The Plan Of This Book

Interest rates can be viewed as changing through many dimensions. The principal dimensions are time, space, quality of the loan, and maturity of the loan. Other distinguishing characteristics are marketability, size of loan, redemption terms, legality, tax status, class of debtor, and class of creditor. Rates on one specific type of loan at one place will change from day to day or from year to year; this is the dimension of time. Or at any one time, the rates on otherwise similar types of loans will change from city to city or from country to country, the dimension of space. Again, at one specific time and place, there usually is a great range of interest rates, according to quality, maturity, size, marketability, and other surrounding circumstances. This history attempts to cover the range of all of these dimensions, with the following limitations and degrees of emphasis:

Time. The dimension of time is covered from 3000 b.c. without any limit except that enforced by the data that have become available. Since there are more good interest-rate data for the nineteenth and twentieth centuries than for all the rest of human history combined, this history reports much more fully on these centuries than on earlier centuries.

Place. It is natural and fortunate that those nations that have been most advanced for their times in the development of personal or commercial credit have left us the fullest records of their interest rates. For ancient and medieval times, therefore, this history has not had to formulate any plan of geographic selectivity; it has attempted to be inclusive. The mainstream of interest rate history as it has been reported to us followed a course similar to that of Western political history, coming down from prehistoric times through Mesopotamia, Greece, and Rome to Eastern Europe in medieval times and to Europe and America in modern times. Only occasional early rates are available from other areas. For modern times, some degree of geographical selectivity has been necessary. By far the greatest space has been allotted to interest rates in the principal commercial and financial countries of the West. Nevertheless, for purposes of background and comparison, some history of interest rates is included for many other countries.

Quality. Some examples of rates of interest on loans entailing a wide range of risk are included when they are available. Rates on high-grade credits are rendered more understandable by such comparisons and also are more easily identified. Nevertheless, this history is concerned chiefly with the course of rates on loans considered high grade by contemporary standards. Such a general and inclusive definition is essential because only such a definition will hold good through the shifting standards of many eras of history. In modern advanced countries, government loans usually set a standard for high quality, followed by loans of the best corporations. In medieval and ancient times, there were no great corporations, and government credit was usually inferior to the credit of propertied individuals. From period to period, therefore, the character of best credits shifted and with it the type of loan that receives the most attention here.

Maturity. This history attempts to report the rates on loans of all maturities, from very short-term personal or trade loans and government bills to perpetual annuities with no maturity date at all. For modern times, maturity is accurately defined, and no reporting problem arises except for the ambiguities inherent in bond averages or optional redemption features. Later chapters present tables showing gradual and unbroken series of interest rates, from the shortest to the longest maturity.

The attempt to cover all maturities, however, succeeds only for a few countries in this century because of lack of earlier data. For the earlier centuries of modern times, the data will consist largely of rates on very long-term bonds or mortgages and rates on many forms of very short-term credit. Rates on medium-maturity loans will usually be lacking. Nevertheless, the definition of maturity will usually be precise.

For the Middle Ages, we will often have to be satisfied with two broad maturity categories, "long" and "short," because the bulk of the data is not more precise. "Long-term" loans will include the perpetual debt of Italian cities, the French rentes, the perpetual annuities issued by many European towns, and other loans that were clearly intended to run for many years. "Short-term" loans will include bills of exchange, bank deposits, pawnshop and other collateral loans, and the floating debt of princes. Much of this short-term debt, in fact, probably ran for years, but the form of contract was short term. There is uncertainty, however, as to the term of many medieval credits; when there is doubt, they have been classified as short term, but a description of the term is given to the reader whenever it has come down to us.

For ancient times, distinctions between interest rates arising from maturity are almost nonexistent. The legal limits of Babylonia and Rome applied equally to long- and short-term loans. Historians report "normal" interest rates on best credits, usually without mention of maturity. There is, however, a great deal of evidence that most ancient loans were intended to run only a few months or at most from one to three years. Rates were usually quoted at so much a month. Even loans secured on real property usually specified repayment in one year; occasionally a longer period was specified, but there was no distinction of rate according to term. Long-term capital projects were not generally financed on credit, and states rarely borrowed. There were no large corporations. Some credits were in fact outstanding for years, but this was apparently due to regular renewal or to default. For these reasons, no attempt has been made to classify ancient rates by term of maturity, although in all cases where it is available the specific maturity has been given. Otherwise it is usually assumed they were short-term loans.

Marketability. The rates of interest here reported are sometimes derived from marketable securities, such as bonds, notes, and treasury bills, and sometimes from nonmarketable loans, such as personal loans, bank loans, mortgages, and deposits. Each type is classified separately. No bourse type of market is reported for any form of credit instruments before medieval times. It is probable that an active exchange of obligations did take place in ancient Athens and Rome, but no quotations have come down to us. The history of the modern money market began in twelfth-century Italy.

Rates. The rates quoted here for nonmarketable debt are the nominal rates set forth in the loan contracts. For marketable debt, both nominal rates (the interest expressed as a percentage of the nominal, face, or par value of the loan) and market yields (the rate of return to the buyer at the market price) are reported whenever they have come down to us. If both are available, the market yield is always preferred as an indication of the going rate of interest on loans of the particular sort described. In the absence of market prices, nominal rate alone is considered an adequate indication of prevailing rates only if the securities were newly and successfully sold at approximately face value. Nominal rates that do not reflect voluntary contracts, such as the rates on forced loans and forced conversions are so labeled and are not carried down to the summaries of prevailing rates.

This history does not attempt to go more deeply into the many mathematical concepts of interest and yield than do its sources. Simple interest at annual rates is the form that is attempted throughout, but it is not always precisely achieved. Rates of discount, for example, are quoted from time to time as interest rates, and these provide a higher simple interest than the rate of discount. The sources do not always distinguish. Where a discount is known as such, it is pointed out. Most ancient rates, like modern small-loan rates, were quoted by the month, and these are simply multiplied by twelve without compounding, and without allowing for variations in the calendar, to give an annual rate.

Other attributes, such as size, redemption features, legality, and tax status, are reported, when available, to the extent that they may affect the record of the trend and level of interest rates.

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