History of Interest Rates
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Sidney Homer (1963), in his seminal history of interest rates, argues that such a history of often dramatic interest rate fluctuations provides an excellent summary of the success of some communities and the failures of others to develop effective commercial ethics and laws and suitable monetary and fiscal techniques and policies. While "credit" is considered a modern device (or vice), a brief survey of financial history will demonstrate that credit was in general use in ancient and in medieval times, antedating industry, banking and even coinage. It is the purpose of this brief report to examine selected issues related to the history of simple and compound interest rates, specifically on loans, and to consider periods when high rates were commonplace in their historical context. Gwartney and Stroup (1990) define the interest rate as the price paid for the use of money or loanable funds for a period of time. Interest is stated as a percentage of the amount borrowed; for example, an interest rate o 10 percent means that the borrower pays 10 cents annually for each dollar borrowed. This, of course, is a "simple interest rate" in which the total interest is a straightforward percentage of the whole sum borrowed. Compound interest, on the other hand, refers to the practice of paying interest on an amount loaned or invested (generally in a bank or other savings vehicle), and then paying interested on the combined principal sum and interest
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time periods as the heyday of Imperial Rome, the rise of Babylonia in the Middle East as a hegemon, and China's own rise to imperial status, interest rates tended to decline as civilizations grew and increase as they declined.
Richard Sylla, an economist who recently undertook an updating of Homer's classic text, A History of Interest Rates, suggests that in modern times interest rates have been tied to government economic policy decisions (Brimelow, 1999). In the Great Depression of the 1930s and the "great inflation" of the 1970s, he argues, poor fiscal policy on the part of government led to wildly escalating interest rates and a corresponding reluctance on the part of capital investors to commit funds to infrastructure development. Currently, Sylla believes that U.S. interest rates are still far from low by historic standards (and past rates of as little as 3.5 percent have been recorded in the U.S.), while real interest rates (rates that are adjusted for inflation) are strikingly higher than they have been for most of the current century (Brimelow, 1999). Sylla anticipates that current rates will decline in the short run, but eventually stabilize around current levels, reflecting the productivity of capital.
In this conte
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Approximate Word count = 1216
Approximate Pages = 5 (250 words per page)
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