1 00:00:00,320 --> 00:00:02,360 Speaker 1: The Odd Loots podcast is brought to you by ex 2 00:00:02,480 --> 00:00:11,040 Speaker 1: On Mobile Energy Lives here. Welcome to Odd Blocks. It 3 00:00:11,200 --> 00:00:15,040 Speaker 1: is Monday, December seven. I'm Tracy Alloway, executive editor of 4 00:00:15,080 --> 00:00:18,400 Speaker 1: Bloomberg Markets, and I'm Joe wasn't All Managing editor of 5 00:00:18,400 --> 00:00:24,119 Speaker 1: Bloomberg Markets. Hey, hey, Joe, Yeah, what's this? Uh? That 6 00:00:24,280 --> 00:00:27,720 Speaker 1: is a book, yes, but specifically it is a seven 7 00:00:27,800 --> 00:00:30,760 Speaker 1: hundred page book on the history of interest rates. Have 8 00:00:30,920 --> 00:00:34,720 Speaker 1: you read the entire thing? I actually did, and I 9 00:00:34,800 --> 00:00:37,199 Speaker 1: have to tell you it is a scintillating read that 10 00:00:37,320 --> 00:00:41,760 Speaker 1: encapsulates everything from Mesopotamian interest rates and three thousand BC 11 00:00:42,040 --> 00:00:46,320 Speaker 1: two medieval attitudes towards usury hyper inflation in Argentina in 12 00:00:46,360 --> 00:00:50,199 Speaker 1: the nineteen eighties. It's actually a pretty famous book in 13 00:00:50,240 --> 00:00:53,720 Speaker 1: financial circles, and it was first written by Sydney Homer 14 00:00:53,800 --> 00:00:58,920 Speaker 1: back in nineteen sixty three. Now, unfortunately Homer has passed 15 00:00:58,920 --> 00:01:01,440 Speaker 1: away since then. But I'm very excited to say that 16 00:01:01,520 --> 00:01:05,039 Speaker 1: the guest we have on today is Richard Silla, who's 17 00:01:05,080 --> 00:01:08,160 Speaker 1: the co author on the fourth edition of this book 18 00:01:08,200 --> 00:01:11,160 Speaker 1: and also a professor of economics and financial markets at 19 00:01:11,240 --> 00:01:14,520 Speaker 1: n y U Stern. So we are about to embark 20 00:01:14,560 --> 00:01:17,479 Speaker 1: on a rollicking six thousand year tour of the history 21 00:01:17,480 --> 00:01:20,399 Speaker 1: of interest rates. So two, quick think they had interest 22 00:01:20,480 --> 00:01:22,920 Speaker 1: rates back then in Mesopotamia, Like, this is not a 23 00:01:22,959 --> 00:01:25,920 Speaker 1: totally modern invention. Oh Joe, You're going to learn so much. 24 00:01:26,200 --> 00:01:29,120 Speaker 1: And studying interest rates could theoretically be pretty exciting right 25 00:01:29,160 --> 00:01:30,800 Speaker 1: now because we may be on the verge of our 26 00:01:30,800 --> 00:01:33,720 Speaker 1: first rate hike in several years. Yes, So what better 27 00:01:33,760 --> 00:01:36,360 Speaker 1: way to prepare for that historic event than to go 28 00:01:36,400 --> 00:01:39,000 Speaker 1: back in time and learn about Dutch interest rates in 29 00:01:39,040 --> 00:01:42,160 Speaker 1: the eighteenth century. Let's do it. I'm excited, Professor Silla, 30 00:01:42,360 --> 00:01:45,399 Speaker 1: thank you so much for joining us. Pleasure to be here. Um. 31 00:01:45,480 --> 00:01:48,320 Speaker 1: I have to ask, so, when Sydney Homer first published 32 00:01:48,320 --> 00:01:51,440 Speaker 1: this book in the early nineteen sixties, that was a 33 00:01:51,480 --> 00:01:55,360 Speaker 1: time when interest rates were not exactly the hot topic 34 00:01:55,400 --> 00:01:57,920 Speaker 1: matter that they are now. Why do you think he 35 00:01:57,960 --> 00:02:00,840 Speaker 1: wanted to look at them? Well, Son, Homer was a 36 00:02:01,000 --> 00:02:05,080 Speaker 1: kind of a cultured fellow Harvard grad who had a 37 00:02:05,120 --> 00:02:08,440 Speaker 1: career on Wall Street. And I think because he was 38 00:02:08,639 --> 00:02:12,720 Speaker 1: highly educated, and uh, he thought, you know more than 39 00:02:12,800 --> 00:02:15,360 Speaker 1: most people do about their jobs, and he wanted to 40 00:02:15,400 --> 00:02:17,600 Speaker 1: know you know, he was in the bond markets, and 41 00:02:17,639 --> 00:02:20,040 Speaker 1: he wanted to know, uh, you know, what was the 42 00:02:21,160 --> 00:02:23,880 Speaker 1: origin of them. And for example, he had heard about 43 00:02:24,600 --> 00:02:27,920 Speaker 1: the Dutch Dutch finances being important. Well exactly what was 44 00:02:28,040 --> 00:02:30,560 Speaker 1: Dutch finance? And so he embarked on this history of 45 00:02:30,800 --> 00:02:33,880 Speaker 1: collecting interest rates as much as he could from you know, 46 00:02:33,919 --> 00:02:37,520 Speaker 1: all the recorded history up to that time, and decided 47 00:02:37,560 --> 00:02:39,959 Speaker 1: to put it into one one book called the History 48 00:02:39,960 --> 00:02:44,200 Speaker 1: of Interest Rates. Now, the book starts in ancient times 49 00:02:44,240 --> 00:02:48,200 Speaker 1: and it starts with things like Babylonian kings setting the 50 00:02:48,280 --> 00:02:52,080 Speaker 1: maximum rates of interest on loans of grain. How in 51 00:02:52,120 --> 00:02:56,920 Speaker 1: the world did Homer go about collecting the data for 52 00:02:57,000 --> 00:03:00,600 Speaker 1: this book, Well, he if you're talking about BABYLONEI, uh, 53 00:03:00,639 --> 00:03:02,760 Speaker 1: there is a great source there which many people have 54 00:03:02,800 --> 00:03:04,799 Speaker 1: heard of, but they probably don't think it has interest 55 00:03:04,880 --> 00:03:07,120 Speaker 1: rates in it. It's the Code of Hammurabi. It was 56 00:03:07,160 --> 00:03:09,000 Speaker 1: sort of a great code that came I think it 57 00:03:09,040 --> 00:03:12,080 Speaker 1: was about eight hundred BC or something like that, so 58 00:03:12,120 --> 00:03:15,480 Speaker 1: it's about four thousand years ago. And in the Code 59 00:03:15,480 --> 00:03:18,440 Speaker 1: of Hammurabi it's sort of specifies that if you lend 60 00:03:18,480 --> 00:03:21,880 Speaker 1: somebody money, the maximum rate you can charge them as 61 00:03:22,000 --> 00:03:25,240 Speaker 1: if you lend somebody grain. Apparently people lent grain as 62 00:03:25,240 --> 00:03:27,679 Speaker 1: well as money, the maximum rate was thirty three and 63 00:03:27,720 --> 00:03:31,120 Speaker 1: a third percent. So how did they How did Hammurabi 64 00:03:31,440 --> 00:03:34,480 Speaker 1: derive these figures? Was it a sort of finger in 65 00:03:34,480 --> 00:03:37,680 Speaker 1: the wind tent seemed like the right amount, or was 66 00:03:37,720 --> 00:03:40,400 Speaker 1: it something more reflective of the economy where there was 67 00:03:40,640 --> 00:03:43,400 Speaker 1: there was a basis in reality. Well, I suspect that 68 00:03:43,440 --> 00:03:45,960 Speaker 1: if since Hammurabi was saying this is the most you 69 00:03:46,000 --> 00:03:49,360 Speaker 1: can charge, that there were a lot of lending practices, 70 00:03:49,400 --> 00:03:52,520 Speaker 1: both for money and grain, and sometimes people tried to 71 00:03:52,600 --> 00:03:54,760 Speaker 1: charge more than a twenty or thirty three and a 72 00:03:54,800 --> 00:03:58,240 Speaker 1: third percent, and Hammurabi thought that was unreasonable, and so 73 00:03:58,320 --> 00:04:00,720 Speaker 1: he sort of put a ceiling on could be charged. 74 00:04:00,720 --> 00:04:03,640 Speaker 1: And I think it was probably sort of customary rates 75 00:04:03,680 --> 00:04:05,720 Speaker 1: at that time. One of the things I love so 76 00:04:05,800 --> 00:04:09,040 Speaker 1: much about the book is all the types of collateral 77 00:04:09,120 --> 00:04:12,320 Speaker 1: that it outlays. So, for instance, there's a king of Jerusalem, 78 00:04:12,400 --> 00:04:17,440 Speaker 1: Baldwin the Second, who famously pledges his beard for hypothication. 79 00:04:18,000 --> 00:04:21,000 Speaker 1: And there's an ancient Greek city that um pledged its 80 00:04:21,040 --> 00:04:25,719 Speaker 1: public colonnades, so when the city defaulted, the citizens couldn't 81 00:04:25,760 --> 00:04:30,320 Speaker 1: walk down the colonades anymore, which just seems absolutely absurd 82 00:04:30,320 --> 00:04:32,960 Speaker 1: to us. Nowadays, but there's a long history of various 83 00:04:32,960 --> 00:04:35,599 Speaker 1: types of collateral being used. Yes, I think, you know, 84 00:04:35,680 --> 00:04:38,479 Speaker 1: there are many, many different kinds of collateral. But the 85 00:04:38,520 --> 00:04:43,720 Speaker 1: traditional main assets were precious metals and land, but I 86 00:04:43,760 --> 00:04:46,760 Speaker 1: think many other things could be used as collateral, particularly 87 00:04:46,760 --> 00:04:50,120 Speaker 1: for smaller loans. Of course, you're citing these the colonnade. 88 00:04:50,160 --> 00:04:53,200 Speaker 1: I mean that's a sort of a public convenience, and 89 00:04:53,520 --> 00:04:55,680 Speaker 1: it's interesting that they would pledge that they must have 90 00:04:55,680 --> 00:04:57,599 Speaker 1: needed to borrow a lot of money, perhaps to fight 91 00:04:57,640 --> 00:05:00,680 Speaker 1: a war. Nowadays, when we think about in rates, we 92 00:05:00,720 --> 00:05:03,240 Speaker 1: think about, you know, there's the risk free rate, and 93 00:05:03,360 --> 00:05:06,479 Speaker 1: rates often sort of move up and down across the 94 00:05:06,480 --> 00:05:10,600 Speaker 1: economy with each other, they trend in the same direction. 95 00:05:11,000 --> 00:05:13,680 Speaker 1: In the very early days, when you first have this 96 00:05:13,839 --> 00:05:17,480 Speaker 1: data of rates and borrowing and lending, how much of 97 00:05:17,520 --> 00:05:21,040 Speaker 1: the lending was sort of idiosyncratic, just a judgment of 98 00:05:21,080 --> 00:05:24,839 Speaker 1: the credit risk of the borrower, and how much was 99 00:05:24,920 --> 00:05:27,920 Speaker 1: this sort of general economic trend at the time. Well, 100 00:05:27,960 --> 00:05:30,320 Speaker 1: in our book, I think we're talking about mostly about 101 00:05:30,360 --> 00:05:33,120 Speaker 1: general economic trends because and I should point this out 102 00:05:33,160 --> 00:05:35,760 Speaker 1: at the start of our conversation. The book was meant 103 00:05:35,800 --> 00:05:38,880 Speaker 1: to say what were the lowest interest rates that we're 104 00:05:38,920 --> 00:05:42,440 Speaker 1: prevailing at these various times in history and various civilizations. 105 00:05:42,440 --> 00:05:44,200 Speaker 1: And you know what, was there a pattern to the 106 00:05:44,240 --> 00:05:46,279 Speaker 1: movement of the rates, But we all know it's the 107 00:05:46,320 --> 00:05:48,800 Speaker 1: world then was just like the world today. There are 108 00:05:48,839 --> 00:05:52,200 Speaker 1: some basic benchmark interest rates or risk free returns we 109 00:05:52,240 --> 00:05:54,440 Speaker 1: talk about in finance at the Servant School at n 110 00:05:54,560 --> 00:05:58,640 Speaker 1: y U and other more risky loans are priced off 111 00:05:58,680 --> 00:06:01,120 Speaker 1: of this sort of basic rate. But the thing we're 112 00:06:01,120 --> 00:06:03,320 Speaker 1: trying to do mostly in the book, especially when you 113 00:06:03,360 --> 00:06:06,080 Speaker 1: go far back into civilization, is to say what were 114 00:06:06,120 --> 00:06:08,960 Speaker 1: the lowest rates people could borrow at at various times 115 00:06:08,960 --> 00:06:12,400 Speaker 1: and four thousand years of history. Now, I mean you're 116 00:06:12,400 --> 00:06:15,599 Speaker 1: talking about the lowest possible rates. That was actually a huge, 117 00:06:15,680 --> 00:06:19,520 Speaker 1: huge debate both in ancient times, medieval times, and going up. 118 00:06:19,720 --> 00:06:21,880 Speaker 1: I mean, I guess it continues today and that's the 119 00:06:21,920 --> 00:06:26,640 Speaker 1: debate over usurally and what constitutes a fair rate of interest. 120 00:06:26,720 --> 00:06:29,760 Speaker 1: Can you maybe talk a little bit about that, well, usury. 121 00:06:29,960 --> 00:06:32,119 Speaker 1: You know that we've had a lot of usury laws 122 00:06:32,120 --> 00:06:35,240 Speaker 1: in history, and many people trace it back to Aristotle, 123 00:06:35,360 --> 00:06:38,240 Speaker 1: you know, a very great philosopher, obviously one of the 124 00:06:38,240 --> 00:06:41,159 Speaker 1: greatest ever, but he had a curious idea that I 125 00:06:41,200 --> 00:06:44,279 Speaker 1: think the translation of the Greek's money is barren. You know, 126 00:06:44,320 --> 00:06:49,480 Speaker 1: since money is barren, money doesn't by itself have any productivity. Therefore, 127 00:06:49,560 --> 00:06:52,440 Speaker 1: interest rate should be zero. When you lend something to somebody, 128 00:06:52,520 --> 00:06:55,919 Speaker 1: you should not charge the interest. And uh, that was 129 00:06:55,960 --> 00:07:00,080 Speaker 1: a view. I think that was not widespread, but it 130 00:07:00,120 --> 00:07:03,000 Speaker 1: was a philosophical view. Then it was picked up by St. 131 00:07:03,000 --> 00:07:06,320 Speaker 1: Thomas Aquinas in the Middle Ages and it became part 132 00:07:06,360 --> 00:07:09,920 Speaker 1: of Catholic teaching that you should not charge people interest. 133 00:07:10,000 --> 00:07:11,960 Speaker 1: You know, he got it from Aristotle and it became 134 00:07:12,000 --> 00:07:14,080 Speaker 1: sort of Catholic teaching. So we come right down to 135 00:07:14,120 --> 00:07:17,080 Speaker 1: the modern world where we have interest rate ceilings and 136 00:07:17,480 --> 00:07:19,960 Speaker 1: not that interest rate should be zero. I think that 137 00:07:20,000 --> 00:07:22,560 Speaker 1: went out a long time ago, but the modern equivalent 138 00:07:22,560 --> 00:07:24,400 Speaker 1: of it to say the interest rate should not be 139 00:07:24,560 --> 00:07:28,960 Speaker 1: higher than so many and when those when those usury 140 00:07:29,080 --> 00:07:33,400 Speaker 1: caps were put in place by various rulers. Again sort 141 00:07:33,440 --> 00:07:35,840 Speaker 1: of going back to my first question, was that just 142 00:07:35,920 --> 00:07:40,600 Speaker 1: something that was that felt right on lending money, that 143 00:07:40,920 --> 00:07:44,840 Speaker 1: felt like a limit that um I wouldn't be breached. 144 00:07:45,080 --> 00:07:48,200 Speaker 1: I would think that, you know, the usury ceilings were 145 00:07:48,600 --> 00:07:52,080 Speaker 1: sort of based on what was normal lending rates at 146 00:07:52,080 --> 00:07:54,960 Speaker 1: a certain time, and maybe set around that level a 147 00:07:55,000 --> 00:07:58,920 Speaker 1: little bit higher, just just so that people couldn't exploit 148 00:07:58,960 --> 00:08:01,280 Speaker 1: other people. I think that the reason behind it was 149 00:08:01,360 --> 00:08:05,720 Speaker 1: sometimes loans were for what we call consumption loans. There 150 00:08:05,800 --> 00:08:08,920 Speaker 1: might have been a drought and the crops failed, and 151 00:08:09,080 --> 00:08:11,680 Speaker 1: one idea behind the usury law was that when the 152 00:08:11,680 --> 00:08:14,400 Speaker 1: crops fail, you shouldn't take advantage of a person who's 153 00:08:14,440 --> 00:08:17,080 Speaker 1: having a hard time getting enough to eat by charging 154 00:08:17,080 --> 00:08:20,200 Speaker 1: them interest. Are the early examples of what we would 155 00:08:20,240 --> 00:08:25,360 Speaker 1: call payday lenders at some point, basically institutions specifically designed 156 00:08:25,360 --> 00:08:29,000 Speaker 1: to take advantage of extraordinarily high levels of interest rates 157 00:08:29,040 --> 00:08:31,600 Speaker 1: from people in desperate needs. Well, we know that the 158 00:08:31,840 --> 00:08:34,679 Speaker 1: in medieval Europe, especially like in Italy, there were things 159 00:08:34,760 --> 00:08:37,520 Speaker 1: like pawn shops, and I think probably there were some 160 00:08:37,640 --> 00:08:40,400 Speaker 1: equivalence of that in the ancient world as well, because 161 00:08:40,440 --> 00:08:42,240 Speaker 1: I mean, it's is, you know, it's a normal human 162 00:08:42,840 --> 00:08:45,840 Speaker 1: need I guess to have some credit at sometimes, and 163 00:08:46,160 --> 00:08:48,280 Speaker 1: you know, I think all of these ancient societies and 164 00:08:48,360 --> 00:08:52,080 Speaker 1: especially even medieval and modern societies have catered to this. 165 00:08:53,080 --> 00:08:55,880 Speaker 1: The thing that strikes me the most about attitudes towards 166 00:08:55,920 --> 00:08:58,320 Speaker 1: what constitutes a high interest rate or not is just 167 00:08:58,400 --> 00:09:02,440 Speaker 1: how much it changes throughout time. So for instance, um, 168 00:09:02,480 --> 00:09:05,760 Speaker 1: I think Hammurabi set the maximum rate in something like thirty. 169 00:09:06,480 --> 00:09:09,439 Speaker 1: But then we also have a Babylonian temple that was 170 00:09:09,520 --> 00:09:12,760 Speaker 1: loaning silver at six and a quarter percent, and that 171 00:09:12,880 --> 00:09:15,440 Speaker 1: was seen as such a low rate that it was 172 00:09:15,480 --> 00:09:19,160 Speaker 1: almost a charitable deed for people. I mean, what do 173 00:09:19,200 --> 00:09:23,560 Speaker 1: you think about changing attitudes towards the level of interest rates? Well, 174 00:09:23,600 --> 00:09:26,120 Speaker 1: I think, you know, I think one of the patterns 175 00:09:26,160 --> 00:09:27,840 Speaker 1: we found in the book is that there's sort of 176 00:09:27,880 --> 00:09:31,640 Speaker 1: a you know, most of these ancient civilizations like Babylonia, Greece, 177 00:09:31,679 --> 00:09:34,320 Speaker 1: and Rome, there's sort of a U shaped pattern that 178 00:09:34,720 --> 00:09:37,920 Speaker 1: when when we first detect interest rates in those civilizations, 179 00:09:37,960 --> 00:09:40,920 Speaker 1: they're pretty high. And then as they develop and reached 180 00:09:40,960 --> 00:09:43,040 Speaker 1: their peaks, you know, like say Rome and the Age 181 00:09:43,040 --> 00:09:45,760 Speaker 1: of Augustus, the interest rates moved down to a very 182 00:09:45,800 --> 00:09:48,959 Speaker 1: low level. And then, for example, when the Roman Empire 183 00:09:49,080 --> 00:09:52,160 Speaker 1: was declining and falling, as Edward Gibbon titled his book 184 00:09:52,160 --> 00:09:54,320 Speaker 1: That Declined and Followed the Roman Empire, you begin to 185 00:09:54,320 --> 00:09:57,040 Speaker 1: see the rates go up again. And this pattern we 186 00:09:57,080 --> 00:09:59,840 Speaker 1: saw it in Babylonia. We saw it in Greece, we 187 00:10:00,080 --> 00:10:03,000 Speaker 1: see it in Rome. Doesn't happen in the modern world 188 00:10:03,040 --> 00:10:06,040 Speaker 1: as well. Right on that basis, I guess with zero 189 00:10:06,040 --> 00:10:10,640 Speaker 1: percent interest in the US, we're at the peak. That's 190 00:10:10,679 --> 00:10:14,080 Speaker 1: an interesting observation. Are we at the high point of 191 00:10:14,080 --> 00:10:17,080 Speaker 1: our civilization? Because interest rates are so low right now? 192 00:10:17,120 --> 00:10:19,080 Speaker 1: I mean that when you study this book, it sort 193 00:10:19,080 --> 00:10:22,240 Speaker 1: of makes you wonder whether you know we are at 194 00:10:22,280 --> 00:10:24,480 Speaker 1: some high point of civilization. I would say, with all 195 00:10:24,520 --> 00:10:26,800 Speaker 1: that's going on in the world that isn't so nice, 196 00:10:26,880 --> 00:10:28,840 Speaker 1: it's started to imagine we're at the high point right now. 197 00:10:29,000 --> 00:10:32,360 Speaker 1: And in the early days of when people started studying 198 00:10:32,440 --> 00:10:35,320 Speaker 1: interest rates, what they've been surprised by the fact that 199 00:10:35,360 --> 00:10:38,280 Speaker 1: we've had basically very mediocre economy and a lot of 200 00:10:38,320 --> 00:10:43,000 Speaker 1: economic deterioration, incredible amounts of debt, and yet interest rates 201 00:10:43,040 --> 00:10:46,080 Speaker 1: have continued to grind lower throughout all this time. Well, 202 00:10:46,160 --> 00:10:48,520 Speaker 1: I I don't think it's a big surprise, because you know, 203 00:10:48,600 --> 00:10:51,880 Speaker 1: before these recent very low interest rates, the lowest rates 204 00:10:51,920 --> 00:10:54,360 Speaker 1: that we talked about in in our country the United 205 00:10:54,400 --> 00:10:56,280 Speaker 1: States were kind of at the end of the nineteen 206 00:10:56,320 --> 00:11:00,040 Speaker 1: thirties and nineteen forty where you rates were not in 207 00:11:00,120 --> 00:11:04,319 Speaker 1: early one, interest rates were not all that much higher 208 00:11:04,320 --> 00:11:06,319 Speaker 1: than they are now. I mean, I think treasury bills 209 00:11:06,320 --> 00:11:08,560 Speaker 1: got down to a quarter percent or something like that. 210 00:11:08,800 --> 00:11:11,520 Speaker 1: But that was right before Pearl Harbor, and then when 211 00:11:11,520 --> 00:11:13,400 Speaker 1: the war came, you know, things went up a little bit. 212 00:11:14,000 --> 00:11:17,480 Speaker 1: What was your favorite section of the book. Well, I'm 213 00:11:17,520 --> 00:11:21,640 Speaker 1: a specialist on US economic history, and so I was 214 00:11:21,760 --> 00:11:25,880 Speaker 1: very interested in seeing the development of our own markets. Uh. 215 00:11:26,520 --> 00:11:29,440 Speaker 1: I think rates of six and seven percent were very 216 00:11:29,559 --> 00:11:32,880 Speaker 1: common in colonial America and the early United States. And 217 00:11:32,960 --> 00:11:35,079 Speaker 1: you know, if somebody asked me what is the typical 218 00:11:35,160 --> 00:11:38,160 Speaker 1: interest rate in US history that occurs more often than another, 219 00:11:38,160 --> 00:11:41,000 Speaker 1: I would say about six percent. And I've seen a 220 00:11:41,040 --> 00:11:43,160 Speaker 1: lot of that in my lifetime. And it goes back 221 00:11:43,160 --> 00:11:46,520 Speaker 1: to the Alexander Hamilton who set up our financial system 222 00:11:46,520 --> 00:11:50,520 Speaker 1: in the seventeen nineties. His main security when he restructured 223 00:11:50,600 --> 00:11:54,920 Speaker 1: the US debt in seventeen was a six percent six 224 00:11:54,960 --> 00:11:58,160 Speaker 1: percent one paid interest quarterly at at a six percent rate, 225 00:11:58,200 --> 00:12:01,320 Speaker 1: and it sold that about at various times. It varied, 226 00:12:01,360 --> 00:12:03,480 Speaker 1: of course, but you know, it got up to par 227 00:12:03,720 --> 00:12:07,000 Speaker 1: very quickly. So for someone like me who only entered 228 00:12:07,080 --> 00:12:11,840 Speaker 1: the workforce, uh, well, relatively recently, I suppose I've been 229 00:12:11,880 --> 00:12:14,320 Speaker 1: living with very very low interest rates for a long time, 230 00:12:14,520 --> 00:12:16,679 Speaker 1: and it kind of shocks me to hear that six 231 00:12:16,720 --> 00:12:20,800 Speaker 1: percent is a normal rate, or even that tent was 232 00:12:20,840 --> 00:12:25,200 Speaker 1: reached in the nineteen eighties under FED chair Paul Volker. Well, 233 00:12:25,280 --> 00:12:28,200 Speaker 1: that's you know. I would say that the highest rates 234 00:12:28,200 --> 00:12:31,280 Speaker 1: in American history and the lowest rates have occurred in 235 00:12:31,280 --> 00:12:34,480 Speaker 1: my lifetime. You you know about the low rates. But 236 00:12:34,640 --> 00:12:37,840 Speaker 1: I'm in seventy five years old now, so I was 237 00:12:37,880 --> 00:12:41,280 Speaker 1: born in nineteen forty and I started by nineteen sixty 238 00:12:41,400 --> 00:12:43,840 Speaker 1: or so. I'm keeping track of all these things. And 239 00:12:43,880 --> 00:12:47,480 Speaker 1: by as you mentioned, by night one, interest rates would 240 00:12:47,520 --> 00:12:50,280 Speaker 1: gone through the roof. There the government was borrowing at 241 00:12:50,960 --> 00:12:54,680 Speaker 1: fourteen fifteen percent, and mortgage rates were eighteen percent, and 242 00:12:54,720 --> 00:12:57,439 Speaker 1: treasury bills, i think, or prime rates at banks reached. 243 00:12:58,480 --> 00:13:00,160 Speaker 1: But of course we had a lot of inflation and 244 00:13:00,240 --> 00:13:03,600 Speaker 1: then so we sometimes we need to talk about real 245 00:13:03,640 --> 00:13:07,080 Speaker 1: interest rates versus nominal interest rates. One of the things 246 00:13:07,160 --> 00:13:10,319 Speaker 1: that it really fascinates me, and it's a phenomenon obviously 247 00:13:10,559 --> 00:13:13,080 Speaker 1: that's been going on for a while is the perennial 248 00:13:13,280 --> 00:13:16,120 Speaker 1: overestimation of where interest rates will go. So we've basically 249 00:13:16,200 --> 00:13:19,480 Speaker 1: in the US we've had declining rates for several decades. 250 00:13:19,559 --> 00:13:22,559 Speaker 1: Yet almost every year when Wall Street analysts are pulled, 251 00:13:22,800 --> 00:13:24,960 Speaker 1: they always think interest rates are going to turn around 252 00:13:25,000 --> 00:13:27,280 Speaker 1: and this will be the year that rates go higher. 253 00:13:27,720 --> 00:13:31,959 Speaker 1: Looking back historically, are there any similar phenomenon where basically 254 00:13:32,000 --> 00:13:34,400 Speaker 1: we saw a trend go on for an extremely long 255 00:13:34,440 --> 00:13:37,839 Speaker 1: time without some kind of mean reversion, surprising a lot 256 00:13:37,880 --> 00:13:40,400 Speaker 1: of people in the process. Well, I would say if 257 00:13:40,440 --> 00:13:43,400 Speaker 1: you study US interest rate history and go back at 258 00:13:43,480 --> 00:13:46,160 Speaker 1: least since the middle to you know, the last part 259 00:13:46,160 --> 00:13:49,640 Speaker 1: of the nineteenth century, one thing we establishes that interest 260 00:13:49,720 --> 00:13:54,360 Speaker 1: rates trend for maybe twenty or thirty years. They trended 261 00:13:54,440 --> 00:13:58,160 Speaker 1: down in the late nineteenth century, than they turned around 262 00:13:58,160 --> 00:14:00,080 Speaker 1: at the end of the nineteenth century and trend it 263 00:14:00,160 --> 00:14:03,240 Speaker 1: up to about nineteen twenty. Then they trended down to 264 00:14:03,360 --> 00:14:06,800 Speaker 1: nineteen forty five or forty six. Then they trended up 265 00:14:06,840 --> 00:14:10,199 Speaker 1: to one those very extremely higher rates we were talking about, 266 00:14:10,520 --> 00:14:14,120 Speaker 1: and from those peaks in one we got gradually back 267 00:14:14,160 --> 00:14:16,800 Speaker 1: to more normal rates. And now we've gotten to these 268 00:14:16,840 --> 00:14:20,360 Speaker 1: extremely low rates. So we've there are these twenty thirty 269 00:14:20,440 --> 00:14:22,320 Speaker 1: year trends. If we go back to eighty one. I 270 00:14:22,320 --> 00:14:24,960 Speaker 1: guess it's thirty four years that rates have trended down, 271 00:14:25,440 --> 00:14:28,360 Speaker 1: and that's kind of at the high end of the trend. 272 00:14:28,480 --> 00:14:31,720 Speaker 1: And so we're talking about the FED possibly raising rates 273 00:14:31,720 --> 00:14:34,920 Speaker 1: soon and normalizing rates, So maybe the trend is about 274 00:14:34,920 --> 00:14:38,240 Speaker 1: over all. Right, We're going to be back in one 275 00:14:38,280 --> 00:14:43,680 Speaker 1: minute after a word from our sponsors. You're listening to 276 00:14:43,720 --> 00:14:45,920 Speaker 1: the Odd Lots podcast, brought to you by ex On 277 00:14:46,000 --> 00:14:53,760 Speaker 1: Mobile Energy lives here. So I have to ask the 278 00:14:53,840 --> 00:14:56,960 Speaker 1: book ends in two thousand five, that was the fourth edition. 279 00:14:57,320 --> 00:14:59,760 Speaker 1: Would you ever do a fifth edition? And if so, 280 00:15:00,160 --> 00:15:02,680 Speaker 1: what would you put in it? Well, I was asked 281 00:15:02,720 --> 00:15:05,720 Speaker 1: recently by the publisher John Wiley whether I would be 282 00:15:05,760 --> 00:15:09,880 Speaker 1: interested in putting out a fifth edition, and because the 283 00:15:09,920 --> 00:15:12,240 Speaker 1: book keeps selling every year, it's sort of a minor 284 00:15:12,320 --> 00:15:15,720 Speaker 1: evergreen book and not not you know, I'm not getting 285 00:15:15,800 --> 00:15:17,880 Speaker 1: rich off of this book, but I get a little 286 00:15:17,960 --> 00:15:20,800 Speaker 1: check every year. And uh so the book keeps on 287 00:15:20,880 --> 00:15:23,960 Speaker 1: selling and the way, of course the publishers wants to 288 00:15:24,040 --> 00:15:26,320 Speaker 1: keep on selling it as to you know, updated, But 289 00:15:26,400 --> 00:15:28,400 Speaker 1: I said, it's I think it's a little too early 290 00:15:28,520 --> 00:15:31,120 Speaker 1: because we are just you know, maybe reaching this bottom 291 00:15:31,120 --> 00:15:33,800 Speaker 1: and interest rates, and I would like to have some 292 00:15:33,960 --> 00:15:38,320 Speaker 1: perspective of two or three years, let's say, of normalizing 293 00:15:38,360 --> 00:15:40,320 Speaker 1: interest rates is, which is what the FED is sort 294 00:15:40,320 --> 00:15:42,960 Speaker 1: of promising, you know, to get some perspective on this 295 00:15:42,960 --> 00:15:44,920 Speaker 1: period we've been through, which is kind of unique in 296 00:15:44,920 --> 00:15:47,000 Speaker 1: the annals of history. So I think it's a little 297 00:15:47,000 --> 00:15:50,840 Speaker 1: bit too early to revise the book. Going back along 298 00:15:51,200 --> 00:15:54,800 Speaker 1: back into history, you mentioned the Code of Hammurabi as 299 00:15:54,920 --> 00:15:57,360 Speaker 1: being one source of interest rates. What are some other 300 00:15:57,520 --> 00:16:04,080 Speaker 1: surprising places one find interest rate data recorded? Well, the 301 00:16:04,120 --> 00:16:07,400 Speaker 1: Middle Ages, you know, had public debt markets in the 302 00:16:07,680 --> 00:16:11,120 Speaker 1: Italian city states, for example, and so their interest rates 303 00:16:11,160 --> 00:16:15,480 Speaker 1: there on public bonds, and and there were also bankers 304 00:16:15,480 --> 00:16:20,400 Speaker 1: who lent money to kings, usually for fighting wars. And 305 00:16:20,440 --> 00:16:22,760 Speaker 1: one of the interesting things I found was that the 306 00:16:22,800 --> 00:16:26,520 Speaker 1: bankers would charge the kings and other politicians a much 307 00:16:26,640 --> 00:16:29,840 Speaker 1: higher rate than they charged the merchants that they dealt with. 308 00:16:30,080 --> 00:16:33,920 Speaker 1: The merchants had much better credit than the heads of 309 00:16:33,960 --> 00:16:36,880 Speaker 1: state that in the modern world, usually the lowest interest 310 00:16:36,960 --> 00:16:40,080 Speaker 1: rates are on government debts because the governments are you know, 311 00:16:40,160 --> 00:16:43,280 Speaker 1: have taxing powers and can print money, and so you 312 00:16:43,360 --> 00:16:46,120 Speaker 1: sort of feel safe holding a government bond. But there 313 00:16:46,240 --> 00:16:49,480 Speaker 1: was a reverse of that in the medieval world, the 314 00:16:49,520 --> 00:16:53,080 Speaker 1: merchants had good credit, they were honorable businessmen, and the 315 00:16:53,160 --> 00:16:55,520 Speaker 1: kings had terrible credit. This is actually one of my 316 00:16:55,560 --> 00:16:58,120 Speaker 1: favorite parts in the book. There was a reason for 317 00:16:58,240 --> 00:17:02,280 Speaker 1: that right, especially in front, well in France and England 318 00:17:02,360 --> 00:17:05,480 Speaker 1: and you know other places that Spain, it was a 319 00:17:05,520 --> 00:17:07,879 Speaker 1: famous example. I mean, the kings would often default, you know, 320 00:17:07,920 --> 00:17:09,920 Speaker 1: they would borrow the money and they wouldn't pay it back. 321 00:17:09,960 --> 00:17:12,240 Speaker 1: You know, they had that in those days, something called 322 00:17:12,280 --> 00:17:14,000 Speaker 1: the divine right of kings, and it seemed to be 323 00:17:14,040 --> 00:17:15,800 Speaker 1: one of the divine rights of the king was not 324 00:17:15,880 --> 00:17:19,600 Speaker 1: to repay people that he promised to repay. Right, so 325 00:17:19,640 --> 00:17:22,200 Speaker 1: you could take out loans and then essentially banish all 326 00:17:22,240 --> 00:17:24,719 Speaker 1: your bankers if you were a prince of France or 327 00:17:24,840 --> 00:17:28,199 Speaker 1: Spain or as good. Yeah, it's a good life. Yeah. Well, 328 00:17:28,240 --> 00:17:32,280 Speaker 1: the Italians, you know, the Italian bankers and twelve d 329 00:17:32,480 --> 00:17:34,240 Speaker 1: lent money to the King of England. He didn't pay 330 00:17:34,280 --> 00:17:36,720 Speaker 1: them back. So many of these early banks failed when 331 00:17:36,760 --> 00:17:39,320 Speaker 1: when they didn't get their money paid back. King Philip 332 00:17:39,400 --> 00:17:43,439 Speaker 1: the Second of Spain UH in the sixteenth century borrowed 333 00:17:43,480 --> 00:17:47,399 Speaker 1: money for all kinds of wars and uh he defaulted 334 00:17:47,480 --> 00:17:50,880 Speaker 1: but generally he defaulted on payment when it was due, 335 00:17:51,000 --> 00:17:53,440 Speaker 1: but generally he paid it back a little bit later, 336 00:17:53,680 --> 00:17:55,520 Speaker 1: so he kind of kept this credit. We call him 337 00:17:55,560 --> 00:17:59,280 Speaker 1: a serial defaulter. He could keep on borrowing because eventually 338 00:17:59,280 --> 00:18:01,480 Speaker 1: he would pay them act and I think the bankers 339 00:18:01,520 --> 00:18:04,080 Speaker 1: charged him enough interests so that they came out hold. 340 00:18:04,200 --> 00:18:07,120 Speaker 1: And so now we think that if a sovereign word 341 00:18:07,119 --> 00:18:09,360 Speaker 1: a default, then you would then see a huge wave 342 00:18:09,400 --> 00:18:12,000 Speaker 1: of default throughout the private sector of the economy at 343 00:18:12,000 --> 00:18:14,280 Speaker 1: the same time, just as for knock on effects. But 344 00:18:14,280 --> 00:18:17,280 Speaker 1: it wasn't necessarily the case back then. No, I think 345 00:18:17,320 --> 00:18:22,920 Speaker 1: sovereign defaults then were you know, kind of they did 346 00:18:22,960 --> 00:18:25,320 Speaker 1: it quite frequently, and the bankers were used to it. 347 00:18:25,359 --> 00:18:27,080 Speaker 1: But you know, one way they made up for it, 348 00:18:27,200 --> 00:18:30,040 Speaker 1: to see the businessman. The merchants didn't default, so they 349 00:18:30,080 --> 00:18:32,840 Speaker 1: got a low rate. So you might say the insurance 350 00:18:32,880 --> 00:18:35,760 Speaker 1: against the default was built into the king's interest rate, 351 00:18:35,800 --> 00:18:37,760 Speaker 1: which could be two or three times higher than what 352 00:18:37,840 --> 00:18:41,680 Speaker 1: businessmen could borrow it. So we've been talking about thousands 353 00:18:41,840 --> 00:18:45,199 Speaker 1: of years worth of interest rates. If you were to 354 00:18:45,359 --> 00:18:49,560 Speaker 1: distill all that information, all seven hundred pages of your book, 355 00:18:49,960 --> 00:18:53,680 Speaker 1: into one simple pattern or takeaway for listeners of the show, 356 00:18:53,720 --> 00:18:58,439 Speaker 1: what would it be? Well. The thing that impressed me 357 00:18:58,480 --> 00:19:01,720 Speaker 1: about looking at all the difference realizations, and remember we're 358 00:19:01,760 --> 00:19:04,359 Speaker 1: looking at the lowest interest rates, that there is an 359 00:19:04,359 --> 00:19:08,800 Speaker 1: association between how well a so civilization or a society 360 00:19:08,920 --> 00:19:11,359 Speaker 1: is doing in the level of its interest rates, and 361 00:19:11,440 --> 00:19:13,600 Speaker 1: so when you have kind of low interest rates, it 362 00:19:13,680 --> 00:19:17,520 Speaker 1: probably means that things are pretty well ordered. Now, I 363 00:19:17,520 --> 00:19:19,680 Speaker 1: wouldn't say that I feel that way about our low 364 00:19:19,720 --> 00:19:21,760 Speaker 1: interest rates right now, because they may be just a 365 00:19:22,160 --> 00:19:25,280 Speaker 1: phenomenon of the recent financial crisis and what we had 366 00:19:25,359 --> 00:19:27,440 Speaker 1: to do to fight it. But over the long period 367 00:19:27,480 --> 00:19:30,960 Speaker 1: of history, you know, Greek interest rates were low in 368 00:19:31,040 --> 00:19:34,680 Speaker 1: the time of Aristotle, and Roman interest rates were low 369 00:19:34,720 --> 00:19:37,160 Speaker 1: in the time of Augustus. And when you look at 370 00:19:37,480 --> 00:19:40,879 Speaker 1: the other low interest rate societies, you know, medieval Italy 371 00:19:41,080 --> 00:19:43,520 Speaker 1: was the most financially advanced and had the lowest rates. 372 00:19:43,560 --> 00:19:47,440 Speaker 1: Then you get Spain and the Netherlands, and then England 373 00:19:47,880 --> 00:19:50,280 Speaker 1: and then the United States, you know, and you can 374 00:19:50,280 --> 00:19:53,200 Speaker 1: sort to see that when the societies or the civilizations 375 00:19:53,240 --> 00:19:56,600 Speaker 1: were doing well, they had low interest rates and then eventually, 376 00:19:56,760 --> 00:19:59,840 Speaker 1: you know, the rates turn up. Now, maybe that takes 377 00:19:59,840 --> 00:20:02,480 Speaker 1: a long period of time, but we tend to think 378 00:20:02,480 --> 00:20:06,040 Speaker 1: our American civilization will last forever. But that isn't what 379 00:20:06,119 --> 00:20:10,000 Speaker 1: history seems to indicate. Professor Silla is the co author 380 00:20:10,160 --> 00:20:13,320 Speaker 1: of A History of Interest Rates, fourth edition and professor 381 00:20:13,359 --> 00:20:16,560 Speaker 1: of Economics and Financial Institutions at m y U Stern. 382 00:20:16,960 --> 00:20:21,119 Speaker 1: He also has a great project tracing the genealogy of 383 00:20:21,160 --> 00:20:24,200 Speaker 1: financial institutions, which you can look up on the internet, 384 00:20:24,240 --> 00:20:26,840 Speaker 1: and I highly recommend you do so, Professor Silla, thank 385 00:20:26,880 --> 00:20:33,560 Speaker 1: you so much, my pleasure. Thank you so. Thus concludes 386 00:20:33,720 --> 00:20:37,920 Speaker 1: our tour of interest rate history. Joe, I love that discussion. 387 00:20:37,920 --> 00:20:40,920 Speaker 1: One thing I love about financial history discussions. You see 388 00:20:40,920 --> 00:20:45,720 Speaker 1: how there are very few new debates in economics or finance. 389 00:20:45,800 --> 00:20:48,159 Speaker 1: All of these things that we regard as modern, or 390 00:20:48,200 --> 00:20:50,440 Speaker 1: we talk about them as though they're new, not only 391 00:20:50,480 --> 00:20:53,600 Speaker 1: have they been talking about before, but often hundreds and 392 00:20:53,640 --> 00:20:56,640 Speaker 1: thousands of years. Yeah. Although I did hear a lot 393 00:20:56,640 --> 00:20:59,000 Speaker 1: of things in that discussion that makes me wonder if 394 00:20:59,000 --> 00:21:01,960 Speaker 1: it's different this time, which is, of course, this idea 395 00:21:02,040 --> 00:21:05,600 Speaker 1: that we have interest rates in thirty years cycles, and 396 00:21:05,720 --> 00:21:08,720 Speaker 1: also the idea of negative interest rates. Yeah, and the 397 00:21:08,800 --> 00:21:12,199 Speaker 1: idea that historically low interest rates were seen as a 398 00:21:12,240 --> 00:21:15,440 Speaker 1: proxy for the health of the economy, and higher interest 399 00:21:15,520 --> 00:21:17,840 Speaker 1: rates were seen as bad, which is funny because right 400 00:21:17,880 --> 00:21:21,000 Speaker 1: now everyone's sort of hoping that higher rates signals a 401 00:21:21,040 --> 00:21:24,680 Speaker 1: new europe economic prosperity, and yet we keep sort of 402 00:21:24,720 --> 00:21:28,440 Speaker 1: getting disappointed and concerned about what it means that rates 403 00:21:28,520 --> 00:21:32,320 Speaker 1: keep plunging. Yes, indeed, all right, I'm Tracy Alloway. You 404 00:21:32,320 --> 00:21:35,600 Speaker 1: can follow me at Tracy Alloway on Twitter, and I'm 405 00:21:35,680 --> 00:21:38,720 Speaker 1: Joe Wisenthal at The Stalwart on Twitter. Thanks so much 406 00:21:38,760 --> 00:21:40,879 Speaker 1: for joining us, and please tune in next week for 407 00:21:40,920 --> 00:21:54,880 Speaker 1: another episode of Odd Lots. Joe and I are very 408 00:21:54,920 --> 00:21:57,600 Speaker 1: proud of our new podcast, Odd Lots, but we are 409 00:21:57,640 --> 00:22:01,560 Speaker 1: also very proud of Bloomberg's. They're growing suite of original 410 00:22:01,640 --> 00:22:05,360 Speaker 1: podcast all designed to help you navigate the complexities of business, 411 00:22:05,440 --> 00:22:09,239 Speaker 1: financial markets, and the global economy. So in addition to 412 00:22:09,280 --> 00:22:12,840 Speaker 1: our own podcast, please don't miss Benchmark with Dan Moss, 413 00:22:12,920 --> 00:22:16,960 Speaker 1: Tory Stillwell and Aki Edo, an informative, jargon free look 414 00:22:17,000 --> 00:22:20,200 Speaker 1: at the inner workings of the global economy. Then there's 415 00:22:20,280 --> 00:22:22,240 Speaker 1: Deal of the Week with our M and A reporter 416 00:22:22,320 --> 00:22:24,840 Speaker 1: Alex Sherman, which is a breakdown of the biggest M 417 00:22:24,840 --> 00:22:27,280 Speaker 1: and A deals and gives you an inside peak at 418 00:22:27,320 --> 00:22:31,840 Speaker 1: corporate boardrooms. All three shows are available on iTunes, SoundCloud, 419 00:22:32,040 --> 00:22:35,240 Speaker 1: pocket cast for Android, Bloomberg dot Com, and of course, 420 00:22:35,359 --> 00:22:38,640 Speaker 1: the Bloomberg Terminal. You've been listening to The Odd Lots podcast, 421 00:22:38,720 --> 00:22:41,560 Speaker 1: brought to you by ex On Mobile Energy lives here.