The Economic History of Interest

This book is a testimony to the idea that history doesn’t repeat itself, but it often rhymes. At almost 700 pages, it is big, very big.

The book is arranged chronologically and geographically within each time period. Time spent on each is roughly in proportion to the amount of unique data that we have from each era, so the recent past gets more pages per year. Roughly one-quarter of the book goes from ancient times to 1800, and one quarter to the 19th century to 2005. Half of the book covers the period from 1900-2005.

There are several things that the book points out, common to each time and area investigated:

1. It is very difficult to eliminate interest. Even when governments or religions try to restrict interest, either in the rate charged or entirely, systems arise to create promises to pay more in the future than full payment today.
2. The more technologically advanced economies get, the lower interest rates tend to get.
3. Boom/bust cycles are impossible to avoid.
4. Governments introduce currencies and often cheat on them (debasement, or inflation of a fiat currency).
5. Governments do sometimes fail, whether due to a lost war, civil war, or default, taking their currencies and debt promises with them.
6. The economic cycle across the world is usually more correlated than most people believe at any given point in time, even in ancient times. (How much more today… decoupling indeed…)
7. Cultures that allowed for a moderate amount of debt financing prospered the most, in general.

Those are my summary points after reading the book. Homer and Sylla drew some, but not all, of those conclusions. It’s an ambitious book, and an ambitious read. Sidney Homer did a lot of significant work researching from the past to the middle of the 20th century, and Richard Sylla did an admirable job giving the grand sweep of the increasing complexity of the bond markets as the 20th century progressed until 2005, which was an interesting point at which to end the fourth edition. The fifth edition, should there be one, will prove even more interesting as it surveys the end of the housing and credit bubbles, and the shape of the financial system in their aftermath.

This book is a must for those that like economic history. I really enjoyed it. For those without such an interest, it’s a big, somewhat-expensive, show-off book that will be occasionally useful as a reference.

If you want, you can find it here: A History of Interest Rates, Fourth Edition (Wiley Finance)

Full disclosure: If anyone enters Amazon through my site and buys something, I get a small commission. Your costs are not increased. This is my equivalent of the “tip jar” and so, if you like what I write, and need to buy through Amazon, please enter Amazon through links on my site.

Comments

[investor88:]

I like the sentence about a modest amount of debt is optimal for society, much like a glass of wine a day. If you get drunk all the time, it is equivalent to being super leveraged which is no good.

2008 Dec 27 07:29 AM

[Reinko:]

Now the Federal Reserve has finally implemented the ZIRP it is only waiting until they tell you can only eat halal meat...

Al Qaida is having the fun of a lifetime with ZIRP.

2008 Dec 27 11:01 AM

[GloomBoom.com:]

This book sounds very reasonable. Not something I am used to lately!

2008 Dec 27 03:17 PM

[Gtarras:]

As to number 6, as we have seen in the past months, the cycles across the world are not only closely correlated, but the boom/bust events happen much quicker today due to technology advances and recent rise in globalization..

Thats the reason we will come out of this bust faster than in the past... All academicians who predict long recovery base their logic on the history, which moves much, much faster today.. Just look at how fast the current crises unfolded.. the recovery will be just as quick...

2008 Dec 27 08:34 PM

[Kinabalu:]

I read an earlier version of this book when I was in graduate school in 1969. I thought it was fantastic then. It's probably time for another look at it.

I'm not sure I agree with No. 6, interest rates dropping as technology advances.

2008 Dec 28 12:56 AM

[Bill M:]

Modest debt is good for society, not buying a house that costs 70% of your take home pay.

2008 Dec 28 10:15 AM

[Moon Kil Woong:]

Actually interest is good to encorage people not to spend too much and incentivise others to deposit/loan money. Without it everything reverts to begging the state to arbitrarily make more of it and give it to various interested parties and or backstop lending since it's not worth it to lend it to anyone. We have obviously entered this phase with TARP, etc.

2008 Dec 28 02:35 PM

[mauijeff:]

I agree with most everything Peter Schiff says but I think when he predicts a decoupling of the the US dollar from the world economy he underestimates how long it will take. I think there will be a decoupling, it will just take too long for me to make any real money on it any time soon (come on Pete, you know you are primarily talking to investors that don't have a decade or two time horizons). So I think it's notable that the book notes a strong correlation of cycles across the world and that decoupling is not as easy as one may think.

2008 Dec 29 02:20 AM

[jelina:]

Why not give security to your fam for the holidays? Lots of good deals on AV out there. Just saw Panda

Security for $20, good until new year's day, apparently:

tinyurl.com/a3cyw6

2008 Dec 29 03:10 AM