean that losses would be minimal.

Franklin calculated that if the plan was carried out for 100 years the initial ?1,000 would make ?131,000 ($584,449) available and, at the discretion of the managers of the fund, ?100,000 ($446,145) should then be given for public works to the two cities.? The remaining ?31,000 ($138,305) should then be relent in the manner previously set forth for another hundred years after which time the money would be worth ?4.076 million ($18.2 million) at which time, ?1.061 should go to Boston and the remainder to the state of Massachusetts. A similar plan was to be followed for Philadelphia. Incidentally, without the aid of a computer, Franklin?s actual number was ?4.061 million.

The projected $36 million for the two cities was actually $6.5 million in 1991. The Franklin bequest was a success and a failure. It did generate funds that were distributed to the cities in the 1890s and 1990s and these were beneficial. However, changes in the nature of work that Franklin could not have foreseen meant that the funds were mostly never loaned to artisans as he had directed. The directors of the funds concluded that Franklin had been too narrow in specifying who could receive loans. Though the author of the book believes that changes could have been made to alter the loan program in a way consistent with Franklin?s intention, the loan programs were abandoned. The microfinance aspect was mostly a failure. In Philadelphia, loans were made with real estate as security, but this turned out to be a better long-term investment.

What are the real lessons to be learned from the Franklin bequest? As the author notes, the emphasis on hard work, thriftiness, and philanthropy are probably the most important legacies of Benjamin Franklin?s bequest.? A return to these values today would do a lot to restore the American Dream which seems to have slipped away in the first decade of the twenty-first century. This is a fascinating book that it is highly recommended for the general reader.

Reference:
Aidan Hollis and Arthur Sweetman (1998), ?Microcredit: What Can We Learn from the Past?? World Development Vol. 26, No. 10, pp. 1875-91.

Ronnie J. Phillips, Senior Fellow, Networks Financial Institute, Indianapolis, Indiana, is currently writing a survey of the academic literature on arts entrepreneurship and economic development for Foundations and Trends in Entrepreneurship and published by Now Publishers (www.nowpublishers.com).? rphillip@me.com

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