History of Interest Rates

By: EconomyWatch Content   Date: 3 November 2009

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The history of interest rates has its roots in the ancient periods in Mesopotamia. Even during that time, people used interest rates to increase their profits, protect their assets and improve economic conditions. Over the years, there have been tremendous changes in the interest rates of various countries. There are many factors responsible for the rise and fall of interest rates, such as liquidity preference, risk of investment, inflationary expectations, alternative investments, taxes and deferred consumption.

History of Interest Rates: Mesopotamia and Babylon

Although lending activities have evolved over time, the process remains essentially the same. In Mesopotamia, lenders and borrowers were protected by laws governing lending activities. This came to light through the 1750 B.C writings of the Babylon ruler Hammurabi. These writings are called the Code of Hammurabi. His writings mirror on the laws pertinent to loan payments and the protection of lenders’ interests.

History of Interest Rates: Controversies

In certain countries, during the ancient times, the practice of charging interest rates or ‘usury’ was looked down upon. In Greece, it was illegal and the offender was punished to death.

Usury was criticized by Plato as "producing inequality of wealth and destroying harmony” among fellow people. The ancient writings of Judaism, Islam and Christianity also slam usury. According to the Islamic Party of Britain, the creation of wealth should only come about through a combination of labor with capital or land.

History of Interest Rates: 20th and 21st Centuries

Later, interest rates came to be fixed by central or reserve banks or the national governments. A glimpse into interest rates across the world, in the 20th and 21st centuries:

  • In the US, the Federal Reserve federal funds rate from 1954 to 2008 fluctuated between 0.25% and 19%.

  • The base rate of the Bank of England varied between 0.5% and 15% during1989 and 2009.

  • In Germany, interest rates in 1920 were about 90%. However, during the 2000s it dipped to around 2%.

  • In 2007, the economy of Zimbabwe experienced spiraling hyperinflation. To handle this, interest rates on borrowing were increased to 800% by the Central Bank of Zimbabwe.


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