WEBVTT - Episode 5: 6,000 Years of Interest Rates 0:00:00.320 --> 0:00:02.360 The Odd Loots podcast is brought to you by ex 0:00:02.480 --> 0:00:11.040 On Mobile Energy Lives here. Welcome to Odd Blocks. It 0:00:11.200 --> 0:00:15.040 is Monday, December seven. I'm Tracy Alloway, executive editor of 0:00:15.080 --> 0:00:18.400 Bloomberg Markets, and I'm Joe wasn't All Managing editor of 0:00:18.400 --> 0:00:24.119 Bloomberg Markets. Hey, hey, Joe, Yeah, what's this? Uh? That 0:00:24.280 --> 0:00:27.720 is a book, yes, but specifically it is a seven 0:00:27.800 --> 0:00:30.760 hundred page book on the history of interest rates. Have 0:00:30.920 --> 0:00:34.720 you read the entire thing? I actually did, and I 0:00:34.800 --> 0:00:37.199 have to tell you it is a scintillating read that 0:00:37.320 --> 0:00:41.760 encapsulates everything from Mesopotamian interest rates and three thousand BC 0:00:42.040 --> 0:00:46.320 two medieval attitudes towards usury hyper inflation in Argentina in 0:00:46.360 --> 0:00:50.199 the nineteen eighties. It's actually a pretty famous book in 0:00:50.240 --> 0:00:53.720 financial circles, and it was first written by Sydney Homer 0:00:53.800 --> 0:00:58.920 back in nineteen sixty three. Now, unfortunately Homer has passed 0:00:58.920 --> 0:01:01.440 away since then. But I'm very excited to say that 0:01:01.520 --> 0:01:05.039 the guest we have on today is Richard Silla, who's 0:01:05.080 --> 0:01:08.160 the co author on the fourth edition of this book 0:01:08.200 --> 0:01:11.160 and also a professor of economics and financial markets at 0:01:11.240 --> 0:01:14.520 n y U Stern. So we are about to embark 0:01:14.560 --> 0:01:17.479 on a rollicking six thousand year tour of the history 0:01:17.480 --> 0:01:20.399 of interest rates. So two, quick think they had interest 0:01:20.480 --> 0:01:22.920 rates back then in Mesopotamia, Like, this is not a 0:01:22.959 --> 0:01:25.920 totally modern invention. Oh Joe, You're going to learn so much. 0:01:26.200 --> 0:01:29.120 And studying interest rates could theoretically be pretty exciting right 0:01:29.160 --> 0:01:30.800 now because we may be on the verge of our 0:01:30.800 --> 0:01:33.720 first rate hike in several years. Yes, So what better 0:01:33.760 --> 0:01:36.360 way to prepare for that historic event than to go 0:01:36.400 --> 0:01:39.000 back in time and learn about Dutch interest rates in 0:01:39.040 --> 0:01:42.160 the eighteenth century. Let's do it. I'm excited, Professor Silla, 0:01:42.360 --> 0:01:45.399 thank you so much for joining us. Pleasure to be here. Um. 0:01:45.480 --> 0:01:48.320 I have to ask, so, when Sydney Homer first published 0:01:48.320 --> 0:01:51.440 this book in the early nineteen sixties, that was a 0:01:51.480 --> 0:01:55.360 time when interest rates were not exactly the hot topic 0:01:55.400 --> 0:01:57.920 matter that they are now. Why do you think he 0:01:57.960 --> 0:02:00.840 wanted to look at them? Well, Son, Homer was a 0:02:01.000 --> 0:02:05.080 kind of a cultured fellow Harvard grad who had a 0:02:05.120 --> 0:02:08.440 career on Wall Street. And I think because he was 0:02:08.639 --> 0:02:12.720 highly educated, and uh, he thought, you know more than 0:02:12.800 --> 0:02:15.360 most people do about their jobs, and he wanted to 0:02:15.400 --> 0:02:17.600 know you know, he was in the bond markets, and 0:02:17.639 --> 0:02:20.040 he wanted to know, uh, you know, what was the 0:02:21.160 --> 0:02:23.880 origin of them. And for example, he had heard about 0:02:24.600 --> 0:02:27.920 the Dutch Dutch finances being important. Well exactly what was 0:02:28.040 --> 0:02:30.560 Dutch finance? And so he embarked on this history of 0:02:30.800 --> 0:02:33.880 collecting interest rates as much as he could from you know, 0:02:33.919 --> 0:02:37.520 all the recorded history up to that time, and decided 0:02:37.560 --> 0:02:39.959 to put it into one one book called the History 0:02:39.960 --> 0:02:44.200 of Interest Rates. Now, the book starts in ancient times 0:02:44.240 --> 0:02:48.200 and it starts with things like Babylonian kings setting the 0:02:48.280 --> 0:02:52.080 maximum rates of interest on loans of grain. How in 0:02:52.120 --> 0:02:56.920 the world did Homer go about collecting the data for 0:02:57.000 --> 0:03:00.600 this book, Well, he if you're talking about BABYLONEI, uh, 0:03:00.639 --> 0:03:02.760 there is a great source there which many people have 0:03:02.800 --> 0:03:04.799 heard of, but they probably don't think it has interest 0:03:04.880 --> 0:03:07.120 rates in it. It's the Code of Hammurabi. It was 0:03:07.160 --> 0:03:09.000 sort of a great code that came I think it 0:03:09.040 --> 0:03:12.080 was about eight hundred BC or something like that, so 0:03:12.120 --> 0:03:15.480 it's about four thousand years ago. And in the Code 0:03:15.480 --> 0:03:18.440 of Hammurabi it's sort of specifies that if you lend 0:03:18.480 --> 0:03:21.880 somebody money, the maximum rate you can charge them as 0:03:22.000 --> 0:03:25.240 if you lend somebody grain. Apparently people lent grain as 0:03:25.240 --> 0:03:27.679 well as money, the maximum rate was thirty three and 0:03:27.720 --> 0:03:31.120 a third percent. So how did they How did Hammurabi 0:03:31.440 --> 0:03:34.480 derive these figures? Was it a sort of finger in 0:03:34.480 --> 0:03:37.680 the wind tent seemed like the right amount, or was 0:03:37.720 --> 0:03:40.400 it something more reflective of the economy where there was 0:03:40.640 --> 0:03:43.400 there was a basis in reality. Well, I suspect that 0:03:43.440 --> 0:03:45.960 if since Hammurabi was saying this is the most you 0:03:46.000 --> 0:03:49.360 can charge, that there were a lot of lending practices, 0:03:49.400 --> 0:03:52.520 both for money and grain, and sometimes people tried to 0:03:52.600 --> 0:03:54.760 charge more than a twenty or thirty three and a 0:03:54.800 --> 0:03:58.240 third percent, and Hammurabi thought that was unreasonable, and so 0:03:58.320 --> 0:04:00.720 he sort of put a ceiling on could be charged. 0:04:00.720 --> 0:04:03.640 And I think it was probably sort of customary rates 0:04:03.680 --> 0:04:05.720 at that time. One of the things I love so 0:04:05.800 --> 0:04:09.040 much about the book is all the types of collateral 0:04:09.120 --> 0:04:12.320 that it outlays. So, for instance, there's a king of Jerusalem, 0:04:12.400 --> 0:04:17.440 Baldwin the Second, who famously pledges his beard for hypothication. 0:04:18.000 --> 0:04:21.000 And there's an ancient Greek city that um pledged its 0:04:21.040 --> 0:04:25.719 public colonnades, so when the city defaulted, the citizens couldn't 0:04:25.760 --> 0:04:30.320 walk down the colonades anymore, which just seems absolutely absurd 0:04:30.320 --> 0:04:32.960 to us. Nowadays, but there's a long history of various 0:04:32.960 --> 0:04:35.599 types of collateral being used. Yes, I think, you know, 0:04:35.680 --> 0:04:38.479 there are many, many different kinds of collateral. But the 0:04:38.520 --> 0:04:43.720 traditional main assets were precious metals and land, but I 0:04:43.760 --> 0:04:46.760 think many other things could be used as collateral, particularly 0:04:46.760 --> 0:04:50.120 for smaller loans. Of course, you're citing these the colonnade. 0:04:50.160 --> 0:04:53.200 I mean that's a sort of a public convenience, and 0:04:53.520 --> 0:04:55.680 it's interesting that they would pledge that they must have 0:04:55.680 --> 0:04:57.599 needed to borrow a lot of money, perhaps to fight 0:04:57.640 --> 0:05:00.680 a war. Nowadays, when we think about in rates, we 0:05:00.720 --> 0:05:03.240 think about, you know, there's the risk free rate, and 0:05:03.360 --> 0:05:06.479 rates often sort of move up and down across the 0:05:06.480 --> 0:05:10.600 economy with each other, they trend in the same direction. 0:05:11.000 --> 0:05:13.680 In the very early days, when you first have this 0:05:13.839 --> 0:05:17.480 data of rates and borrowing and lending, how much of 0:05:17.520 --> 0:05:21.040 the lending was sort of idiosyncratic, just a judgment of 0:05:21.080 --> 0:05:24.839 the credit risk of the borrower, and how much was 0:05:24.920 --> 0:05:27.920 this sort of general economic trend at the time. Well, 0:05:27.960 --> 0:05:30.320 in our book, I think we're talking about mostly about 0:05:30.360 --> 0:05:33.120 general economic trends because and I should point this out 0:05:33.160 --> 0:05:35.760 at the start of our conversation. The book was meant 0:05:35.800 --> 0:05:38.880 to say what were the lowest interest rates that we're 0:05:38.920 --> 0:05:42.440 prevailing at these various times in history and various civilizations. 0:05:42.440 --> 0:05:44.200 And you know what, was there a pattern to the 0:05:44.240 --> 0:05:46.279 movement of the rates, But we all know it's the 0:05:46.320 --> 0:05:48.800 world then was just like the world today. There are 0:05:48.839 --> 0:05:52.200 some basic benchmark interest rates or risk free returns we 0:05:52.240 --> 0:05:54.440 talk about in finance at the Servant School at n 0:05:54.560 --> 0:05:58.640 y U and other more risky loans are priced off 0:05:58.680 --> 0:06:01.120 of this sort of basic rate. But the thing we're 0:06:01.120 --> 0:06:03.320 trying to do mostly in the book, especially when you 0:06:03.360 --> 0:06:06.080 go far back into civilization, is to say what were 0:06:06.120 --> 0:06:08.960 the lowest rates people could borrow at at various times 0:06:08.960 --> 0:06:12.400 and four thousand years of history. Now, I mean you're 0:06:12.400 --> 0:06:15.599 talking about the lowest possible rates. That was actually a huge, 0:06:15.680 --> 0:06:19.520 huge debate both in ancient times, medieval times, and going up. 0:06:19.720 --> 0:06:21.880 I mean, I guess it continues today and that's the 0:06:21.920 --> 0:06:26.640 debate over usurally and what constitutes a fair rate of interest. 0:06:26.720 --> 0:06:29.760 Can you maybe talk a little bit about that, well, usury. 0:06:29.960 --> 0:06:32.119 You know that we've had a lot of usury laws 0:06:32.120 --> 0:06:35.240 in history, and many people trace it back to Aristotle, 0:06:35.360 --> 0:06:38.240 you know, a very great philosopher, obviously one of the 0:06:38.240 --> 0:06:41.159 greatest ever, but he had a curious idea that I 0:06:41.200 --> 0:06:44.279 think the translation of the Greek's money is barren. You know, 0:06:44.320 --> 0:06:49.480 since money is barren, money doesn't by itself have any productivity. Therefore, 0:06:49.560 --> 0:06:52.440 interest rate should be zero. When you lend something to somebody, 0:06:52.520 --> 0:06:55.919 you should not charge the interest. And uh, that was 0:06:55.960 --> 0:07:00.080 a view. I think that was not widespread, but it 0:07:00.120 --> 0:07:03.000 was a philosophical view. Then it was picked up by St. 0:07:03.000 --> 0:07:06.320 Thomas Aquinas in the Middle Ages and it became part 0:07:06.360 --> 0:07:09.920 of Catholic teaching that you should not charge people interest. 0:07:10.000 --> 0:07:11.960 You know, he got it from Aristotle and it became 0:07:12.000 --> 0:07:14.080 sort of Catholic teaching. So we come right down to 0:07:14.120 --> 0:07:17.080 the modern world where we have interest rate ceilings and 0:07:17.480 --> 0:07:19.960 not that interest rate should be zero. I think that 0:07:20.000 --> 0:07:22.560 went out a long time ago, but the modern equivalent 0:07:22.560 --> 0:07:24.400 of it to say the interest rate should not be 0:07:24.560 --> 0:07:28.960 higher than so many and when those when those usury 0:07:29.080 --> 0:07:33.400 caps were put in place by various rulers. Again sort 0:07:33.440 --> 0:07:35.840 of going back to my first question, was that just 0:07:35.920 --> 0:07:40.600 something that was that felt right on lending money, that 0:07:40.920 --> 0:07:44.840 felt like a limit that um I wouldn't be breached. 0:07:45.080 --> 0:07:48.200 I would think that, you know, the usury ceilings were 0:07:48.600 --> 0:07:52.080 sort of based on what was normal lending rates at 0:07:52.080 --> 0:07:54.960 a certain time, and maybe set around that level a 0:07:55.000 --> 0:07:58.920 little bit higher, just just so that people couldn't exploit 0:07:58.960 --> 0:08:01.280 other people. I think that the reason behind it was 0:08:01.360 --> 0:08:05.720 sometimes loans were for what we call consumption loans. There 0:08:05.800 --> 0:08:08.920 might have been a drought and the crops failed, and 0:08:09.080 --> 0:08:11.680 one idea behind the usury law was that when the 0:08:11.680 --> 0:08:14.400 crops fail, you shouldn't take advantage of a person who's 0:08:14.440 --> 0:08:17.080 having a hard time getting enough to eat by charging 0:08:17.080 --> 0:08:20.200 them interest. Are the early examples of what we would 0:08:20.240 --> 0:08:25.360 call payday lenders at some point, basically institutions specifically designed 0:08:25.360 --> 0:08:29.000 to take advantage of extraordinarily high levels of interest rates 0:08:29.040 --> 0:08:31.600 from people in desperate needs. Well, we know that the 0:08:31.840 --> 0:08:34.679 in medieval Europe, especially like in Italy, there were things 0:08:34.760 --> 0:08:37.520 like pawn shops, and I think probably there were some 0:08:37.640 --> 0:08:40.400 equivalence of that in the ancient world as well, because 0:08:40.440 --> 0:08:42.240 I mean, it's is, you know, it's a normal human 0:08:42.840 --> 0:08:45.840 need I guess to have some credit at sometimes, and 0:08:46.160 --> 0:08:48.280 you know, I think all of these ancient societies and 0:08:48.360 --> 0:08:52.080 especially even medieval and modern societies have catered to this. 0:08:53.080 --> 0:08:55.880 The thing that strikes me the most about attitudes towards 0:08:55.920 --> 0:08:58.320 what constitutes a high interest rate or not is just 0:08:58.400 --> 0:09:02.440 how much it changes throughout time. So for instance, um, 0:09:02.480 --> 0:09:05.760 I think Hammurabi set the maximum rate in something like thirty. 0:09:06.480 --> 0:09:09.439 But then we also have a Babylonian temple that was 0:09:09.520 --> 0:09:12.760 loaning silver at six and a quarter percent, and that 0:09:12.880 --> 0:09:15.440 was seen as such a low rate that it was 0:09:15.480 --> 0:09:19.160 almost a charitable deed for people. I mean, what do 0:09:19.200 --> 0:09:23.560 you think about changing attitudes towards the level of interest rates? Well, 0:09:23.600 --> 0:09:26.120 I think, you know, I think one of the patterns 0:09:26.160 --> 0:09:27.840 we found in the book is that there's sort of 0:09:27.880 --> 0:09:31.640 a you know, most of these ancient civilizations like Babylonia, Greece, 0:09:31.679 --> 0:09:34.320 and Rome, there's sort of a U shaped pattern that 0:09:34.720 --> 0:09:37.920 when when we first detect interest rates in those civilizations, 0:09:37.960 --> 0:09:40.920 they're pretty high. And then as they develop and reached 0:09:40.960 --> 0:09:43.040 their peaks, you know, like say Rome and the Age 0:09:43.040 --> 0:09:45.760 of Augustus, the interest rates moved down to a very 0:09:45.800 --> 0:09:48.959 low level. And then, for example, when the Roman Empire 0:09:49.080 --> 0:09:52.160 was declining and falling, as Edward Gibbon titled his book 0:09:52.160 --> 0:09:54.320 That Declined and Followed the Roman Empire, you begin to 0:09:54.320 --> 0:09:57.040 see the rates go up again. And this pattern we 0:09:57.080 --> 0:09:59.840 saw it in Babylonia. We saw it in Greece, we 0:10:00.080 --> 0:10:03.000 see it in Rome. Doesn't happen in the modern world 0:10:03.040 --> 0:10:06.040 as well. Right on that basis, I guess with zero 0:10:06.040 --> 0:10:10.640 percent interest in the US, we're at the peak. That's 0:10:10.679 --> 0:10:14.080 an interesting observation. Are we at the high point of 0:10:14.080 --> 0:10:17.080 our civilization? Because interest rates are so low right now? 0:10:17.120 --> 0:10:19.080 I mean that when you study this book, it sort 0:10:19.080 --> 0:10:22.240 of makes you wonder whether you know we are at 0:10:22.280 --> 0:10:24.480 some high point of civilization. I would say, with all 0:10:24.520 --> 0:10:26.800 that's going on in the world that isn't so nice, 0:10:26.880 --> 0:10:28.840 it's started to imagine we're at the high point right now. 0:10:29.000 --> 0:10:32.360 And in the early days of when people started studying 0:10:32.440 --> 0:10:35.320 interest rates, what they've been surprised by the fact that 0:10:35.360 --> 0:10:38.280 we've had basically very mediocre economy and a lot of 0:10:38.320 --> 0:10:43.000 economic deterioration, incredible amounts of debt, and yet interest rates 0:10:43.040 --> 0:10:46.080 have continued to grind lower throughout all this time. Well, 0:10:46.160 --> 0:10:48.520 I I don't think it's a big surprise, because you know, 0:10:48.600 --> 0:10:51.880 before these recent very low interest rates, the lowest rates 0:10:51.920 --> 0:10:54.360 that we talked about in in our country the United 0:10:54.400 --> 0:10:56.280 States were kind of at the end of the nineteen 0:10:56.320 --> 0:11:00.040 thirties and nineteen forty where you rates were not in 0:11:00.120 --> 0:11:04.319 early one, interest rates were not all that much higher 0:11:04.320 --> 0:11:06.319 than they are now. I mean, I think treasury bills 0:11:06.320 --> 0:11:08.560 got down to a quarter percent or something like that. 0:11:08.800 --> 0:11:11.520 But that was right before Pearl Harbor, and then when 0:11:11.520 --> 0:11:13.400 the war came, you know, things went up a little bit. 0:11:14.000 --> 0:11:17.480 What was your favorite section of the book. Well, I'm 0:11:17.520 --> 0:11:21.640 a specialist on US economic history, and so I was 0:11:21.760 --> 0:11:25.880 very interested in seeing the development of our own markets. Uh. 0:11:26.520 --> 0:11:29.440 I think rates of six and seven percent were very 0:11:29.559 --> 0:11:32.880 common in colonial America and the early United States. And 0:11:32.960 --> 0:11:35.079 you know, if somebody asked me what is the typical 0:11:35.160 --> 0:11:38.160 interest rate in US history that occurs more often than another, 0:11:38.160 --> 0:11:41.000 I would say about six percent. And I've seen a 0:11:41.040 --> 0:11:43.160 lot of that in my lifetime. And it goes back 0:11:43.160 --> 0:11:46.520 to the Alexander Hamilton who set up our financial system 0:11:46.520 --> 0:11:50.520 in the seventeen nineties. His main security when he restructured 0:11:50.600 --> 0:11:54.920 the US debt in seventeen was a six percent six 0:11:54.960 --> 0:11:58.160 percent one paid interest quarterly at at a six percent rate, 0:11:58.200 --> 0:12:01.320 and it sold that about at various times. It varied, 0:12:01.360 --> 0:12:03.480 of course, but you know, it got up to par 0:12:03.720 --> 0:12:07.000 very quickly. So for someone like me who only entered 0:12:07.080 --> 0:12:11.840 the workforce, uh, well, relatively recently, I suppose I've been 0:12:11.880 --> 0:12:14.320 living with very very low interest rates for a long time, 0:12:14.520 --> 0:12:16.679 and it kind of shocks me to hear that six 0:12:16.720 --> 0:12:20.800 percent is a normal rate, or even that tent was 0:12:20.840 --> 0:12:25.200 reached in the nineteen eighties under FED chair Paul Volker. Well, 0:12:25.280 --> 0:12:28.200 that's you know. I would say that the highest rates 0:12:28.200 --> 0:12:31.280 in American history and the lowest rates have occurred in 0:12:31.280 --> 0:12:34.480 my lifetime. You you know about the low rates. But 0:12:34.640 --> 0:12:37.840 I'm in seventy five years old now, so I was 0:12:37.880 --> 0:12:41.280 born in nineteen forty and I started by nineteen sixty 0:12:41.400 --> 0:12:43.840 or so. I'm keeping track of all these things. And 0:12:43.880 --> 0:12:47.480 by as you mentioned, by night one, interest rates would 0:12:47.520 --> 0:12:50.280 gone through the roof. There the government was borrowing at 0:12:50.960 --> 0:12:54.680 fourteen fifteen percent, and mortgage rates were eighteen percent, and 0:12:54.720 --> 0:12:57.439 treasury bills, i think, or prime rates at banks reached. 0:12:58.480 --> 0:13:00.160 But of course we had a lot of inflation and 0:13:00.240 --> 0:13:03.600 then so we sometimes we need to talk about real 0:13:03.640 --> 0:13:07.080 interest rates versus nominal interest rates. One of the things 0:13:07.160 --> 0:13:10.319 that it really fascinates me, and it's a phenomenon obviously 0:13:10.559 --> 0:13:13.080 that's been going on for a while is the perennial 0:13:13.280 --> 0:13:16.120 overestimation of where interest rates will go. So we've basically 0:13:16.200 --> 0:13:19.480 in the US we've had declining rates for several decades. 0:13:19.559 --> 0:13:22.559 Yet almost every year when Wall Street analysts are pulled, 0:13:22.800 --> 0:13:24.960 they always think interest rates are going to turn around 0:13:25.000 --> 0:13:27.280 and this will be the year that rates go higher. 0:13:27.720 --> 0:13:31.959 Looking back historically, are there any similar phenomenon where basically 0:13:32.000 --> 0:13:34.400 we saw a trend go on for an extremely long 0:13:34.440 --> 0:13:37.839 time without some kind of mean reversion, surprising a lot 0:13:37.880 --> 0:13:40.400 of people in the process. Well, I would say if 0:13:40.440 --> 0:13:43.400 you study US interest rate history and go back at 0:13:43.480 --> 0:13:46.160 least since the middle to you know, the last part 0:13:46.160 --> 0:13:49.640 of the nineteenth century, one thing we establishes that interest 0:13:49.720 --> 0:13:54.360 rates trend for maybe twenty or thirty years. They trended 0:13:54.440 --> 0:13:58.160 down in the late nineteenth century, than they turned around 0:13:58.160 --> 0:14:00.080 at the end of the nineteenth century and trend it 0:14:00.160 --> 0:14:03.240 up to about nineteen twenty. Then they trended down to 0:14:03.360 --> 0:14:06.800 nineteen forty five or forty six. Then they trended up 0:14:06.840 --> 0:14:10.199 to one those very extremely higher rates we were talking about, 0:14:10.520 --> 0:14:14.120 and from those peaks in one we got gradually back 0:14:14.160 --> 0:14:16.800 to more normal rates. And now we've gotten to these 0:14:16.840 --> 0:14:20.360 extremely low rates. So we've there are these twenty thirty 0:14:20.440 --> 0:14:22.320 year trends. If we go back to eighty one. I 0:14:22.320 --> 0:14:24.960 guess it's thirty four years that rates have trended down, 0:14:25.440 --> 0:14:28.360 and that's kind of at the high end of the trend. 0:14:28.480 --> 0:14:31.720 And so we're talking about the FED possibly raising rates 0:14:31.720 --> 0:14:34.920 soon and normalizing rates, So maybe the trend is about 0:14:34.920 --> 0:14:38.240 over all. Right, We're going to be back in one 0:14:38.280 --> 0:14:43.680 minute after a word from our sponsors. You're listening to 0:14:43.720 --> 0:14:45.920 the Odd Lots podcast, brought to you by ex On 0:14:46.000 --> 0:14:53.760 Mobile Energy lives here. So I have to ask the 0:14:53.840 --> 0:14:56.960 book ends in two thousand five, that was the fourth edition. 0:14:57.320 --> 0:14:59.760 Would you ever do a fifth edition? And if so, 0:15:00.160 --> 0:15:02.680 what would you put in it? Well, I was asked 0:15:02.720 --> 0:15:05.720 recently by the publisher John Wiley whether I would be 0:15:05.760 --> 0:15:09.880 interested in putting out a fifth edition, and because the 0:15:09.920 --> 0:15:12.240 book keeps selling every year, it's sort of a minor 0:15:12.320 --> 0:15:15.720 evergreen book and not not you know, I'm not getting 0:15:15.800 --> 0:15:17.880 rich off of this book, but I get a little 0:15:17.960 --> 0:15:20.800 check every year. And uh so the book keeps on 0:15:20.880 --> 0:15:23.960 selling and the way, of course the publishers wants to 0:15:24.040 --> 0:15:26.320 keep on selling it as to you know, updated, But 0:15:26.400 --> 0:15:28.400 I said, it's I think it's a little too early 0:15:28.520 --> 0:15:31.120 because we are just you know, maybe reaching this bottom 0:15:31.120 --> 0:15:33.800 and interest rates, and I would like to have some 0:15:33.960 --> 0:15:38.320 perspective of two or three years, let's say, of normalizing 0:15:38.360 --> 0:15:40.320 interest rates is, which is what the FED is sort 0:15:40.320 --> 0:15:42.960 of promising, you know, to get some perspective on this 0:15:42.960 --> 0:15:44.920 period we've been through, which is kind of unique in 0:15:44.920 --> 0:15:47.000 the annals of history. So I think it's a little 0:15:47.000 --> 0:15:50.840 bit too early to revise the book. Going back along 0:15:51.200 --> 0:15:54.800 back into history, you mentioned the Code of Hammurabi as 0:15:54.920 --> 0:15:57.360 being one source of interest rates. What are some other 0:15:57.520 --> 0:16:04.080 surprising places one find interest rate data recorded? Well, the 0:16:04.120 --> 0:16:07.400 Middle Ages, you know, had public debt markets in the 0:16:07.680 --> 0:16:11.120 Italian city states, for example, and so their interest rates 0:16:11.160 --> 0:16:15.480 there on public bonds, and and there were also bankers 0:16:15.480 --> 0:16:20.400 who lent money to kings, usually for fighting wars. And 0:16:20.440 --> 0:16:22.760 one of the interesting things I found was that the 0:16:22.800 --> 0:16:26.520 bankers would charge the kings and other politicians a much 0:16:26.640 --> 0:16:29.840 higher rate than they charged the merchants that they dealt with. 0:16:30.080 --> 0:16:33.920 The merchants had much better credit than the heads of 0:16:33.960 --> 0:16:36.880 state that in the modern world, usually the lowest interest 0:16:36.960 --> 0:16:40.080 rates are on government debts because the governments are you know, 0:16:40.160 --> 0:16:43.280 have taxing powers and can print money, and so you 0:16:43.360 --> 0:16:46.120 sort of feel safe holding a government bond. But there 0:16:46.240 --> 0:16:49.480 was a reverse of that in the medieval world, the 0:16:49.520 --> 0:16:53.080 merchants had good credit, they were honorable businessmen, and the 0:16:53.160 --> 0:16:55.520 kings had terrible credit. This is actually one of my 0:16:55.560 --> 0:16:58.120 favorite parts in the book. There was a reason for 0:16:58.240 --> 0:17:02.280 that right, especially in front, well in France and England 0:17:02.360 --> 0:17:05.480 and you know other places that Spain, it was a 0:17:05.520 --> 0:17:07.879 famous example. I mean, the kings would often default, you know, 0:17:07.920 --> 0:17:09.920 they would borrow the money and they wouldn't pay it back. 0:17:09.960 --> 0:17:12.240 You know, they had that in those days, something called 0:17:12.280 --> 0:17:14.000 the divine right of kings, and it seemed to be 0:17:14.040 --> 0:17:15.800 one of the divine rights of the king was not 0:17:15.880 --> 0:17:19.600 to repay people that he promised to repay. Right, so 0:17:19.640 --> 0:17:22.200 you could take out loans and then essentially banish all 0:17:22.240 --> 0:17:24.719 your bankers if you were a prince of France or 0:17:24.840 --> 0:17:28.199 Spain or as good. Yeah, it's a good life. Yeah. Well, 0:17:28.240 --> 0:17:32.280 the Italians, you know, the Italian bankers and twelve d 0:17:32.480 --> 0:17:34.240 lent money to the King of England. He didn't pay 0:17:34.280 --> 0:17:36.720 them back. So many of these early banks failed when 0:17:36.760 --> 0:17:39.320 when they didn't get their money paid back. King Philip 0:17:39.400 --> 0:17:43.439 the Second of Spain UH in the sixteenth century borrowed 0:17:43.480 --> 0:17:47.399 money for all kinds of wars and uh he defaulted 0:17:47.480 --> 0:17:50.880 but generally he defaulted on payment when it was due, 0:17:51.000 --> 0:17:53.440 but generally he paid it back a little bit later, 0:17:53.680 --> 0:17:55.520 so he kind of kept this credit. We call him 0:17:55.560 --> 0:17:59.280 a serial defaulter. He could keep on borrowing because eventually 0:17:59.280 --> 0:18:01.480 he would pay them act and I think the bankers 0:18:01.520 --> 0:18:04.080 charged him enough interests so that they came out hold. 0:18:04.200 --> 0:18:07.120 And so now we think that if a sovereign word 0:18:07.119 --> 0:18:09.360 a default, then you would then see a huge wave 0:18:09.400 --> 0:18:12.000 of default throughout the private sector of the economy at 0:18:12.000 --> 0:18:14.280 the same time, just as for knock on effects. But 0:18:14.280 --> 0:18:17.280 it wasn't necessarily the case back then. No, I think 0:18:17.320 --> 0:18:22.920 sovereign defaults then were you know, kind of they did 0:18:22.960 --> 0:18:25.320 it quite frequently, and the bankers were used to it. 0:18:25.359 --> 0:18:27.080 But you know, one way they made up for it, 0:18:27.200 --> 0:18:30.040 to see the businessman. The merchants didn't default, so they 0:18:30.080 --> 0:18:32.840 got a low rate. So you might say the insurance 0:18:32.880 --> 0:18:35.760 against the default was built into the king's interest rate, 0:18:35.800 --> 0:18:37.760 which could be two or three times higher than what 0:18:37.840 --> 0:18:41.680 businessmen could borrow it. So we've been talking about thousands 0:18:41.840 --> 0:18:45.199 of years worth of interest rates. If you were to 0:18:45.359 --> 0:18:49.560 distill all that information, all seven hundred pages of your book, 0:18:49.960 --> 0:18:53.680 into one simple pattern or takeaway for listeners of the show, 0:18:53.720 --> 0:18:58.439 what would it be? Well. The thing that impressed me 0:18:58.480 --> 0:19:01.720 about looking at all the difference realizations, and remember we're 0:19:01.760 --> 0:19:04.359 looking at the lowest interest rates, that there is an 0:19:04.359 --> 0:19:08.800 association between how well a so civilization or a society 0:19:08.920 --> 0:19:11.359 is doing in the level of its interest rates, and 0:19:11.440 --> 0:19:13.600 so when you have kind of low interest rates, it 0:19:13.680 --> 0:19:17.520 probably means that things are pretty well ordered. Now, I 0:19:17.520 --> 0:19:19.680 wouldn't say that I feel that way about our low 0:19:19.720 --> 0:19:21.760 interest rates right now, because they may be just a 0:19:22.160 --> 0:19:25.280 phenomenon of the recent financial crisis and what we had 0:19:25.359 --> 0:19:27.440 to do to fight it. But over the long period 0:19:27.480 --> 0:19:30.960 of history, you know, Greek interest rates were low in 0:19:31.040 --> 0:19:34.680 the time of Aristotle, and Roman interest rates were low 0:19:34.720 --> 0:19:37.160 in the time of Augustus. And when you look at 0:19:37.480 --> 0:19:40.879 the other low interest rate societies, you know, medieval Italy 0:19:41.080 --> 0:19:43.520 was the most financially advanced and had the lowest rates. 0:19:43.560 --> 0:19:47.440 Then you get Spain and the Netherlands, and then England 0:19:47.880 --> 0:19:50.280 and then the United States, you know, and you can 0:19:50.280 --> 0:19:53.200 sort to see that when the societies or the civilizations 0:19:53.240 --> 0:19:56.600 were doing well, they had low interest rates and then eventually, 0:19:56.760 --> 0:19:59.840 you know, the rates turn up. Now, maybe that takes 0:19:59.840 --> 0:20:02.480 a long period of time, but we tend to think 0:20:02.480 --> 0:20:06.040 our American civilization will last forever. But that isn't what 0:20:06.119 --> 0:20:10.000 history seems to indicate. Professor Silla is the co author 0:20:10.160 --> 0:20:13.320 of A History of Interest Rates, fourth edition and professor 0:20:13.359 --> 0:20:16.560 of Economics and Financial Institutions at m y U Stern. 0:20:16.960 --> 0:20:21.119 He also has a great project tracing the genealogy of 0:20:21.160 --> 0:20:24.200 financial institutions, which you can look up on the internet, 0:20:24.240 --> 0:20:26.840 and I highly recommend you do so, Professor Silla, thank 0:20:26.880 --> 0:20:33.560 you so much, my pleasure. Thank you so. Thus concludes 0:20:33.720 --> 0:20:37.920 our tour of interest rate history. Joe, I love that discussion. 0:20:37.920 --> 0:20:40.920 One thing I love about financial history discussions. You see 0:20:40.920 --> 0:20:45.720 how there are very few new debates in economics or finance. 0:20:45.800 --> 0:20:48.159 All of these things that we regard as modern, or 0:20:48.200 --> 0:20:50.440 we talk about them as though they're new, not only 0:20:50.480 --> 0:20:53.600 have they been talking about before, but often hundreds and 0:20:53.640 --> 0:20:56.640 thousands of years. Yeah. Although I did hear a lot 0:20:56.640 --> 0:20:59.000 of things in that discussion that makes me wonder if 0:20:59.000 --> 0:21:01.960 it's different this time, which is, of course, this idea 0:21:02.040 --> 0:21:05.600 that we have interest rates in thirty years cycles, and 0:21:05.720 --> 0:21:08.720 also the idea of negative interest rates. Yeah, and the 0:21:08.800 --> 0:21:12.199 idea that historically low interest rates were seen as a 0:21:12.240 --> 0:21:15.440 proxy for the health of the economy, and higher interest 0:21:15.520 --> 0:21:17.840 rates were seen as bad, which is funny because right 0:21:17.880 --> 0:21:21.000 now everyone's sort of hoping that higher rates signals a 0:21:21.040 --> 0:21:24.680