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A Penny Saved Was Never A Penny Earned

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POST WRITTEN BY
Blaine McCormick & Burton Folsom
This article is more than 9 years old.

One of the characters in Woody Allen’s 1986 film Hannah and Her Sisters quipped, “If Jesus came back and saw what’s going on in his name, he’d never stop throwing up.” If Ben Franklin came back he might have to strengthen his gag reflex as well. Despite the popularity of the t-shirt in tourist shops throughout Philadelphia, Franklin never said, “Beer is proof that God loves us and wants us to be happy.” Not even close. Franklin announced in 1736 that, “There’s more old drunkards than old doctors,” to contrast the undisciplined path a life could take and the narrower road of skill-acquisition. Franklin also never said, “A penny saved is a penny earned.” He only says this on Google.

Ben Franklin was Dean of the Colonial Business School. In his newspapers, almanacs and in his famous autobiography he created line after line of great business advice. Some of his maxims, like “Early to bed and early to rise makes a man healthy, wealthy, and wise,” were so straightforward they needed little explanation then or now. Other aphorisms like, “Strange, that he who lives by shifts can seldom shift himself,” require more commentary for modern Americans. (HINT: This is a pro- free market teaching.) Throughout his life and writings, Franklin did more than anyone else to lay the groundwork for wealth creation in the American experiment.

So if a penny saved was never a penny earned, what exactly did he say? In his 1737 almanac Franklin printed a column called “Hints For Those That Would Be Rich” in which he dispensed all manner of sound financial advice. He closed with the maxim, “A penny saved is two pence clear.” Later, in his famous preface to his 1758 almanac he noted that, “A penny saved is a penny got.” But he never, ever said that a penny saved is a penny earned. Franklin – a seasoned businessman by the time he penned these – knew that a penny unspent in the competitive marketplace could never be equivalent to a penny earned in revenue.

Franklin knew that business was more a game of balance sheets than income statements. So just how does a saved penny become “two pence clear” – or two pennies free and clear from debt? Is Franklin engaged in some magical economic thinking here? When we think of saving in the 21st century, we think of either money in a savings account or possibly a promotional discount. Saving a penny in Franklin’s mind meant rescuing the penny from wasted alternatives –like “being saved” from a life of drunkenness.

Franklin used this maxim to teach opportunity costs – or how to, “…discern what might have been and may for the future be saved,” as he would instruct in his writing “Advice to a Young Tradesman.” Let’s assume that two businesspeople start out with empty balance sheets. The foolish person decides to take the day off, go out to supper (as the last meal of the Colonial day was called) and enjoy his one penny meal on credit. Franklin would note in 1757, “Sleep without supping, and you’ll rise without owing for it.” The wise person might spend his day working, earn a penny, and then sleep without supping. The wise person then has one cent worth of assets on his balance sheet. The foolish person, in contrast, has one cent worth of liabilities on his balance sheet.

Here’s where the two pence clear comes in: The difference in financial standing between the wise and foolish person is actually two pennies (or “two pence” in Colonial terms). That is, it takes one penny to clear the debt on the foolish balance sheet and another penny to equalize it to the asset base on the wise balance sheet. Thus, a penny saved from foolish purchases is equivalent to two pennies free and clear from debt. Franklin makes it clear that a foolish debtor is not just running slower in the competitive marketplace; rather, he is running in the opposite direction. Every penny will end up on someone else’s balance sheet. When it leaves yours on credit, you are two pennies behind the people who never consumed unnecessarily in the first place. Maybe it’s time we learn to think more from our asset bases than our credit limits.

“A penny earned” and other Franklin misattributions are symbolic of the lack of financial literacy and discipline plaguing the United States. The Federal Reserve recently released a series of charts demonstrating that younger Americans are running faster and faster in the opposite direction in the balance sheet competition. In contrast to older Americans, younger Americans are more likely to have higher levels of commercial debt and larger gaps between their assets and their liabilities. And why not? Their elders, with almost $18 trillion in national debt, and much more in unfunded liabilities, are spending pennies long before they have the chance to be rescued. Sadly, our burgeoning national debt keeps us running in the opposite direction of Franklin’s other great contribution to Colonial businesses: the amazing power of compound interest over time.

Blaine McCormick is chair of the Department of Management at Baylor University’s Hankamer School of Business. Burton Folsom is professor of history at Hillsdale College and author (with his wife Anita Folsom) of Uncle Sam Can't Count: A History of Failed Government Investments from Beaver Pelts to Green Energy.