With the OCR heading for 0%, we are in uncharted waters. Proof that interest rates are the lowest they’ve been in the last 5,000 years of civilisation…
Last week I published an article titled “How Will Negative Interest Rates Impact Investors?“. Included was a chart of NZ OCR interest rates going back to 2007.
The following day, the Reserve Bank dropped the OCR to a record low of 1%.
In a follow-up interview, Adrian Orr said the Reserve Bank was actively thinking about what it should do if the OCR gets to 0%, including looking at options such as charging banks negative interest rates on their deposits with the central bank.
With the OCR heading for 0% and below, we are in uncharted waters.
And now for the really big picture, I have found interest rate data going back since before Muhammad (born c. AD 570), Jesus (born 4 BC), Julius Caesar (born 100 BC), Buddha (born 623 BC), Hammurabi, 6th king of the First Babylonian dynasty (born c. 1810 BC), and nearly as far back as Krishna, the Hindu god of compassion, tenderness and love (born 3102 BC).
About 1772 BC, King Hammurabi of the first dynasty of ancient Babylonia gave his people their earliest known formal code of laws. Hammurabi is pictured above (standing), depicted as receiving his royal insignia from Shamash.
A number of the chief provisions of Hammurabi’s code of laws regulated credit, according to Homer and Sylla in their book “A History of Interest Rates“.
The maximum rate of interest was set at 33.3% p.a. for loans of grain, repayable in kind, and 20% p.a. for loans of silver by weight.
All loans had to be accompanied by written contracts witnessed before officials. Land and movables could be pledged for debt, as could the borrower himself, his wife, concubine, children, or slaves. Personal slavery for debt, however, was limited to 3 years.
As barbaric as those times may have been, one part of Hammurabi’s code was a big improvement on current practices. If a higher than legal interest rate was collected by subterfuge, the principal of the debt was cancelled. That would certainly force predatory lenders to toe the line!
And now, thanks to the Bank of England we have 5,000 years of interest rate data summarised in one graph…
Sources: Bank of England, Global Financial Data, Homer and Sylla “A History of Interest Rates”. Note: The intervals on the x-axis change through time up to 1700, after which they are annual intervals.
Here are some of the interesting points in time from the graph…
- Mesopotamia, c. 3000 BC: interest rates of 20%
- Persian conquest (King Cyrus takes Babylon), 539 BC: interest rates of 40+%.
- Rome, Twelve Tables, 443 BC: 8.33%
- Rome, AD 1: 4%
- Venice, 1430s: 20%
- Venice, (Leonardo da Vinci paints “The Last Supper in Milan), 1490s: 6.25%
- England, 1700s: 9.92%
- US, West Florida annexed by the US, 1810s: 7.64%
- US, circa World War II, 1940s: 1.85%
- US, Reagan administration, 1980s: 15.84%
The dramatic drop in interest rates during the Great Depression that followed the 1929 sharemarket crash is clearly evident in the graph, as is the prolonged sideways slide thanks to World War II.
But today we do not have a Great Depression, let alone a Global Financial Crisis or a World War.
The old fashioned rule of thumb was that interest on a loan should be set at a rate that roughly returned the capital over 10 years. A $1,000 loan would become $2,000 over 10 years with compounding interest. Of course there were big swings both ways, but 0% or minus rates were never contemplated.
If you’re worried our historically low rates might go up again, I suggest you check out our NZ interest rates forecast page.
I’m told a US company recently borrowed $1 billion dollars at 0%, which seems impossible. How was it done? Apparently the $1 billion was lodged with the bank for safety reasons at negative one percent interest (-1%), so the bank was making 1% by on-lending at 0%. Not a bad earner if you can make it.
Once we were taught to save, save, save.
Now we are told to spend, spend, spend.
Once we were told that inflation was a beast that must be tamed.
Now we are told that we must all push to create more inflation.
Confused? You are not the only one.