History of Interest Rates

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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