- Historically, interest rates have been much higher
- Is an inflation target a good rationale for setting rates?
What are interest rates? This isn’t a trick question. Anyone following the news today would probably (and quite correctly) answer that they are a policy tool, used to control inflation. But historically speaking, using interest rates in this way is a relatively recent development. Tying them to an inflation target, even more so.
We know that ancient societies had their own interest rates, which were often fixed by law. In ancient Mesopotamia, interest rates were 20 per cent; they were 10 per cent in ancient Greece, and 8.33 per cent in ancient Rome. Michael Hudson, a professor of economics at the University of Missouri, said that “with our modern ways of thinking”, it is easy to imagine that interest rates fell over the centuries as financial risk diminished with the progress of civilization. After all, in more stable economies, creditors no longer had to protect themselves with exorbitant interest rates. But he thinks that a far more pragmatic explanation probably explains the change.