A History of Interest Rates

"In historical times credit preceded the coining of money by over two thousand years. Coinage is dated from the first millennium B.C., but old ian documents, circa 3000 B.C., reveal a systematic use of credit based on loans of grain by volume and loans of metal by weight. Often these loans carried interest."

"Cattle breeding has supplied us with many financial terms used in later money economies. For example, there is our own word capital and our term pecuniary, from pecus, meaning a “flock” in Latin. Sumerians used the word mas for calves and for interest. The Egyptian term ms, meaning interest, is derived from the verb msj, which means “to give birth.” Early Greeks, in fact, valued their precious metals in terms of cattle."

"There are many references in the Iliad and the Odyssey to the use of the ox as a unit of account. The Homeric Greeks had been nomads in the grassy steppes. ...One of the later reforms of Solon, 594 B.C., was the recomputation of fines and bounties in coined money instead of cattle."

"Solon's reforms were radical and for the most part they endured. ...All those enslaved for debt were freed; those sold abroad for debt were redeemed at state expense. All restrictions were removed from rates of interest and from loan transactions, except that personal slavery for debts was forbidden. Political power was reapportioned according to property. The drachma was devalued by one quarter. Weights and measures were increased in size. Citizenship was granted to immigrants who were skilled artisans. Judging from these reforms and their acceptance, the economic crisis of 594 B.C. must have been severe..."

"In 508 B.C. a democracy was established in Athens. From this time on Athens so rapidly outdistanced other Greek cities in trade and finance that the history of Greek credit and interest rates is largely... a history of Athenian credit and... interest rates."

"Each city struck its own coinage. Every foreign transaction required a money-changing transaction. Many cities engaged in unscrupulous alloying. ...Athens had the advantage of the silver mines of [in south-eastern ]. ...Even in times of tragic national disaster, when the treasury was empty and Attica occupied by an enemy, Athens refused to debase this silver coinage. As a consequence, the Athenian "owl" became current in all markets and an article for export. It remained a most acceptable currency throughout the Mediterranean for 600 years, long after the disastrous defeat of Athens in the ... This tragic event, immortalized by Thucydides and mourned... by lovers of human excellence, was not a turning point in the financial history of Greece."

"Before the Persian wars... the hoarding of coin was general... Cities and temples, especially the Temple of Delphi, accumulated treasure. Temples made loans to states and to individuals. But after 450 B.C., investment in productive capital became common. ...land, ...rental housing, slaves let out for hire, business investments ...Even Socrates... had a friend to whom he entrusted his investments, and loans bearing interest."

"The victories of the Turks and the interruption of the Oriental trade route through the Mediterranean led to the discovery of alternative trade routes. This ultimately deprived the Italians of their central trading position. Nevertheless, in this century Italian prosperity continued..."

"Between 1430 and 1480, the at Florence was by far the greatest financial organization in Europe.., with branches throughout Europe, the and North Africa. It was the chief bank for the Curia. Many other Italian banks had large capital and a worldwide business. Venice kept ahead of Genoa and was the first seaport of the Mediterranean."

"The structure of trade and industry changed. Europe now had great capitalists possessed of large and diversified interests. These men were not local merchants; they were no longer dependent on the restrictive regulations of the town burghers. They could move their operations from place to place: to the country or to other towns. ...They began to operate on credit on a large scale and to speculate. They supported royalty and financed wars."

"Spain, recently the most powerful of European states, sank into financial decrepitude in spite of her empire in the New World and in spite of inpouring gold and silver. Spanish state bankruptcies occurred about every twenty years: 1607–1627–1649. ...Spain’s imported gold and silver were pledged in advance to Genoese bankers."

"While the pledged Spanish gold and silver flowed to , Spain sank to a copper standard of currency. Often money was lacking to supply the king’s table. Revenues were pledged five to ten years in advance. At times it turned out that Crown property had been pledged several times. ...By 1627 nearly everybody in Genoa had an interest in Spanish claims, and the ruin there became general. The big Genoese banks reached the end of their resources. The s who had clung to old Spanish claims dating back to the sixteenth century were now completely ruined. Spain never recovered her international political and financial power."

"In France the Italian bankers to the Crown were ruined in a more orderly and fastidious way. The power of France grew under Louis XIII... and Louis XIV... and these absolute monarchs were strong enough to exploit their creditors. There were, however, a number of enlightened efforts by French finance ministers to reform the state credit, and in the course of these France made some valuable contributions to techniques of government finance."

"Under Henry IV... Sully... consolidated the debts during a state bankruptcy into low-rate rentes. He avoided floating debt, introduced economy, improved the national finances, and brought on a period of prosperity."

"In 1610 a new period of mismanagement began. The aggressive foreign policy of Richelieu... and the extravagance of the court led again to a new and huge floating debt. At this time the term “partisans” was coined: people who had partis, money transactions with the government, and thus became its unconditional adherents."

"Another French state bankruptcy in 1648 eliminated the Italian bankers, mostly Florentines. State revenues by that time had been anticipated three years ahead by borrowing from the partisans who charged the Crown ruinous rates. Even the rentes (perpetual loans) were not always serviced in full. From 1639 French rentes enjoyed a market on the new Paris Exchange."

"There are only meager data on interest rates, i.e. the net opportunity cost of holding real capital. For estimates near the 1774 benchmark, see Homer and Sylla..."

"[M]uch academic work had been done on interest-rate theory over the years, including the writings of Irving Fisher, John Maynard Keynes, and Frederick R. Macaulay. And in 1962 Sidney Homer, my mentor and partner at , was putting the finishing touches on his monumental A History of Interest Rates, which would appear the following year. Nevertheless, in those days there was remarkably little interaction between academicians and financial practitioners."

"Sidney Homer was another remarkable person. In early 1961 he moved to Salomon Brothers from Scudder, Stevens, and Clark, where he had worked for many years. Late in 1961 he invited me to leave the and join him in establishing a research department at Salomon Brothers. He was my boss... from then until he retired from the firm in 1972, at age seventy. He passed away eleven years later. Although Sidney had only an undergraduate degree from Harvard, he was a scholar of the first rank. He was an innovator in flow-of-funds analysis and in investigating the behavior of bond price relationships, and of course in analyzing interest rates. His A History of Interest Rates... is still considered a standard work in the field."

"This book will always be important to me, not just because of the subject matter but also because of my rather intimate involvement with it. Just a few weeks after I joined Salomon Brothers, Sidney came to be with the galleys of his book in hand. He asked if I would read them for him, which of course I readily agreed to. But being exceedingly meticulous, he then added that he wanted me to read the galleys out loud to my secretary, who would also have a set."

"Sidney had many admirable qualities. I benefited enormously from his detailed knowledge of financial markets and his historical perspective. His style of writing and his behevior were remarkable. He wrote with a flair in a grand manor. He never criticized; he suggested. ...[H]e plowed through complicated statistical and economic material to unearth meanings and then explained those meanings in understandable language. His advice on my writings was invaluable."

"Charlie [Simon] explained to me that... Salomon had recruited Sidney Homer from Scudder, Stevens and Clark, where he had developed a number of analytical techniques for measuring bond values and served as a bond portfolio manager. Charlie had brought Sidney to the attention of the firm, with the hope that Sidney would establish a fixed-income research operation at Salomon. Charlie hoped that I would meet with Sidney... to discuss the possibility of serving as his assistant in the new research effort. No research unit of that kind... existed on Wall Street at the time. ...Sidney was given a free hand in creating a bond market research operation. Years later, he wrote a short... memoir... Fun with Bonds. ...Sidney was taken into the firm as a general partner when he was nearly 60... Sidney was completely different from any other partners. He was a Harvard graduate. He had an extraordinary family background. His mother...sang with ... and his father... was a composer and conductor. Sidney was related to ... and ... He liked to tell the story of his mother's reaction upon learning that her son intended to become what he called, "a bond man." "Where did we go wrong?" she wailed."

"Sidney had a great historical perspective, not merely in financial matters, but also when it came to social and political developments. ...Sidney wrote with great clarity. He could close the door to his office and emerge a few hours later with a 10-page memo... that demanded little editing. I later came to appreciate his great historical sensibilities when he asked me to review and edit a draft of a book he had just completed entitled A History of Interest Rates, which he described as covering 40 centuries and 40 nations. ...Like many good writers, Sidney knew that I would spot more grammatical errors and other problems by reading the book aloud. Years later, when I decided to fund a directorship at the Salomon Center and NYU's Stern School of Business, I was eager and gratified to endow it in Sidney's name."