It is not proven that the famous physicist said this exactly. According to other sources, he said that compound interest is the greatest invention of mankind, or that it is the eighth wonder of the world.
Anyway, there is no doubt that compound interest – or in simpler terms: the interest – plays an important role in our lives. It determines to a large extent what we can afford, and hence our standard of living and quality of life, both today and for the rest of our lives.
But what is it exactly?
In a first stage, don’t worry about the term “compound interest” and let’s look at what we generally mean by interest.
If we deposit our money in a savings or a bank account, i.e. if we put our money at the disposal of a bank, this bank will pay us interest. From our perspective, this is credit interest.
However, if we borrow money from a bank, we are the ones who will have to pay interest to the bank. This is called debit interest.
To understand why interest rates are justified – and why they can rise or fall over time – we have to keep in mind that money is a commodity like any other, and that it is therefore also subject to the law of supply and demand.
Suppose a company wants to build a new factory. To pay for this construction, it needs more money than it has currently available. The company thus creates a demand for money.
Where can it get the money it needs? Well, from those savers who have put some money aside that they don’t need immediately and who are therefore willing to make it available, for a certain period of time, to those who need money immediately. Savers thus create as a supply of money.