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INTEREST RATES.
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Examines several issues related to the history of simple & compound interest rates.... More...
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Paper Abstract:
Examines several issues related to the history of simple & compound interest rates. Centers on loans, credit. Defines terms. Overview of history of interest rates; fluctations; government economic policy decisions; supply & demand for money. Summary of averages of prime short-term rates (19th & 20th Centuries). Suggests that interest rates are tied to non-economic as well as economic factors.

Paper Introduction:
Introduction Sidney Homer (1963), in his seminal history of interest rates, argues that such a history of often dramatic interest rate fluctuations provides an excellent summary of the success of some communities and the failures of others to develop effective commercial ethics and laws and suitable monetary and fiscal techniques and policies. While "credit" is considered a modern device (or vice), a brief survey of financial history will demonstrate that credit was in general use in ancient and in medieval times, antedating industry, banking and even coinage. It is the purpose of this brief report to examine selected issues related to the history of simple and compound interest rates, specifically on loans, and to consider periods when high rates were commonplace in their historical context.

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Richard Sylla, an economist who recently undertook an updating ofHomer's classic text, A History of Interest Rates, suggests that in moderntimes interest rates have been tied to government economic policy decisions(Brimelow, 1999). High interest rates have historically induced people to holdless money (i.e., to invest more), while low rates have the oppositeeffect. NewYork: Academic Press. monetary authority, often finds it necessary to interveneto "adjust" the interest rate to further "adjust" the monetary supply anddemand curves and related activity.Periods of Historic Highs and Lows in the Interest Rate Homer (1963), in his analysis of interest rat fluctuation,identified any number of historical periods in which dramatic highs andlows emerged. The Federal ReserveSystem, the U.S. The Theory of Money and Credit.Indianapolis: Liberty Classics.----------------------- 1 2 2.51United States 7.18 3.23 Based on these calculations, Homer (1963) argued that modern primeshort-term interest rates in the West have continued the trend toward lowerminimum short-term rates. A History of Interest Rates. Forbes,164 (15), 218 -219. Making the Most of Your Money. In the 12th Century, England saw rates varyfrom 12 percent for "poorer credit" to 43.5 percent for "best credits; inthe Netherlands, a rate of 1 to 16 percent could be obtained on borrowedfunds at this time, while 13thCentury Venetians could borrow funds at rates ranging from 5 to 15 percentand the residents of Provence, France, were require to pay as much as 3 percent interest. interestrates are still far from low by historic standards (and past rates of aslittle as 3.5 percent have been recorded in the U.S.), while real interestrates (rates that are adjusted for inflation) are strikingly higher thanthey have been for most of the current century (Brimelow, 1999). Currently, Sylla believes that U.S. (1999). Gwartney, J.D., and Stroup, R. In Egypt during this same general era,rates were seen as high as 1 percent (Ninth Century B.C.) and as low as 6percent (Second Century A.D. Averages of Prime Short-Term Rates 19th Century % 2 th Century %England 3.66 2.75France 3.78 2.88Holland 3.13 2.46Belgium 3.7 2.95Germany 4.17 3.91Sweden 4.86 4.18Switzerland 4. Syllaanticipates that current rates will decline in the short run, buteventually stabilize around current levels, reflecting the productivity ofcapital. It is the purpose ofthis brief report to examine selected issues related to the history ofsimple and compound interest rates, specifically on loans, and to considerperiods when high rates were commonplace in their historical context.Definitions of Terms Gwartney and Stroup (199 ) define the interest rate as the pricepaid for the use of money or loanable funds for a period of time. New York:Simon & Schuster. For example, he foundthat in such disparate locations and time periods as the heyday of ImperialRome, the rise of Babylonia in the Middle East as a hegemon, and China'sown rise to imperial status, interest rates tended to decline ascivilizations grew and increase as they declined. The literaturesuggests that interest rates are tied to non-economic factors as well aseconomic ones, and that government in the modern world has tended toparticipate directly in establishing and then manipulating interest ratesto achieve economic and other policy objectives.References Brimelow, P. Under the laws of theancient Greeks and Romans, taking of interest was legal but notrespectable. At the same time, Homer (1963) believes that whena civilization begins to reach its zenith, a sharp increase in interestrates will almost invariably occur.Summary and Conclusion The topics related to interest rates are many and varied - far toomany and too varied to be thoroughly addressed in a report of this brevity.In general, it can be concluded that interest rates reflect the price ofmoney. Homer (1963, p. While "credit" is considered amodern device (or vice), a brief survey of financial history willdemonstrate that credit was in general use in ancient and in medievaltimes, antedating industry, banking and even coinage. In this context, Gwartney and Stroup (199 ) note that in Keynesianeconomic theory, the interest rate is linked to the supply of and demandfor money. What drives interest rates? Such prices have been attached to money and other goods for almostas long as man has recognized the value of such items. Every theologian who considered the issue thenbelieved that the taking of interest was harmful, unnatural, anduncharitable. Mises, L. (1963. Compound interest isgenerally associated with savings deposited in a fund of some sort and is arelatively recent phenomena (Quinn, 1997).Overview of the History of Interest Rates Early in human history the lay mind discovered an explanation of thefact that money on loan bears interest, or that money actually "works (VonMises, 198 )." In various cultures of the ancient and medieval worlds,public opinion disapproved of the taking of interest. This, of course, is a "simple interest rate" in which thetotal interest is a straightforward percentage of the whole sum borrowed.Compound interest, on the other hand, refers to the practice of payinginterest on an amount loaned or invested (generally in a bank or othersavings vehicle), and then paying interested on the combined principal sumand interest that has been added (Quinn, 1997). NewBrunswick, N.J.: Rutgers University Press. Economics. Homer, S. Quinn, J.B. von. Only Jews in the medieval European world were permitted tocharge interest (or practice the Christian sin of usury). Homer (1963) traced the fluctuations of interest rates n varioushistorical periods and commented that in general, it can be argued that thehigher a country's intelligence and moral strength, the lower the rate ofinterest. Homer (1963) believedthat a cycle of interest rate fluctuations could be observed thatdovetailed with the ebb and flow of civilizations. Introduction Sidney Homer (1963), in his seminal history of interest rates, arguesthat such a history of often dramatic interest rate fluctuations providesan excellent summary of the success of some communities and the failures ofothers to develop effective commercial ethics and laws and suitablemonetary and fiscal techniques and policies. The Christian, Roman Catholic Church adopted this proscriptionof interest and attempted to support this attitude with quotations from theBible (Von Mises, 198 ). 515) provided a summary of averages on prime short-term rates in the West, depicted below, which suggest that even relativelysmall variations in such rates can have an enormous impact upon economiclife. Interestis stated as a percentage of the amount borrowed; for example, an interestrate o 1 percent means that the borrower pays 1 cents annually for eachdollar borrowed. (199 ). In the Great Depression of the 193 s and the "greatinflation" of the 197 s, he argues, poor fiscal policy on the part ofgovernment led to wildly escalating interest rates and a correspondingreluctance on the part of capital investors to commit funds toinfrastructure development. In Rome, from the Fifth Century B.C. (1997). to the Fourth CenturyA.D., interest rates climbed from 8.5 percent (a legal maximum establishedby the Senate) to 12.5+ percent; at one time around 25 B.C., Roman interestrates reached a low of 4 percent. During normal times, the demand curve for money is like the demandcurve for other goods; when the price (the interest rate) of holding moneyrises, the quantity of money demanded will decline. (198 ). In making this assertion, Homer (1963) drew upon ideas advancedearlier by Austrian economist Eugen von Bohm-Bawerk.

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