They are the ‘universal price’ at the base of an economy. Keeping rates artificially low has created an addiction with its own cost.
By historian Adam Rowe. He reviews the book The Price of Time: The Real Story of Interest by Edward Chancellor. Excerpts:
"The practice of charging interest is as old as time itself. Before Mesopotamians had learned to coin money or place wheels on carts, lenders had established the practice of demanding more in the future of whatever they made available to borrowers in the present. The etymology of many of the words for interest derive from the offspring of livestock, reflecting an awareness that wealth well managed is fruitful. But the etymology also reflects a suspicion that interest allows the rich to devour the poor. Ancient Hebrew words for interest include one meaning “the bite of a serpent.”"
"From the beginning, Mr. Chancellor shows, rulers have tried to intervene to soften the antagonism between borrowers and lenders. The earliest set of laws, Hammurabi’s code in Babylon (from around 1750 B.C.), is preoccupied with regulating interest—setting maximum loan rates, including 20% for silver and 33.33% for barley. A millennium later, Athens’s renowned lawgiver Solon ordered all the stones recording mortgages destroyed as part of an effort at moral and political renewal. (His predecessor Draco, to whom we owe the word “draconian,” had forced many debtors into slavery.) Thinkers and philosophers throughout history—from Aristotle and Aquinas to Proudhon and Marx—have regarded any rate of interest as unjust. Mere scribblers shared this view. According to Daniel Defoe, “interest of money is a canker-worm upon the tradesman’s profit.”"
"Of proto-capitalist 16th-century England, the historian R.H. Tawney wrote: “The borrower was often a merchant, who raised a loan in order to speculate on the exchanges or to corner the wool crop.” As for the lender, he might well be “an economic innocent, who sought a secure investment for his savings.”"
"Like any other price, the rate of interest reflects a complex balance of forces in the real economy, from aggregate savings to future expectations. When governments push that price too low—or too high—they create distortions that are counterproductive and socially unjust."
"The price of securities tends to rise or fall inversely with the price of interest. Those who own the most securities thus benefit the most when interest rates fall."
"Low interest rates don’t help the poor, who don’t have access to cheap credit. They do help people with formidable assets already, in part by making leverage more attractive. With money so cheap, financiers can boost investment returns with borrowed cash."
"Artificially low rates distort the decentralized decision-making process of a market economy. Without interest, he writes, “capital can’t be properly allocated and too little is saved.” Investors accept more risk in pursuit of higher returns, making future growth seem more attractive than current profits. And because interest is one of the chief costs in finance, low rates shift economic activity from “real world” enterprises to purely financial transactions."
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