Talking About Interest Rates

It seems that the minute people were freed from having to wear their COVID masks all the time, they started talking about interest rates. A couple of years ago, nobody in person or on Twitter ever mentioned ‘the Fed’ or, to a lesser degree, the Bank of Canada. But now, they are major concerns as people speculate that once inflation is out of the way, where will interest rates land, the terminal rate, as it is known.

To   provide some context, and perhaps guidance, I turn to the 733- page classic ‘A History of Interest Rates,’ by Sidney Homer and Richard Sylla, first published in 1963 with newer editions published almost every decade. Here are some observations:

Credit Has Existed for Thousands of Years and Rates Were Mostly Reasonable

“Credit is sometimes considered a modern device, or even a modern vice. It is true that new credit forms have been developed in our country and the statistics reflecting the growth of the volume of credit during recent decades are impressive. But a glance through the pages of financial history will dispel any notion of great recent novelty. Credit was in general use in ancient and in medieval times. Credit long antedated industry, banking, and even coinage; it probably antedated primitive forms of money,” say the authors.

While comparing rates between centuries is not easy, I was struck by how in past times of less/no regulation and no central bankers, interest rates were not ridiculously high. For example, about 1800 BC, Hammurabi, a king of the first dynasty of ancient Babylonia, gave his people their earliest known formal code of laws and set the maximum rate of interest at 33⅓ per cent per year for loans of grain and at 20 per cent per year for loans of silver.

Later, Romans began their legal history with a body of laws regulating credit. Interest on loans was limited to no more than 8⅓ per cent. Later rates mostly followed this trend.

Yes, there were some outliers. In the 12th century, personal loans in England were 52 to 120 per cent a year (which is where today’s payday loans sit), But while this was happening in England, in the Netherlands long-term loans secured by real estate were made at eight to 10 per cent a year.

Rates Were Even Lower in the Middle Ages and Renaissance

Commercial loans in Italy reached lows of four to five per cent per year for over 150 years beginning in the 14th century. Mortgages and other long-term debt could be had for as little as four per cent a year in Italy, Germany, and Spain for much of the period beginning in the 15th century. The authors conclude, “The later Renaissance rates were well within the range of modern rates and the lowest were far below modern rates in periods of credit stringency.”

The Past 300 Years Were a Time of Lower Lows but Also Higher Highs

Interest rates started rising in the 1800s and rose and fell due to wars and other economic shocks. The key is that while at times the high rates were getting higher, with rates approaching double digits in many countries and staying there for decades, overall the downtrend has continued. It is never a smooth journey but the 20th and 21st century lows were mostly unmatched in history.

So where does this leave us? There are three points.

The first is that people who speak of ‘reversion to the mean’ and search for long time series have one here ... in centuries and not decades.

Secondly, century-long volatility has always been with us.

And finally, maybe the high rates of the 1970s and 1980s should be viewed as the anomaly, as the overall trend for interest rates across countries for 2,000 years has been for lower rates, which speaks well for the next 100 years.

Jim Helik is a contributing author to the ‘Managing High Net Worth’ and the ‘Commodities as Investments’ courses published by CSI Global Education. He’s also one of the first holders in Canada of the Human Resource Management Professional designation from the Society for Human Resource Management.